Martin Marietta Materials, Inc. — Q2 2019 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The unaudited filing covers a natural resource-based building materials company supplying aggregates, cement, ready-mixed concrete, asphalt and paving services, plus magnesia-based chemical products. Operations span more than 300 locations across 27 states, Canada, the Bahamas and the Caribbean.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue | $1.279 billion | $1.202 billion | 6% increase |
| Gross profit | $356.9 million | $315.9 million | 13% increase |
| Gross margin | 27.9% | 26.3% | 160 basis-point expansion |
| Earnings from operations | $285.9 million | $264.0 million | 8% increase |
| Net earnings attributable to Martin Marietta | $189.5 million | $185.4 million | 2% increase |
| Diluted EPS | $3.01 | $2.92 | 3% increase |
| Adjusted EBITDA | $378.5 million | $376.1 million | 1% increase |
For the six months ended June 30, 2019, revenue was $2.218 billion versus $2.004 billion, gross profit was $499.8 million versus $426.3 million, operating earnings were $355.1 million versus $303.0 million, net earnings attributable to Martin Marietta were $232.3 million versus $195.4 million, diluted EPS was $3.69 versus $3.08, and Adjusted EBITDA was $536.7 million versus $497.4 million.
- Second-quarter Building Materials revenue increased to $1.203 billion from $1.129 billion. Aggregates volume increased 9.9% and pricing increased 3.4%; same-store volume and pricing increased 6.1% and 4.1%, respectively.
- Mid-America and Southeast results improved substantially, while West Group operating earnings declined to $110.2 million from $122.8 million, primarily reflecting unfavorable weather and lower downstream shipments.
- Magnesia Specialties revenue increased 3.3% to $70.4 million; product gross margin improved to 41.5% from 36.5%, supported by product mix, production efficiencies and lower energy costs.
- Six-month operating cash flow was $333.7 million, compared with $238.0 million in the prior-year period. Capital expenditures were $207.5 million.
- Cash and cash equivalents were $53.6 million at June 30, 2019, compared with $44.9 million at December 31, 2018. Accounts receivable increased to $710.6 million from $523.3 million, while inventories declined to $646.3 million from $663.0 million.
- Total debt was $3.117 billion, including $385.0 million classified as current debt and $2.732 billion classified as long-term debt. The company had no borrowings outstanding under its $700 million revolving facility.
- The company reported $712.7 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to covenant compliance. The debt-to-EBITDA covenant ratio was 2.68x versus a 3.50x maximum.
- The company repurchased 232,411 shares for $50.0 million during the second quarter and paid $60.6 million of dividends during the first six months.
Material changes versus the prior comparable period
- Revenue, gross profit and operating earnings increased in both the quarter and year-to-date period, driven principally by higher aggregates volumes and pricing, acquisitions and improved operating leverage.
- Aggregates gross margin increased to 33.2% in the quarter and 26.8% year to date. The comparison benefited from the absence of the $10.2 million impact in 2018 from selling acquired inventory after its acquisition-accounting fair-value markup.
- West Group downstream activity weakened: second-quarter ready-mixed concrete shipments decreased 15.5%, cement shipments decreased 4.9% and asphalt shipments decreased 8.2%, although pricing increased across these product lines.
- Second-quarter 2018 included $31.2 million of other operating income, including a $16.9 million gain on surplus land and a $7.7 million net gain on legal settlements. Second-quarter 2019 included only $1.4 million of other operating income.
- Second-quarter 2019 other nonoperating expense included a $15.7 million pretax, noncash out-of-period correction for a prior-period overstatement of earnings from a nonconsolidated equity affiliate. The filing states that the error was not material to the current or prior periods.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing approximately $502.5 million of operating lease right-of-use assets and $501.6 million of operating lease liabilities. Management stated that the adoption did not materially affect earnings or cash flow.
- The April 2018 Bluegrass acquisition continued to affect comparability. Bluegrass contributed $70.2 million of revenue and $23.6 million of operating earnings in the second quarter of 2019.
Guidance, outlook, risks and contingencies
Management raised full-year aggregates shipment guidance based on expected continued construction-cycle strength:
- Infrastructure shipments: high-single-digit increase versus 2018.
- Nonresidential shipments: double-digit increase.
- Residential shipments: mid-single-digit increase.
- ChemRock/Rail shipments: slight increase.
Full-year capital spending was expected to range from $350 million to $400 million. Management indicated that cash flow, available financing and capital-market access should be sufficient for operating needs, debt service, near-term maturities, capital expenditures, potential acquisitions, share repurchases and dividends.
- The $400 million Trade Receivable Facility matures September 25, 2019. The company classified $300 million of floating-rate notes due in December 2019 and $300 million due in May 2020 as long-term because it intended and was able to refinance them under the Revolving Facility.
- Key risks include weather-related disruptions, construction-cycle weakness, infrastructure funding delays, pricing and demand volatility, fuel and input-cost inflation, labor and transportation constraints, equipment failures, environmental regulation, customer credit exposure, interest-rate changes, trade disputes and the possibility that acquisition synergies or expected profitability are not achieved.
- The company was contingently liable for $35.3 million of letters of credit at June 30, 2019. It was also a co-borrower on a $15.5 million affiliate revolving line, of which $12.7 million was outstanding.
- The Manistee, Michigan collective bargaining agreement was scheduled to expire in August 2019. Management expected renewal or extension but stated that no assurance could be given.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the terms and refinancing status of the Trade Receivable Facility and the $300 million floating-rate notes due in 2019 and 2020.
- Assess whether aggregates volume, pricing and the raised end-market shipment guidance were achieved, particularly in infrastructure and nonresidential markets.
- Monitor weather exposure and the recovery of West Group cement, ready-mixed concrete and asphalt volumes.
- Evaluate leverage, covenant headroom and liquidity after capital expenditures, dividends, repurchases and any acquisitions.
- Review the impact of the $15.7 million out-of-period affiliate-accounting correction and the company’s controls over nonconsolidated investments.
- Consider the effect of the Bluegrass acquisition on year-over-year comparability and future operating synergies.