MARTIN MARIETTA MATERIALS INC annual report, FY2019

Martin Marietta Materials, Inc. — 2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. This is an annual Form 10-K, not a standalone fourth-quarter filing. The company supplies aggregates, cement, ready mixed concrete, asphalt and paving services through its Building Materials business, and produces magnesia-based chemicals and dolomitic lime through Magnesia Specialties.

Business context

Building Materials operates through the Mid-America, Southeast and West Groups. Aggregates represented 62% of consolidated products and services revenue.
The company operated more than 300 quarries, mines and distribution yards in 27 states, Canada and the Bahamas, with aggregate reserves averaging 89 years at current production levels.
Approximately 72% of Building Materials products and services revenue came from Texas, Colorado, North Carolina, Georgia and Iowa.
End-use exposure for 2019 aggregates shipments was 35% public infrastructure, 36% nonresidential construction, 22% residential construction and 7% ChemRock/Rail.

Financial performance and key metrics

Metric	2019	2018	Change
Total revenues	$4,739.1 million	$4,244.3 million	+11.7%
Products and services revenue	$4,422.3 million	$3,980.4 million	+11.1%
Gross profit	$1,179.0 million	$966.6 million	+22.1%
Gross margin	24.9%	22.8%	+210 basis points
Earnings from operations	$884.9 million	$690.7 million	+28.1%
Net earnings attributable to Martin Marietta	$611.9 million	$470.0 million	+30.2%
Diluted EPS	$9.74	$7.43	+31.1%
Adjusted EBITDA	$1,254.5 million	$1,092.1 million	+14.9%
Operating cash flow	$966.1 million	$705.1 million	+37.0%

SG&A was $302.7 million, or 6.4% of revenue versus 6.6% in 2018. The estimated effective tax rate was 18.2%, compared with 18.3% in 2018. A $15.2 million tax benefit from changing the tax status of an acquired entity increased 2019 net earnings by approximately $0.24 per diluted share.

Segment and operating trends

Building Materials revenue increased to $4,467.8 million from $3,956.6 million. Earnings from operations increased to $894.2 million from $690.8 million.
Aggregates revenue increased to $3,034.8 million from $2,593.4 million. Pricing increased 4.2% and shipments increased 11.7% to 191.1 million tons.
Aggregates gross margin improved to 29.3% from 25.7%, supported by pricing, volume, operating leverage and the full-year contribution from Bluegrass operations acquired in 2018.
Cement revenue increased to $455.5 million from $404.1 million; cement shipments reached a record 3.9 million tons, including internal shipments.
Ready mixed concrete revenue declined to $948.9 million from $964.8 million, while asphalt and paving revenue increased to $294.1 million from $258.5 million.
Magnesia Specialties revenue declined 5.7% to $271.3 million, and earnings from operations declined 5.1% to $83.6 million, primarily due to lower lime shipments to domestic steel customers and international customer inventory rationalization.

Cash flow, capital allocation, debt and liquidity

Capital expenditures were $387.6 million, compared with $381.3 million in 2018. There were no acquisitions in 2019; 2018 investing cash use included approximately $1.64 billion for Bluegrass.
Net cash used in investing activities was $385.9 million, compared with $1.95 billion in 2018.
The company repaid $350.1 million of net debt, including the $300 million Floating Rate Senior Notes due 2019.
Total debt, including current maturities, was $2.77 billion at December 31, 2019, compared with $3.12 billion at December 31, 2018. Cash and cash equivalents were $21.0 million.
Debt-to-consolidated EBITDA under the revolving credit agreement was 2.16x, within the company’s 2.0x to 2.5x target range and below the principal 3.50x covenant limit.
Available borrowing capacity under the revolving and trade receivable facilities was $757.7 million. The $700 million revolving facility matures in December 2024; the $400 million trade receivable facility was extended to September 23, 2020.
Dividends paid totaled $129.8 million, or $2.06 per share, following a 15% dividend increase in August 2019. The company repurchased approximately 0.4 million shares for $98.2 million and had 13.7 million shares remaining under its authorization.

Material changes versus 2018

Results benefited from stronger demand, a 4.2% aggregates price increase, 11.7% aggregates shipment growth, improved operating leverage and the full-year inclusion of Bluegrass.
Gross margin expanded by 210 basis points, while earnings from operations and diluted EPS increased substantially.
Interest expense declined to $129.3 million from $137.1 million due primarily to lower debt balances.
Acquisition-related expenses declined to $0.5 million from $13.5 million, and 2019 did not include the 2018 asset and portfolio rationalization charge of $18.8 million.
Other nonoperating results shifted from $22.5 million of income in 2018 to $7.3 million of expense in 2019. The 2019 amount included a $15.7 million pretax, noncash out-of-period correction related to overstated equity earnings from a nonconsolidated affiliate.
Adoption of ASC 842 increased reported assets and liabilities through recognition of operating lease right-of-use assets of $481.9 million and operating lease liabilities of $486.6 million at year-end; the adoption did not materially affect earnings or cash flow.

Outlook, risks and unusual items

Management expected infrastructure activity in 2020 and beyond to benefit from FAST Act funding, state and local infrastructure initiatives and anticipated continuing resolutions if a successor federal highway bill was not enacted before September 2020.
Management expected future organic profit growth in Magnesia Specialties from pricing, product portfolio rationalization and cost reductions, but noted exposure to steel utilization, customer realignment, energy prices and the strong U.S. dollar.
Management expected cement consumption to slow modestly in 2020, with industry growth decreasing to approximately 1.7% from 2.4% in 2019, based on Portland Cement Association projections.
Construction demand is cyclical and seasonal. Weather, including excessive precipitation, winter conditions, hurricanes and flooding, can materially affect production, shipments and margins. In 2019, Hurricane Dorian, Tropical Storm Imelda and cold, wet Rocky Mountain weather temporarily disrupted operations.
Key operating risks include infrastructure funding uncertainty, private construction downturns, interest rates, labor and trucking shortages, rail and water transportation availability, energy and raw-material costs, cement imports, environmental and zoning restrictions, climate regulation, equipment failures, cybersecurity incidents and acquisition integration.
Scheduled cement shutdown costs increased to $26.3 million from $17.3 million, and Magnesia Specialties shutdown costs were $4.4 million in 2019.
Environmental compliance costs were approximately $26.0 million in 2019. The company reported no material environmental remediation provision and believes pending litigation is unlikely to have a material adverse effect, although adverse outcomes remain possible.
Contractual commitments included $2.77 billion of long-term debt, $486.6 million of operating lease obligations, $133.9 million of contracts of affreightment, $114.9 million of royalty commitments and $93.4 million of capital purchase commitments.
The company had $32.9 million of standby letters of credit and $395.1 million of surety bonds outstanding. Management reported that material claims had not historically been made against these instruments.

Important facts for investors to verify

Whether public infrastructure awards and federal funding remain sufficient to support the company’s expected 2020 shipment growth.
Whether aggregates pricing and volume growth can be sustained without unfavorable mix, freight, labor or energy-cost pressure.
The refinancing plan and terms for the $300 million Floating Rate Senior Notes due May 22, 2020 and the September 2020 maturity of the trade receivable facility.
The effect of weather, transportation constraints and construction labor availability on quarterly results.
Whether Magnesia Specialties’ steel-related demand and international inventory levels recover.
The sensitivity of the $2.4 billion goodwill balance, including $934.7 million associated with the Cement and Southwest Ready Mix Division, to lower volumes, pricing or higher discount rates.
Future pension funding requirements, including estimated 2020 contributions of $60.2 million, and the effect of interest-rate changes on the $109.8 million pension underfunding.
The financial impact of environmental, zoning, greenhouse-gas and mine-permitting developments, as well as the company’s contractual, legal and surety obligations.