MARTIN MARIETTA MATERIALS INC quarterly report, Q3 FY2018

Business Context and Reporting Period

Martin Marietta Materials, Inc. is a natural-resource-based building-materials company supplying aggregates, cement, ready-mixed concrete, asphalt and paving services, plus magnesia-based products. Its Building Materials business operates through the Mid-America, Southeast and West groups. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods.

Financial Performance and Position

Metric	Q3 2018	Q3 2017	9M 2018	9M 2017
Total revenues	$1.220 billion	$1.088 billion	$3.224 billion	$2.995 billion
Gross profit	$313.0 million	$291.7 million	$739.3 million	$712.8 million
Earnings from operations	$240.7 million	$227.0 million	$543.7 million	$517.0 million
Net earnings attributable to Martin Marietta	$180.2 million	$151.5 million	$375.6 million	$336.2 million
Diluted EPS	$2.85	$2.39	$5.93	$5.30
EBITDA	$333.4 million	$302.0 million	$813.4 million	$742.0 million

Q3 revenue increased 12.1%, operating earnings increased 6.0%, attributable net earnings increased 18.9%, diluted EPS increased 19.2%, and EBITDA increased 10.4%. Nine-month revenue increased 7.6%, operating earnings 5.2%, attributable net earnings 11.7%, diluted EPS 11.9%, and EBITDA 9.6%.

Reported gross margin was 25.7% in Q3 versus 26.8% in the prior-year quarter and 22.9% for the nine months versus 23.8%. SG&A was 5.6% of revenue in Q3 versus 5.3% and 6.5% for both nine-month periods.

Q3 Building Materials revenue was $1.146 billion, up from $1.024 billion; Magnesia Specialties revenue was $73.5 million, up from $63.9 million.
Q3 aggregates revenue benefited from a 14.9% increase in total aggregates volume, including 5.1 million tons from acquisitions. Heritage aggregates volume, excluding the divested Forsyth quarry, increased 3.8%, while pricing increased 2.9%.
At September 30, 2018, cash and cash equivalents were $54.0 million, compared with $1.446 billion at December 31, 2017, primarily reflecting the Bluegrass acquisition and related financing activity.
Total debt was $3.210 billion, including $380.0 million classified as current; long-term debt was $2.830 billion. Total debt was $1.723 billion at September 30, 2017.
Total assets were $9.588 billion and total equity was $4.942 billion at September 30, 2018.
Nine-month operating cash flow was $441.5 million versus $418.1 million. Capital expenditures were $262.2 million, and full-year capital spending was expected to approximate $375 million.
The company paid $86.2 million in dividends and repurchased $60.4 million of common stock during the first nine months.

Material Changes Versus the Prior Comparable Period

On April 27, 2018, Martin Marietta acquired Bluegrass Materials Company for $1.617 billion in cash. Bluegrass contributed $115.0 million of revenue and $18.3 million of operating earnings during the nine-month period, including only the post-acquisition period in reported results.
The acquisition added approximately $239.4 million of preliminary goodwill and increased property, plant and equipment by approximately $1.522 billion. Purchase accounting remained subject to adjustment at September 30, 2018.
To satisfy DOJ competition requirements, the company divested the Forsyth quarry in Georgia and the Beaver Creek quarry in Maryland. A $14.8 million pretax gain was recognized on the Forsyth divestiture.
Acquisition-related expenses were $27.7 million for the nine months. Selling acquired inventory at acquisition-date fair value reduced gross profit by $18.5 million for the nine months, including $8.3 million in Q3.
Q3 other operating expenses included a $7.1 million restructuring charge related primarily to Southwest ready-mixed-concrete operations. The prior-year quarter included $12.4 million of leased-railcar repair costs.
Nine-month other operating income included a $16.9 million gain on surplus land and a $7.7 million net gain on legal settlements.
The company made $150.0 million of discretionary pension contributions during Q3, producing a reported tax benefit. The nine-month effective tax rate was 18.3%, compared with 26.2% in 2017; the rates are not directly comparable because of the 2017 Tax Act and other tax items.
The company adopted new revenue-recognition and cash-flow-classification standards with immaterial reported effects. It expects adoption of the lease standard on January 1, 2019 to materially increase recognized right-of-use assets and lease liabilities.

Guidance, Outlook, Risks and Unusual Items

Management updated 2018 guidance to reflect extraordinary third-quarter weather. Heritage aggregates pricing is expected to increase 3% to 4%, while heritage aggregates volume is expected to be flat to up 1%, excluding 2017 Forsyth shipments. Infrastructure shipments are expected to be relatively flat, nonresidential shipments to increase in the low- to mid-single digits, residential shipments to increase in the high-single digits, and ChemRock/Rail shipments to decrease. The filing does not provide a clear full-year revenue or earnings guidance value.

Record precipitation in Texas and Hurricane Florence disruptions in the Carolinas delayed construction activity and reduced September shipments and operating efficiency.
Management cited expected support from infrastructure funding, state and local transportation initiatives, energy-related projects and favorable residential-market demographics.
Liquidity included $617.7 million of unused borrowing capacity under the revolving and trade-receivable facilities, subject to covenant compliance. The company stated that cash flows and financing resources should be sufficient for operating needs, debt service, capital expenditures, dividends, repurchases and certain acquisitions.
The company’s trailing-twelve-month debt-to-EBITDA ratio, as defined by its revolving facility, was 2.72x at September 30, 2018, below the 3.50x covenant limit. The company reported compliance with the covenant.
The $400.0 million Trade Receivable Facility matures September 25, 2019 and contains cross-default provisions. The $700.0 million revolving facility expires December 5, 2021.
Key risks include construction-cycle and economic weakness, infrastructure funding delays, weather, fuel and other input-cost inflation, labor and transportation constraints, interest-rate exposure, commodity pricing, environmental regulation, customer-credit concentration, acquisition integration and synergy execution, goodwill impairment, tax-law changes and potential debt-covenant or credit-rating pressure.
A 100-basis-point increase in rates on $1.08 billion of variable-rate borrowings would increase annual interest expense by approximately $10.8 million. A 15% change in energy prices was estimated to affect full-year 2018 energy expense by approximately $37.4 million.

Most Important Facts for Investors to Verify

Whether Bluegrass integration, expected synergies and post-acquisition profitability support the company’s leverage and investment-grade credit ratings.
The timing and amount of the $2019 Trade Receivable Facility maturity and the company’s refinancing plans.
Whether heritage aggregates volumes and pricing achieve the updated 2018 guidance after weather-related disruptions.
Underlying gross-margin performance excluding acquisition accounting, restructuring, divestiture gains, legal settlements and other unusual items.
The final purchase-accounting adjustments for Bluegrass, including goodwill, property, plant and equipment and deferred taxes.
The impact of the January 1, 2019 lease-standard adoption on assets, liabilities, disclosures and covenant calculations.
Exposure to variable interest rates, fuel and energy costs, construction demand, infrastructure funding, labor shortages and adverse weather.
Reported liquidity, debt maturities, covenant headroom, dividends and share repurchases as acquisition and seasonal working-capital needs continue.