Martin Marietta Materials, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Martin Marietta Materials is a natural resource-based building materials company supplying aggregates, cement, ready mixed concrete, asphalt and paving services, and magnesia-based specialty products. Its Building Materials business operates through the East Group and West Group, with approximately 350 quarries, mines and distribution yards across 28 states, Canada and The Bahamas. The filing covers the three and six months ended June 30, 2022; results are unaudited and include continuing operations unless otherwise noted.
The Company completed the $2.26 billion acquisition of Lehigh Hanson’s West Region in October 2021. Certain California cement and ready mixed concrete operations acquired in that transaction are classified as discontinued operations or assets held for sale.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenues | $1,641.7 million | $1,377.9 million | $2,872.5 million | $2,360.3 million |
| Gross profit | $425.2 million | $385.1 million | $581.3 million | $559.8 million |
| Earnings from operations | $478.6 million | $307.5 million | $538.4 million | $406.8 million |
| Net earnings attributable to Martin Marietta | $366.5 million | $225.8 million | $387.9 million | $291.1 million |
| Diluted EPS from continuing operations | $5.65 | $3.61 | $6.04 | $4.65 |
| Adjusted EBITDA | $478.3 million | $439.2 million | $675.5 million | $644.8 million |
| Adjusted diluted EPS from continuing operations | $3.96 | $3.81 | $4.36 | $4.87 |
Q2 total revenue increased approximately 19%, while six-month revenue increased approximately 22%. Q2 gross margin was 25.9%, down from 27.9%; six-month gross margin was 20.2%, down from 23.7%. Reported Q2 operating margin was 29.2%, compared with 22.3% in the prior-year quarter, but included a $151.7 million pretax gain on divestiture. Excluding specified nonrecurring items, adjusted Q2 operating earnings were $329.8 million versus $324.4 million, and adjusted six-month operating earnings were $391.0 million versus $425.0 million.
Cash flow, balance sheet, debt and liquidity
- Cash provided by operating activities was $286.2 million for the six months ended June 30, 2022, compared with $441.2 million in the prior-year period. The decline reflected increased accounts receivable and inventory investments, partly offset by higher earnings and noncash charges.
- Capital expenditures were $220.7 million, compared with $213.0 million in the prior-year period.
- Investing activities provided $433.5 million, primarily from $644.4 million of divestiture and asset-sale proceeds. Financing activities used $206.5 million, including $47.7 million of debt repayments, $50.0 million of share repurchases and $77.0 million of dividends.
- Cash and cash equivalents were $772.1 million at June 30, 2022, versus $258.4 million at December 31, 2021. Total assets were $14.54 billion and total equity was $6.77 billion.
- Total debt was $5.04 billion, compared with $5.10 billion at year-end 2021. Approximate gross debt less cash was $4.27 billion at June 30, 2022.
- No borrowings were outstanding under the $800 million revolving facility or the $400 million trade receivable securitization facility. Available borrowing capacity under these facilities was $1.197 billion, subject to covenant compliance.
- The Company was in compliance with its leverage covenant at June 30, 2022. The trade receivable facility matures September 21, 2022, and the revolving facility expires December 21, 2026.
Material changes versus the prior comparable period
- The West Group benefited from the Lehigh West Region acquisition. Q2 West Group revenue increased to $885.5 million from $666.8 million, and operating earnings increased to $274.5 million from $101.8 million, including the divestiture gain.
- Aggregates shipments increased 9.3% in Q2 and 11.0% year to date, including acquired operations. Organic aggregates shipments increased 1.8% in Q2 and 2.4% year to date, constrained by supply-chain and logistics bottlenecks.
- Aggregate pricing increased 8.4% in Q2 and 7.2% year to date. Cement pricing increased 14.7% in Q2 and 13.5% year to date; asphalt pricing increased 24.0% and 24.7%, respectively.
- Ready mixed concrete shipments declined 22.6% in Q2 and 4.9% year to date, primarily reflecting the divestiture of Colorado and Central Texas operations. Asphalt shipments increased 40.2% in Q2 and 67.4% year to date, largely due to acquired operations.
- Energy, fuel, freight, supplies, repairs, contract services and personnel costs increased materially. Aggregate, ready mixed concrete, asphalt and Magnesia Specialties margins declined, while cement margin improved.
- On April 1, 2022, the Company divested its Colorado and Central Texas ready mixed concrete operations for a pretax gain of $151.7 million. On June 30, 2022, it sold the Redding, California cement plant, related terminals and 14 California ready mixed concrete operations for $235 million in cash, with an additional $15 million joint-venture interest sale agreed.
- The Company repurchased $60.5 million principal amount of senior notes, recognizing an $11.6 million pretax gain, and repurchased 130,551 common shares for $50.0 million during the first six months.
Outlook, commentary, risks and unusual items
Management stated that cash on hand, expected internal cash flows and available financing resources should be sufficient for operating needs, debt service, near-term maturities, capital expenditures, potential acquisitions, share repurchases and dividends for the foreseeable future. The filing does not provide a specific full-year revenue, earnings or EBITDA guidance range.
- Underlying public and private construction demand remained healthy, particularly infrastructure and Texas construction, but volumes were affected by weather, logistics constraints, labor shortages and supply-chain disruptions.
- Organic energy expense increased approximately 59% in the first six months. Management estimated that a hypothetical 59% change in consolidated organic full-year 2022 energy expense would affect expense by approximately $179.3 million, assuming constant volumes.
- Key risks include inflation, diesel and natural-gas costs, liquid asphalt costs, transportation availability, rail and trucking constraints, labor shortages, adverse weather, equipment failures, interest-rate increases, weaker residential or nonresidential construction, changes in infrastructure funding, COVID-19 effects, environmental regulation and commodity-price volatility.
- Rising interest rates may reduce residential and nonresidential construction activity. The Federal Reserve had increased the federal funds target rate by 150 basis points since December 31, 2021, with further increases expected at the filing date.
- The Company amended its qualified pension plan, resulting in a remeasurement and a $33.0 million net-of-tax other comprehensive loss before reclassifications for the six months. The amendment is expected to increase annual pension expense relative to the initial estimate.
- 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 had $17.2 million of standby letters of credit outstanding and guaranteed an affiliate facility with $3.7 million outstanding.
Important facts for investors to verify
- Separate recurring operating performance from the $151.7 million divestiture gain and the $11.6 million debt-repurchase gain.
- Assess whether pricing increases can continue to offset energy, fuel, freight, labor and raw-material inflation, particularly in aggregates, asphalt and ready mixed concrete.
- Monitor organic shipment trends independently of the Lehigh acquisition and subsequent divestitures.
- Review the September 2022 maturity of the trade receivable securitization facility and the Company’s ability to maintain its leverage covenant.
- Evaluate the effect of rising interest rates on construction demand, debt costs, pension expense and valuation.
- Confirm the timing, proceeds and remaining obligations associated with California assets held for sale and discontinued operations.
- Review working-capital requirements, especially the increase in accounts receivable and inventories, against seasonal cash-flow patterns.
- Reconcile GAAP results with management’s non-GAAP measures, including Adjusted EBITDA and adjusted EPS.