MARTIN MARIETTA MATERIALS INC quarterly report, Q3 FY2021

Martin Marietta Materials, Inc. — 2021 Q3 Form 10-Q Summary

Business Context and Reporting Period

Unaudited quarterly report for the three and nine months ended September 30, 2021, filed November 2, 2021. Martin Marietta is a natural-resource-based building-materials company operating approximately 320 quarries, mines and distribution yards across 26 states, Canada and The Bahamas. Its reportable segments are the East Group, West Group and Magnesia Specialties. Products include aggregates, cement, ready mixed concrete, asphalt, paving services and magnesia-based chemicals and lime.

Financial Metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Total revenue	$1,557.3 million	$1,321.4 million	$3,917.6 million	$3,550.3 million
Gross profit	$441.9 million	$404.5 million	$1,001.7 million	$927.4 million
Gross margin	28.4%	30.6%	25.6%	26.1%
Earnings from operations	$356.9 million	$400.6 million	$763.7 million	$764.8 million
Net earnings attributable to Martin Marietta	$254.6 million	$294.4 million	$545.7 million	$538.0 million
Diluted EPS	$4.07	$4.71	$8.72	$8.61
Adjusted EBITDA	$490.0 million	$501.7 million	$1,134.9 million	$1,057.8 million

Q3 revenue increased 17.9%, while nine-month revenue increased 10.3%. Q3 operating margin was approximately 22.9%, compared with 30.3% in the prior-year quarter; nine-month operating margin was approximately 19.5%, compared with 21.5%. The filing does not provide a consolidated EBITDA margin.

Operating cash flow for the first nine months was $780.3 million, compared with $684.0 million in 2020.
Capital expenditures were $321.3 million, compared with $250.8 million. Acquisitions used $792.9 million, compared with $64.0 million.
Cash, cash equivalents and restricted cash totaled $2,383.1 million at September 30, 2021, including $2,381.4 million of unrestricted cash and $1.7 million of restricted cash.
Total debt was $5,119.5 million, compared with $2,625.8 million at December 31, 2020. Long-term debt was $5,099.4 million, with $20.1 million classified as current.
The company had $20.0 million outstanding under its trade receivable facility and no borrowings under its $700 million revolving facility. Unused borrowing capacity under the two facilities was $1,077.4 million, subject to covenant compliance.
Trailing-twelve-month consolidated net debt-to-consolidated EBITDA, as defined under the revolving facility, was 3.49x at September 30, 2021. The company was in compliance with its 3.50x covenant.
Dividends declared during the first nine months totaled $1.75 per share, or $110.0 million. No shares were repurchased during the period.

Material Changes Versus the Prior Comparable Period

Q3 revenue growth reflected higher aggregates, ready mixed concrete and Magnesia Specialties volumes, acquisitions and pricing. Aggregates shipments increased 10.2%, ready mixed concrete shipments increased 23.2%, cement shipments increased 4.1% and asphalt shipments increased 115.9%.
Nine-month earnings attributable to Martin Marietta increased 1.4% and diluted EPS increased 1.3%, despite higher acquisition-related costs, energy costs and operating expenses.
Q3 net earnings declined 13.5% and diluted EPS declined 13.6%, principally because Q3 2020 included $69.9 million of nonrecurring gains on sales of investment land and divested assets. Q3 2021 also included $7.4 million of acquisition-related expenses and $8.1 million of costs related to selling acquired inventory at its acquisition-date fair value.
For the nine-month period, 2021 operating results included $18.0 million of acquisition-related expenses and $15.7 million of acquired-inventory fair-value costs. The prior-year period included the $69.9 million of nonrecurring asset-sale gains.
Gross margin declined in Q3 to 28.4% from 30.6%, driven by higher diesel, energy, repairs, maintenance, contract-service and raw-material costs, as well as acquisition accounting effects. Nine-month gross margin declined modestly to 25.6% from 26.1%.
The East Group benefited from Tiller operations and reported Q3 operating earnings of $205.8 million, up from $181.4 million. West Group Q3 operating earnings declined to $150.6 million from $212.3 million, reflecting cost pressures, acquisition accounting effects, Colorado liquid-asphalt shortages and the prior-year asset-sale gains.
Magnesia Specialties Q3 operating earnings rose to $23.1 million from $16.4 million, supported by improved chemicals and lime demand. Nine-month operating earnings increased to $69.8 million from $51.2 million.

Guidance, Outlook, Risks and Unusual Items

Management stated that cash on hand, projected operating cash flow and financing availability are expected to be sufficient for operating needs, debt service, near-term maturities, capital expenditures, acquisitions, potential share repurchases and dividends for the foreseeable future. The filing does not provide specific earnings or revenue guidance.
On October 1, 2021, after the reporting date, the company completed the $2.3 billion cash acquisition of Lehigh Hanson’s West Region business. The transaction includes 17 active aggregates quarries, two cement plants and related downstream operations in California and Arizona. Initial purchase accounting was not complete as of November 2, 2021.
The Lehigh acquisition was primarily financed with $2.5 billion of senior notes issued on July 2, 2021: $700 million due 2023, $900 million due 2031 and $900 million due 2051. This issuance substantially increased debt and interest expense.
Construction activity is seasonal and sensitive to weather. Excessive rainfall, drought, hurricanes, early winter conditions and project delays can affect volumes, costs and profitability.
Principal operating risks include inflation, fuel and energy costs, supply-chain and labor constraints, transportation and rail availability, raw-material costs, construction and infrastructure spending, interest rates, COVID-19 impacts, environmental regulation and the ability to realize acquisition synergies while maintaining debt covenants.
Energy expense increased approximately 29% in the first nine months. Management estimated that a hypothetical 29% change in energy prices would affect full-year 2021 energy expense by approximately $67 million, assuming constant volumes.
Pending legal and administrative proceedings, including environmental matters, were assessed as unlikely to result in a material loss based on currently available information. The company also had $35.0 million of contingent letters of credit.
The company deferred $27.6 million of employer Social Security taxes under the CARES Act; one-half is due December 31, 2021 and the balance December 31, 2022, without interest.
Disclosure controls and procedures were evaluated as effective as of September 30, 2021, with no reported material changes to internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Confirm the post-quarter impact of the Lehigh West Region acquisition on revenue, EBITDA, debt, amortization, integration costs and covenant calculations.
Assess whether pricing increases can offset inflation in diesel, energy, raw materials, repairs, maintenance and contract services.
Monitor the 3.49x net debt-to-EBITDA covenant ratio, available borrowing capacity and the company’s ability to reduce leverage after the Lehigh transaction.
Reconcile reported earnings with adjusted results by separately evaluating nonrecurring asset-sale gains, acquisition-related costs and acquired-inventory fair-value charges.
Evaluate demand trends in infrastructure, nonresidential, residential, energy and steel-related markets, including the effect of government infrastructure funding and interest rates.
Review weather, supply-chain, labor, transportation, environmental and COVID-19 developments that could affect production, shipments and margins.