Martin Marietta Materials, Inc. — Form 10-Q Summary
Business context and reporting period
Martin Marietta is a natural-resource-based building-materials company operating more than 300 quarries, mines and distribution yards across 27 states, Canada and the Bahamas. Its Building Materials business includes aggregates, cement, ready-mixed concrete, asphalt and paving services, reported through the Mid-America, Southeast and West Groups. The company also operates Magnesia Specialties. This unaudited report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $1.420 billion | $1.220 billion | $3.639 billion | $3.224 billion |
| Gross profit | $420.6 million | $313.0 million | $920.4 million | $739.3 million |
| Gross margin | 29.6% | 25.7% | 25.3% | 22.9% |
| Earnings from operations | $345.3 million | $240.7 million | $700.4 million | $543.7 million |
| Operating margin | 24.3% | 19.7% | 19.2% | 16.9% |
| Net earnings attributable to Martin Marietta | $248.6 million | $180.2 million | $480.9 million | $375.6 million |
| Diluted EPS | $3.96 | $2.85 | $7.65 | $5.93 |
| Adjusted EBITDA | $439.1 million | $344.6 million | $975.8 million | $842.0 million |
Third-quarter revenue increased 16%, gross profit increased 34%, operating earnings increased 44%, and diluted EPS increased 39%. For the first nine months, revenue increased 13%, gross profit increased 25%, operating earnings increased 29%, and diluted EPS increased 29%.
- Building Materials revenue was $1.355 billion in the third quarter and $3.423 billion for nine months. Aggregates shipments increased 12.4% in the quarter and 14.2% year to date, while aggregates pricing increased 5.3% and 3.9%, respectively.
- Third-quarter aggregates product gross margin expanded to 35.1%, helped by volume, pricing, operating leverage and the absence of the 2018 Bluegrass acquisition-accounting inventory charge.
- Magnesia Specialties product revenue declined 13.2% in the quarter to $59.3 million as customers reduced inventories; nine-month product revenue declined 1.2% to $198.9 million.
- Net cash provided by operating activities was $649.8 million for the first nine months, compared with $441.5 million in 2018. Capital expenditures were $283.0 million; full-year capital spending was expected at $375 million to $400 million.
- Cash and cash equivalents were $49.1 million at September 30, 2019, compared with $44.9 million at December 31, 2018.
- Total debt was $2.923 billion at September 30, 2019, compared with $3.120 billion at year-end 2018. Long-term debt was $2.733 billion, and no borrowings were outstanding under the $700 million revolving facility.
- The company reported $907.7 million of unused borrowing capacity under its revolving and trade receivable facilities, subject to covenant compliance. Its debt-to-consolidated-EBITDA ratio was 2.32x versus a 3.50x covenant limit.
- Shareholders’ equity increased to $5.304 billion from $4.949 billion at December 31, 2018. The company repurchased 261,634 shares for $57.3 million and paid $95.2 million in dividends during the first nine months.
Material changes versus the prior comparable period
- Performance benefited from stronger aggregates demand, higher pricing, increased shipments and improved operating leverage. Infrastructure, nonresidential and residential shipments all increased, with nonresidential and residential each representing a double-digit growth opportunity.
- West Group operating earnings increased to $156.4 million from $92.1 million in the third quarter and to $286.5 million from $249.9 million for nine months.
- Ready-mixed concrete shipments declined 4% for the first nine months because of unfavorable weather in Texas and Colorado, although third-quarter shipments increased 9%.
- Nine-month asphalt and paving gross margin declined to 17.1%, primarily because raw-material costs, particularly liquid asphalt, increased 26%.
- 2018 included $8.3 million of third-quarter and $18.5 million of nine-month negative impact from selling Bluegrass acquired inventory at its fair-value markup, as well as $7.1 million of asset and portfolio rationalization charges. These items did not recur in 2019.
- 2019 nine-month other operating income included a $6.9 million reversal of sales-tax and unclaimed-property accruals. The period also included a $15.7 million pretax, noncash out-of-period correction for an overstatement of earnings from a nonconsolidated affiliate, reducing net earnings by approximately $12.0 million after tax.
- The company adopted ASC 842 leases on January 1, 2019, recognizing approximately $484.9 million of operating lease right-of-use assets at September 30. Adoption did not materially affect earnings or cash flow.
Guidance, outlook, risks and contingencies
Management raised full-year 2019 guidance. Compared with 2018, infrastructure aggregates shipments were expected to increase in the high-single digits, while nonresidential and residential shipments were expected to increase at double-digit rates. ChemRock/Rail shipments were expected to increase slightly.
Management stated that cash on hand, operating cash flow and financing access should be sufficient for operating needs, debt service, near-term maturities, capital expenditures, potential acquisitions, share repurchases and dividends. The company expected to refinance $300 million of floating-rate senior notes due in December 2019 and another $300 million due in May 2020.
- Results are seasonal and highly sensitive to weather, including excessive rainfall, drought, hurricanes, late springs and early winters.
- Demand depends on economic conditions, construction spending, infrastructure funding, transportation projects, residential activity and energy-sector investment.
- Key cost risks include diesel fuel, natural gas, liquid asphalt, transportation, labor, equipment, repair parts and other consumables.
- Potential risks include customer receivable losses, railcar and truck availability, environmental regulation, labor shortages, equipment failures, tariffs and weakness in steel or Magnesia Specialties markets.
- Debt covenant compliance depends on operating performance and acquisition synergies; a covenant breach could accelerate amounts under the revolving and trade receivable facilities.
- Legal and administrative proceedings were considered by management and counsel unlikely to have a material adverse effect. The company was contingently liable for $35.3 million of letters of credit, including $2.3 million issued under the revolving facility.
- The company adopted ASU 2016-13, the current expected credit loss standard, on January 1, 2020; management expected no material impact.
Important facts for investors to verify
- Whether the raised 2019 shipment outlook and pricing assumptions were achieved, particularly in infrastructure, nonresidential and residential markets.
- The refinancing or repayment of the $300 million notes due in December 2019 and May 2020 and the subsequent effect on interest expense and liquidity.
- Debt covenant calculations, available borrowing capacity and the effect of seasonal working-capital requirements.
- Whether aggregates margin gains persist after the favorable comparison caused by the absence of 2018 Bluegrass acquisition-accounting charges.
- Trends in ready-mixed concrete and asphalt margins, including transportation, energy and liquid-asphalt costs.
- The effect of the $15.7 million affiliate-accounting correction and the sustainability of the 2019 tax-rate benefit.
- Exposure to weather, infrastructure funding, construction activity, customer credit, environmental obligations and other risks described in the company’s Form 10-K.