OREANDA-NEWS. Fitch Ratings has affirmed the ratings of Martin Marietta Materials, Inc. (NYSE: MLM), including the company's Issuer Default Rating (IDR), at 'BBB-'. The Rating Outlook has been revised to Positive from Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The rating for Martin Marietta is supported by the expected relatively stable demand for construction products prompted by committed federal government funding of transportation projects, the company's leading market position, geographically diverse quarry network, consistent free cash flow generation and solid liquidity. The rating also takes into account the company's operating leverage and high level of fixed costs. Fitch's concerns include the historic relative volatility of state and federal spending on highway construction and the seasonal and cyclical nature of the construction industry, as well as the company's sizeable share repurchase program.

The rating also reflects management's willingness to opportunistically pursue a more aggressive growth strategy and consequently higher leverage levels as demonstrated by the acquisition of Texas Industries in 2014 and Martin Marietta's previous hostile bid for Vulcan Materials Company in 2011. (That proposed business combination was not consummated.)

The Positive Outlook reflects Fitch's view of continued improvement in Martin Marietta's various end markets during 2016. In particular, highway construction is expected to expand in the intermediate term given the passage of the new long-term highway bill in December 2015. Fitch believes that the new long-term highway bill provides greater certainty of funding from the federal government, which allows individual states to plan longer-term projects.

The Positive Outlook also incorporates Fitch's expectation that Martin Marietta will maintain (or improve) its credit metrics in the intermediate term, including debt-to-EBITDA consistently and comfortably within its target leverage of 2x-2.5x, FFO adjusted at or below 3x, and interest coverage steadily above 7.5x.

LEADERSHIP POSITION

Martin Marietta is a leading supplier of aggregates and heavy building materials, with operations spanning 36 states, Canada and the Caribbean. The company has a network of more than 400 quarries, distribution facilities and plants. Management believes that it has the #1 or #2 position in 85% of the markets it serves.

Barriers to entry in the aggregates industry are high, as there are increasingly more stringent zoning and environmental restrictions that can limit new quarry development. Additionally, the aggregates business is capital intensive and the high weight of aggregates makes transportation expensive. Fitch believes that the high barriers to entry can deter new entrants and somewhat limit competition, thereby supporting the sustainability of the company's leading market position over the intermediate- to long-term.

The company is vertically integrated in certain markets and derives a portion of its revenues from cement, asphalt, ready-mixed concrete and road paving operations. 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.

GROWTH STRATEGY

Management has shown its willingness to opportunistically pursue a more aggressive growth strategy and consequently higher leverage levels as demonstrated by the acquisition of Texas Industries, Inc. (TXI) in July 2014 and Martin Marietta's previous hostile bid for Vulcan Materials Company (Vulcan) in 2011. While the proposed business combination with Vulcan was not consummated, it demonstrates management's willingness to pursue transformative acquisitions if the opportunity presents itself.

Martin Marietta has in the past regularly made acquisitions and Fitch anticipates this strategy will continue, although the company will be less likely to do larger acquisitions, since it has already reached significant scale. In 2015, Martin Marietta spent about $43.2 million on acquisitions.

IMPROVING CREDIT METRICS

The acquisition of TXI initially weakened Martin Marietta's credit metrics. Debt/EBITDA increased from 2.6x at the end of 2013 to 3.4x on a pro forma combined basis. The company quickly reduced leverage to 2.7x at year-end 2014 (which only includes six months of operating results from TXI) and 2.1x at the conclusion of 2015. Fitch expects leverage will remain around 2x during 2016.

Interest coverage remains strong, with EBITDA/Interest Expense improving from 7.2x during 2014 to 10.8x during 2015. Fitch expects leverage will remain above 10x during 2016.

SIZEABLE SHARE REPURCHASE PROGRAM

In February 2015, Martin Marietta announced a share repurchase authorization of 20 million shares (30% of outstanding stock and equal to the amount of shares previously issued for the TXI acquisition). This included the 5 million shares remaining under the company's previous authorization and will be executed over a multi-year period. Based on the stock price on the date of announcement, this would translate to about $2.4 billion of share repurchases.

According to management, the company will look at its excess free cash flow (FCF) and any cash flow from the sale of non-strategic assets on a quarterly basis, and allocate these for share repurchases. Management indicated that this assumes that all of its capital priorities are met and leverage stays at around 2x.

In 2015, the company repurchased 3.3 million shares for $520 million. The share repurchases were funded with proceeds from the sale of its cement operations in California (which were sold on Sept. 30, 2015 for $420 million) and FCF.

The company's rating and the Positive Outlook take into account Fitch's expectation that the company will continue to execute its share repurchase program and fund buybacks with FCF and perhaps incremental debt so long as the company's leverage stays at the lower end of its 2x-2.5x target.

LIQUIDITY AND FREE CASH FLOW

Martin Marietta has a solid liquidity position with cash of $168.4 million and $347.5 million of borrowing capacity under its $350 million revolving credit facility and $250 million of unused capacity under its $250 million trade receivable facility.

The company has meaningful debt maturities in the next three years, including $300 million of floating rating notes due June 2017, $300 million of senior notes due April 2018, and a $224 million term loan facility maturing in November 2018. These maturities represent about 52% of total debt. Martin Marietta has demonstrated in the past its ability to access the capital markets. Fitch expects the company will again access the capital markets ahead of these maturities to refinance as needed.

The company has demonstrated its ability to generate FCF through the cycle, including during 2008-2011 despite the weak operating environment. The company was slightly FCF negative during 2012 ($2.1 million), which included $35.1 million in business development expenses related to its hostile bid for Vulcan Materials. The company generated FCF of $79.6 million (3.7% FCF margin) during 2013, $58.2 million (2%) during 2014 and $147.1 million (4.2%) during 2015. Fitch expects Martin Marietta will generate a FCF margin of 4% to 5% during 2016.

CONSTRUCTION OUTLOOK

Fitch projects overall construction spending (Value of Construction Put In Place as measured by the Census Bureau) will advance 7.1% during 2016 following a 10.5% increase in 2015, a 5.4% improvement in 2014 and 5.8% growth in 2013. Private residential construction spending is projected to advance 9.5% while private non-residential construction is expected to improve 7% this year. Public construction spending is forecast to increase 4%. Fitch expects industry aggregates shipments and pricing will expand by mid-single-digit percentage this year.

Fitch believes that highway spending will grow and remain relatively stable in the intermediate term given the recent certainty of funding from the federal government. On Dec. 4, 2015, President Obama signed into law a new five-year, $305 billion highway bill. This measure is the first long-term highway program put in place since the expiration of the last long-term highway bill in 2009. Spending will also be supported by state initiatives to fund highway projects. State governments continue to seek alternative revenue sources to fund highway projects, including increasing state gas and motor fuel taxes, raising sales taxes, and transferring general fund revenues to highway fund budgets. Several states have initiated some of these approaches and have also tapped the private sector to supplement funding for highway expenditures.

Fitch believes that the passage of a long-term highway bill, combined with state initiatives, will allow individual states to plan longer-term (and more aggregates-intensive) construction projects.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Vulcan include:
--Overall U.S. construction spending grows 7.1% during 2016;
--Martin Marietta's heritage aggregates shipments and pricing rise by mid-single digits during 2016;
--Martin Marietta generates FCF margin of 4% - 5% during 2016;
--FCF is used to fund share repurchases;
--Debt-to-EBITDA settles at around 2x by the end of 2016;
--Interest coverage is above 10x during 2016.

RATING SENSITIVITIES

Additional future ratings and Outlooks will be influenced by broad construction market trends, as well as company-specific activity, including FCF trends and uses.

Martin Marietta's IDR may be upgraded to 'BBB' in the next 12 months if the company maintains (or improves) its credit metrics, including debt-to-EBITDA consistently and comfortably within the company's target leverage of 2x-2.5x, FFO adjusted leverage is at or below 3x and interest coverage is steadily above 7.5x. Fitch will also take into account Martin Marietta's ability to sustain these credit metrics through the cycle. In considering a rating upgrade, Fitch will also consider management's adherence to its plan to execute share repurchases when it is at the lower end of its 2x-2.5x leverage target.

On the other hand, the Outlook could be revised to Stable if Martin Marietta's credit metrics weaken from current levels, including debt-to-EBITDA consistently between 2.5x-3x, FFO adjusted leverage routinely between 3.5x-4x and interest coverage falls below 7x.

A negative rating action may be considered if there is a sustained erosion of profits and cash flows due to particularly weak construction activity (possibly prompted by an untypically severe downturn), meaningful and continued loss of market share, and/or ongoing cost pressures resulting in margin contraction and deterioration in credit metrics, including debt-to-EBITDA levels consistently and meaningfully above 3x, FFO adjusted leverage routinely above 4x and interest coverage falling below 6x. Fitch will also consider negative rating actions if Martin Marietta funds its share repurchase program primarily with incremental debt, leading to debt-to-EBITDA sustaining above 3x.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Martin Marietta Materials, Inc.:
--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'.

Fitch has also assigned a 'BBB-' rating to Martin Marietta's $224.1 million outstanding unsecured term loan due November 29, 2018.

The Rating Outlook is Positive.