MARTIN MARIETTA MATERIALS INC annual report, FY2021

Martin Marietta Materials, Inc. — FY2021 Form 10-K Summary

Business context and reporting period

Annual report for the fiscal year ended December 31, 2021, filed February 22, 2022. Martin Marietta is a natural-resource-based building materials company operating approximately 350 quarries, mines and distribution yards across 28 U.S. states, Canada and The Bahamas. Its principal businesses are aggregates, cement, ready mixed concrete, asphalt and paving services, and Magnesia Specialties.

The Building Materials business is reported through the East Group and West Group. Magnesia Specialties is a separate reportable segment. The Company acquired Tiller Corporation, Southern Crushed Concrete and the Lehigh Hanson West Region during 2021. Certain California cement and ready mixed concrete operations acquired in the Lehigh transaction were classified as held for sale and discontinued operations at year-end.

Key financial metrics

Metric	2021	2020	Change
Total revenues	$5,414.0 million	$4,729.9 million	14.5% increase
Gross profit	$1,348.4 million	$1,252.8 million	7.6% increase
Gross margin	24.9%	26.5%	160 basis-point decline
Earnings from operations	$973.8 million	$1,005.4 million	Decrease
Net earnings attributable to Martin Marietta	$702.5 million	$721.0 million	Decrease
Diluted EPS from continuing operations	$11.22	$11.54	Decrease
Adjusted EBITDA from continuing operations	$1,528.5 million	$1,392.8 million	9.7% increase
Cash provided by operating activities	$1,137.7 million	$1,050.1 million	8.3% increase
Capital expenditures	$423.1 million	$359.7 million	Increase

Aggregates product gross profit represented 67% of consolidated product and services gross profit. Aggregates shipments increased 7.9% to 201.2 million tons, including acquired operations; organic aggregates shipments increased 3.8%. Total aggregates pricing increased 2.1%, or 2.7% on a mix-adjusted basis.

Aggregates gross profit was $904.8 million, with a 29.6% margin versus 30.6% in 2020.
Cement gross profit was $157.0 million, with a 31.8% margin versus 37.8% in 2020. Higher energy, maintenance and raw-material costs more than offset pricing and volume gains.
Ready mixed concrete revenue increased to $1,145.8 million; shipment volume increased 18.8% and pricing increased 1.4%.
Asphalt and paving revenue increased to $514.2 million, primarily reflecting acquired operations.
Magnesia Specialties revenue increased 23% to $298.7 million; gross profit increased 24% to $106.5 million and earnings from operations increased 28% to $90.8 million.
The effective income tax rate declined to 17.9% from 18.9%, primarily reflecting the statutory depletion deduction and other tax items.

Liquidity, debt and capital allocation

Cash and cash equivalents were $258.4 million at December 31, 2021, compared with $207.3 million at year-end 2020.
Long-term debt, including current maturities, increased to $5.10 billion from $2.63 billion, principally to finance acquisitions.
The Company issued $2.50 billion of senior notes in July 2021 with a weighted-average interest rate of approximately 2.2%.
The $800.0 million revolving facility and $400.0 million trade receivable facility had no borrowings outstanding at year-end. The Company reported $1.20 billion of unused borrowing capacity across these facilities.
The Company was in compliance with its debt covenant at December 31, 2021. Management targets a consolidated debt-to-EBITDA leverage ratio of 2.0x to 2.5x within a reasonable period after debt-financed transactions.
Total equity was $6.54 billion. The Company paid $147.8 million of dividends, or $2.36 per share, and made no share repurchases in 2021. Approximately 13.5 million shares remained available under the repurchase authorization.

Material changes versus the prior comparable period

The Lehigh West Region acquisition closed October 1, 2021 for $2.28 billion in cash and added 17 active aggregates quarries, two cement plants, distribution terminals and downstream operations in California, Arizona, Nevada and Oregon. Total 2021 acquisition spending was approximately $3.11 billion, including Tiller and Southern Crushed Concrete.
Acquisitions increased goodwill by approximately $1.08 billion and significantly expanded West Group assets and debt.
2021 gross profit benefited from pricing, favorable weather, stronger demand and acquisitions, but margins were pressured by energy and raw-material inflation, higher maintenance costs and $30.6 million of costs from selling acquired inventory marked up to fair value.
Acquisition-related expenses were $57.9 million in 2021 versus $1.3 million in 2020.
Interest expense increased to $142.7 million from $118.1 million because of higher average debt.
Other operating income declined to $34.3 million from $59.8 million. The 2021 amount included $21.6 million of gains on land and asset sales, compared with $69.9 million of nonrecurring gains in 2020.
California cement and ready mixed concrete operations classified as discontinued operations generated $0.5 million of net earnings in 2021 and included a $6.0 million loss on sale.
The Company’s pension plans moved from a $74.0 million underfunded status at year-end 2020 to a $64.8 million overfunded status at year-end 2021, primarily reflecting investment returns and actuarial gains.

Guidance, outlook, management commentary and risks

Management expects the Infrastructure Investment and Jobs Act to provide greater infrastructure funding visibility, with stable federal infrastructure spending anticipated in 2022 and more meaningful effects beginning in 2023. State and local infrastructure spending was also expected to increase in 2022. Management cited continued residential and nonresidential construction activity, population growth and limited local aggregates supply as favorable demand drivers.

Management expects future Magnesia Specialties profit growth from pricing, portfolio rationalization, efficiency improvements and cost reductions. Approximately 64% of the segment’s 2022 coal, natural gas and petroleum coke requirements were covered by fixed-price agreements.

Results remain cyclical and highly dependent on construction spending, infrastructure funding, interest rates, access to credit and regional economic conditions.
Weather, including winter conditions, heavy precipitation, hurricanes, wildfires, drought and earthquakes, can materially affect production, shipments and profitability.
Fuel, energy, raw-material, labor and transportation costs are significant risks. A hypothetical 10% change in 2022 energy prices was estimated to change energy expense by $33.3 million, assuming constant volumes.
Railcar, locomotive, trucking and shipping availability may constrain distribution and increase costs.
Environmental, zoning, permitting, reclamation, silica-exposure and greenhouse-gas requirements may increase operating or capital costs and restrict expansion.
Integration risk remains relevant for the 2021 acquisitions; purchase-price allocations were preliminary at year-end, and the measurement period remained open.
The Company identified risks from COVID-19, supply-chain constraints, labor shortages, cybersecurity incidents, higher interest rates, cement imports, steel-market weakness and potential goodwill impairment.
Pending litigation and environmental proceedings were considered unlikely by management to have a material adverse effect, but the Company cannot assure that an adverse outcome would not be material.

Management and PricewaterhouseCoopers LLP concluded that internal control over financial reporting was effective as of December 31, 2021. Certain controls relating to the newly acquired Lehigh West Region and Tiller businesses were excluded from the assessment, covering $274.8 million of assets and $401.2 million of consolidated revenue, including $79.2 million reported in discontinued operations.

Important facts for investors to verify

Whether the Lehigh West Region acquisition delivers the expected operating synergies and whether the Company can reduce leverage toward its 2.0x–2.5x target.
The final purchase-price allocation and any subsequent changes to goodwill, mineral reserves, intangible assets, asset-retirement obligations or other liabilities.
The timing and financial impact of the planned sale of the California cement and ready mixed concrete operations.
Whether pricing increases offset inflation in diesel, natural gas, coal, petroleum coke, liquid asphalt, labor, maintenance and transportation.
Actual infrastructure spending under the Infrastructure Investment and Jobs Act and state and local programs, particularly in the Company’s largest markets.
Debt maturities of approximately $697.4 million in 2023, $398.2 million in 2024 and $124.6 million in 2025, and the Company’s refinancing plans.
Potential effects of weather, drought, wildfires, permitting restrictions, greenhouse-gas regulation and other environmental liabilities.
The effect of discontinued operations, acquisition-related costs, fair-value inventory adjustments and nonrecurring asset-sale gains when assessing recurring earnings.