MARTIN MARIETTA MATERIALS INC quarterly report, Q3 FY2022

Martin Marietta Materials, Inc. — 2022 Third-Quarter Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022; filed November 2, 2022. The company is a natural resource-based building materials producer operating approximately 350 quarries, mines and distribution yards across 28 states, Canada and The Bahamas. Its reportable segments are the East Group, West Group and Magnesia Specialties.

Financial performance and position

Metric	Three months ended September 30	Nine months ended September 30
Total revenues	$1,811.7 million, up from $1,557.3 million	$4,684.2 million, up from $3,917.6 million
Gross profit	$487.8 million; 26.9% margin versus 28.4%	$1,069.1 million; 22.8% margin versus 25.6%
Earnings from operations	$405.9 million, up from $356.9 million	$944.4 million, up from $763.7 million
Net earnings attributable to Martin Marietta	$295.3 million, including $4.1 million from discontinued operations	$683.2 million, including $14.3 million from discontinued operations
Diluted EPS from continuing operations	$4.67 versus $4.07	$10.69 versus $8.72
Adjusted EBITDA	$533.1 million versus $490.0 million	$1,208.6 million versus $1,134.9 million
Cash provided by operating activities	Not separately reported	$560.7 million versus $780.3 million

Quarterly operating performance benefited from pricing, while higher energy, freight, supplies, repairs and maintenance costs compressed gross margin. Nine-month earnings from operations included a $151.9 million pretax gain on the divestiture of Colorado and Central Texas ready mixed concrete operations. Excluding specified nonrecurring items, nine-month adjusted earnings from operations were $798.6 million versus $797.4 million, and adjusted diluted EPS was $9.03 versus $9.12.

Third-quarter aggregates shipments increased 5.6% including acquisitions, while aggregate pricing increased 11.6%. Organic shipments were approximately flat and organic pricing increased 11.9%.
Third-quarter cement shipments increased 2.3% and pricing increased 21.4%; cement gross margin expanded to 41.5% from 37.7%.
Ready mixed concrete shipments declined 37.6%, primarily due to divestitures, project completions and weather; asphalt shipments increased 31.3% including acquired operations.
Magnesia Specialties product revenue declined 4.0% in the quarter, and product gross profit declined 22.9% because of lower steel-related demand and higher energy costs.

Liquidity, cash flow and debt

Cash and cash equivalents were $135.7 million at September 30, 2022, versus $258.4 million at December 31, 2021.
Restricted investments of $704.6 million were placed in escrow to satisfy the $700 million of 0.650% Senior Notes due July 2023. The notes remain on the balance sheet because the transaction was a satisfaction and discharge rather than a legal defeasance.
Total debt was $5.04 billion, versus $5.10 billion at year-end 2021; debt fair value was $4.23 billion. Long-term debt was $4.34 billion, with $698.7 million classified as current maturities.
The company had no borrowings under its $800 million revolving facility or $400 million trade receivable securitization facility. Available borrowing capacity was $1.197 billion, subject to the leverage covenant.
The company was in compliance with its maximum 3.50x consolidated net debt-to-EBITDA covenant at September 30, 2022. The revolving facility expires in December 2026; the trade receivable facility was extended to September 2023.
Capital expenditures were $309.1 million for the nine months. The company repurchased $150.0 million of common stock and paid $118.1 million of dividends.
Management stated that cash, expected operating cash flow and financing resources should be sufficient for operating needs, debt service, capital expenditures, acquisitions, share repurchases and dividends for the foreseeable future.

Material changes and unusual items

The October 2021 acquisition of Lehigh Hanson’s West Region materially expanded the West Group. The acquisition remained subject to final purchase-price allocation adjustments; goodwill increased by $171.4 million during the third quarter, and the company reported that no material further adjustments were expected.
The company divested Colorado and Central Texas ready mixed concrete operations in April 2022, generating the $151.9 million pretax gain and reducing ready mixed concrete volumes.
The company sold the Redding, California cement plant and related operations for $235.0 million in June 2022 and sold a cement distribution-terminal joint venture interest for $15.0 million in July 2022.
In August 2022, the company agreed to sell the Tehachapi, California cement plant and related terminals for $350.0 million, subject to regulatory approval and customary closing conditions.
Discontinued operations include remaining California cement and ready mixed concrete operations classified as held for sale. Assets held for sale totaled $454.6 million, net of related liabilities, at September 30, 2022.
The company amended its qualified pension plan, resulting in a remeasurement, higher 2022 pension expense and a $33.0 million net-of-tax other comprehensive loss before reclassifications for the nine-month period.

Outlook, risks and contingencies

The filing does not provide a specific quantitative full-year revenue, earnings or EPS guidance target. Management expects continued support from infrastructure and nonresidential construction demand and ongoing pricing actions, but results remain seasonal and weather-sensitive.

Key risks include rising interest rates, construction-market weakness, residential affordability pressures, inflation, energy and fuel costs, labor shortages, supply-chain constraints and transportation or railcar availability.
Organic energy expense increased approximately 59% for the nine months. Management estimated that a comparable increase in full-year 2022 organic energy expense would affect expense by approximately $179.3 million versus 2021, before considering acquired operations.
Weather events, including excessive rainfall, drought, hurricanes, wildfires and early winter conditions, can materially affect production, shipments and profitability.
Demand is exposed to federal, state and local infrastructure funding, construction spending, cement and ready mixed concrete pricing, and conditions in the steel industry affecting Magnesia Specialties.
The company had $21.8 million of contingent letters of credit and guaranteed $3.6 million outstanding under an affiliate revolving line of credit. Management considers the probability of a material loss from pending legal and administrative proceedings remote.
The company had $27.6 million of deferred employer Social Security taxes under the CARES Act, with the remaining half due December 31, 2022.
Management concluded that disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Reconcile reported GAAP earnings and EPS with adjusted measures, particularly the $151.9 million divestiture gain and other acquisition-related adjustments.
Monitor the completion and proceeds of the proposed Tehachapi sale and the disposition of remaining California held-for-sale assets.
Assess whether pricing gains continue to offset energy, freight, raw-material and labor inflation, especially in aggregates and asphalt and paving.
Track operating cash flow, working-capital requirements, capital expenditures and the scheduled settlement of the discharged 2023 Notes.
Evaluate compliance with the leverage covenant under scenarios involving lower construction volumes, weaker pricing or additional acquisition debt.
Review exposure to interest rates, infrastructure funding, residential and nonresidential construction, weather disruptions, transportation constraints and Magnesia Specialties’ steel and natural-gas markets.