Fitch Affirms Martin Marietta Materials' IDR at 'BBB'; Outlook to Stable
October 07, 2009 at 16:31 PM EDT
Fitch Ratings has affirmed the ratings of Martin Marietta Materials, Inc. (NYSE:MLM) as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured debt rating at 'BBB';
--Revolving bank credit facility at 'BBB';
--Commercial Paper rating at 'F2'.
The Rating Outlook has been revised to Stable from Negative.
The ratings affirmation reflects the still relatively substantial demand for construction products prompted by federal and state government funding of transportation projects, consistent free cash flow generation, and solid 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 potential volatility of state and federal spending on highway construction, the cyclical nature of the construction industry and exposure to environmental issues.
The revision of the Outlook to Stable from Negative reflects Fitch's macro view of Martin Marietta's various end-markets for 2010. Martin Marietta's aggregates volume fell 21.1% during the first quarter of 2009 and dropped 25.6% during the second quarter. The company expects its aggregates volume to fall approximately 15%-18% for all of 2009. Fitch currently expects Martin Marietta's volume to be flat to slightly higher in 2010, with volume gains in public infrastructure and residential construction offset by declines in non-residential construction. The expected volume gains in infrastructure are due to increased spending from the stimulus package passed this past February, and in particular from the $27.5 billion in additional highway and bridge funding. Spending under the stimulus bill has had a slow start, with only $2.1 billion spent so far on 4,088 projects currently under construction. However, 72% of the total funds have been obligated and 7,965 transportation projects have been authorized. Fitch currently expects a majority of the stimulus funds to be spent in 2010, offsetting the projected lower state spending on infrastructure projects resulting from budget deficits. Fitch expects aggregates pricing to increase roughly 2%-3% next year, which is in line with long-term averages.
Cash flow from operations for Martin Marietta has so far been generally stable despite the cyclical nature of the construction industry. The company derives about 50% of its aggregates shipments from public infrastructure projects, which have been less volatile than commercial and residential construction. Moreover, there has been a shift in pricing dynamics in the aggregates industry over the past few years, which has provided aggregates companies with the opportunity to continue to increase prices despite the significant decline in volumes. For the latest 12 months (LTM) ended June 30, 2009, Martin Marietta generated $333.2 million of cash flow from operations. This compares to $341.7 million for fiscal 2008 and $395.6 million for fiscal 2007.
Over the past few quarters, Martin Marietta improved its liquidity position by issuing stock (net proceeds of $232.9 million), entering into a new $130 million three-year term loan facility, and completing a $100 million three-year secured accounts receivable (A/R) credit facility. Currently, the company has solid liquidity with cash of $133 million, $323 million available under its unsecured revolving credit agreement, and $100 million of borrowing capacity under its A/R facility. Martin Marietta has sufficient liquidity to meet $225 million in senior notes maturing in April 2010. The company's next debt maturity is in April 2011, when $250 million of senior notes become due. Martin Marietta remains in compliance with the leverage ratio under its various credit agreements. The company ended the second quarter with a debt-to-EBITDA ratio of 2.82 times (x) compared to the maximum required ratio of 3.25x.
Martin Marietta's operating results have been negatively affected by the weakening aggregates demand across most of the company's end-markets. Martin Marietta's EBITDA declined from $603 million in 2007 to $458 million for the LTM period as of June 30, 2009. As a result, the company's leverage (as measured by debt to EBITDA) has been higher than its normalized target ratio of 2.0x-2.5x. Fitch expects Martin Marietta's leverage ratio to remain above its target level into 2010.
The company has taken a more cautious stance on share repurchases during the past year. Management has committed to suspend share repurchases and indicated that it will only buy back shares if 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.
In the past, the company has regularly made acquisitions and Fitch believes this strategy will continue, although the company has now reached significant scale and may be less likely to do larger acquisitions going forward. In 2008, the company spent $218.5 million on acquisitions, including a $192 million cash payment for the purchase of six quarries in Georgia and Tennessee from Vulcan Materials. (In addition to the cash payment, Martin Marietta also divested several assets to Vulcan.) In June 2009, the company announced that it acquired three quarries plus the remaining 49% interest in an existing joint venture from CEMEX, Inc., for a total purchase price of $65 million.
Martin Marietta generates the majority of its revenues from aggregates production and sales (principally granite, limestone, sand and gravel). In 2008, the company shipped over 159.4 million tons of aggregates to its customers in 29 states, Canada, the Bahamas and the Caribbean Islands from 273 quarries, underground mines and distribution yards. The company is vertically integrated in certain markets and derives a portion of its revenues from asphalt, ready mixed concrete and road paving operations. Its small magnesia specialties operation manufactures and markets magnesia-based chemicals products for industrial, agricultural and environmental applications and dolomitic lime for use primarily in the steel industry.
The company and the industry continue to benefit from higher pricing, although at more moderate rates of increase compared to recent years, and in spite of lower volumes for the past 13 consecutive quarters. Martin Marietta's heritage aggregates product line pricing (same-store) increased 7.9%, 13.5%, 10.3% and 6.7% for 2005, 2006, 2007 and 2008, respectively. Aggregates pricing was up 3.6% through June 30, 2009 and is expected to grow 3.5%-5.0% for all of 2009. This compares to an average annual price increase of 5.5% and 3.7% for the 10 and 20 years ended Dec. 31, 2008, respectively.
Martin Marietta's aggregates division markets its products primarily to the construction industry, with approximately 50% of its shipments made to contractors in connection with highway and other public infrastructure projects, 31% to commercial construction contractors, 9% to contractors of residential construction projects, with the balance of its shipments to chemical, railroad ballast and other projects. The company's exposure to fluctuations in commercial and residential construction is somewhat lessened by the company's mix of public-sector-related shipments, which is typically less volatile than commercial and residential construction due to funding from federal, state and local governments. However, infrastructure spending has been recently influenced by diminished tax receipts, resulting in lower volume consumption.
Additional information is available at www.fitchratings.com.