MARTIN MARIETTA MATERIALS INC annual report, FY2018

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Business Context and Reporting Period

Martin Marietta Materials, Inc. filed its Form 10-K for the fiscal year ended December 31, 2018, filed February 25, 2019. The filing is an annual report rather than a standalone fourth-quarter filing.

The Company supplies aggregates, cement, ready mixed concrete, asphalt and paving services through its Building Materials business, serving 31 states, Canada, the Bahamas and the Caribbean. It also operates Magnesia Specialties, which produces magnesia-based chemicals and dolomitic lime. Building Materials is organized into the Mid-America, Southeast and West Groups; Magnesia Specialties is a separate reportable segment.

Key Financial and Operating Metrics

  • The filing text provided does not include clear consolidated values for revenue, operating income, net earnings, earnings per share, operating cash flow, free cash flow, total debt, cash, liquidity or consolidated margins. These statements are incorporated by reference from the 2018 Annual Report.
  • Aggregates represented 61% of consolidated total revenue in 2018.
  • The top 10 states accounted for 85% of Building Materials revenue, while the five largest states—Texas, Colorado, North Carolina, Georgia and Iowa—accounted for 72%.
  • Aggregates production was 175.0 million tons in 2018, compared with 166.8 million tons in 2017 and 163.3 million tons in 2016.
  • Average aggregates productive capacity utilization was approximately 65%. The Company could not capitalize $44.5 million of costs that could have been inventoried under normal operating conditions because production operated significantly below capacity.
  • Texas cement plants operated at approximately 75% to 80% utilization. Combined annual cement capacity was approximately 4.5 million tons, including permitted expansion capacity of up to 800,000 tons at Midlothian.
  • The ready mixed concrete and asphalt and paving businesses had a combined gross margin of 10.3% in 2018 versus 12.7% in 2017.
  • Cement shutdown costs were $17.3 million in 2018, compared with $14.0 million in 2017. Magnesia Specialties shutdown costs were $5.8 million in 2018.
  • Environmental compliance operating costs were approximately $25.3 million in 2018 versus $23.4 million in 2017. Environmental control facilities capitalized costs were approximately $14 million in 2018.
  • At December 31, 2018, the Company reported approximately 16.7 billion tons of aggregate reserves, with an average reserve life exceeding 75 years based on normalized production and approximately 100 years at current production rates.

Material Changes Versus the Prior Comparable Period

  • The Company completed the acquisition of Bluegrass Materials Company in 2018. Bluegrass added 22 active sites and more than 2.2 billion tons of strategically located reserves across Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania.
  • Management reported that Bluegrass integration synergies surpassed the $15 million annual run-rate target.
  • 2018 aggregate production increased approximately 4.9% from 2017, although West Group production declined while Mid-America and Southeast production increased.
  • Ready mixed concrete and asphalt and paving gross margin declined to 10.3% from 12.7%, reflecting the lower-margin and more volatile nature of these operations.
  • Liquid asphalt prices were higher in 2018 than in 2017. Average diesel fuel cost increased to $2.29 per gallon from $1.81 in 2017, while natural-gas cost per MCF decreased 4% year over year.
  • Severe precipitation and Hurricane Florence adversely affected production and shipments in the Carolinas, Georgia, Maryland, Tennessee and other markets. Management nevertheless stated that warmer-than-average conditions helped support record full-year revenue and profitability; specific consolidated amounts are not included in the supplied text.
  • The Company repurchased 216,572 shares during the fourth quarter at an average price of $184.70 per share. Of these, 125,507 shares were repurchased in November and 91,065 in December. The remaining authorization was 14,147,751 shares at December 31, 2018.

Guidance, Outlook, Risks and Unusual Items

  • Management expected increased state-level infrastructure spending in 2019 and some increased federal spending related to the FAST Act, but did not expect the full impact of FAST Act funding or any enhanced federal infrastructure bill until 2020 or later.
  • The Portland Cement Association projected that U.S. cement consumption growth would moderate to 2.6% in 2019 from 2.9% in 2018.
  • Management expected future organic earnings growth from increased pricing, asset and portfolio rationalization, and additional cost reductions. It also expected further gross-margin improvement in legacy TXI aggregates-related downstream operations.
  • The Company may continue to divest underperforming assets during 2019 and redeploy capital toward other opportunities.
  • Principal risks include construction-cycle exposure, dependence on infrastructure funding, regional concentration, adverse weather, transportation constraints, fuel and raw-material inflation, cement imports and pricing, environmental and greenhouse-gas regulation, permitting and zoning limitations, labor negotiations, equipment outages, litigation, cybersecurity and access to credit markets.
  • Long-term shipping contracts generally contain take-or-pay minimum-volume obligations through expiration dates ranging from 2023 to 2027. The Company did not incur related minimum-volume freight costs in 2018, but disclosed that a charge could arise in 2019 if shipment volumes fail to meet contractual minimums.
  • The Manistee, Michigan labor agreement expires in August 2019; the Woodville, Ohio agreement expires in June 2022.
  • Management stated that pending litigation was not expected to have a material adverse effect, although an unexpected adverse outcome could be material. Environmental liabilities and future regulatory changes remain potentially significant contingencies.
  • Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018. Bluegrass controls covering less than 1% of consolidated assets and 4% of consolidated revenue were excluded from the assessment because the acquisition occurred during 2018.

Investor Verification Priorities

  1. Verify the incorporated 2018 Annual Report for consolidated revenue, earnings, EPS, operating cash flow, capital expenditures, cash, debt, liquidity, margins and segment results.
  2. Reconcile 2018 results with 2017 on an as-reported and comparable basis, including the effect of the Bluegrass acquisition and any divestitures.
  3. Review acquisition consideration, purchase accounting, goodwill, financing, leverage and expected Bluegrass synergies.
  4. Assess the $44.5 million of uncapitalized production costs and the implications of below-capacity aggregates operations.
  5. Review debt maturities, variable-rate exposure, covenant capacity and refinancing requirements; the supplied text lists significant senior notes and a $700 million revolving credit agreement but does not state outstanding balances or availability.
  6. Evaluate exposure to infrastructure appropriations, state transportation spending, weather disruptions and regional concentration in the five largest states.
  7. Review environmental, reclamation, greenhouse-gas, silica, permitting and litigation disclosures, including Note O commitments and contingencies.
  8. Monitor the 2019 Manistee labor-contract renewal, shipping minimum-volume obligations and cement shutdown schedule.