Martin Marietta Materials, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2020, compared with the prior-year quarter. Martin Marietta supplies aggregates, cement, ready-mixed concrete, asphalt and paving services through approximately 300 locations across 27 states, Canada and the Bahamas. It also operates a Magnesia Specialties business. Operations were generally treated as essential during the COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $958.2 million | $939.0 million | +2.0% |
| Gross profit | $142.4 million | $142.9 million | -0.3% |
| Gross margin | 14.9% | 15.2% | -30 bps |
| Earnings from operations | $57.8 million | $69.2 million | -16.5% |
| Operating margin | 6.0% | 7.4% | -140 bps |
| Net earnings attributable to Martin Marietta | $25.9 million | $42.9 million | -39.6% |
| Diluted EPS | $0.41 | $0.68 | -39.7% |
| Adjusted EBITDA | $149.0 million | $158.2 million | -5.8% |
| Cash flow from operations | $106.7 million | $117.9 million | -9.5% |
| Capital expenditures | $104.1 million | $130.1 million | -20.0% |
Revenue growth was led by the Building Materials business, whose total revenue increased to $892.5 million from $864.9 million. Magnesia Specialties revenue declined to $65.7 million from $74.1 million. At March 31, 2020, cash and cash equivalents were $424.0 million, versus $21.0 million at December 31, 2019.
Total debt was $3.264 billion, compared with $2.774 billion at year-end 2019. Current maturities and short-term facilities were $639.9 million, including $300 million of floating-rate notes due in May 2020 and $340 million outstanding under the trade receivable facility. Long-term debt was $2.624 billion. The company had $757.7 million of unused borrowing capacity under its revolving and trade receivable facilities and reported a covenant debt-to-EBITDA ratio of 2.56x versus a 3.50x maximum.
Material changes versus the prior comparable period
- Aggregates shipments increased 2.3% and pricing increased 2.7%; aggregates gross profit declined to $93.4 million from $98.0 million, primarily because of operational impacts and a $15.2 million unfavorable inventory-cost effect.
- Cement shipments increased 5.2%, pricing increased 2.6%, and cement gross margin expanded to 25.6% from 13.9%.
- Ready-mixed concrete shipments decreased 14.1% because of weather-related project delays in Texas, while pricing increased 4.6%.
- Building Materials operating earnings declined to $57.5 million from $72.0 million. West Group operating earnings increased to $22.7 million from $20.3 million, but Mid-America and Southeast earnings declined.
- Other operating expense was $5.6 million versus $4.7 million of income in the prior-year quarter, reflecting higher bad-debt expense, lower asset-sale gains and the absence of a prior-year $4.2 million reversal of unclaimed-property accruals.
- Net earnings benefited from a $6.9 million discrete tax benefit related to financing third-party railroad maintenance. The prior-year period included a $13.2 million discrete tax benefit from a subsidiary tax-status change.
- On March 5, 2020, the company issued $500 million of 2.500% senior notes due 2030, intended in part to fund repayment of the $300 million floating-rate notes due May 2020.
- The company repurchased 210,616 shares for $50.0 million during the quarter, but temporarily suspended further repurchases in March because of COVID-19.
Guidance, outlook, commentary and risks
The filing does not provide a specific full-year earnings or revenue forecast. Management stated that quarterly results are seasonal and not indicative of full-year performance, particularly given weather and the uncertain effects of COVID-19.
Management viewed infrastructure construction, especially aggregates-intensive highway and street projects, as the most near-term resilient end market. However, lower state fuel-tax collections, competing pandemic-related funding needs, project delays or cancellations, reduced residential and nonresidential construction, and changes in government orders could reduce future demand. Weather, including excessive rainfall, also affected first-quarter shipments.
Management believed liquidity was sufficient for foreseeable operating needs, debt service, capital expenditures and near-term maturities. The company expected to defer approximately $25 million of employer Social Security taxes under the CARES Act and deferred certain estimated tax payments. The trade receivable facility expires September 23, 2020 and contains a cross-default provision. The company was in compliance with its debt covenant at March 31, 2020.
Principal risks include the duration and severity of COVID-19, whether operations remain classified as essential, construction-market weakness, infrastructure funding reductions, customer credit losses, supply-chain and transportation constraints, labor availability, fuel and other input costs, commodity-price volatility, adverse weather, pension-asset declines, environmental regulation and potential debt-covenant or credit-rating pressure. A hypothetical 100-basis-point increase in variable-rate borrowing costs would increase annual interest expense by approximately $6.4 million.
Important facts for investors to verify
- Repayment or refinancing of the $300 million floating-rate notes due May 2020 and the continuing availability or renewal of the trade receivable facility.
- COVID-19 effects on shipment volumes, project timing, customer receivables, employee availability and site operations after March 31, 2020.
- Whether infrastructure funding and state transportation projects remain on schedule as tax revenues and public budgets are affected.
- Progress in restoring operating margins, particularly aggregates operational performance and ready-mixed concrete volumes.
- Use of cash and debt capacity, including any resumption of share repurchases, dividends, acquisitions or additional borrowing.
- Changes in the 2.56x leverage ratio and continued compliance with the 3.50x covenant threshold.
- Potential effects of lower pension-asset values on future pension expense and accumulated other comprehensive loss.