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Fitch Affirms Martin Marietta Materials' IDR at 'BBB-'; Outlook Stable

January 29, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings has affirmed Martin Marietta Materials, Inc.'s (NYSE: MLM) ratings, including the company's Issuer Default Rating (IDR) at 'BBB-', following the company's announcement of a definitive 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. KEY RATING DRIVERS The rating affirmation reflects Fitch's view that the proposed merger agreement has good strategic rationale as the combined company will create a market leading supplier of aggregates and heavy building materials with vertically integrated aggregate and targeted cement operations. The transaction will initially increase Martin Marietta's leverage from 2.6x at the end of 2013 to approximately 3.5x 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 ratings for Martin Marietta are 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 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 volatility of state and federal spending on highway construction, and the cyclical nature of the construction industry. The ratings also reflect 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 9.3% in 2014. LEADING MARKET POSITION After the close of the transaction, the combined company will be the nation's largest producer of construction aggregates. The combined company will have 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 TXI's 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 $43.7 million and about $340 million of borrowing availability under its revolving credit and securitization facilities as of Dec. 31, 2013 . The company had sufficient room under the covenant requirements of its bank credit agreement as of year-end 2013. However, Fitch expects the company will request a temporary amendment from its bank group as the proposed merger will likely result in leverage that will be very close to the 3.5x maximum leverage covenant (up to 3.75x when excluding certain acquisition debt for 180 days) under its credit agreement. 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 2013 with Fitch-calculated debt-to-LTM EBITDA of 2.6x. This compares to 2.8x during 2012 and 3.0x during 2011. On a combined pro forma basis, Fitch estimates Martin Marietta's leverage at approximately 3.5x. The rating affirmation 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 7.4x during 2013. This compares to 7.0x during 2012 and 6.1x during 2011. On a combined pro forma basis, interest coverage weakens to about 4.5x. Fitch expects this ratio will settle at or slightly above 6.0x within twelve months following the close of the merger, assuming Martin Marietta is able to refinance the TXI's 9.25% notes at a lower interest rate. CONSTRUCTION SECTOR OUTLOOK Fitch expects total construction spending will increase 9.3% during 2014. Private residential construction spending is projected to advance 18.4% while private non-residential construction is expected to grow 5% this year. Public construction spending is projected to increase 3%. Fitch expects industry aggregates shipments will grow in the low to mid-single-digit percentage this year, with robust gains in 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-digit range, 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. Once the merger agreement is consummated, 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 agreement. 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 has affirmed the following ratings: --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 ' '. Applicable Criteria and Related Research : --'Corporate Rating Methodology' ( Aug. 5, 2013 ); --'Rating Basic Building Materials Companies' ( Aug. 9, 2012 ). Applicable Criteria and Related Research : Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013 Rating Basic Building Materials Companies Additional Disclosure Solicitation Status ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Primary Analyst Robert Rulla , CPA, +1 312-606-2311 Director Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 or Secondary Analyst Robert Curran , +1 212-908-0515 Managing Director or Committee Chairperson Craig Fraser , +1 212-908-0310 Managing Director or Media Relations: Sandro Scenga , +1 212-908-0278 Source: Fitch Ratings

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