Fitch Downgrades Martin Marietta Materials' IDR to 'BBB'; Outlook Negative
October 28, 2008 at 18:01 PM EDT
Fitch Ratings has downgraded Martin Marietta Materials, Inc. (NYSE: MLM) as follows:
--Issuer Default Rating (IDR) to 'BBB' from 'BBB+';
--Senior unsecured debt rating to 'BBB' from 'BBB+';
--Revolving bank credit facility to 'BBB' from 'BBB+'.
The company's 'F2' commercial paper rating is affirmed.
The Rating Outlook is Negative.
The ratings downgrade and Outlook reflect the company's weakening operating results and Fitch's expectation that leverage will be higher compared to the targets set forth by management. Additionally, Martin Marietta's liquidity is somewhat constrained given the upcoming maturity of $200 million of senior notes on Dec. 1, 2008. The ratings also reflect the still relatively substantial demand for construction products prompted by federal and state government funding of transportation projects and Martin Marietta's consistent generation of free cash flow. 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.
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 $590 million in 2007 to $544 million for the latest 12 months (LTM) period as of Sept. 30, 2008. The company's debt levels are higher compared to the end of 2007 as a result of the acquisition of six quarries earlier this year from Vulcan Materials, wherein the company paid $192 million and divested several assets to Vulcan. At the end of the third quarter, the company had total debt of $1.36 billion, which included $200 million of senior notes maturing in December 2008. As a result, the company's leverage has been at the high end of its 2-2.5 times (x) leverage target. Debt-to-EBITDA at the end of the third quarter was 2.49x.
Currently, the company has sufficient liquidity to cover its upcoming $200 million debt maturity. Martin Marietta has no outstanding balance under its $325 million commercial paper (CP) program. Alternatively, if the CP program is not available, the company can also tap $323 million of availability under its revolving credit facility. However, this will leave Martin Marietta with reduced availability under its revolver to fund working capital needs going into 2009 if the company is unable to access the capital markets. The company recently amended its revolving credit facility to increase the maximum leverage covenant (measured by debt-to-EBITDA) from the current 2.75x requirement to 3.25x. While the revolving credit facility's leverage requirement has been adjusted, Fitch expects the covenant cushion to be tight, at least in the short term, given the company's weakening results.
Martin Marietta generates the majority of its revenues from aggregates production and sales (principally granite, limestone, sand and gravel). In 2007, the company shipped over 182 million tons of aggregates to its customers in 31 states, Canada, the Bahamas and the Caribbean Islands from 272 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 have benefited from strong aggregates pricing over the past four years, in spite of lower volumes for the past 10 consecutive quarters. The company's average annual heritage (same-store) aggregates product line price increase for the 10 and 20 years ended Dec. 31, 2007 was 5.1% and 3.5%, respectively. However, pricing increased 7.9%, 13.4% and 10.3% for 2005, 2006 and 2007, respectively. Heritage aggregates product line pricing was up 6.2% through Sept. 30, 2008 and is expected to grow 6%-8% for all of 2008.
Martin Marietta 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 during 2008 compared with stock buybacks of $495.2 million during the first nine months of 2007. (Note: The company used $24.2 million of cash during January 2008 to settle share repurchases made during Dec. 31, 2007.) The company 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. Most recently, the company acquired six quarries in Georgia and Tennessee from Vulcan Materials. In addition to a $192 million cash payment, Martin Marietta divested several assets to Vulcan. Over the past few years, Martin Marietta has been focused on investing in internal expansion projects in high-growth markets as suitable acquisition targets have lessened. Capital expenditures in 2007 were $265 million, flat compared to 2006. Management expects capital expenditures to be approximately $255 million in 2008.
Martin Marietta's aggregates division markets its products primarily to the construction industry, with approximately 48% of its 2007 shipments made to contractors in connection with highway and other public infrastructure projects, 30% to commercial construction contractors, 12% 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 impacted by diminished tax receipts and materials cost escalation, which reduces purchasing power resulting in lower volume consumption. Aggregates demand is expected to remain weak for the residential sector, while the commercial construction market is expected to be negatively impacted by the weakening economy and disruptions in the credit market.