TEXT - S&P revises Texas Industries outlook to stable

Wed Nov 21, 2012 2:50pm EST

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Overview
     -- U.S.-based cement, aggregates, and ready-mix concrete producer Texas 
Industries Inc. turned profitable on better operating conditions in key
Texas construction markets and we expect conditions to continue to improve over
the next 12 months.
     -- We expect EBITDA to strengthen off deep cyclical lows, though the 
company is likely to remain highly leveraged for the foreseeable future.
     -- We revised our outlook to stable from negative and we affirmed our 
ratings, including our 'B-' corporate credit rating on the company.
     -- The stable outlook reflects our view that the company will burn 
through less cash than we previously anticipated because of lower future 
capital expenditures and better working capital management and that its 
liquidity position will remain adequate over the next 12 months.
Rating Action
On Nov. 21, 2012, Standard & Poor's Ratings Services revised its outlook on 
Dallas-based Texas Industries Inc. to stable from negative. At the same time 
we affirmed our ratings on company, including our 'B-' corporate credit rating.

We affirmed our 'B-' rating on Texas Industries' $650 million senior notes due 
2020. The '4' recovery rating indicates our expectation for average (30% to 
50%) recovery in the event of default.

Rationale
The outlook revision and rating affirmation acknowledge Texas Industries' 
return to profitability in recent quarters, albeit at still weak levels, and 
our expectation that positive trends will continue over the next several 
quarters. The outlook revision further reflects our view that the company will 
burn through less cash than we previously anticipated because of lower future 
capital expenditures and better working capital management and that its 
liquidity position will remain adequate over the next 12 to 24 months.

The rating on Texas Industries reflects our view of the cement, ready-mix 
concrete, and aggregates company's "highly leveraged" financial risk profile 
and "weak" business risk profile. Our highly leveraged financial risk 
assessment acknowledges risks associated with the company's large debt balance 
and its weak EBITDA, which is just beginning to recover from deep cyclical 
lows. Our weak business risk assessment reflects improving, but still low 
demand for the geographically concentrated company's commodity products.

Texas Industries turned profitable this year, albeit at weak levels. We expect 
profitability to continue to improve and for the company to generate $50 
million of EBITDA in its fiscal 2013 (ending May 31) and at least $70 million 
in its fiscal 2014. However, leverage will remain very high (near 10x) given 
its $700 million of debt (including adjustments for operating leases and 
pension obligations). This baseline scenario reflects the following 
assumptions:

     -- Revenues grow 7% in 2013 and 10% 2014 based on our view for flat 
commercial and public infrastructure spending and improved residential 
construction;
     -- Gross margins improve about 200 basis points to 18.5% on improved 
operating efficiencies and modest price increases; and 
     -- Sales, general, and administrative costs drop to 10% of revenues (from 
over 11% in 2012) as fixed overhead is spread across higher sales.

Texas Industries is the largest producer of cement in Texas and one of the 
largest cement producers in Southern California. The company also supplies 
construction aggregates, ready-mix concrete and concrete products. We view 
Texas and California to have favorable long-term operating characteristics, 
though demand is currently very weak due to the sharp correction in 
residential and commercial construction as well as lower infrastructure 
spending by budget-constrained state and local governments.
Liquidity
We believe Texas Industries' liquidity is currently "adequate" under our 
criteria, based on the following expectations:

     -- Sources of liquidity will exceed uses by more than 1.2x over the next 
12 months and sources will exceed uses even if our assumed EBITDA were to 
decline by 15%; and
     -- Availability under a $200 million secured revolving credit facility 
will not drop below $25 million, which would trigger a 1x fixed-charge 
covenant; but
     -- Qualitative factors (including our view that the company could not 
absorb low probability, high impact events without refinancing) preclude us 
from viewing liquidity as strong under our criteria.

Texas Industries held $61 million of cash on Aug. 31, 2012. We expect the 
company to draw down much of its cash over the next 12-18 months to fund 
operating cash flow deficits, but that it won't need to use its revolving 
credit facility. Under our baseline assumptions, deficits would arise from a 
combination of improving but still cyclically weak EBITDA, about $60 million 
to $65 million of gross annual interest expense, $20 million to $30 million of 
recurring capital expenditures, and up to $18 million to complete the 
expansion of its Hunter, Texas cement plant.

Other sources of liquidity include about $100 million available on a $200 
million secured revolving credit facility that matures in August 2016. 
Availability is restricted by a borrowing base and is estimated after $29 
million of letters of credit and a $25 million minimum availability 
requirement. The company is not subject to restrictive financial covenants 
unless availability dropped below $25 million, at which time a 1x fixed charge 
covenant would be effective.
Recovery analysis
For our full recovery analysis on Texas Industries, see our recovery report 
published on RatingsDirect July 23, 2012.
Outlook
The stable rating outlook reflects our baseline assumption that construction 
activity in Texas Industries' core markets will continue to improve modestly 
over the next year and that EBITDA will strengthen to fully cover $60 million 
to $65 million of annual interest expense by its fiscal year 2014.

We are unlikely to upgrade our rating under our baseline scenario for the next 
12 months, given our view that leverage is likely to remain elevated over that 
span, at 10x EBITDA or above. However, we would raise our ratings if operating 
conditions improved markedly such that EBITDA surpassed $140 million and 
leveraged dropped below 5x.

We would lower our rating if Texas construction markets dipped into a second 
recession causing us to expect the company to incur EBITDA/interest coverage 
shortfalls in fiscal 2014. In this downside scenario Texas Industries could 
burn through its cash and draw down its revolving borrowing capacity below $75 
million, which would cause us to view the company's liquidity to be less than 
adequate.
Related Criteria And Research
     -- Industry Report Card: U.S. Natural Resources Split As Housing Boosts 
Building Products Companies While A Tough Market Puts Coal Miners Deeper In 
The Hole, Oct. 8, 2012
     -- Issuer Ranking: North American Building Materials Companies, Oct. 1, 
2012
     -- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 
1, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011.
     -- Key Credit Factors: Business And Financial Risks In The Global 
Building Products And Materials Industry, Nov. 19, 2008.

Temporary telephone contact number: James Fielding (917-734-3477); Tobias 
Crabtree (917-539-4614)

Ratings List
Ratings Affirmed

Ratings Affirmed; Outlook Action
                                        To                 From
Texas Industries Inc.
 Corporate Credit Rating                B-/Stable/--       B-/Negative/--
 Senior Unsecured                       B-                 
  Recovery Rating                       4
FILED UNDER: