Fitch Affirms Martin Marietta's IDR at 'BBB-'; Outlook Stable
CHICAGO -- July 2, 2014
Fitch Ratings has affirmed the ratings of Martin Marietta Materials, Inc.
(NYSE: MLM), including the company's Issuer Default Rating (IDR) at 'BBB-',
following the completion of the company's merger agreement with Texas
Industries, Inc. (NYSE: TXI).
The Rating Outlook is Stable. A complete list of rating actions follows at the
end of this release.
On July 1, 2014, Martin Marietta and Texas Industries completed the previously
announced definitive merger agreement under which Martin Marietta acquired all
of the outstanding shares of Texas Industries common stock in a tax-free,
stock-for-stock transaction. Under the terms of the transaction, Texas
Industries shareholders received 0.7 Martin Marietta shares for each Texas
KEY RATING DRIVERS
The rating for Martin Marietta reflects Fitch's view 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.
Fitch projects that the transaction will initially increase Martin Marietta's
debt to EBITDA from 2.6x for the latest-twelve months (LTM) ending March 31,
2014 to approximately 3.6x on a combined pro forma basis. The rating
affirmation reflects Fitch's expectation that leverage will fall below 3.0x
within twelve months following the close of the merger.
The rating for Martin Marietta is also supported by 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, and the cyclical nature of the construction
The rating also reflects management's willingness to opportunistically pursue
a more aggressive growth strategy and consequently higher leverage levels as
demonstrated by this transaction and Martin Marietta's previous hostile bid
for Vulcan Materials Company (Vulcan) in 2011. (That proposed business
combination was not consummated.)
The Stable Outlook reflects Fitch's macro view of the company's various
end-markets for 2014. Fitch forecasts total construction spending as measured
by the Census Bureau (Value of Construction Put in Place) will increase
approximately 7.2% in 2014.
LEADING MARKET POSITION
The combined company is a leading producer of construction aggregates with a
network of more than 400 quarries, mines, distribution yards and plants
spanning 36 states, Canada and the Bahamas.
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 Texas Industries' cement operations in Texas and California
will further diversify 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.
Martin Marietta has adequate liquidity with cash of $35.8 million and about
$327 million of borrowing availability under its revolving credit facility as
of March 31, 2014.
On June 20, 2014, the company entered into an amendment to the credit
agreement governing its revolving credit facility in order to temporarily
amend the leverage ratio requirement to a maximum of 3.75x for the quarter
ended Sept. 30, 2014. The ratio will revert back to the 3.50x maximum
requirement by year-end 2014. The amendment also revises certain definitions
to account for merger-related expenses in the calculation of EBITDA.
On June 23, 2014, Martin Marietta completed the issuance of $700 million of
senior unsecured notes made up of two tranches: $400 million of 4.25% senior
unsecured notes due 2024 and $300 million of floating rate notes due 2017.
Proceeds from the notes issuance, along with cash on hand and drawings under
its trade receivables and/or revolving credit facility, will be used to redeem
all $650 million of principal amount of Texas Industries' outstanding 9.25%
senior unsecured notes due 2020, plus a make whole premium as well as unpaid
Martin Marietta continued to generate positive free cash flow (FCF) during
2008 - 2011 despite the weak operating environment. The company was slightly
FCF negative during 2012 ($2.1 million), which included about $35.1 million in
business development expenses related to its hostile bid for Vulcan. For 2013,
the company generated $79.6 million of FCF. Fitch expects Martin Marietta will
generate FCF of approximately 1%-3% of revenues in 2014.
Martin Marietta has taken a more cautious stance on share repurchases during
the past few years. Fitch expects the company will refrain from making
meaningful share repurchases until it is within its leverage target. The
company has not repurchased any stock since 2007. Martin Marietta currently
has 5.04 million shares remaining under its repurchase authorization.
The company has been operating above its normalized target leverage of 2.0x -
2.5x debt-to-EBITDA since 2008 and ended the 2014 first quarter with
Fitch-calculated debt-to-LTM EBITDA of 2.6x. This compares to 2.6x during 2013
and 2.8x during 2012.
On a combined pro forma basis, Fitch estimates Martin Marietta's leverage at
approximately 3.6x. The rating reflects Fitch's expectation that leverage will
fall below 3.0x within twelve months following the close of the merger.
EBITDA-to-interest expense remains strong at 8.0x for the LTM period ending
March 31, 2014. This compares to 7.4x during 2013 and 7.0x during 2012. On a
combined pro forma basis, interest coverage weakens to about 4.5x. Fitch
expects this ratio will settle at or above 6.0x within twelve months following
the close of the merger.
CONSTRUCTION SECTOR OUTLOOK
Fitch expects total industry construction spending will increase 7.2% during
2014. Private residential construction spending is projected to advance 14.5%
while private non-residential construction is expected to grow 5% this year.
Public construction spending is projected to increase 1%.
Fitch expects industry aggregates shipments will grow at a low to
mid-single-digit percentage this year, with robust gains in the residential
construction sector and slightly higher volumes directed to the private
non-residential and public infrastructure construction segments. Fitch also
expects industry aggregates pricing will grow in the low-single-digits,
similar to the historical long-term industry average annual price growth of 2%
Future ratings and Outlooks will be influenced by broad construction market
trends, as well as company specific activity, including FCF trends and uses.
Fitch will monitor the company's progress in deleveraging its balance sheet,
particularly management's goal to lower debt to EBITDA levels below 3x within
twelve months following the close of the merger.
A positive rating action is unlikely in the next 12 months due to the increase
in leverage associated with the merger. However, one may be considered if
Martin Marietta's debt-to-EBITDA is comfortably and consistently in the 2x -
2.5x range, FFO-adjusted leverage is at or below 3.0x, and interest coverage
is steadily above 7.5x.
Negative rating actions could occur if the company's leverage is consistently
in the 3.0x - 3.5x range and FFO-adjusted leverage is routinely above 4.0x.
Additionally, Fitch may also consider negative rating actions if the company
resumes meaningful share repurchases while its leverage is above its targeted
Fitch affirms MLM 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'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating Basic Building Materials Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Rating Basic Building Materials Companies
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Robert Rulla, CPA, +1 312-606-2311
Fitch Ratings, Inc.
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Chicago, IL 60602
Robert Curran, +1 212-908-0515
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