MARTIN MARIETTA MATERIALS INC annual report, FY2020

Martin Marietta Materials, Inc. — FY2020 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K, not a quarterly filing. Martin Marietta is a natural-resource-based building materials company operating approximately 300 quarries, mines and distribution yards across 27 states, Canada and The Bahamas. Its principal businesses are Building Materials and Magnesia Specialties.

Business Context

Building Materials: Aggregates, cement, ready mixed concrete, asphalt and paving services. The East Group supplies aggregates; the West Group supplies aggregates, cement and downstream products.
Magnesia Specialties: Magnesia-based chemicals and dolomitic lime used in industrial, agricultural, environmental and steel-related applications.
Aggregates accounted for 68% of consolidated product gross profit in 2020. The five largest Building Materials revenue states—Texas, Colorado, North Carolina, Georgia and Iowa—represented 71% of Building Materials revenue.
Operations continued during the COVID-19 pandemic because the Company was generally classified as an essential business, although aggregates volumes and Magnesia Specialties demand were affected.

Key Financial Metrics

Metric	2020	2019	Change
Total revenues	$4,729.9 million	$4,739.1 million	Down $9.2 million
Products and services revenues	$4,432.1 million	$4,422.3 million	Up $9.8 million
Gross profit	$1,252.8 million	$1,179.0 million	Up 6.3%
Gross margin	26.5%	24.9%	Up 160 basis points
Earnings from operations	$1,005.4 million	$884.9 million	Up 13.6%
Operating margin	21.3%	18.7%	Up 260 basis points
Net earnings attributable to Martin Marietta	$721.0 million	$611.9 million	Up 17.8%
Diluted EPS	$11.54	$9.74	Up 18.5%
Adjusted EBITDA	$1,392.8 million	$1,254.5 million	Up 11.0%
Cash provided by operating activities	$1,050.1 million	$966.1 million	Up $84.0 million

Segment and Operating Trends

Building Materials revenue increased to $4,487.2 million from $4,467.8 million, while gross profit increased to $1,159.8 million from $1,080.6 million.
Building Materials performance benefited from pricing, cost management, lower energy costs and reduced cement maintenance costs.
Aggregates shipments declined 2.4% to 186.5 million tons, while aggregate pricing increased 3.1%; mix-adjusted pricing increased 4.0%.
Cement shipments increased 2.4%, reported pricing increased 1.0%, and cement gross margin expanded 510 basis points. The Texas cement plants operated at approximately 80% utilization.
Adjusted ready mixed concrete volume increased 3.2% after excluding acquired operations and the divested ArkLaTex business. Asphalt volume increased 15.3%.
Magnesia Specialties revenue declined 11% to $242.7 million, gross profit declined 10% to $85.5 million, and earnings from operations declined 15% to $70.7 million. COVID-19-related weakness in steel and chemical markets was the primary factor.
Aggregates product gross profit remained the principal earnings contributor. Management reported record consolidated gross profit, earnings from operations, net earnings, diluted EPS and Adjusted EBITDA.

Cash Flow, Capital Allocation, Debt and Liquidity

Operating cash flow was $1,050.1 million. Cash used in investing activities was $409.7 million, including $359.7 million of property, plant and equipment additions and $65.1 million for acquisitions.
Capital investments into operations were approximately $367 million. Pretax proceeds from divestitures and asset sales were $142.3 million, including $122.8 million of net cash proceeds from specified land and asset sales.
Net long-term debt repayment was $149.0 million. Long-term debt, including current maturities, was $2,625.8 million at December 31, 2020, compared with $2,773.6 million at December 31, 2019.
The Company issued $500.0 million of 2.500% Senior Notes due 2030 and used proceeds partly to repay $300.0 million of floating-rate notes at maturity.
At year-end, unrestricted cash and short-term investments were $207.3 million, restricted cash was $97.1 million, and unused borrowing capacity under the revolving and trade receivable facilities was approximately $1.1 billion.
The Company’s consolidated net debt-to-consolidated EBITDA ratio under its credit agreement was 1.75x, below the 3.50x covenant limit.
Dividends increased 4% to $2.24 per share; cash dividends paid were $140.3 million. The Company repurchased 0.2 million shares for $50.0 million and had 13.5 million shares remaining under its authorization.
Total equity was $5.89 billion. The Company expects cash on hand, operating cash flow and available financing to support operating needs, debt service, capital expenditures, potential acquisitions and dividends.

Material Changes Versus 2019

Revenue was broadly stable, but profitability improved substantially because pricing and operating efficiencies more than offset lower aggregates volumes and weaker Magnesia Specialties results.
Gross margin increased from 24.9% to 26.5%; operating margin increased from 18.7% to 21.3%.
Interest expense declined to $118.1 million from $129.3 million because of lower average debt and lower variable interest rates.
Other operating income increased to $59.8 million from $9.1 million, primarily because of $69.9 million of nonrecurring gains on land and divested asset sales.
COVID-19-related expenses were approximately $6.0 million, principally for cleaning and sanitizing protocols.
Capital expenditures declined from $393.5 million to $359.7 million as management reduced spending in response to pandemic uncertainty.
The Company completed an acquisition of certain assets, including a sand and gravel plant and four ready mixed concrete operations, for cash consideration of approximately $65.1 million. The acquisition was not material to reported operating results.
Organizational changes effective July 1, 2020 consolidated operating divisions into the East, Central, Southwest and West divisions, reported externally as the East Group and West Group.

Guidance, Outlook, Risks and Unusual Items

Management expected increased state and local infrastructure spending in 2021, supported by December 2020 federal stimulus funding and approved state and local ballot initiatives. Federal infrastructure spending was expected to remain stable under the FAST Act extension, although longer-term funding depends on successor legislation or continuing resolutions.
Management expected continued residential construction growth, supported by low interest rates, favorable demographics, housing undersupply and population growth. It also cited potential growth from infrastructure, distribution centers, data centers and other large projects.
Magnesia Specialties’ future organic profit growth is expected to depend on pricing, recovery from COVID-19 effects, portfolio rationalization, efficiency improvements and cost reductions. Approximately 63% of the segment’s 2021 coal, natural gas and petroleum coke requirements were covered by fixed-price agreements.
Key risks include construction-cycle weakness, COVID-19 effects, public infrastructure funding uncertainty, adverse weather and hurricanes, fuel and raw-material inflation, transportation disruptions, labor negotiations, steel-industry weakness, environmental and zoning restrictions, climate regulation, equipment failures, cybersecurity incidents and acquisition-integration risks.
The Company’s facilities and operations are subject to extensive environmental, health, safety, zoning and permitting requirements. Environmental compliance costs were approximately $32.8 million in 2020; management stated that the ultimate effect of pending litigation and environmental proceedings was not expected to be material, although adverse outcomes remain possible.
Unusual 2020 items included $69.9 million of nonrecurring asset-sale gains, $11.4 million of third-party railroad track maintenance expense and a $14.2 million discrete tax benefit related to financing railroad maintenance.
Pension obligations increased because of lower discount rates. The defined benefit projected obligation was $1.11 billion, the plans were underfunded by $74.0 million, and estimated 2021 pension and SERP contributions were $82.6 million.
Management and PwC concluded that internal control over financial reporting and disclosure controls were effective as of December 31, 2020. The audit report contained a critical audit matter concerning valuation of the projected benefit obligation.

Important Facts for Investors to Verify

Whether 2021 infrastructure funding, residential activity and large Texas and southeastern projects offset continuing weakness in private nonresidential, energy-related and steel markets.
Whether pricing gains can continue to offset volume pressure, inflation in fuel and other inputs, and higher transportation costs.
The sustainability of 2020 margins after excluding the $69.9 million of nonrecurring asset-sale gains and considering the Company’s substantial operating leverage.
Progress in Magnesia Specialties’ recovery, specialty-chemical strategy and exposure to steel utilization.
Debt maturities, refinancing needs and compliance with the 3.50x leverage covenant, particularly if construction volumes or pricing weaken.
Cash deployment among capital expenditures, acquisitions, dividends, debt repayment and share repurchases.
Potential effects of environmental, climate, zoning and permitting developments on quarry access, cement operations and Magnesia Specialties.
Pension funding requirements, discount-rate sensitivity and the $74.0 million underfunded pension position.
Renewal and cost terms for rail, waterborne shipping, royalty, energy and labor agreements.