Fitch Affirms Martin Marietta's IDR at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of Martin Marietta Materials, Inc. MLM, including the company's Issuer Default Rating (IDR) at 'BBB-'.

The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The rating for Martin Marietta reflects the relatively substantial demand for construction products prompted by federal and state government funding of transportation projects, the company's leading market position, geographically diverse quarry network, consistent free cash flow generation, and adequate liquidity. The rating also takes into account the operating leverage of the company and the high level of fixed costs. Fitch's concerns also include weather-related risks, the volatility of state and federal spending on highway construction, the seasonal and cyclical nature of the construction industry, and the company's recently announced sizeable share repurchase program.

The Stable Outlook reflects Fitch's macro view of the company's various end-markets for 2015. Fitch forecasts total construction spending as measured by the Census Bureau (Value of Construction Put in Place) will increase approximately 7.1% in 2015.

TXI ACQUISITION

On July 1, 2014, Martin Marietta and Texas Industries, Inc. (TXI) completed a definitive merger agreement under which Martin Marietta acquired all of the outstanding shares of TXI common stock in a tax-free, stock-for-stock transaction valued at about $2.7 billion. Under the terms of the transaction, TXI shareholders received 0.7 Martin Marietta shares for each TXI share. Martin Marietta issued 20.3 million shares of its stock for the acquisition.

Fitch believes that the merger has good strategic rationale as the combined company creates a market leading supplier of aggregates and heavy building materials with vertically integrated aggregates and targeted cement operations.

CREDIT METRICS

The TXI acquisition initially weakened Martin Marietta's credit metrics. Leverage as measured by debt to EBITDA increased from 2.6x at the end of 2013 to 3.4x on a pro forma combined basis. The company has quickly reduced leverage to 2.7x at year-end 2014, which only includes six months of operating results from TXI. Fitch expects leverage will settle at around 2.0x at the conclusion of 2015.

EBITDA to interest improved from 7.5x during 2013 to 8.9x during 2014. Fitch expects interest coverage will settle above 10x during 2015.

SHARE REPURCHASES

In February 2015, Martin Marietta announced a share repurchase authorization of 20 million shares, including the 5 million shares remaining from the previous authorization. (This represents 30% of the company's outstanding stock and is equal to the amount of shares previously issued for the TXI acquisition). The new authorization will be executed over a 3-year time period. Based on the stock price on the date of announcement, this would translate to about $2.4 billion of share repurchases.

According to management, on a quarterly basis, the company will look at its excess free cash flow and any cash flow from the sale of non-strategic TXI-related assets, and allocate these for share repurchases. Management indicated that this assumes that all of its capital priorities are met and leverage stays at around 2x. Fitch expects the company will start evaluating share buybacks during the second half of 2015.

For 2015, management estimates that it should be able to allocate between $280 million and $320 million of capital for share repurchases. Fitch is comfortable with Martin Marietta's share repurchase strategy so long as the company funds the program with free cash flow (FCF) and Martin Marietta's leverage is comfortably within management's leverage target of 2.0x - 2.5x when the share repurchases are executed.

LIQUIDITY

Martin Marietta has a solid liquidity position with cash of $108.7 million, $347.5 million of borrowing capacity under its $350 million revolving credit facility and $250 million of unused capacity under its $250 million trade receivable facility as of Dec. 31, 2014. The company has no major maturities until 2017, when $300 million of floating rate notes mature.

In June 2014, Martin Marietta completed the offering of $300 million floating rate senior notes due 2017 and $400 million of 4.25% senior notes due 2024. Proceeds from these offerings, along with cash on hand and incremental drawings under its trade receivable facility, were used to redeem all $650 million in principal amount of TXI's 9.25% senior unsecured notes due 2020 plus a make-whole premium and accrued unpaid interest.

FREE CASH FLOW GENERATION

The company generated FCF of $79.6 million (3.7% FCF margin) during 2013 and $58.2 million (2%) during 2014. Fitch expects Martin Marietta will generate FCF margins of 4.5% to 6.5% in the next few years. The company has historically generated positive FCF, including during the 2008-2011 economic and construction downturns.

LEADING MARKET POSITION

The company is a leading producer of construction aggregates with a network of more than 400 quarries, mines, distribution yards and plants spanning 32 states, Canada and the Caribbean. Management believes that it has the #1 or #2 position in 85% of the markets it serves.

Barriers to entry in the aggregates industry is high, as there are increasingly more stringent zoning and environmental restrictions that can limit new quarry development. Additionally, the aggregates business is capital intensive and high transportation costs make it cost-prohibitive to haul aggregates from long distances. Fitch believes that the high barriers to entry can deter new entrants and somewhat limit competition, thereby supporting the sustainability of Martin Marietta's leading market position over the intermediate to long term.

The company is vertically integrated in certain markets and derives a portion of its revenues from asphalt, ready-mixed concrete and road paving operations. The addition of TXI's cement operations in Texas and California further diversified the company's product and customer mix. The company also has a comparatively small but very profitable specialty products business that manufactures and markets magnesia-based chemicals products for industrial, agricultural and environmental applications and dolomitic lime for use primarily in the steel industry.

CONSTRUCTION SECTOR OUTLOOK

Fitch expects total industry construction spending will increase 7.1% during 2015 following a 5.5% growth in 2014. Private residential construction spending is projected to advance 10.5% while private non-residential construction is expected to grow 7% this year. Public construction spending is projected to increase 3%, although Fitch expects highway spending will perhaps advance at a faster pace.

Fitch expects industry aggregates shipments will grow mid-single-digit percentage this year. Fitch also expects industry aggregates pricing will grow in the low to mid-single-digit range, perhaps modestly higher than the historical long-term industry average annual price growth of 2% - 3%.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--U.S. construction spending increases 7.1% during 2015;

--Martin Marietta's heritage aggregates shipments and pricing rise mid-single digits during 2015;

--EBITDA margins improve 100-150 bps during 2015;

--Debt/EBITDA at year end 2015 settles between 2.0x - 2.5x and interest coverage is at or above 10.0x;

--Martin Marietta generates FCF margin of 4.5% - 6.5% during the next few years;

--Share repurchases of $280 million to $320 million in 2015.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad construction market trends and how the company manages its capital structure through the cycle, including FCF trends and uses.

Positive rating actions may be considered in the next 12 months if the company shows sustained improvement in financial results and credit metrics, including debt to EBITDA consistently and comfortably within the company's target leverage of 2.0x - 2.5x, FFO adjusted leverage at or below 3x and interest coverage is steadily above 7.5x. In considering positive rating actions, Fitch will also take into account management's adherence to its plan of executing share repurchases when it is at the lower end of its 2.0x - 2.5x leverage target.

On the other hand, a negative rating action may be considered if the recovery in the U.S. construction market dissipates and there is a sharp decline in aggregates shipments (perhaps in excess of 10%), leading to weaker than expected credit metrics, including debt to EBITDA levels consistently in the 3.0x - 3.5x range, FFO adjusted leverage is routinely above 4.0x and interest coverage falls below 6x. Fitch will also consider negative rating actions if Martin Marietta funds its proposed share repurchase program primarily with incremental debt, leading to debt to EBITDA levels sustaining above 3.0x.

Fitch affirms the ratings of Martin Marietta as follows:

--Long-term IDR at 'BBB-';

--Senior unsecured debt rating at 'BBB-;

--Unsecured revolving credit facility at 'BBB-';

--Short-term IDR at 'F3';

--Commercial Paper at 'F3'.

The Rating Outlook is Stable

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Building Materials: Ratings Navigator Companion' (Nov. 11, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Building Materials: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=803388

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983697

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