TEXT - S&P revises Texas Industries outlook to stable
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
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