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.
MERGER AGREEMENT
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 Industries share.
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 industry.
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.
LIQUIDITY
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 interest accrued.
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.
CREDIT METRICS
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% - 3%.
RATING SENSITIVITIES
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 levels.
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 Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating Basic Building Materials Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682315
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=837619
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