Aug 13 - Fitch Ratings has downgraded Martin Marietta Materials, Inc.'s
(NYSE: MLM) ratings, including the company's Issuer Default Rating
(IDR), to 'BBB-' from 'BBB'. Fitch has also removed Martin Marietta's ratings
from Rating Watch Negative. The Rating Outlook is Stable. A complete list of
rating actions follows at the end of this press release.
Fitch had originally placed the company's ratings on Watch Negative in December
2011 following Martin Marietta's proposed business combination with Vulcan
Materials Company (NYSE: VMC). On May 14, 2012, the Court of Chancery of
the State of Delaware entered a final order and judgment enjoining Martin
Marietta for a period of four months from taking steps to acquire control of
VMC's shares or assets. The Delaware Supreme Court affirmed the Court of
Chancery decision on May 31, 2012. In accordance with the order, Martin Marietta
terminated its exchange offer for VMC shares and proxy solicitation to elect
four nominees to the board of directors of VMC. Fitch will likely put the
company's ratings back on Watch Negative should Martin Marietta re-initiate its
bid for VMC.
The downgrade reflects Fitch's expectation that the company's leverage will
remain elevated during the next 12-18 months as operating performance is only
projected to improve slightly. Martin Marietta has been operating above its
normalized target leverage of 2-2.5 times (x) since 2008 and ended the 2012
second quarter with debt to latest-12-months (LTM) EBITDA ratio of 3.2x (Fitch
calculated leverage ratio that excludes non-recurring items). Fitch currently
expects this leverage ratio will remain at or slightly above 2.5x through at
least 2013. Fitch had previously expected Martin Marietta's leverage to be
comfortably within its leverage target by year-end 2013. FFO adjusted leverage
also remains elevated at 4.8x for the LTM period ending June 30, 2012. Fitch
expects this ratio will be at or slightly above 4x at year-end 2012.
The downgrade also reflects management's willingness to pursue a more aggressive
growth strategy and consequently higher leverage levels as demonstrated by its
hostile bid for VMC. In the past, Martin Marietta has regularly made
acquisitions, and while Fitch anticipated this strategy would continue, Fitch
had expected that the company would be less likely to do larger acquisitions
since it had already reached significant scale.
The ratings for Martin Marietta are based on its position as a leading producer
of construction aggregates, its geographically diverse quarry network, the still
relatively substantial demand for construction products prompted by federal and
state government funding of transportation projects and the comparatively small
but growing and very profitable specialty products business (dolomitic lime and
specialty chemicals). 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 potential volatility of state and federal spending on
highway construction, the cyclical nature of the construction industry and
exposure to environmental issues.
The Stable Outlook reflects Fitch's macro view of Martin Marietta's various
end-markets for the remainder of 2012 and into 2013. Fitch forecasts total
construction spending as measured by the Census Bureau (Value of Construction
Put in Place) will increase approximately 5.8% in 2012 and grow 4.2% in 2013.
Fitch currently expects Martin Marietta's aggregates shipments will be slightly
higher in 2012, with volume gains in residential and nonresidential construction
largely offset by continued weakness in public infrastructure construction.
Fitch also expects aggregates pricing will average a few percentage points
higher this year, which is comparable to the historical long-term industry
average annual price increase of 2%-3%.
On July 6, 2012, President Obama signed into law a new transportation bill -
Moving Ahead for Progress in the 21st Century Act (Map-21). The new bill, which
expires on Sept. 30, 2014, totals $105 billion and provides guaranteed funding
at current levels (plus inflation) for fiscal 2013 and 2014. The passage of a
new highway bill provides state and local governments with the certainty to plan
longer term projects, given that the previous authorization had 10 short-term
extensions following its September 2009 expiration. Nevertheless, the benefits
of the new highway bill will likely be more evident in 2013 as it will take some
time to start larger, longer term projects. Additionally, the new highway bill
does not increase federal funding from current levels, which will likely
moderate the growth in total spending. Fitch currently projects public
construction spending will remain flat in 2012 and grow 2% in 2013.
Cash flow from operations for Martin Marietta has so far been relatively stable
despite the cyclical nature of the construction industry. The company derives
about 55% of its aggregates shipments from public infrastructure projects, which
have historically been less volatile than commercial and residential
construction. For the LTM period ended June 30, 2012, Martin Marietta generated
$229.7 million of cash flow from operations. This compares to $259.1 million for
fiscal 2011, $269.8 million for fiscal 2010 and $318.4 million for fiscal 2009.
Fitch currently expects cash flow from operations for 2012 will be comparable to
2011 levels and anticipates cash flow will be slightly higher in 2013.
Martin Marietta continues to have adequate liquidity, with cash of $41.4 million
and roughly $202.5 million of unused borrowing capacity under its revolving
credit facility as of June 30, 2012. However, due to the leverage covenant
requirement, Fitch estimates that the company's actual borrowing capacity
without violating the leverage covenant is closer to $100 million. The company
ended the second quarter with a debt-to-EBITDA ratio of 3.63x (based on MLM's
credit facility covenant calculation) compared to the maximum required ratio of
3.95x. The leverage requirement steps down to 3.75x at Sept. 30, 2012 and 3.5x
for the Dec. 31, 2012 calculation. Fitch is comfortable with Martin Marietta's
liquidity position given that the company has no major debt maturities until
2015, when its $250 million bank term loan facility matures.
The company has taken a more cautious stance on share repurchases during the
past few years. Fitch expects the company to 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.
Future ratings and Outlooks will be influenced by broad construction market
trends, as well as company specific activity, particularly free cash flow trends
and uses. Martin Marietta's ratings are constrained in the intermediate term due
to its high leverage, but a positive rating action may be considered if the
company shows greater than expected volume and pricing gains next year, leading
to improved credit metrics, particularly debt to EBITDA levels at the 2-2.5x
range and FFO adjusted leverage at or below 3x. 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 will also likely put the company's ratings
on Watch Negative should Martin Marietta re-initiate its bid for VMC.
Fitch has downgraded the following ratings for Martin Marietta:
--IDR to 'BBB-' from 'BBB';
--Senior unsecured debt rating to 'BBB-' from 'BBB';
--Revolving bank credit facility to 'BBB-' from 'BBB'.
Fitch has also affirmed the following ratings for Martin Marietta:
--Short-term IDR 'F3';
--Commercial Paper 'F3'.
Robert Rulla, CPA
70 W. Madison
Chicago, IL 60602
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email:
Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Rating Basic Building Materials Companies' (Sept. 21, 2010);
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Rating Basic Building Materials Companies
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
here. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE.
Code of Ethics
Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries.
Ratings and Research
Products and Services