RPT-Fitch affirms Martin Marietta Materials' IDR at 'BBB-'; outlook stable
Aug 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Martin Marietta Materials, Inc.'s (NYSE: MLM) ratings, 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 ratings for MLM are based on 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 ratings also take 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 cyclical nature of the construction industry, and, although improving, MLM's still high leverage position.
The ratings also reflect management's willingness to opportunistically pursue a more aggressive growth strategy and consequently higher leverage levels as demonstrated by its previous hostile bid for Vulcan Materials Company (Vulcan) in 2011. (The proposed business combination was not consummated.) In the past, MLM has regularly made small- to medium-sized acquisitions, and while Fitch anticipated this strategy would continue, Fitch had expected that the company would be less likely to do large acquisitions, since it was already of significant scale.
The Stable Outlook reflects Fitch's macro view of MLM's various end-markets for the remainder of 2013 and into 2014. Fitch forecasts total construction spending as measured by the Census Bureau (Value of Construction Put in Place) will increase approximately 7.3% in 2013 and grow 10.7% in 2014.
LEADING MARKET POSITION
The ratings for MLM are supported by its position as the nation's second largest producer of aggregates products for the construction industry and its geographically diverse quarry network. In 2012, the company shipped 128.1 million tons of aggregates to its customers in 33 states, Canada, the Bahamas and the Caribbean Islands from 300 quarries, underground mines and distribution yards. MLM also continues to pursue acquisition opportunities in markets where it can position the company as the number one or number two market participant.
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 company also has a comparatively small but growing and 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.
MLM has adequate liquidity with cash of $43.7 million and roughly $297 million of borrowing availability under its revolving credit facility as of June 30, 2013. However, Fitch estimates that actual borrowing capacity was closer to $207 million based on the requirements under the revolving credit facility's maximum leverage covenant.
MLM 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 the LTM ending June 30, 2013, MLM generated $34.3 million of FCF. Fitch expects the company will generate between $40 million-$75 million of FCF during 2013.
MLM 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. MLM currently has 5.04 million shares remaining under its repurchase authorization.
MLM has been operating above its normalized target leverage of 2x-2.5x debt-to-EBITDA since 2008 and ended the 2013 second quarter with Fitch-calculated debt-to-LTM EBITDA of 3.1x. This compares to 2.8x during 2012 and 3.0x during 2011. Fitch expects this leverage ratio will remain above 2.5x through 2013 and will be within MLM's target range during 2014. Funds from operations (FFO)-adjusted leverage also remains elevated at 3.8x for the LTM period ending June 30, 2013. Fitch expects this leverage ratio will improve slightly to 3.7x by year-end 2013.
EBITDA-to-interest expense remains strong at 6.7x for the LTM ending June 30, 2013. This compares to 7.0x during 2012 and 6.1x during 2011. Fitch expects this ratio to settle at or slightly above 7.0x by year-end 2013. FFO interest coverage was 6.4x for the June 30, 2013 LTM compared with 5.9x during 2012 and 5.3x during 2011. Fitch expects this ratio will be roughly 6.0x at the conclusion of 2013.
CONSTRUCTION SECTOR OUTLOOK
Fitch expects total construction spending will increase 7.3% in 2013 following 8.7% growth during 2012, a 2.1% drop in 2011 and a 10.9% decrease in 2010. Construction spending during the first half of 2013 increased 5.1% compared to the same period last year. Private residential spending is projected to grow 20.9% while private non-residential construction is expected to advance 2% during 2013. Public non-residential construction spending is projected to remain flat this year.
Fitch expects industry aggregates shipments will grow in the low-single-digit percentage range this year, with gains in residential and non-residential construction and a slight decline in volumes directed to the public infrastructure construction segment. Aggregates volume during the first half of 2013, particularly shipments to the public infrastructure sector, was negatively affected by wet weather conditions. Assuming more normal weather patterns, Fitch expects slightly stronger volume gains during the second half of the year.
Fitch also expects industry aggregates pricing will grow in the low-single-digit range, similar to the historical long-term industry average annual price growth of 2%-3%.
For calendar year 2014, Fitch projects total construction spending will increase 10.7% compared with 2013. Private residential construction spending is projected to advance 22.7% while private non-residential construction is expected to grow 5% in 2014. Public construction spending is projected to increase 3% next year.
Future ratings and Outlooks will be influenced by broad construction market trends, as well as company specific activity, including FCF trends and uses. A positive rating action may be considered in the next 12 to 18 months if MLM performs in line with Fitch's 2014 expectations, including revenue growth in the high-single digits, EBITDA margins above 20%, debt-to-EBITDA comfortably in the 2x-2.5x range, FFO-adjusted leverage at or below 3.0x, and interest coverage consistently above 7.5x.
Negative rating actions could occur if the company's leverage is consistently above 3.5x and FFO-adjusted leverage is above 4.25x. Additionally, Fitch may also consider negative rating actions if the company resumes meaningful share repurchases while its leverage is above its targeted levels.
Fitch has affirmed the following ratings:
--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'.
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