Business Context and Reporting Period
Martin Marietta Materials, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2022. The company supplies aggregates, cement, ready-mixed concrete, asphalt and paving services through approximately 350 quarries, mines and distribution yards in 28 states, Canada and The Bahamas. Its reportable segments are the East Group, West Group and Magnesia Specialties.
California cement and ready-mixed concrete operations acquired with the Lehigh West Region transaction were classified as discontinued operations and held for sale. Continuing-operations comparisons below exclude those businesses unless otherwise noted.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $1,230.8 million | $982.4 million | 25.3% increase |
| Gross profit | $156.1 million | $174.7 million | 10.6% decrease |
| Gross margin | 12.7% | 17.8% | Down 510 basis points |
| Earnings from operations | $59.9 million | $99.3 million | 39.7% decrease |
| Operating margin | 4.9% | 10.1% | Down 520 basis points |
| Net earnings attributable to Martin Marietta | $21.4 million | $65.3 million | 67.2% decrease |
| Continuing-operations diluted EPS | $0.39 | $1.04 | 62.5% decrease |
| Adjusted EBITDA | $197.2 million | $205.6 million | 4.1% decrease |
| Cash provided by operating activities | $169.9 million | $191.9 million | 11.5% decrease |
Products and services revenue increased to $1,147.8 million from $921.9 million, while freight revenue increased to $83.0 million from $60.5 million. Revenue growth was led by the West Group, including the October 2021 acquisition of Lehigh Hanson’s West Region business. Building Materials products and services revenue increased to $1,077.0 million from $856.6 million.
- Aggregates shipments increased 13.4%, including acquisitions, while pricing increased 5.6%. Organic aggregates shipments increased 2.5% and organic pricing increased 6.5%.
- East Group revenue increased to $418.8 million from $394.9 million, but earnings from operations declined to $28.0 million from $61.7 million.
- West Group revenue increased to $735.0 million from $516.6 million, and earnings from operations increased to $43.0 million from $31.9 million.
- Magnesia Specialties revenue increased to $77.0 million from $70.9 million, while earnings from operations decreased to $21.5 million from $23.5 million.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $189.6 million at March 31, 2022, down from $258.4 million at December 31, 2021.
- Operating cash flow was $169.9 million. Capital expenditures were $139.8 million, compared with $110.3 million in the prior-year quarter.
- Investing activities used $123.0 million, including capital expenditures. Financing activities used $116.2 million, including $50.0 million of share repurchases and $38.9 million of dividends.
- Total debt was approximately $5.10 billion, substantially unchanged from December 31, 2021. Long-term debt fair value was $4.93 billion at March 31, 2022.
- No borrowings were outstanding under the $800 million revolving facility or the $400 million trade receivable securitization facility. Outstanding letters of credit totaled $17.2 million, including $2.6 million issued under the revolving facility.
- Unused borrowing capacity under the two facilities was reported at $1,197.4 million, subject to the applicable leverage covenant. The company was in compliance with the covenant at March 31, 2022.
- The company stated that cash on hand, projected internal cash flows and available financing resources are expected to support operating needs, debt service, capital expenditures, potential acquisitions, share repurchases and dividends for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue growth from acquisitions, higher volumes and pricing did not offset substantially higher diesel, energy, freight, supplies, repair, contract-service and personnel costs.
- Aggregates gross margin declined to 14.9% from 21.3%. Management cited approximately $12 million of higher diesel costs, approximately $20 million of higher contract-service costs and approximately $9 million of higher internal freight costs, as well as the Tiller winter shutdown.
- Cement gross margin improved to 20.3% from 14.0%, aided by higher pricing and the absence of prior-year Texas Deep Freeze costs.
- Ready-mixed concrete gross margin declined to 7.3% from 8.3% because higher raw-material and diesel costs more than offset price increases.
- Magnesia Specialties product gross margin declined to 37.8% from 43.5% because higher energy, supplies and raw-material costs exceeded revenue growth.
- Corporate operating loss increased to $32.6 million from $17.8 million, contributing to the consolidated operating-profit decline.
- Interest expense increased to $40.5 million from $27.4 million, primarily reflecting higher debt associated with the Lehigh West Region acquisition.
- Comprehensive loss attributable to Martin Marietta was $10.2 million versus comprehensive earnings of $68.1 million, principally due to a $31.6 million after-tax other comprehensive loss from pension and postretirement benefit remeasurement.
Outlook, Commentary, Risks and Unusual Items
No specific quantitative full-year revenue, earnings or margin guidance is provided in the filing. Management cautions that first-quarter results are not necessarily indicative of the full year because construction activity is seasonal and affected by weather.
- Management cited continued demand in infrastructure and nonresidential construction, including highway widening, warehousing and railroad maintenance activity. Residential demand was affected by supply-chain issues, higher costs and labor shortages.
- Organic energy expense increased approximately 52% year over year. Management identified diesel-price volatility, exacerbated by the Russia-Ukraine conflict, as a significant risk; a hypothetical 52% change would affect full-year 2022 organic energy expense by approximately $158.1 million, assuming constant volumes.
- Other material risks include inflation, interest-rate increases, adverse weather, construction labor and supply-chain constraints, transportation availability, equipment failures, environmental regulation, construction-market weakness, public-infrastructure funding and potential failure to realize acquisition synergies.
- The company amended its qualified pension plan to provide enhanced benefits for eligible hourly employees retiring after April 30, 2022. The amendment increased projected pension expense and produced a $33.3 million after-tax pension-related other comprehensive loss before reclassifications.
- The company announced a $250 million cash sale of the Redding, California cement plant, related terminals and 14 California ready-mixed concrete operations. Closing was expected in the second half of 2022, subject to regulatory approvals and other conditions.
- The Colorado and Central Texas ready-mixed concrete operations were classified as held for sale at March 31, 2022 and divested on April 1, 2022. The company expected to recognize a gain.
- Discontinued operations generated $94.7 million of revenue and a $3.1 million net loss in the quarter.
- The $400 million trade receivable facility matures September 21, 2022, while the $800 million revolving facility expires December 21, 2026. The company stated it has historically extended facility maturities.
- Pending legal and administrative proceedings were described as incidental to normal business activities, and management believes the probability of a material loss from currently pending matters is remote.
Important Facts for Investors to Verify
- Whether pricing actions can continue to offset diesel, energy, freight, labor and other inflationary costs.
- The pace and profitability of integration for the Lehigh West Region and other acquisitions, including compliance with debt covenants.
- The timing, regulatory approvals, proceeds and ultimate gain or loss from the announced California and completed Colorado and Central Texas divestitures.
- Available liquidity and refinancing plans for the trade receivable facility maturity in September 2022 and the first publicly traded debt maturity in 2023.
- The effect of pension-plan amendments, discount-rate changes and asset performance on future pension expense and equity.
- Infrastructure, nonresidential and residential construction volumes, including the impact of interest rates, public funding, weather and supply-chain conditions.
- Future developments in fuel and other commodity prices, especially diesel, natural gas, cement inputs and transportation costs.