-- 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.
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.
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
-- Revenues grow 7% in 2013 and 10% 2014 based on our view for flat
commercial and public infrastructure spending and improved residential
-- 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.
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
-- 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.
For our full recovery analysis on Texas Industries, see our recovery report
published on RatingsDirect July 23, 2012.
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
Related Criteria And Research
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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,
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
-- 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
Ratings Affirmed; Outlook Action
Texas Industries Inc.
Corporate Credit Rating B-/Stable/-- B-/Negative/--
Senior Unsecured B-
Recovery Rating 4