Martin Marietta Materials, Inc. — 2020 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2020, compared with the respective 2019 periods. Martin Marietta supplies aggregates through approximately 290 quarries, mines and distribution yards in 27 states, Canada and The Bahamas, and also provides cement, ready mixed concrete, asphalt and paving services in western and southwestern U.S. markets. Magnesia Specialties produces magnesia-based chemicals and dolomitic lime.
Effective July 1, 2020, the Company reorganized its operating divisions and now reports Building Materials through the East Group and West Group, with Magnesia Specialties as a separate reportable segment. COVID-19, construction activity, weather and energy-sector demand materially affected operating trends.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Total revenues | $1,321.4 million | $1,420.2 million | $3,550.3 million | $3,638.7 million |
| Gross profit | $404.5 million | $420.6 million | $927.4 million | $920.4 million |
| Earnings from operations | $400.6 million | $345.3 million | $764.8 million | $700.4 million |
| Net earnings attributable to Martin Marietta | $294.4 million | $248.6 million | $538.0 million | $480.9 million |
| Diluted EPS | $4.71 | $3.96 | $8.61 | $7.65 |
| Adjusted EBITDA | $501.7 million | $439.1 million | $1,057.8 million | $975.8 million |
Calculated margins were approximately 30.6% gross, 30.3% operating and 22.3% net in Q3 2020, compared with 29.6%, 24.3% and 17.5%, respectively, in Q3 2019. For the first nine months, gross, operating and net margins were approximately 26.1%, 21.5% and 15.2%, respectively, compared with 25.3%, 19.2% and 13.2% in 2019.
- Operating cash flow was $684.0 million for the first nine months, compared with $649.8 million in 2019.
- Capital expenditures were $250.8 million; acquisitions used $64.0 million, while divestitures and asset sales generated $141.2 million.
- Cash, cash equivalents and restricted cash totaled $193.7 million at September 30, 2020, including $77.1 million restricted for Section 1031 reinvestment.
- Total debt was $2.625 billion, compared with $2.774 billion at December 31, 2019. No borrowings were outstanding under the $700 million revolving facility or $400 million trade receivable facility.
- The trailing-twelve-month debt-to-consolidated EBITDA covenant ratio was 1.94x, below the 3.50x limit. Unused borrowing capacity under the two facilities was $1.098 billion, subject to covenant compliance.
- Total equity was $5.759 billion at September 30, 2020, compared with $5.353 billion at year-end 2019.
Material changes versus the prior comparable periods
- Q3 revenue declined 7.0%, primarily due to lower aggregates, ready mixed concrete, Magnesia Specialties and freight revenues. Year-to-date revenue declined 2.4%.
- Q3 aggregates shipments declined 8.7%, while aggregates pricing increased 2.7%, or 4.0% on a mix-adjusted basis. Lower volumes reflected weather-delayed projects, weaker energy-sector demand and comparison with a strong 2019 quarter.
- Q3 Building Materials gross profit declined to $383.8 million from $395.9 million, but gross margin improved to 30.4% from 29.2%, supported by pricing and lower fuel and operating costs.
- Q3 operating earnings increased 16.0% and net earnings increased 18.4%; however, these increases include $69.9 million of nonrecurring pretax gains on sales of investment land and divested assets. The gains contributed $54.1 million after tax, or $0.87 per diluted share.
- For the first nine months, Building Materials operating earnings increased to $754.3 million from $704.2 million, while Magnesia Specialties operating earnings declined to $51.2 million from $68.0 million.
- Magnesia Specialties product revenue declined 7% in Q3 and approximately 18% year to date, reflecting lower steel, lime, periclase and chemical-product demand associated with COVID-19 and reduced auto manufacturing.
- The Company issued $500 million of 2.500% Senior Notes due 2030 and used proceeds partly to repay $300 million of floating-rate notes at maturity in May 2020.
- During Q3, the Company acquired a sand and gravel plant and four ready mixed concrete operations in the Dallas/Fort Worth market. Preliminary purchase accounting remains subject to adjustment, and the acquisition was not material to reported operating results.
- Share repurchases totaled $50.0 million during the first nine months, but the program was temporarily suspended in March 2020 because of the pandemic. Dividends paid were $104.8 million.
Outlook, commentary, risks and unusual items
Management stated that cash on hand, projected operating cash flow and available financing are expected to support operating needs, debt service, capital expenditures, potential acquisitions, dividends and a possible resumption of share repurchases for the foreseeable future. The filing does not provide a specific full-year revenue or earnings guidance range.
- COVID-19 remains the principal uncertainty. Operations were treated as essential at the reporting date, but future government restrictions, site-specific health concerns, supply disruptions, labor constraints, customer delays and project cancellations could reduce volumes and profitability.
- Construction demand is exposed to federal, state and local infrastructure funding, fuel-tax receipts, commercial and residential construction, energy-sector activity and interest rates.
- Weather, including excessive rainfall, drought, hurricanes and winter conditions, can materially affect production, shipments, product mix and margins.
- Energy costs are significant. Nine-month energy expense declined approximately 18% year over year; management estimated that an 18% change in full-year energy prices would change 2020 energy expense by approximately $50 million, assuming constant volumes.
- Other unusual items included $4.8 million of COVID-related cleaning and sanitizing expenses year to date, a $6.9 million discrete tax benefit, $5.6 million of third-party railroad track maintenance expense and an $8.9 million reduction in pension expense versus the prior year.
- The Company was contingently liable for $31.7 million of letters of credit and was co-borrower on a $12.5 million affiliate revolving line, of which $9.4 million was outstanding. The affiliate agreed to reimburse and indemnify the Company for related payments and expenses.
- Management believes pending legal and administrative proceedings are unlikely to result in a material loss based on currently available information.
Most important facts for investors to verify
- Reconcile reported earnings growth to the $69.9 million nonrecurring pretax gains and assess underlying operating performance excluding those gains.
- Track COVID-19 effects on aggregates volumes, infrastructure funding, nonresidential and energy-related construction, and Magnesia Specialties demand.
- Monitor aggregates pricing, shipment volumes, product mix, fuel costs and ready mixed concrete margins.
- Verify liquidity, restricted Section 1031 cash, facility availability, debt maturities and continued compliance with the 3.50x leverage covenant.
- Assess the Dallas/Fort Worth acquisition’s final purchase accounting, integration progress and contribution to future results.
- Review the status of the suspended share-repurchase program, dividend capacity and planned capital expenditures.
- Consider pension sensitivity, commodity and energy-price exposure, weather risks, environmental matters and the potential for further government COVID-19 restrictions.