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Texas Industries 10-K 2006 Documents found in this filing:
Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K
For the fiscal year ended May 31, 2006 OR
For the transition period from to Commission File Number 1-4887 TEXAS INDUSTRIES, INC. (Exact name of Registrant as specified in its charter)
Registrant’s telephone number, including area code (972) 647-6700 Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨. Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated Filer ¨ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x The aggregate market value of the Registrant’s Common Stock, $1.00 par value, held by non-affiliates of the Registrant as of November 30, 2005, the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $1,127,069,000 (based on the closing sale price of the Registrant’s common stock on that date as reported on the New York Stock Exchange). As of June 30, 2006, 23,946,981 shares of the Registrant’s common stock, $1.00 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant’s definitive proxy statement for the annual meeting of shareholders to be held October 17, 2006, are incorporated by reference into Part III.
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General We are one of the largest suppliers of heavy building materials in the United States through our three business segments: cement, aggregates and consumer products. Our cement segment produces gray portland cement and specialty cements. Our cement production and distribution facilities are concentrated primarily in Texas and California, the two largest cement markets in the United States. Based on production capacity, we are the largest producer of cement in Texas with a 30% share in that state and the fourth largest producer in southern California. Our aggregates segment produces natural aggregates, including sand, gravel and crushed limestone, and specialty lightweight aggregates. Our consumer products segment produces primarily ready-mix concrete and, to a lesser extent, packaged products. We are a major supplier of aggregates and ready-mix concrete in Texas and Louisiana and, to a lesser extent, in Oklahoma, Arkansas and Colorado. As of May 31, 2006, we operated 91 manufacturing facilities in six states. For the year ended May 31, 2006, our business had net sales of $943.9 million, of which 42.2% was generated by our cement segment, 23.4% by our aggregates segment, and 34.4% by our consumer products segment. For the year ended May 31, 2006, we shipped 5.1 million tons of finished cement, 25.2 million tons of natural aggregates, 1.8 million cubic yards of lightweight aggregates and 3.8 million cubic yards of ready-mix concrete. Our revenue is derived from multiple end-use markets, including the public works, residential, commercial, retail, industrial and institutional construction sectors, as well as the energy industry. Our diversified mix of products provides access to this broad range of end-user markets and mitigates the exposure to cyclical downturns in any one product and end-user market. No one customer accounted for more than 10% of total net sales in our business for the year ended May 31, 2006. In November 2005, we commenced construction on a project to expand and modernize our Oro Grande, California cement plant. We plan to expand the Oro Grande plant to approximately 2.3 million tons of advanced dry process cement production capacity annually, and retire the 1.3 million tons of existing, but less efficient, production after the new plant is commissioned. As a result of the increase in capacity, we expect to become the second largest producer of cement in southern California. Once completed, the Oro Grande plant will be a modern, low cost facility, similar to our Midlothian facility, and we will be well positioned to cost-effectively supply the southern California market. We expect the Oro Grande project will take at least two years to construct and will cost approximately $358 million excluding capitalized interest related to the project. We expect our capital expenditures in fiscal year 2007, including those related to the expansion and modernization of our Oro Grande cement plant, to be approximately $280 million. Discontinued Operations–Spin-off of Steel Subsidiary On July 29, 2005, we spun off Chaparral Steel Company, our steel manufacturing subsidiary, through a pro-rata, tax-free dividend to our stockholders of one share of Chaparral common stock for each share of our common stock. In connection with the spin-off, we issued $250 million principal amount of our 7 1/4% senior unsecured notes due 2013, entered into a new $200 million senior secured revolving credit facility, terminated our then existing senior credit facility and purchased for cash all of our then outstanding $600 million principal amount of 10 1/4% senior notes due 2011. See footnote entitled “Discontinued Operations” in the Notes to Consolidated Financial Statements in Item 8. As a consequence of the spin-off, Chaparral became an independent, public company. We have no further ownership interest in Chaparral or in any steel business, and Chaparral has no ownership interest in us. In addition, Chaparral is not a guarantor of any of our indebtedness nor are we a guarantor of any Chaparral indebtedness. Our relationship with Chaparral is now governed by a separation and distribution agreement and the ancillary agreements described in that agreement.
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Table of ContentsWe have reported the historical results of our steel operations as discontinued operations in our financial statements. Because we no longer own any interest in Chaparral or its steel operations, we have omitted any discussion of the steel operations from this Item 1. Our Competitive Strengths and Strategies We believe the following competitive strengths and strategies are key to our ability to grow and compete successfully: Leading Market Positions. We strive to be a major supplier in markets that have attractive characteristics, such as large market size, above average long-term projected population growth, strong economic activity and a year-round building season. We are the largest producer of cement in Texas (with a 30% share of total capacity in that state) and the fourth largest cement producer in southern California. We believe we are also the largest supplier of expanded shale and clay specialty aggregate products west of the Mississippi River, the second largest supplier of stone, sand and gravel aggregate products in North Texas, one of the largest suppliers of ready-mix concrete in North Texas and one of the largest suppliers of sand and gravel aggregate products and ready-mix concrete in Louisiana. We believe our leadership in these markets enhances our competitive position. Low Cost Supplier. We strive to be a low cost supplier in our markets. We believe we have some of the lowest operating costs in the cement and aggregate industries, with the exception of our California cement plants, where we are expanding and modernizing our Oro Grande plant. We focus on optimizing the use of our equipment, enhancing our productivity and exploring new technologies to further improve our unit cost of production at each of our facilities. Our low operating costs are primarily a result of our efficient plant designs, high productivity rate and innovative manufacturing processes. Strategic Locations and Markets. The strategic locations of our facilities near our customer base and sources of raw materials allow us to access the largest cement consuming markets in the United States. Our cement manufacturing facilities are located in California and Texas, the two largest U.S. cement markets. During calendar year 2005, California and Texas accounted for approximately 34 million tons of cement consumption or approximately 24% of total U.S. cement consumption. California and Texas have also been the largest beneficiaries of increased federal transportation funding during the last several years. Funds distributed under multi-year federal highway legislation historically have comprised a majority of California and Texas’ public works spending. Diversified Product Mix and Broad Range of End-User Markets. Our revenue streams are derived from multiple end-user markets, including the public works, residential, commercial, retail, industrial and institutional construction sectors, as well as the energy industry. Accordingly, we have a broad and diverse customer base. Our diversified mix of products provides access to this broad range of end-user markets and mitigates the exposure to cyclical downturns in any one product or end-user market. No one customer accounted for more than 10% of net sales for our business in fiscal year 2006. Long-Standing Customer Relationships. We have established a solid base of long-standing customer relationships. For example, our ten largest customers during fiscal year 2006 have done business with us for an average of 18 years. We strive to achieve customer loyalty by delivering superior customer service and maintaining an experienced sales force with in-depth market knowledge. We believe our long-standing relationships and our leading market positions help to provide additional stability to our operating performance and make us a preferred supplier. Experienced Management Team. Mel Brekhus, our chief executive officer, Dick Fowler, our chief financial officer, and the vice presidents responsible for the cement, aggregates and consumer products segments have an average of 26 years of industry experience. Our management team has led our company through several industry cycles and has demonstrated the ability to successfully complete and operate major expansion projects.
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Table of ContentsProducts Cement Segment Our cement segment produces gray portland cement as its principal product. We also produce specialty cements such as white portland, masonry and oil well cements. Our cement production facilities are located at four sites in Texas and California: Midlothian, Texas, south of Dallas/ Fort Worth, the largest cement plant in Texas; Hunter, Texas, south of Austin; and Oro Grande and Crestmore, California, both near Los Angeles. Except for the Crestmore facility, the limestone reserves used as the primary raw material are located on property we own adjacent to each of the plants. We purchase raw material for the Crestmore facility from multiple outside suppliers. Information regarding each of our facilities is as follows:
We use, under license, the patented CemStarSM process in both of our Texas facilities and our Oro Grande, California facility to increase combined annual production of cement clinker by approximately 6%. The CemStarSM process adds “slag”, a co-product of steel-making, into a cement kiln along with the regular raw material feed. The slag is added to the feedstock materials fed into the kiln and serves to increase the production of clinker with little additional cost. We purchase the slag for our Midlothian plant from an adjacent steel plant. We originally developed and patented the CemStarSM process, and in 2004 we sold the U.S. patent to a third party, retaining a license to use the process. We continue to receive royalty payments from our original licensees, and have retained our right to license CemStarSM foreign patents. The primary fuel source for all of our facilities is coal; however, we currently displace approximately 12% of our coal needs at our Midlothian plant and approximately 5% of our coal needs at our Hunter plant by utilizing alternative fuels such as waste-derived fuels and tires. Our facilities also consume large amounts of electricity. We believe that adequate supplies of both fuel and electricity are generally available. We produced approximately 5.0 million tons of finished cement in fiscal year 2006, 5.1 million tons in 2005, and 5.1 million tons in 2004. Total shipments of finished cement were approximately 5.1million tons in fiscal year 2006, 5.4 million tons in 2005 and 5.3 million tons in 2004, of which 4.2 million tons in fiscal year 2006, 4.4 million tons in 2005 and 4.4 million tons in 2004 were shipped to outside trade customers. The difference between production and shipments of cement is cement we purchased from third parties. At June 30, 2006, our backlog was approximately 0.9 million tons, approximately 0.2 million tons of which we do not expect to fill in fiscal year 2007. At June 30, 2005, our backlog was approximately 1.4 million tons. We market our cement products in the southwestern United States. Our principal marketing area includes the states of Texas, Louisiana, Oklahoma, California, Nevada, Arizona and Utah. Sales offices are maintained throughout the marketing area and sales are made primarily to numerous customers in the construction industry, no one of which accounted for more than 10% of the trade sales volume in fiscal year 2006. Cement is distributed by rail or truck to eight distribution terminals located throughout the marketing area. The cement industry is highly competitive with suppliers differentiating themselves based on price, service and quality.
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Table of ContentsAggregates Segment Natural Aggregates. Our natural aggregate operations, which produce sand, gravel and crushed limestone, are conducted from facilities primarily serving the Dallas/Fort Worth, Austin and Houston areas in Texas; the southern Oklahoma area; and the Alexandria, New Orleans, Baton Rouge and Monroe areas in Louisiana. The following table summarizes certain information about our natural aggregate production facilities.
Reserves identified with the facilities shown above and additional reserves available to support future plant sites are contained on approximately 40,800 acres of land, of which we own approximately 26,400 acres and lease the remainder. The plants operated at 89% of rated annual productive capacity for fiscal year 2006 and sales for the year totaled 25.2 million tons, of which approximately 20.0 million tons were shipped to outside trade customers. The cost of transportation limits the marketing of aggregate products to the areas within approximately 100 miles of the plant sites, therefore, sales are related to the level of construction activity near the plants. The products are marketed by our sales organization located in the areas served by the plants and are sold to numerous customers, no one of which would be considered significant to our business. Products are distributed to trade customers principally by contract or customer-owned haulers or through rail distribution facilities. To enhance our efficiency and competitiveness, particularly in sales of crushed stone, we strive to establish direct rail links between production facilities and our key markets, reducing the cost of transportation. We have installed rail loops at our crushed stone plants and rail terminals close to major markets, which allows rapid loading and unloading of product using unit-trains. In local areas surrounding our rail terminals, we believe we have a transportation cost advantage over some competing suppliers who rely to a greater extent on truck transportation. Lightweight Aggregates. Expanded shale and clay, a specialty lightweight aggregate product, is manufactured from facilities serving the Dallas/Fort Worth, Austin and Houston areas in Texas; the Oakland/San Francisco and Los Angeles areas in California; and the Denver area in Colorado. The following table summarizes certain information about our expanded shale and clay production facilities.
The expanded shale and clay plants operated at 89% of rated annual productive capacity for fiscal year 2006 and sales for the year totaled approximately 1.8 million cubic yards, of which approximately 1.6 million cubic yards were shipped to outside trade customers. At the end of fiscal year 2006, we sold the land associated with
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Table of Contentsour plant near Houston, Texas, to a real estate developer, retaining the right to continue operating the plant until May 2007 and to continue shipping product inventory until May 2008. After the inventory is exhausted, we will serve that market from our plant in north central Texas. The cost of transportation limits the marketing of most expanded shale and clay products to the areas within approximately 200 miles of the plant or terminal sites, therefore, sales are related to the level of construction activity near the plants and terminals. The products are marketed by our sales organization located in the areas served by the plants and terminals and are sold to numerous customers, no one of which would be considered significant to our business. Products are distributed to trade customers principally by contract or customer-owned haulers and, to a lesser extent, by rail. Certain specialty products we have developed from our expanded shale and clay, such as DiamondPro® baseball infield conditioner, have developed a geographically dispersed customer base and are shipped to a significant portion of the continental United States. Consumer Products Segment Ready-mix Concrete. Our ready-mix concrete operations are situated in three areas in Texas (Dallas/Fort Worth/Denton, Houston and east Texas), in north and central Louisiana, and at one location in southern Arkansas. The following table summarizes various information concerning these facilities.
The plants listed above are located on sites we own or lease. We manufacture and supply a substantial amount of the cement and aggregates used by the ready-mix plants with the remainder being purchased from outside suppliers. Ready-mix concrete is sold to various contractors in the construction industry, no one of which would be considered significant to our business. We believe that we are a significant participant in the Texas and Louisiana concrete products markets. The principal methods of competition in concrete products markets are quality and service at competitive prices. Because TXI is a producer of cement and aggregates, the primary components of concrete, we believe that our customers view us as a reliable supplier of quality concrete, particularly during times that the supply of raw material is tight. Other Products. We manufacture and market packaged concrete, mortar, sand and related products from plant or distribution sites we own in the Dallas/Fort Worth, Austin and Houston areas in Texas. The products are marketed by our sales force in each of these locations, and are delivered primarily by contract haulers direct to retailers. Since the cost of delivery is significant to the overall cost of most of these products, the market area is generally restricted to within approximately 100 miles of the plant locations. These products are sold by the retailers to contractors, owners and distributors. Competition All of the markets in which we participate are highly competitive. These markets are also generally regional because transportation costs are high relative to the value of the product. Ready-mix concrete also competes in relatively small geographic areas due to delivery time limits associated with pre-mixed concrete after the addition of water. As a result, in our aggregates and consumer products markets, there is little competition from imported products. However, our cement segment does compete with imported cement because of the higher value of the product. The nature of our competition varies among our product lines due to the widely differing amounts of capital necessary to build production facilities. Ready-mix concrete production requires relatively small amounts of capital to build a concrete batching plant and acquire delivery trucks. As a result, in each local market we face competition from numerous small producers of ready mix concrete as well as large companies with local
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Table of Contentsfacilities in many markets. Sand and gravel production by dredging, or crushed stone production from stone quarries, is moderately capital intensive with fewer and larger competitors. Construction of cement production facilities is highly capital intensive and requires long lead times to complete engineering design, obtain regulatory permits, acquire equipment and construct a plant. As a result, most domestic producers of cement are owned by large foreign companies operating in multiple international markets. Our competitors in the cement markets include domestic subsidiaries of Holcim Ltd. and Cemex S.A. de C. V., other domestic suppliers and importers of foreign cement. Most domestic producers of cement are owned by large foreign producers, and maintain the capability to import cement from foreign production facilities during periods when market demand exceeds supply. Our major competitors in the aggregates markets include Hanson Aggregates, Vulcan Materials, and Martin Marietta Materials. Large competitors in our ready-mix markets include US Concrete, Southern Star, Campbell Ready Mix, and Lattimore Materials. Competition for all of our products is based largely on price and, to a lesser extent, quality and service due to the lack of product differentiation. As a result, the prices that we charge our customers are not likely to be materially different from the prices charged by other producers in the same markets. Accordingly, our profitability is generally dependent on the level of demand for cement, aggregates and concrete products in the local markets we serve, and on our ability to control operating costs. Employees At May 31, 2006, we had approximately 2,600 employees. Approximately 200 employees at our Oro Grande, California cement plant are covered by a collective bargaining agreement that expired in September 2005, but which has been extended from time to time as negotiations on a new agreement continue. Employees at our Crestmore, California cement plant voted in August 2005 to join the United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers Union, the same union that represents our Oro Grande plant employees. We are currently negotiating a collective bargaining agreement that will cover approximately 80 Crestmore employees. At this time we cannot predict when negotiations on either contract will be concluded. We believe our relationship with our employees is good. Legal Proceedings We are defendants in lawsuits that arose in the ordinary course of business. In our judgment, the ultimate liability, if any, from such legal proceedings will not have a material effect on our consolidated financial position or results of operations. Environmental We are subject to various federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern the generation, use, handling, storage, transportation and disposal of hazardous substances and wastes, and provide for the investigation and remediation of contamination existing at current and former properties, and at third-party waste disposal sites. Emission sources at our facilities are regulated by a combination of permit limitations and emission standards of national and statewide application. These laws, regulations and permit limitations have tended to become increasingly stringent over time. As with others in our business, we expend substantial amounts to comply with these laws, regulations and permit limitations, including amounts for pollution control equipment required to monitor and regulate wastewater discharges and air emissions. The U.S. Environmental Protection Agency, or EPA, and state agencies are charged with enforcing these laws and regulations, and these agencies can impose substantial fines and penalties, as well as curtail or suspend our operations, for violations and non-compliance. Moreover, certain of these laws and regulations permit private
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Table of Contentsparties to bring actions against us for injuries to persons and damages to property allegedly caused by our operations. Changes in environmental laws, regulations and permits may interrupt production, increase the cost of compliance and hinder our ability to build new or expand production facilities. For example, there currently is considerable scientific and political debate about whether the production of gases such as carbon dioxide may be causing global climate change. Since the manufacture of cement also produces carbon dioxide, any new regulations limiting our emissions of carbon dioxide could significantly impact our production volumes or costs of compliance. Many of the raw materials, products and by-products associated with the operation of any industrial facility, including those for the production of cement or concrete products, contain chemical elements or compounds that can be designated as hazardous. Some examples are the metals present in cement kiln dust, or CKD, and the ignitability of the waste derived fuels that we use as a primary or supplementary fuel substitute for nonrenewable coal and natural gas to fire certain of our cement kilns. Currently, CKD is exempt from hazardous waste management standards under the Resource Conservation and Recovery Act, or RCRA, if certain tests are satisfied. We have demonstrated that the CKD we generate satisfies these tests. We utilize hazardous materials such as gasoline, acids, solvents and chemicals as well as materials that have been designated or characterized as hazardous waste by the EPA, which we utilize for energy recovery. This requires us to familiarize our work force with the more exacting requirements of applicable environmental laws and regulations with respect to human health and the environment related to these activities. The failure to observe these exacting requirements could jeopardize our hazardous waste management permits and, under certain circumstances, expose us to significant liabilities and costs of cleaning up releases of hazardous substances into the environment or claims by employees or others alleging exposure to hazardous substances. We believe we are in substantial compliance with all legal requirements regarding the environment and health and safety matters, but since many of these requirements are subjective and therefore not quantifiable, or are presently not determinable, or are likely to be affected by future legislation or rule making by government agencies, it is not possible to accurately predict the aggregate future costs of compliance and their effect on our future results of operations or financial condition. Notwithstanding our intentions to comply with all legal requirements, if injury to persons or damage to property or contamination of the environment has been or is caused by the conduct of our business or hazardous substances or wastes used in, generated or disposed of by us, we may be liable for such injuries and damages and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability could be material. Intellectual Property We own trademarks such as TXI® and Maximizer® and certain process patents. While we believe that none of our active trademarks or patents are essential to our business as a whole, brand recognition can play a role in sales of specialty products and packaged products. We believe our packaged product brands are perceived as premium quality in the local markets we serve, such as Riverside® white cement in southern California, and the Maximizer® brand of patented lightweight concrete in Texas. Real Estate We own significant amounts of land, acquired for our business purposes such as mining sand, gravel, crushed limestone, and clay. When mining is completed or land becomes surplus for other reasons, we sell it for development or, in some instances, develop it ourselves. We are involved in the sale of land in a small number of high quality industrial and multi-use parks that we developed in the metropolitan areas of Dallas/Fort Worth and Houston, Texas. Research and Development We incurred no research and development cost for any of the past three fiscal years. All of our innovations are developed through the production process.
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Table of ContentsExecutive Officers Following is information as of June 30, 2006 about the persons who are our executive officers: Mel G. Brekhus, age 57, has been President and Chief Executive Officer since June 1, 2004. From 1998 through May 2004, he was Executive Vice President, Cement, Aggregate and Concrete. He joined us in 1989 as Vice President, Cement Production and within a short period became Vice President, Cement. His career in the cement industry began in 1972 when he joined Lehigh Portland Cement Company (1972-1983). While at Lehigh, he held various positions as Chemist, Production Manager and Plant Manager throughout the United States. He was Technical Manager and Plant Manager for Missouri Portland Cement Company (1984-1989) in their Midwest operations. His professional affiliations include the Portland Cement Association, where he is Past Chairman and presently a Director. Richard M. Fowler, age 63, has been Executive Vice President—Finance and Chief Financial Officer since July 2000. He was Vice President-Controller (1972-1984), Vice President Finance-Steel (1985-1987) and Vice President Finance-TXI (1987-2000). As a Certified Public Accountant (CPA), he maintains membership in both the Texas Society and the American Institute of CPAs, is a member of the Financial Executive Institute and serves on the Advisory Board of FM Global and the Board of Directors of Dee Brown, Inc. Frederick G. Anderson, age 55, has been Vice President, General Counsel and Secretary since November 2004. He has been a practicing attorney for 26 years. From March 2003 until November 2004 he engaged in the private practice of law, including as of counsel to Davis Munck P.C., a Dallas, Texas based law firm. From August 1997 through March 2003, he was Senior Vice President, General Counsel and Secretary of WebLink Wireless, Inc., a wireless telecommunications company. Mr. Anderson maintains membership in the State Bar of Texas, American Bar Association and Dallas Bar Association. Barry M. Bone, age 48, has been Vice President—Real Estate since 1995 and President of Brookhollow Corporation, our real estate subsidiary, since 1991. He joined us in 1982 and has served in various real estate positions since then. J. Lynn Davis, age 57, has been Vice President—Cement since December 1996. He joined us in 1971 and has served in various positions in our cement, aggregates and concrete operations since then. William J. Durbin, age 61, has been Vice President—Human Resources since March 2000. From 1996 to 2000, he served as Vice President-Human Resources and Administration of USI Bath & Plumbing Products, and Vice President-Human Resources of Zurn Industries. Stephen D. Mayfield, age 46, has been Vice President—Aggregates since September 2000. He joined us in 1984 and has held various positions in our cement, aggregates and concrete operations since then. He is a director of the National Stone, Sand and Gravel Association and a member and former director of the Texas Aggregate and Concrete Association. James B. Rogers, age 39, has been Vice President—Consumer Products since August 2002. He joined us in 1996 and has held various positions in our cement, aggregates and concrete operations since then, including General Manager-Consumer Products from November 2000 until August 2002. He is a director of the National Ready-Mix Concrete Association and the Texas Aggregates and Concrete Association. Mr. Rogers is the son of Robert D. Rogers, our Chairman of the Board. Executive officers are elected annually by the board of directors and serve at the pleasure of the board. Available Information Our company was incorporated in Delaware in 1951. We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements and other
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Table of Contentsinformation filed by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains an internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings are also available to the public at the website maintained by the SEC, http://www.sec.gov. We make available, free of charge, through our investor relations website our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. The URL for our investor relations website is www.txi.com.
In addition to the risks discussed elsewhere in this annual report, you should carefully consider the risks described below before making an investment decision. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. Any of the events discussed in the risk factors below may occur. If they do, our business, results of operations or financial condition could be materially adversely affected. In such an instance, the trading price of our securities could decline, and you might lose all or part of your investment. Our project to expand and modernize our Oro Grande, California cement plant or future expansionary capital expenditures may not strengthen our competitive position. In order to strengthen our competitive position, in recent years we have made significant capital expenditures to expand our facilities. In November 2005 we commenced a project to expand and modernize our cement plant in Oro Grande, California. We expect the project will take at least two years to construct, and will cost approximately $358 million excluding capitalized interest related to the project. We could experience construction delays or cost overruns for many reasons, including inclement weather, unavailability of materials and unanticipated site conditions. Although we have all material environmental permits necessary for the construction of the plant, we cannot obtain operating permits until the construction is complete. In addition, as we finalize the construction plans during the course of construction, we expect that amendments to our existing construction permits will be required to accommodate any changes we make to the original construction plans. Failure to timely receive any such permits, or permit amendments, could delay construction. Our construction costs would also increase if we incur unanticipated costs to comply with any permit requirements that may be imposed as conditions to obtaining such permits. We cannot assure you that the new plant, when completed, will operate in accordance with its design specifications. If it does not, we could incur additional costs or production delays while problems are corrected and operating permits are obtained. As we do not have control over the cost or the outcome of these factors, we cannot assure you that the planned expansion will occur on schedule, within budget or at all. In February 2006 we filed an application for the environmental permit necessary to expand our Hunter, Texas cement plant. If cement market conditions in Texas remain favorable, we expect to begin engineering design work on the expansion project soon after the permit is issued and, ultimately, to construct an additional cement kiln at the Hunter plant. We cannot assure you, however, that all necessary permits will be issued, that market conditions will remain favorable, or that any financing, if required, will be available on acceptable terms. As a result, we cannot assure you that this expansion project will be commenced, and if commenced when it will be completed. The Oro Grande project, the Hunter project or any other future expansionary capital expenditures may not improve our competitive position and business prospects as anticipated. If certain of the events described above occur, it could materially and adversely affect our results of operations and financial condition.
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Table of ContentsOur business is sensitive to economic cycles within the public, residential and non-residential construction segments as well as seasonality and inclement weather conditions. Some of our competitors may cope better with adverse economic and market conditions than we would. A significant percentage of sales of our products is attributable to the level of construction activity in our specific local markets. Historically, construction spending and cement consumption have been cyclical. Demand for cement is derived primarily from public (infrastructure), residential and non-residential construction. Construction activity in each of these segments is cyclical and is influenced by prevailing economic conditions, including availability of public funds, interest rate levels, inflation, consumer spending habits and employment. Additionally, fluctuations in the value of the dollar can be expected to affect our business because a strong U.S. dollar makes imported cement less expensive, resulting in more imports into the United States by foreign competitors. Moreover, our industry is characterized by low backlogs, which means that our results of operations may be promptly affected by short-term economic fluctuations. In particular, our customers are engaged in a substantial amount of construction in which government funding is a component and, as a result, can be subject to government budget constraints and political shifts resulting in fund reallocation. For example, funds distributed under multi-year federal highway legislation historically comprised a majority of California and Texas’ public works spending. A significant decline in the level of construction activity in our markets would negatively affect our operating results. The cement, aggregate and concrete markets are also generally regional because transportation costs are high relative to the value of the product. Regional markets in particular are highly cyclical. Sales in regional markets are dependent on regional demand, which is tied to local economic factors that may fluctuate more widely than those of the United States as a whole. As a result, even though we sell in more than one area of the country, our operating results are subject to significant fluctuation. The regional nature of our business also makes us vulnerable to changes in regional weather and its impact on the regional construction industry. Our operating profit is generally lower in our fiscal quarter ending on the last day of February than it is in our other three fiscal quarters because of the impact of winter weather on construction activity. Although southern California and Texas are regions characterized by longer periods of favorable weather, extended periods of inclement weather can reduce construction activity at any time of the year. Because we sell almost all of our cement in Texas and Southern California, and because cement sales contribute more to our profitability than any other product line, a significant decline in cement demand in Texas or southern California would negatively impact our profitability. Our product prices are subject to material changes in response to relatively minor fluctuations in supply and demand, which can be affected by economic and other market conditions beyond our control. We may face price or volume declines in the future. Due to the high fixed cost nature of our business, our operating results may be significantly affected by relatively small changes in production volumes. Some of our competitors are larger and have greater financial resources or have less financial leverage than we do. As a result, these competitors may cope better with any downward pricing pressure and adverse economic or market conditions than we would. The availability and pricing of energy could lower our results of operations and harm our financial condition. We are dependent upon energy sources, including electricity and fossil fuels. During our last fiscal year, our operating results were negatively impacted by increasing energy costs. Prices for energy are subject to market forces largely beyond our control. We have generally not entered into any long-term contracts to satisfy our fuel and electricity needs, with the exception of coal which we purchase from specific mines pursuant to long-term contracts. Despite long-term coal contracts, our coal supplies could be interrupted in the event of rail service disruptions or mine failures. If we are unable to meet our requirements for fuel and electricity, we may experience interruptions in our production. Price increases or disruption of the uninterrupted supply of these products could adversely affect our results of operations and financial condition.
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Table of ContentsWe may incur substantial expenditures to comply with environmental laws which may adversely affect our results of operations and harm our financial condition. We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, kiln dust disposal and wastewater discharge. We believe we are in substantial compliance with applicable environmental laws and regulations. However, from time to time we receive claims from federal and state environmental regulatory agencies and entities asserting that we are or may be in violation of certain environmental laws and regulations. Based on our experience and information currently available to us, we believe that such claims will not have a material impact on our financial condition or results of operations. Despite our compliance and experience, it is possible that we could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us, interrupt production or hinder our ability to build new or expand production facilities. For example, there currently is considerable scientific and political debate about whether the production of gases such as carbon dioxide may be causing global climate change. Since the manufacture of cement also produces carbon dioxide, any new regulations limiting our emissions of carbon dioxide could significantly impact our production volumes or costs of compliance. We believe we are in substantial compliance with all legal requirements regarding the environment and health and safety matters, but since many of these requirements are subjective and therefore not quantifiable, or are presently not determinable, or are likely to be affected by future legislation or rule making by government agencies, it is not possible to accurately predict the aggregate future costs of compliance and their effect on our operations, future net income or financial condition. Notwithstanding our intentions to comply with all legal requirements, if injury to persons or damage to property or contamination of the environment has been or is caused by the conduct of our business or hazardous substances or waste used in, generated or disposed of by us, we may be liable for such injuries and damages, and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability could be material, and we may incur material liability in connection with possible claims related to our operations and properties under environmental, health and safety laws. Future litigation could affect our profitability. The nature of our business exposes us to various litigation matters including product liability claims, employment matters, environmental matters, regulatory and administrative proceedings, governmental investigations, tort claims and contract disputes. We contest these matters vigorously and make insurance claims where appropriate. However, litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome of existing or future litigation. Although we make accruals as we believe warranted, the amounts that we accrue could vary significantly from any amounts we actually pay due to the inherent uncertainties and shortcomings in the estimation process. Future litigation costs, settlements or judgments could materially and adversely affect our results of operations and financial condition. Unexpected equipment failures, catastrophic events and scheduled maintenance may lead to production curtailments or shutdowns. Due to the high fixed cost nature of our business, interruptions in our production capabilities may cause our productivity and results of operations to decline significantly during the affected period. Our manufacturing processes are dependent upon critical pieces of equipment, such as our kilns and finishing mills. This equipment, on occasion, may be out of service as a result of unanticipated failures or damaged during accidents. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. In addition, our operations in California are susceptible to damage from earthquakes, for which we maintain only a limited amount of earthquake insurance and, therefore, we are not fully insured against earthquake risk. We also have one to two-week scheduled shut-downs every 12 to 24 months to refurbish our cement production facilities. Any significant interruption in production capability
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Table of Contentsmay require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenue due to lost production time, which could have a material adverse effect on our results of operations and financial condition. Implementation of our growth strategy has certain risks. As part of our growth strategy, we may expand existing facilities, build additional plants, acquire other reserves or operations, enter into joint ventures or form strategic alliances that we believe will expand or complement our existing business. If any of these transactions occur, they will likely involve some or all of the following risks:
Pursuing our growth strategy may be required for us to remain competitive, but we may not be able to complete any such transactions or obtain financing, if necessary, for such transactions on favorable terms or at all. Future transactions may not improve the competitive position and business prospects as anticipated, and could reduce sales or profit margins, and, therefore, earnings if they are not successful. Our business could suffer if cement imports from Mexico or other countries significantly increase or are sold in the U.S. in violation of U.S. fair trade laws. In 1989 and 1990, groups of domestic cement producers, including us, filed antidumping petitions that resulted in the imposition of significant antidumping import duties on imports of gray portland cement and clinker from Mexico and Japan. On March 6, 2006, the governments of the U.S. and Mexico signed the U.S.-Mexico Agreement on Cement, which settled the 16-year dispute over the U.S. antidumping duty order on imports from Mexico. During the three-year term of the agreement, Mexican cement producers are allowed to import into the United States up to 3.0 million metric tons of cement and clinker annually, which will be subject to a reduced import duty of $3.00 per ton. Maximum import levels will be adjusted annually within certain limits to reflect changes in consumption, and will be allowed to increase to higher levels, if needed, to respond to natural disasters such as hurricanes. The antidumping order will be terminated in 2009 if Mexican producers have complied with the agreement. The agreement also provides that U.S. Customs will deposit into an escrow account substantially all of the cash deposits of estimated antidumping duties collected from importers of Mexican cement and clinker. In a separate agreement, the importers and certain producers in the U.S., including us, agreed that 50% of the deposits in the escrow account would be distributed to the importers and the remaining 50% would be distributed to the U.S. producers. We expect to receive about 12% of the amounts distributed to the U.S. producers.
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Table of ContentsAlthough we expect the antidumping order against cement and clinker from Japan to remain in effect until at least 2011, beginning in 2009 unlimited imports from Mexico may enter the U.S. without the imposition of any import duties. In addition, as has always been the case, independently owned cement operators can construct new import facilities and begin to purchase cement from other countries, such as those in Asia, which could compete with domestic producers. An influx of cement or clinker products from countries not subject to antidumping orders, or sales of imported cement or clinker in violation of U.S. fair trade laws, could materially and adversely affect our results of operations and financial condition. The financing agreements governing our debt contain various covenants that limit our discretion in the operation of our business and could lead to acceleration of debt. Our financing agreements, including our senior secured credit facility and the indenture governing our outstanding notes, impose operating and financial restrictions on our activities. Our senior secured credit facility requires us to comply with or maintain certain financial tests and ratios, including a leverage ratio and an interest coverage ratio. Restrictions contained in these financing agreements also limit or prohibit our ability and certain of our subsidiaries ability to, among other things:
Various risks and events beyond our control could affect our ability to comply with these covenants and maintain financial tests and ratios. If we cannot comply with the financial covenants in our senior secured credit facility, we may not be able to borrow under this facility. In addition, failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing that debt. In addition, lenders may be able to terminate any commitments they made to supply us with further funds. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by our financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we will be able to obtain waivers or amendments of our financing agreements, if necessary, at acceptable terms or at all. The spin-off could result in significant tax liability. Our distribution of the common stock of Chaparral was conditioned upon our receipt of an opinion from our tax counsel to the effect that, among other things, the distribution qualified as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, to us and our stockholders for U.S. federal income tax purposes. The opinion is based upon various factual representations and assumptions, as well as upon certain undertakings. We are not aware of any facts or circumstances that would cause the representations and assumptions to be untrue or incomplete in any material respect. If, however, any of those factual representations or assumptions were untrue or incomplete in any material respect, any undertaking was not complied with, or the facts upon which the opinion is based were materially different from the facts at the time of the distribution, the distribution may not qualify for tax-free treatment.
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Table of ContentsUnder current policy of the Internal Revenue Service, or IRS, advance rulings will not be issued for certain significant aspects of spin-off transactions. Therefore, we did not apply for an advance ruling from the IRS with respect to the U.S. federal income tax consequences of the distribution. Opinions of counsel are not binding on the courts or the IRS, and the conclusions expressed in the opinion delivered to us could be challenged by the IRS. If the spin-off fails to qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, we would be subject to tax as if we had sold the Chaparral common stock in a taxable sale for its fair market value. Our stockholders would be treated as if they had received a taxable dividend equal to the fair market value of the Chaparral common stock that was distributed to them, taxed as a dividend (without reduction for any portion of a stockholder’s basis in its shares of our common stock) for U.S. federal income tax purposes and possibly for purposes of state and local tax law, to the extent of a stockholder’s pro rata share of our current and accumulated earnings and profits (including any taxable gain of ours with respect to the spin-off). It is expected that the amount of any such taxes to our stockholders and us would be substantial. Our ability to engage in acquisitions and other strategic transactions is subject to limitations because we agreed to certain restrictions in order to comply with U.S. federal income tax requirements for a tax-free spin-off. Current U.S. tax law that applies to spin-offs generally creates a presumption that the spin-off would be taxable to us but not to our stockholders if we engage in, or enter into an agreement to engage in, a transaction (or series of transactions) that would result in a 50% or greater change by vote or by value in our stock ownership during the four-year period beginning on the date two years before the distribution date, unless it is established that the transaction (or a series of transactions) is not pursuant to a plan related to the spin-off. U.S. Treasury regulations generally provide that whether an acquisition transaction and a spin-off transaction are part of a plan is determined based on all of the facts and circumstances, including specific factors listed in the regulations. In addition, the regulations provide certain “safe harbors” for acquisition transactions that are not considered to be part of a plan. There are other restrictions imposed on us under current U.S. federal income tax laws for spin-offs with which we will need to comply in order to preserve the favorable tax treatment of the distribution of Chaparral common stock to our stockholders, such as continuing to own and manage our remaining business and limitations on sales or redemptions of our common stock for cash or other property following the distribution. In our tax sharing and indemnification agreement with Chaparral, we agreed that, among other things, we will not take any actions that would result in any tax being imposed on the spin-off. Further, during the two-year period following the spin-off, we may not repurchase any of our stock except in certain circumstances permitted by the IRS nor may we during the six-month period following the spin-off, except in certain specified transactions, liquidate, merge or consolidate with another person or sell or dispose of our assets (or those of certain of our subsidiaries) except in the ordinary course of business. We may, however, take certain actions prohibited by the tax sharing and indemnification agreement if we receive an unqualified opinion of tax counsel or an IRS ruling acceptable to us, to the effect that these actions will not affect the tax-free nature of the spin-off. These restrictions could substantially limit our strategic and operational flexibility, including our ability to finance our operations by issuing equity securities, make acquisitions using equity securities, repurchase our equity securities, raise money by selling assets or enter into business combination transactions. We may be required to satisfy certain indemnification obligations to Chaparral or may not be able to collect on indemnification rights from Chaparral. In the tax sharing and indemnification agreement between us and Chaparral, Chaparral agreed to indemnify us and our subsidiaries for any loss, including any adjustment to our taxes, resulting from (1) any action or failure to act by Chaparral or any of its subsidiaries following the completion of the spin-off that would be inconsistent with or prohibit the spin-off from qualifying as a tax-free transaction to us and our stockholders
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Table of Contentsunder Section 355 of the Code, (2) certain acquisitions of its equity securities or assets or those of certain of its subsidiaries, and (3) any breach of any representation or covenant given by Chaparral or its subsidiaries in the separation documents or in connection with the tax opinion delivered by our tax counsel in connection with the spin-off. Chaparral’s indemnification obligations to us and our subsidiaries, officers and directors, are not limited in amount or subject to any cap. Under the terms of the separation and distribution agreement between us and Chaparral, we and Chaparral have agreed to indemnify each other with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies. These indemnification obligations could be significant. The ability to satisfy these indemnities if called upon to do so will depend upon the future financial strength of each of our companies. We cannot determine whether we will have to indemnify Chaparral for any substantial obligations after the distribution. We also cannot assure you that, if Chaparral has to indemnify us for any substantial obligations, Chaparral will have the ability to satisfy those obligations to us. If Chaparral is unable to satisfy its obligations under its indemnity to us under the circumstances set forth above, we may be subject to substantial liabilities.
None.
The information required by this item is included in Item 1.
The information required by this item is included in the section of the Notes to Consolidated Financial Statements footnote entitled “Legal Proceedings and Contingent Liabilities” presented in Part II, Item 8 on pages 44 and 45 and incorporated herein by reference.
None
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Table of ContentsPART II
Our shares of common stock, $1 par value, are traded on the New York Stock Exchange (ticker symbol TXI). As of June 30, 2006 there were 2,043 shareholder accounts of record. Restrictions on the payment of dividends are described in the Notes to Consolidated Financial Statements footnote entitled “Long-term Debt” on pages 38 through 40 and are incorporated herein by reference. We did not purchase any of our Common Stock during the three-month period ended May 31, 2006. The following table sets forth for each of the quarterly periods indicated the high and low prices per share for our common stock as reported on the New York Stock Exchange and dividends paid per share. Stock prices prior to July 29, 2005, the last trading day before the spin-off of Chaparral Steel Company, have not been adjusted for the value of the distribution.
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TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
On July 29, 2005, we completed the spin-off of our steel segment in the form of a pro-rata, tax-free dividend to our shareholders of one share of Chaparral Steel Company common stock for each share of our common stock that was owned on July 20, 2005. The results of operations of the steel segment prior to the spin-off are presented as discontinued operations. See Notes to Consolidated Financial Statements footnote entitled “Discontinued Operations” on pages 50 and 51. Stock prices prior to July 29, 2005, the last trading day before the spin-off of Chaparral Steel Company, have not been adjusted for the value of the distribution.
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GENERAL We are a leading supplier of construction materials. On July 29, 2005, we completed the spin-off of our steel segment in the form of a pro-rata, tax-free dividend to our shareholders of one share of Chaparral Steel Company (“Chaparral”) common stock for each share of our common stock that was owned on July 20, 2005. The results of operations of the steel segment prior to the spin-off are presented as discontinued operations. See Notes to Consolidated Financial Statements footnote entitled “Discontinued Operations” on pages 50 and 51. Unless otherwise indicated our discussion and analysis of financial condition and results of operations relates to our continuing operations. We have organized our continuing operations into three business segments: cement, aggregates and consumer products. Our principal products are gray portland cement, produced and sold through our cement segment; stone, sand and gravel, produced and sold through our aggregates segment; and ready-mix concrete, produced and sold through our consumer products segment. Other products include expanded shale and clay aggregates, produced and sold through our aggregates segment, and packaged concrete and related products, produced and sold through our consumer products segment. Our facilities are concentrated primarily in Texas, Louisiana and California. During fiscal year 2006, we commenced construction on a project to expand and modernize our Oro Grande, California cement plant. We plan to expand the Oro Grande plant to approximately 2.3 million tons of advanced dry process cement production capacity annually, and retire the 1.3 million tons of existing, but less efficient, production after the new plant is commissioned. We expect the Oro Grande project will take at least two years to construct and will cost approximately $358 million. We own long-term reserves of the primary raw materials for the production of cement and aggregates. Our business requires large amounts of capital investment, energy, labor and maintenance. Our corporate administrative, financial, legal, environmental, human resources and real estate activities are not allocated to operations and are excluded from operating profit.
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Table of ContentsRESULTS OF OPERATIONS The following table highlights certain of our operating information.
Fiscal Year 2006 Compared to Fiscal Year 2005 Gross profit at $177.0 million increased $34.6 million from fiscal year 2005 as a result of improved margins. Net Sales. Net sales at $943.9 million increased $109.1 million from fiscal year 2005. Total cement sales increased $42.8 million on 16% higher average prices and 5% lower shipments. Total stone, sand and gravel sales increased $19.3 million on 7% higher average prices and shipments. Total ready-mix concrete sales increased $42.6 million on 14% higher average prices and 4% higher volume. Construction activity in the Texas and California markets we serve remains solid. Average prices for our major products continue to improve. Average selling prices for cement increased throughout the year, following price increase announcements in the summer and spring quarters. These price increases followed increases in costs of sales discussed below. Average prices for stone, sand and gravel and ready-mix concrete had a similar pattern during the year. Cement shipments during the year declined because of lower beginning inventories and the lack of availability of outside purchases of cement and clinker in certain markets. We believe market conditions should continue to support the current level of pricing. Cost of Sales. Cost of products sold at $766.9 million increased $74.5 million from fiscal year 2005. Cement unit costs increased 10%. Energy costs representing 38% of total cement costs increased 37%. Stone, sand and gravel unit costs increased 9%. Energy and maintenance costs representing 41% of total stone, sand and gravel costs increased 34% and 16%, respectively. Ready-mix concrete unit costs increased 11%, primarily due to price increases in its cement and aggregate raw materials. Selling, General and Administrative. Selling, general and administrative expense at $88.7 million increased $10.2 million from fiscal year 2005. Operating selling, general and administrative expense at $49.6 million increased $4.4 million, primarily due to $6.3 million higher incentive compensation expense offset by
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Table of Contentslower insurance and general expenses. Corporate selling, general and administrative expense at $39.1 million increased $5.8 million, primarily due to $4.8 million higher incentive and stock-based compensation expenses. Other Income. Other income at $47.3 million increased $24.5 million from fiscal year 2005. Operating other income at $32.0 million increased $15.7 million. Included in operating other income were a gain of $24.0 million from the sale of real estate in 2006 and a gain of $6.2 million from the sale of emissions credits in 2005. Both sales were associated with our expanded shale and clay aggregate operations in south Texas. Additional routine sales of surplus operating assets resulted in gains of $5.4 million in 2006 and $6.7 million in 2005. Corporate other income increased $8.9 million to $15.2 million primarily as a result of an increase of $4.2 million in interest and real estate income and a gain of $3.8 million from the sale of an investment. Fiscal Year 2005 Compared to Fiscal Year 2004 Gross profit at $142.4 million increased $12.6 million from fiscal year 2004. Favorable weather and improved cement production efficiencies in the May 2005 quarter contributed to improved margins for the year. Net Sales. Net sales at $834.8 million increased $67.6 million from fiscal year 2004. Total cement sales increased $42.0 million on 10% higher average prices and 2% higher shipments. Total stone, sand and gravel sales increased $13.2 million on 5% higher average prices and 6% higher shipments. Total ready-mix concrete sales increased $16.3 million on 4% higher average prices and 3% higher volume. Continued solid demand for our major products resulted in higher average selling prices. Favorable weather in the May 2005 quarter increased shipments. Cost of Sales. Cost of products sold at $692.4 million increased $55.1 million from fiscal year 2004. Cement unit costs increased 8%. Energy costs and maintenance costs representing 46.8% of total costs increased 13% and 8%, respectively. Stone, sand and gravel unit costs increased 2%. Energy and maintenance costs representing 39% of total costs were up 26% and 12%, respectively. Increased shipments reduced the effect of higher costs on overall unit costs. Ready-mix concrete unit costs increased 6%, primarily due to increases in raw material costs. Selling, General and Administrative. Selling, general and administrative expense at $78.4 million increased $3.6 million from fiscal year 2004. Operating selling, general and administrative expense at $45.2 million decreased $1.0 million, primarily due to lower bad debt and insurance expenses offset in part by $2.2 million higher incentive compensation expense. Corporate selling, general and administrative expense at $33.2 million increased $4.6 million, primarily due to $4.4 million higher incentive compensation and retirement plan expenses. Other Income. Other income at $22.7 million decreased $17.8 million from fiscal year 2004. Operating other income at $16.3 million decreased $22.8 million. Included in operating other income were a gain of $6.2 million from the sale of emissions credits in 2005 and a gain of $34.7 million from the sale of our brick production facilities in Texas and Louisiana in 2004. Additional routine sales of surplus operating assets resulted in gains of $6.7 million in 2005 and $3.1 million in 2004. Corporate other income at $6.4 million increased $5.0 million primarily as a result of an increase of $4.3 million in interest and real estate income. Interest Expense Interest expense at $31.2 million increased $7.6 million from fiscal year 2005. Interest expense capitalized in conjunction with our Oro Grande, California cement plant expansion and modernization project reduced the amount of interest expense recognized by $1.5 million. Total interest expense to be capitalized related to this project during the two year construction period is currently estimated at $25 million. In connection with the spin-off of Chaparral, we entered into new financing agreements and purchased the outstanding $600 million aggregate principal amount of 10.25% senior notes due 2011. On July 6, 2005, we
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Table of Contentsissued $250 million aggregate principal amount of new 7.25% senior notes due 2013 and entered into a separate new senior secured revolving credit facility. Prior to the spin-off of Chaparral, interest was allocated to discontinued operations based on the amount of our consolidated debt attributed to the steel operations. The total amount of interest allocated was $5.4 million in 2006, $47.3 million in 2005 and $49.6 million in 2004. Loss on Early Retirement of Debt Loss on debt retirements and spin-off charges includes a loss of $107.0 million related to the early retirement of our 10.25% senior notes and old credit facility consisting of $96.0 million in premiums and consent payments plus transaction costs and a write-off of $11.0 million of debt issuance costs and interest rate swap gains and losses associated with the debt purchased. We also incurred expense of $800,000 related to the May 2006 conversion of $40.2 million of convertible subordinated debentures. In addition, we incurred $5.4 million in charges related to the spin-off of Chaparral in July 2005. We recognized a loss on early retirement of debt of $12.3 million in fiscal year 2004 as a result of the June 2003 refinancing and May 2004 partial termination of our old senior secured credit facility. Income Taxes Our effective tax rate for continuing operations was 93.3% in 2006, 27.0% in 2005 and 28.5% in 2004. The primary reason that the effective tax rate differed from the 35% statutory corporate rate was due to state income taxes, additional percentage depletion that is tax deductible and, in 2006, spin-off and debt conversion costs that are not tax deductible. The effective rate for discontinued operations was 35.1% in 2006, 35.0% in 2005 and 35.7% in 2004. We incurred federal and state net operating losses in 2006. A portion of the federal net operating loss is planned to be carried back and offset against federal taxable income in 2005 with the remaining balance carried forward against expected federal taxable income in 2007. The state net operating losses are planned to be carried forward against expected state taxable income in 2007 and subsequent years. Accounts receivable in 2006 includes $9.5 million representing the expected tax refund claim. Deferred taxes include a $13.7 million alternative minimum tax credit carryforward that is available for offset against future regular federal income taxes. The American Jobs Creation Act of 2004, among other things, allows a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. We did not realize a benefit in 2006 because of a taxable loss for the year. Income from Discontinued Operations—Net of Income Taxes As a result of the spin-off of Chaparral, the operating results of our steel segment, including the allocation of certain corporate expenses, have been reclassified and presented as discontinued operations. Fiscal year 2006 includes steel operations through the July 29, 2005 spin-off date. Cumulative Effect of Accounting Change—Net of Income Taxes Effective June 1, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which applies to legal obligations associated with the retirement of long-lived assets. We incur legal obligations for asset retirement as part of our normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. Application of the new rules resulted in a cumulative charge of $1.6 million, net of income taxes of $800,000 in fiscal year 2004.
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Table of ContentsCRITICAL ACCOUNTING POLICIES The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. We believe the following critical accounting policies affect management’s more complex judgments and estimates. Receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If we are aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve. Environmental Liabilities. We are subject to environmental laws and regulations established by federal, state and local authorities, and make provision for the estimated costs related to compliance when it is probable that a reasonably estimable liability has been incurred. Legal Contingencies. We are defendants in lawsuits which arose in the normal course of business, and make provision for the estimated loss from any claim or legal proceeding when it is probable that a reasonably estimable liability has been incurred. Long-lived Assets. Management reviews long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. Goodwill. Management tests goodwill for impairment at least annually. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the applicable reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. New Accounting Standards. In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards. We will adopt SFAS 123R effective June 1, 2006 using the “modified prospective” method. Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Financial information for periods prior to the date of adoption of SFAS 123R would not be restated. We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. We have not yet determined which model we will use to measure the fair value of awards of equity instruments to employees upon the adoption of SFAS 123R. The adoption of SFAS No. 123R will not have an impact on our consolidated financial position. Although the impact of SFAS No. 123R on our results of operations can not be predicted at this time because it will depend on the number of equity awards granted in the future, as well as the model used to value the awards, it is expected to have a significant effect on our future results of operations. However, had we adopted the requirements of SFAS No. 123R in prior periods, the impact would have approximated the amounts disclosed in “Summary of Significant Accounting Policies—Stock-based Compensation” in the Notes to Consolidated Financial Statements.
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Table of ContentsSFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options. In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will become effective for us beginning June 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead cost to inventory be based on the normal capacity of the production facilities. We are currently evaluating the potential impact of this standard on our financial position and results of operations. In March 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” which will become effective for us beginning June 1, 2006. EITF 04-6 requires that stripping costs incurred during the production phase of the mine be included in the costs of the inventory produced during the period that the stripping costs are incurred. In June 2005, the EITF modified the consensus requiring entities to recognize any cumulative effect adjustment in retained earnings in the period of adoption. As of May 31, 2006, the balance of our post-production capitalized stripping costs was $7.9 million. In accordance with the transition provision of EITF 04-6, the Company will write off these deferred costs to retained earnings on June 1, 2006, and prospectively recognize the costs of all post-production stripping activity as a cost of the inventory produced during the period the stripping costs are incurred. Although dependent in part on the future level of post-production stripping activity which varies from period to period, we do not expect that the adoption of EITF 04-6 will have a material impact on our financial position or results of operations for periods following adoption. LIQUIDITY AND CAPITAL RESOURCES In addition to cash and cash equivalents of $84.1 million at May 31, 2006, our sources of liquidity include cash from operations, proceeds from sales of our short-term investments, borrowings available under our $200 million senior secured revolving credit facility and distributions available from our investments in life insurance contracts. Short-term Investments. Our short-term investments, totaling $50.6 million at May 31, 2006, consist of investment grade auction rate securities with an active resale market to ensure liquidity and the ability to be readily converted into cash. These securities are expected to be sold within one year to fund current operations, or satisfy other cash requirements as needed. Senior Secured Revolving Credit Facility. We have available a $200 million senior secured revolving credit facility expiring in July 2010. It includes a $50 million sub-limit for letters of credit. Any outstanding letters of credit are deducted from the borrowing availability under the facility. At May 31, 2006, $27.0 million of the facility was utilized to support letters of credit. Amounts drawn under the facility bear interest either at the LIBOR rate plus a margin of 1% to 2%, or at a base rate (which is the higher of the federal funds rate plus 0.5% and the prime rate) plus a margin of up to 1%. The interest rate margins are subject to adjustments based on our leverage ratio. All of our consolidated subsidiaries, following the spin-off of Chaparral, have guaranteed our obligations under the credit facility. The credit facility is secured by first priority security interests in all or most of our existing and future accounts, inventory, equipment, intellectual property and other personal property, and in all of our equity interest in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries.
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Table of ContentsThe credit facility contains covenants restricting, among other things, prepayment or redemption of our new 7.25% senior notes, distributions, dividends and repurchases of capital stock and other equity interests, acquisitions and investments, indebtedness, liens and affiliate transactions. We are required to comply with certain financial tests and to maintain certain financial ratios, such as leverage and interest coverage ratios. We are in compliance with all of our loan covenants. Investments in Life Insurance Contracts. During 2005 we repaid previous distributions received from our investments in life insurance contracts in the amount of $51.2 million. Approximately $50 million of these funds are available for redistribution at our election. Contractual Obligations. The following is a summary of our estimated future payments under our material contractual obligations as of May 31, 2006.
During fiscal year 2006, we commenced construction on a project to expand and modernize our Oro Grande, California cement plant. We plan to expand the Oro Grande plant to approximately 2.3 million tons of
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Table of Contentsadvanced dry process cement production capacity annually, and retire the 1.3 million tons of existing, but less efficient, production after the new plant is commissioned. We expect the Oro Grande project will take at least two years to construct and will cost approximately $358 million excluding capitalized interest related to the project. We expect our capital expenditures in fiscal year 2007, including those related to the expansion and modernization of our Oro Grande cement plant, to be approximately $280 million. We expect cash and cash equivalents, cash from operations, proceeds from sales of our short-term investments, available borrowings under our senior secured revolving credit facility and available distributions from our investments in life insurance contracts to be sufficient to provide funds for capital expenditure commitments (including the expansion and modernization of our Oro Grande, California cement plant), scheduled debt payments, working capital needs and other general corporate purposes for at least the next year. Cash Flows Net cash provided by continuing operating activities was $97.4 million, compared to $144.4 million in fiscal year 2005. The decrease resulted primarily from changes in working capital items and the utilization of tax benefits in 2005. Accounts receivable increased $5.1 million, primarily due to higher selling prices. Inventories increased $18.8 million, primarily due to higher levels of clinker and finished cement. Accounts payable and accrued expenses increased $11.2 million primarily as a result of increased accounts payable due to higher manufacturing costs and higher incentive compensation accruals. We also incurred a federal net operating tax loss in 2006 that resulted in a $9.5 million tax refund claim. Net cash used by continuing investing activities was $141.4 million, compared to $98.5 million in fiscal year 2005. Capital expenditures incurred in connection with the expansion and modernization of our Oro Grande, California cement plant were $73.2 million, up $66.8 million from the prior year. Capital expenditures for normal replacement and technological upgrades of existing equipment and acquisitions to sustain our existing operations were $37.0 million, down $2.8 million from the prior year. In 2006, we invested $50.5 million in auction rate securities. In 2005, we increased our investment in life insurance contracts primarily as a result of repaying $51.2 million in prior distributions. Proceeds from asset disposals result from routine sales of surplus operating assets, which in fiscal year 2006 included the proceeds from the sale of real estate associated with our expanded shale and clay operations in south Texas and in fiscal year 2004 included the proceeds from the sale of our brick production facilities in Texas and Louisiana. Net cash used for continuing financing activities was $453.5 million, compared to $27.7 million provided in fiscal year 2005. We purchased $600 million aggregate principal amount of our 10.25% senior notes, paying $96.0 million in premiums and consent payments plus transaction costs. To fund the purchase we issued $250 million aggregate principal amount of our new 7.25% senior notes and incurred $7.4 million in debt issuance costs, received a cash dividend of $341.1 million from Chaparral and used $112.3 million of cash and cash equivalents on hand. Net cash provided by discontinued operations was $330.1 million, compared to $44.9 million in fiscal year 2005. In connection with our refinancing and spin-off transactions, Chaparral issued $300 million aggregate principal amount of senior notes and borrowed $50 million under its new $150 million credit facility. The net proceeds were used to pay us a dividend of $341.1 million. OTHER ITEMS Environmental Matters We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, furnace dust disposal and wastewater discharge. We believe we are in substantial compliance with applicable environmental laws and regulations; however, from time to time we receive claims from federal and state environmental regulatory agencies and entities asserting that we are or may be in violation
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Table of Contentsof certain environmental laws and regulations. Based on our experience and the information currently available to us, we believe that such claims will not have a material impact on our financial condition or results of operations. Despite our compliance and experience, it is possible that we could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us. Market Risk Historically, we have not entered into derivatives or other financial instruments for trading or speculative purposes. Because of the short duration of our investments, changes in market interest rates would not have a significant impact on their fair value. The fair value of fixed rate debt will vary as interest rates change. The estimated fair value of each class of financial instrument as of May 31, 2006 approximates its carrying value except for long-term debt having fixed interest rates and convertible subordinated debentures. The fair value of long-term debt at May 31, 2006, estimated based on broker/dealer quoted market prices, is approximately $257.2 million compared to the carrying amount of $252.2 million. The fair value of convertible subordinated debentures at May 31, 2006, estimated based on NYSE quoted market prices, is approximately $164.5 million compared to the carrying amount of $159.7 million. Our operations require large amounts of energy and are dependent upon energy sources, including electricity and fossil fuels. Prices for energy are subject to market forces largely beyond our control. In December 2005 we renegotiated three contracts for the purchase of coal for use in our cement and expanded shale and clay plants in Texas. Each contract specifies a fixed price (escalated quarterly or annually) at which we must purchase a minimum amount of coal each calendar year through 2008, and we may purchase additional amounts up to a specified maximum. We have generally not entered into any long-term contracts to satisfy our natural gas and electricity needs. However, we continually monitor these markets and we may decide in the future to enter into long-term contracts. If we are unable to meet our requirements for fuel and electricity, we may experience interruptions in our production. Price increases or disruption of the uninterrupted supply of these products could adversely affect our results of operations. Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995 Certain statements contained in this annual report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the impact of competitive pressures and changing economic and financial conditions on our business, the level of construction activity in our markets, abnormal periods of inclement weather, unexpected periods of equipment downtime, changes in the cost of raw materials, fuel and energy, the impact of environmental laws and other regulations, and the risks and uncertainties described in Part I, Item 1A, “Risk Factors,” on pages 9 through 15.
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Table of Contents
The information required by this item is included in Item 7.
INDEX TO FINANCIAL STATEMENTS
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Table of ContentsTEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF OPERATIONS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS Texas Industries, Inc. and subsidiaries (unless the context indicates otherwise, collectively, the “Company” or “TXI”) is a leading supplier of construction materials. On July 29, 2005, the Company completed the spin-off of its steel segment in the form of a pro-rata, tax-free dividend to the Company’s shareholders of one share of Chaparral Steel Company (“Chaparral”) common stock for each share of the Company’s common stock that was owned on July 20, 2005. Following the spin-off, the Company’s continuing operations were organized into three business segments: cement, aggregates and consumer products, which produce and sell cement; stone, sand and gravel and expanded shale and clay aggregate; ready-mix concrete and packaged concrete and related products, respectively, from facilities concentrated in Texas, Louisiana and California. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of Texas Industries, Inc. and all subsidiaries except a subsidiary trust in which the Company has a variable interest but is not the primary beneficiary. As a result of the spin-off of the steel segment the prior period financial statements have been reclassified to present the steel segment as discontinued operations. See “Discontinued Operations” footnote on pages 50 and 51. In addition, certain other amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Unless otherwise indicated, all amounts in the accompanying footnotes relate to continuing operations. Estimates. The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. Fair Value of Financial Instruments. The estimated fair value of each class of financial instrument as of May 31, 2006 approximates its carrying value except for long-term debt having fixed interest rates and convertible subordinated debentures. The fair value of long-term debt at May 31, 2006, estimated based on broker/dealer quoted market prices, is approximately $257.2 million compared to the carrying amount of $252.2 million. The fair value of convertible subordinated debentures at May 31, 2006, estimated based on NYSE quoted market prices, is approximately $164.5 million compared to the carrying amount of $159.7 million. Cash and Cash Equivalents. Investments with maturities of less than 90 days when purchased are classified as cash equivalents and consist primarily of money market funds and investment grade commercial paper issued by major corporations and financial institutions. Short-Term Investments. The Company’s short-term investments consist of investment grade auction rate securities with an active resale market to ensure liquidity and the ability to be readily converted into cash to fund current operations, or satisfy other cash requirements as needed. These securities have legal maturities ranging from 19 to 38 years, but have their interest rates reset at predetermined intervals, typically less than 30 days, through an auction process. These securities are expected to be sold within one year, regardless of their legal maturity date. Accordingly, these securities have been classified as available-for-sale and as current assets in the consolidated balance sheet as of May 31, 2006. The auction rate securities are stated at cost plus accrued interest which approximates fair value. Net unrealized gains and losses, net of deferred taxes, are not significant due to the short duration between interest rate reset dates. Purchase and sale activity of short-term investments is presented as cash flows from investing activities in the consolidated statements of cash flows. Receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If the Company is aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve.
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Table of ContentsEnvironmental Liabilities. The Company is subject to environmental laws and regulations established by federal, state and local authorities, and makes provision for the estimated costs related to compliance when it is probable that a reasonably estimable liability has been incurred. Legal Contingencies. The Company is a defendant in lawsuits which arose in the normal course of business, and makes provision for the estimated loss from any claim or legal proceeding when it is probable that a reasonably estimable liability has been incurred. Long-lived Assets. Management reviews long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for the Company’s products, capital needs, economic trends and other factors. Property, plant and equipment is recorded at cost. Provisions for depreciation are computed generally using the straight-line method. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials. Useful lives for the Company’s primary operating facilities range from 10 to 25 years. Maintenance and repairs are charged to expense as incurred. Goodwill. Management tests goodwill for impairment at least annually by reporting unit. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for the Company’s products, capital needs, economic trends and other factors. Goodwill having a carrying value of $58.4 million at both May 31, 2006 and 2005 resulted from the acquisition of Riverside Cement Company and is identified with the Company’s California cement operations. The fair value of the reporting unit exceeds its carrying value. Real Estate and Investments. Surplus real estate and real estate acquired for development of high quality industrial, office or multi-use parks totaled $7.3 million and $9.2 million at May 31, 2006 and 2005, respectively. Investments are composed primarily of life insurance contracts purchased in connection with certain Company benefit plans. The contracts, recorded at their net cash surrender value, totaled $96.3 million (net of distributions of $1.3 million) at May 31, 2006 and $89.4 million (net of distributions of $1.3 million) at May 31, 2005. Distributed amounts totaling $51.2 million were repaid in 2005. Charges incurred on the distributions of $100,000 in both 2006 and 2005, and $3.3 million in 2004 were included in interest expense. Investments also include a note receivable in the amount of $22.0 million which matures on July 31, 2007, taken by the Company in connection with a $24.0 million sale of land associated with its expanded shale and clay operations in south Texas. Deferred Charges and Intangibles. Deferred charges are composed primarily of debt issuance costs that totaled $10.3 million and $17.3 million at May 31, 2006 and 2005, respectively. The costs are amortized over the term of the related debt. Intangibles are composed of non-compete agreements and other intangibles with finite lives being amortized on a straight-line basis over periods of 7 to 15 years. Their carrying value, adjusted for write-offs, totaled $1.4 million (net of accumulated amortization of $3.0 million) at May 31, 2006 and $1.8 million (net of accumulated amortization of $2.6 million) at May 31, 2005. Amortization expense incurred was $400,000 in each of the years ending 2006, 2005 and 2004. Estimated amortization expense for each of the five succeeding years is approximately $300,000 per year. Other Credits. Other credits of $55.3 million at May 31, 2006 and $57.8 million at May 31, 2005 are composed primarily of liabilities related to the Company’s retirement plans, deferred compensation agreements and asset retirement obligations.
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Table of ContentsAsset Retirement Obligations. Effective June 1, 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which applies to legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through a charge to operating expense. A gain or loss on settlement is recognized if the obligation is settled for other than the carrying amount of the liability. The Company incurs legal obligations for asset retirement as part of its normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. Prior to the adoption of SFAS No. 143, the Company generally accrued for land reclamation obligations related to its aggregate mining process on the unit of production basis and for its other obligations as incurred. Determining the amount of an asset retirement liability requires estimating the future cost of contracting with third parties to perform the obligation. The estimate is significantly impacted by, among other considerations, management’s assumptions regarding the scope of the work required, labor costs, inflation rates, market-risk premiums and closure dates. The initial application of the new rules at June 1, 2003, resulted in an increase in net property, plant and equipment of $500,000, a net increase in asset retirement obligation liabilities of $2.9 million and a pretax cumulative charge of $2.4 million. Changes in asset retirement obligations are as follows:
Pension Liability Adjustment. The pension liability adjustment to shareholders’ equity totaled $4.5 million (net of tax of $2.5 million) at May 31, 2006 and $7.7 million (net of tax of $4.2 million) at May 31, 2005. The adjustment relates to a defined benefit retirement plan covering approximately 600 employees and retirees of the Company’s California cement subsidiary. Comprehensive income or loss consists of net income or loss and the pension liability adjustment to shareholders’ equity. Comprehensive income was $11.4 million in 2006, $121.3 million in 2005 and $37.8 million in 2004. Net Sales. Sales are recognized when title has transferred and products are delivered. The Company includes delivery fees in the amount it bills customers to the extent needed to recover the Company’s cost of freight and delivery. Net sales are presented as revenues including these delivery fees. Other Income. Routine sales of surplus operating assets and real estate resulted in gains of $35.0 million in 2006, $9.0 million in 2005 and $4.2 million in 2004. In addition, other income in 2006 includes a gain of $3.8 million from the sale of certain investment assets. Other income in 2005 includes a gain of $6.2 million from the sale of emissions credits associated with the Company’s expanded shale and clay aggregate operations in south Texas. Other income in 2004 includes a gain of $34.7 million from the sale of the Company’s Texas and Louisiana brick production facilities. Income Taxes. Accounting for income taxes uses the liability method of recognizing and classifying deferred income taxes. The Company joins in filing a consolidated return with its subsidiaries. Current and deferred tax expense is allocated among the members of the group based on a stand-alone calculation of the tax of the individual member.
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Table of ContentsEarnings Per Share (“EPS”). Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period including certain contingently issuable shares. Contingently issuable shares relate to deferred compensation agreements in which directors elected to defer annual and meeting fees and vested shares under the Company’s former stock awards program. The deferred compensation is denominated in shares of the Company’s common stock and issued in accordance with the terms of the agreement subsequent to retirement or separation from the Company. The shares are considered contingently issuable because the director has an unconditional right to the shares to be issued. Vested stock award shares are issued in the year in which the employee reaches age 60. Diluted EPS adjusts income from continuing operations and the outstanding shares for the dilutive effect of convertible subordinated debentures, stock options and awards. Basic and Diluted EPS are calculated as follows:
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Table of ContentsStock-based Compensation. The Company accounts for employee stock options using the intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” as allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Generally, no expense is recognized related to the Company’s stock options because the exercise price of each option is set at the fair market value of the underlying common stock on the date the option is granted. In accordance with SFAS No. 123, the Company discloses the compensation cost related to its stock options based on the estimated fair value at the date of grant. All options were granted with graded vesting valued as single awards and the compensation cost recognized using a straight-line attribution method over the shorter of the vesting period or required service period with forfeitures recognized as they occurred. The fair value of each option grant was estimated on the date of grant for purposes of the pro forma disclosures using the Black-Scholes option-pricing model. In 2006, the weighted-average fair value of options granted was $20.46 based on weighted average assumptions for dividend yield of .58%, volatility factor of .338, risk-free interest rate of 4.31% and expected life in years of 6.4. In 2005, the weighted-average fair value of options granted was $23.83 based on weighted average assumptions for dividend yield of .50%, volatility factor of .345, risk-free interest rate of 3.89% and expected life in years of 6.4. No options were granted in 2004. Expected dividend yields were based on the approved annual dividend rate in effect and the current market price of the Company’s common stock at the time of grant. Expected volatility was based on an analysis of historical volatility of the Company’s common stock. Risk-free interest rates were determined using the implied yield currently available for U.S. treasury bonds and notes with a remaining term equal to the expected life of the options. Expected lives of options are determined based on the historical share option exercise experience of the Company’s optionees. In addition to grants under its stock option plans, the Company has provided stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program. Stock compensation expense related to these grants is included in the determination of net income as reported in the financial statements. If the Company had applied the fair value recognition provision of SFAS No. 123, the Company’s net income and earnings per share would have been adjusted to the following pro forma amounts:
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB Opinion No. 25. Among other items, SFAS No. 123R eliminates the use of APB Opinion No. 25 and the intrinsic value method of accounting, and requires companies to recognize in the financial
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Table of Contentsstatements the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards. The Company will adopt SFAS No. 123R effective June 1, 2006 using the “modified prospective” method. Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Financial information for periods prior to the date of adoption of SFAS No. 123R would not be restated. The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of awards of equity instruments to employees upon the adoption of SFAS No. 123R. The adoption of SFAS No. 123R will not have an impact on the Company’s consolidated financial position. Although the impact of SFAS No. 123R on the Company’s results of operations can not be predicted at this time, because it will depend on the number of equity awards granted in the future, as well as the model used to value the awards, it is expected to have a significant effect on the Company’s future results of operations. However, had the Company adopted the requirements of SFAS No. 123R in prior periods, the impact would have approximated the amounts disclosed in the table above. SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options. Accounting for Mining Stripping Costs. In March 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” which will become effective for the Company beginning June 1, 2006. EITF 04-6 requires that stripping costs incurred during the production phase of the mine be included in the costs of the inventory produced during the period that the stripping costs are incurred. In June 2005, the EITF modified the consensus requiring entities to recognize any cumulative effect adjustment in retained earnings in the period of adoption. As of May 31, 2006, the balance of the Company’s post-production capitalized stripping costs was $7.9 million. In accordance with the transition provision of EITF 04-6, the Company will write off these deferred costs to retained earnings on June 1, 2006, and prospectively recognize the costs of all post-production stripping activity as a cost of the inventory produced during the period the stripping costs are incurred. Although dependent in part on the future level of post-production stripping activity which varies from period to period, the Company does not expect that the adoption of EITF 04-6 will have a material impact on its financial position or results of operations for periods following adoption. WORKING CAPITAL Working capital totaled $283.9 million at May 31, 2006, compared to $372.8 million at May 31, 2005. Receivables include tax refund claims of $9.5 million at May 31, 2006. Accounts receivable are presented net of allowances for doubtful receivables of $1.6 million at May 31, 2006 and $2.2 million at May 31, 2005. Provisions for bad debts charged to expense were $300,000 in 2006, $1.1 million in 2005 and $2.1 million in 2004. Uncollectible accounts written off amounted to $900,000 in 2006, $2.7 million in 2005 and $2.0 million in 2004.
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Table of ContentsInventories consist of:
Inventories are stated at cost (not in excess of market) with finished products, work in process and raw material inventories using the last-in, first-out (“LIFO”) method and parts and supplies inventories using the average cost method. If the average cost method (which approximates current replacement cost) had been used for all of these inventories, inventory values would have been higher by $26.8 million in 2006 and $16.8 million in 2005. In 2005, certain inventory quantities were reduced, which resulted in a liquidation of LIFO inventory layers carried at lower costs prevailing in prior years. The effect of the liquidation was to decrease cost of products sold by approximately $900,000. In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will become effective for the Company beginning June 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The adoption of this standard is not expected to have an immediate effect on the Company’s consolidated financial position or results of operations. Accrued interest, wages and other items consist of:
LONG-TERM DEBT Long-term debt consists of:
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Table of ContentsRefinancing in Connection with the Spin-off of Chaparral. In connection with the spin-off of Chaparral in July 2005 (see “Discontinued Operations” footnote on pages 48 and 49), the Company entered into new financing agreements and purchased the outstanding $600 million aggregate principal amount of its 10.25% senior notes due 2011 (“10.25% Senior Notes”). On July 6, 2005, the Company issued $250 million aggregate principal amount of its new 7.25% senior notes due July 15, 2013 (“7.25% Senior Notes”) and entered into a new senior secured revolving credit facility. In addition, Chaparral issued $300 million aggregate principal amount of its new senior notes due 2013 (“Chaparral Senior Notes”) and entered into a separate new senior secured revolving credit facility. Chaparral used the net proceeds from its note offering and borrowings under its credit facility to pay the Company a dividend of $341.1 million. The Company used the net proceeds from its offering of notes, the dividend paid by Chaparral and existing cash to purchase for cash all of its outstanding $600 million aggregate principal amount of 10.25% Senior Notes. The Company paid a total of $699.5 million to the holders of the 10.25% Senior Notes, which was comprised of $600 million of principal, $3.6 million of accrued interest and $95.9 million of premiums and consent fees. The Company recorded a charge of $107.0 million related to the early retirement of the 10.25% Senior Notes and old credit facility, consisting of $96.0 million in premiums or consent payments and transaction costs and a write-off of $11.0 million of debt issuance costs and interest rate swap gains and losses associated with the debt repaid. On July 29, 2005, Chaparral became an independent, public company and the Company has no obligations with respect to Chaparral’s long-term debt. Chaparral is not a guarantor of any of the Company’s indebtedness nor is the Company a guarantor of any Chaparral indebtedness. 7.25% Senior Notes. At any time on or prior to July 15, 2009, the Company may redeem the notes at a redemption price equal to the sum of the principal amount thereof, plus accrued interest and a make-whole premium. On and after July 15, 2009, the Company may redeem the notes at a premium of 103.625% in 2009, 101.813% in 2010 and 100% in 2011 and thereafter. In addition, prior to July 15, 2008, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 107.25% of the principal amount thereof, plus accrued interest with the net cash proceeds from certain equity offerings. If the Company experiences a change of control, it may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued interest. All of the Company’s consolidated subsidiaries have unconditionally guaranteed the 7.25% Senior Notes. The indenture governing the notes contains covenants that will limit the Company’s ability and the ability of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem its stock, make investments, sell assets, incur liens, enter into agreements restricting its subsidiaries’ ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of its assets. Senior Secured Revolving Credit Facility. The senior secured revolving credit facility expires in July 2010 and provides up to $200 million of available borrowings. It includes a $50 million sub-limit for letters of credit. Any outstanding letters of credit are deducted from the borrowing availability under the facility. At May 31, 2006, $27.0 million of the facility was utilized to support letters of credit. Amounts drawn under the facility bear interest either at the LIBOR rate plus a margin of 1% to 2%, or at a base rate (which is the higher of the federal funds rate plus 0.5% and the prime rate) plus a margin of up to 1%. The interest rate margins are subject to adjustments based on the Company’s leverage ratio. Commitment fees are payable currently at an annual rate of 0.375% on the unused portion of the facility. The Company may terminate the facility at any time. All of the Company’s consolidated subsidiaries have guaranteed the Company’s obligations under the credit facility. The credit facility is secured by first priority security interests in all or most of the Company’s existing and future accounts, inventory, equipment, intellectual property and other personal property, and in all of the Company’s equity interest in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries. The credit facility contains covenants restricting, among other things, prepayment or redemption of the Company’s new senior notes, distributions, dividends and repurchases of capital stock and other equity interests,
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Table of Contentsacquisitions and investments, indebtedness, liens and affiliate transactions. The Company is required to comply with certain financial tests and to maintain certain financial ratios, such as leverage and interest coverage ratios. At May 31, 2006, the Company was in compliance with all of its loan covenants. Debt Outstanding at May 31, 2005. On June 6, 2003, the Company issued $600 million of 10.25% Senior Notes. A portion of the net proceeds was used to repay $473.5 million of the outstanding debt at May 31, 2003. The remaining proceeds were used to repurchase the entire outstanding interest in the defined pool of trade receivables previously sold totaling $115.5 million, of which $72.0 million related to continuing operations. The Company recognized a loss on early retirement of debt of $11.2 million, representing $8.5 million in premium or consent payments to holders of the existing senior notes and a write-off of $2.7 million of debt issuance costs associated with the debt repaid. To replace the terminated revolving credit facility and agreement to sell receivables, the Company also entered into a senior secured credit facility expiring June 6, 2007. Available borrowings under the senior secured credit facility were lowered from $200 million to $100 million effective May 27, 2004. As a result, the Company recognized a loss on early retirement of debt of $1.1 million, representing a termination fee of $100,000 and a write-off of $1.0 million of debt issuance costs related to the portion of the facility that was terminated. No borrowings were outstanding under this senior secured credit facility at May 31, 2005; however, $27.1 million of the facility was utilized to support letters of credit. Commitment fees at an annual rate of .375% were paid on the unused portion of the facility. On February 14, 2005, the Company terminated its outstanding interest rate swap agreements associated with $300 million of the 10.25% Senior Notes resulting in a loss of $6.3 million. On March 11, 2004, the Company terminated its August 5, 2003 interest rate swap agreements associated with $200 million of the 10.25% Senior Notes resulting in a gain of $8.4 million. Gains and losses from interest rate swap terminations have been recorded as increases or decreases in the carrying value of the Company’s long-term debt and amortized as adjustments to interest expense over the remaining term of the 10.25% Senior Notes. Other. Maturities of long-term debt for each of the five succeeding years are $700,000 for 2007, $1.1 million for 2008 and none for 2009 through 2011. The total amount of interest paid was $55.7 million in 2006, $69.5 million in 2005 and $47.8 million in 2004. Interest capitalized was $1.5 million in 2006. No interest was capitalized in 2005 and 2004. CONVERTIBLE SUBORDINATED DEBENTURES On June 5, 1998, the Company issued $206.2 million aggregate principal amount of 5.5% convertible subordinated debentures due June 30, 2028 (the “Debentures”). TXI Capital Trust I (the “Trust”), a Delaware business trust 100% owned by the Company, issued 4,000,000 of its 5.5% Shared Preference Redeemable Securities (“Preferred Securities”) to the public for gross proceeds of $200 million. The combined proceeds from the issuance of the Preferred Securities and the issuance to the Company of the common securities of the Trust were invested by the Trust in the Debentures which are the sole assets of the Trust. The Debentures are redeemable for cash, at par, plus accrued and unpaid interest, under certain circumstances relating to federal income tax matters, or in whole or in part at the option of the Company. Upon any redemption of the Debentures, a like aggregate liquidation amount of Preferred Securities will be redeemed. Debentures are convertible at any time prior to the close of business on June 30, 2028, at the option of the holder of the Preferred Securities into shares of the Company’s common stock. On July 29, 2005, due to the spin-off of Chaparral the conversion rate was adjusted as provided in the Amended and Restated Trust Agreement of the Trust from .72218 shares to .97468 shares of the Company’s common stock for each Preferred Security. In May 2006, the Company completed an offer to exchange .98914 shares of the Company’s common stock for each Preferred Security tendered. A total of 804,240 Preferred Securities were tendered and 795,471 commons shares issued. The exchange reduced the aggregate principal amount of the Debentures by $40.2 million. The exchange resulted in an increase to common stock and additional paid-in capital of $40.1 million.
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Table of ContentsThe Company recognized a loss on conversion of $800,000 representing the transaction costs and the market value of the premium paid in common shares. At May 31, 2006, 3,194,504 Preferred Securities representing an undivided beneficial interest in $159.7 million principal amount of Debentures were outstanding. Holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of $2.75 per Preferred Security (equivalent to a rate of 5.5% per annum of the stated liquidation amount of $50 per Preferred Security). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Preferred Securities, to the extent not paid by the Trust (the “Guarantee”). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Trust Agreement of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust other than with respect to the Preferred Securities and the common securities of the Trust), provide a full and unconditional guarantee of amounts due on the Preferred Securities. The Preferred Securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 30, 2028, or upon earlier redemption. COMMITMENTS Operating Leases. The Company leases certain mobile and other equipment, office space and other items which in the normal course of business are renewed or replaced by subsequent leases. Total expense for such operating leases (other than for mineral rights) amounted to $20.8 million in 2006, $21.7 million in 2005 and $23.8 million in 2004. Non-cancelable operating leases with an initial or remaining term of more than one year totaled $56.1 million at May 31, 2006. Estimated lease payments for each of the five succeeding years are $15.7 million, $8.8 million, $8.3 million, $7.1 million and $8.4 million. Purchase Obligations. In December 2005, the Company renegotiated three long-term contracts for the purchase of coal for use in the Company’s cement and expanded shale and clay plants in Texas that now require minimum amounts of coal be purchased. The Company expects to utilize these required amounts in the normal course of business operations. Total cost incurred under the contracts amounted to $7.1 million in 2006. Future minimum payment amounts, excluding transportation surcharges that may be imposed under certain circumstances, total $28.6 million in 2007, $31.6 million in 2008 and $18.9 million in 2009. In November 2005, the Company commenced construction on a project to expand and modernize its Oro Grande, California cement plant. The Company plans to expand the Oro Grande plant to approximately 2.3 million tons of advanced dry process cement production capacity annually, and retire the 1.3 million tons of existing, but less efficient, production after the new plant is commissioned. The Oro Grande project is expected to take at least two years to construct and will cost approximately $358 million excluding capitalized interest related to the project. Costs incurred toward the project excluding capitalized interest totaled $79.8 million as of May 31, 2006. SHAREHOLDERS’ EQUITY Common stock at May 31 consists of:
There are authorized 100,000 shares of Cumulative Preferred Stock, no par value, of which 20,000 shares are designated $5 Cumulative Preferred Stock (Voting), redeemable at $105 per share and entitled to $100 per share upon dissolution. An additional 25,000 shares are designated Series B Junior Participating Preferred Stock.
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Table of ContentsThe Series B Preferred Stock is not redeemable and ranks, with respect to the payment of dividends and the distribution of assets, junior to (i) all other series of the Preferred Stock unless the terms of any other series shall provide otherwise and (ii) the $5 Cumulative Preferred Stock. No shares of Cumulative Preferred Stock or Series B Junior Participating Preferred Stock were outstanding as of May 31, 2006. Pursuant to a Rights Agreement, in November 1996, the Company distributed a dividend of one preferred share purchase right for each outstanding share of the Company’s Common Stock. Each right entitles the holder to purchase from the Company one two-thousandth of a share of the Series B Junior Participating Preferred Stock at a price of $122.50, subject to adjustment. The rights will expire on November 1, 2006 unless the date is extended or the rights are earlier redeemed or exchanged by the Company pursuant to the Rights Agreement. STOCK-BASED COMPENSATION Stock Option Plans. The Texas Industries, Inc. 2004 Omnibus Equity Compensation Plan (the “2004 Plan”) provides that, in addition to other types of awards, non-qualified and incentive stock options to purchase Common Stock may be granted to employees and non-employee directors at market prices at date of grant. Options become exercisable in installments beginning one year after date of grant and expire ten years later. In addition, non-qualified and incentive stock options remain outstanding under the Company’s 1993 Stock Option Plan. During 2006, the Company’s Board of Directors approved the amendment of certain options to conform the “change of control” provisions in such options with the terms of other agreements of the Company. A summary of option transactions for the three years ended May 31, 2006, follows:
Options exercisable as of May 31 were 880,088 shares in 2006, 818,710 shares in 2005 and 2,025,428 shares in 2004 at a weighted-average option price of $25.15, $32.96 and $30.42, respectively. The following table summarizes information about stock options outstanding as of May 31, 2006.
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Table of ContentsOutstanding options expire on various dates to January 18, 2016. The Company has reserved 2,054,229 shares for future awards under the 2004 Plan. Non-vested options held by Chaparral’s employees and new directors were canceled on July 29, 2005 in connection with the spin-off of Chaparral. Options held by the Company’s continuing employees and directors and vested options held by Chaparral’s employees and new directors were adjusted based on the closing share prices of the Company and Chaparral on July 29, 2005. As of May 31, 2006, the aggregate intrinsic value (the difference in the closing market price of the Company’s common stock of $48.97 and the exercise price to be paid by the optionee) of stock options outstanding was $30.8 million. The aggregate intrinsic value of exercisable stock options at that date was $21.0 million. During 2006, the total intrinsic value for options exercised (the difference in the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) was $14.1 million. As of May 31, 2006, the total future compensation cost related to previous grants of stock options to be recognized in the statement of operations following the adoption of SFAS 123R was $8.6 million. In addition, $300,000 remains to be recognized related to previous grants of restricted stock. The Company currently expects to recognize stock compensation expense of approximately $3.4 million in 2007, $2.6 million in 2008, $1.4 million in 2009, $1.1 million in 2010, and $400,000 in 2011, related to these grants. Other Stock-based Compensation. The Company has provided stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program. At May 31, 2006, outstanding Stock Appreciation Rights totaled 161,311 shares, deferred compensation agreements payable in cash totaled 97,974 shares, deferred compensation agreements payable in common stock totaled 4,238 shares and stock awards totaled 10,020 shares. Total charges under these grants and restricted stock payments included in selling, general and administrative expense were $4.4 million in 2006, $1.8 million in 2005 and $2.1 million in 2004. INCOME TAXES The provisions (benefit) for income taxes are composed of:
A reconciliation of income taxes at the federal statutory rate to the preceding provisions (benefit) follows:
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Table of ContentsThe components of the net deferred tax liability at May 31 are summarized below.
The Company made income tax payments of $4.3 million, $8.9 million and $1.6 million in 2006, 2005 and 2004, respectively, and received income tax refunds of $400,000 in 2004. The Company incurred federal and state net operating losses in 2006. The Company plans to carry back $9.5 million of its federal net operating loss to offset against federal taxable income in 2005; the remaining balance of the federal net operating loss will be carried forward against expected federal taxable income in 2007. The state net operating losses are planned to be carried forward against expected state taxable income in 2007 and subsequent years. As of May 31, 2006, the Company had an alternative minimum tax credit carryforward of $13.7 million. The credit, which does not expire, is available for offset against future regular federal income tax. Management believes it is more likely than not that its deferred tax assets will be realized. In 2006, the Company’s deferred state income tax provision includes an adjustment to recognize the impact of the newly enacted Texas margin tax. In addition, the company adjusted its state apportionment factors for the related state deferred taxes as a result of the spin-off of the Chaparral companies. The American Jobs Creation Act of 2004, among other things, allows a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The Company will not realize a benefit in 2006 because of a taxable loss for the year, and is evaluating its impact for 2007. LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations; however, from time to time the Company receives claims from federal and state environmental regulatory agencies and entities asserting that the Company is or may be in violation of certain environmental laws and regulations. Based on its experience and the information currently available to it, the Company believes that such claims will not have a material impact on its financial condition or results of operations. Despite the Company’s compliance and experience, it is possible that the Company could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by the Company.
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Table of ContentsThe Company and its subsidiaries are defendants in lawsuits which arose in the normal course of business. In management’s judgment the ultimate liability, if any, from such legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Company. In connection with the Company’s spin-off of Chaparral, the Company entered into a separation and distribution agreement and a tax sharing and indemnification agreement with Chaparral. In these agreements, the Company has indemnified Chaparral against, among other things, any liabilities arising out of the businesses, assets or liabilities retained by the Company and any taxes imposed on Chaparral in connection with the spin-off that result from the Company’s breach of its covenants in the tax sharing and indemnification agreement. Chaparral has indemnified the Company against, among other things, any liabilities arising out of the businesses, assets or liabilities transferred to Chaparral and any taxes imposed on the Company in connection with the spin-off that result from Chaparral’s breach of its covenants in the tax sharing and indemnification agreement. The Company and Chaparral have made certain covenants to each other in connection with the spin-off that prohibit the Company and Chaparral from taking certain actions. Pursuant to these covenants: (1) neither the Company nor Chaparral will liquidate, merge, or consolidate with any other person, sell, exchange, distribute or otherwise dispose of our assets (or those of certain of our subsidiaries) except in the ordinary course of business, or enter into any substantial negotiations, agreements, or arrangements with respect to any such transaction, during the six months following the distribution date of July 29, 2005; (2) the Company and Chaparral will, for a minimum of two years after the distribution date, continue the active conduct of the cement or steel business, respectively; (3) neither the Company nor Chaparral will repurchase its stock for two years following the distribution except in certain circumstances permitted by the IRS; (4) the Company and Chaparral will not take any actions inconsistent with the representations made in the separation and distribution agreement or in connection with the issuance by the Company’s tax counsel of its tax opinion with respect to the spin-off; and (5) the Company and Chaparral will not take or fail to take any other action that would result in any tax being imposed on the spin-off. The Company or Chaparral may take actions inconsistent with these covenants if it obtains an unqualified opinion of counsel or a private letter ruling from the IRS that such actions will not cause the spin-off to become taxable, except that Chaparral may not, under any circumstances, take any action described in (1) above. INCENTIVE PLANS All personnel employed as of May 31 and not subject to production-based incentive awards share in the pretax income of the Company for the year then ended based on predetermined formulas. The duration of most of the plans is one year. Certain executives are additionally covered under a three-year plan. All plans are subject to annual review by the Compensation Committee of the Board of Directors. Incentive compensation included in selling, general and administrative expense was $19.3 million in 2006, $10.8 million in 2005 and $6.7 million in 2004. BUSINESS SEGMENTS Following the spin-off of the Company’s steel operations, the Company’s continuing operations were organized into three business segments: cement, aggregates and consumer products. The Company’s business segments are managed separately along product lines. Through the cement segment, the Company produces and sells gray portland cement as its principal product. Through the aggregates segment the Company produces and sells stone, sand and gravel as its principal products, as well as expanded shale and clay aggregates. Through the consumer products segment the Company produces and sells ready-mix concrete as its principal product, as well as packaged concrete and related products. The Company accounts for intersegment sales at market prices. Segment operating profit consists of net sales less operating costs and expenses, including certain operating overhead and other income items not allocated to a specific segment. Corporate includes administrative, financial, legal, environmental, human resources and real estate activities which are not allocated to operations and are excluded from segment operating profit. Identifiable assets by segment are those assets that are used in the Company’s operation in each segment. Corporate assets consist primarily of cash and cash equivalents, real estate and other financial assets not identified with a business segment.
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Table of ContentsThe following is a summary of operating results and certain other financial data for the Company’s business segments.
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Table of ContentsAll sales were made in the United States during the periods presented with no single customer representing more than 10 percent of sales. Aggregates segment operating profit in 2006 includes a gain of $24.0 million from the sale of land associated with its expanded shale and clay aggregate operations in south Texas. Unallocated other income in 2004 includes a gain of $34.7 million from the sale of the Company’s Texas and Louisiana brick production facilities. Cement capital expenditures include $73.2 million in 2006, $6.4 million in 2005, and $700,000 in 2004, incurred in connection with the expansion and modernization of the Company’s Oro Grande, California cement plant. Other capital expenditures incurred represent normal replacement and technological upgrades of existing equipment and acquisitions to sustain existing operations in each segment. RETIREMENT PLANS Defined Contribution Plans. Substantially all employees of the Company are covered by a series of defined contribution retirement plans. The amount of pension expense charged to costs and expenses for these plans was $4.4 million in 2006, $3.5 million in 2005 and $2.8 million in 2004. It is the Company’s policy to fund the plans to the extent of charges to income. Riverside Defined Benefit Plans. Approximately 600 employees and retirees of Riverside Cement Company, a subsidiary of the Company, are covered by a defined benefit pension plan and a postretirement health benefit plan. Unrecognized prior service costs and actuarial gains or losses for these plans are recognized in a systematic manner over the remaining service periods of active employees expected to receive benefits under these plans. The amount of the defined benefit pension plan and postretirement health benefit plan expense charged to costs and expenses was as follows:
The Company contributes amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as are considered appropriate. The Company expects to make a contribution of $2.6 million in 2007.
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Table of ContentsObligation and asset data for the defined benefit pension plan and health benefit plan at May 31, 2006 were as follows:
The estimated future benefit payments under the defined benefit pension plan for each of the five succeeding years are $2.2 million, $2.3 million, $2.4 million, $2.5 million and $2.6 million and for the five-year period thereafter an aggregate of $15.7 million. The plan fiduciaries set the long-term strategic investment objectives for the defined benefit pension plan assets. The objectives include preserving the funded status of the trust and balancing risk and return. Investment performance and plan asset mix are periodically reviewed with external consultants. Plan assets are currently allocated to the fixed income and equity categories of investments in a manner that varies in the short term, but has a long term objective of averaging approximately 55% in equity securities and 45% in fixed income securities. Within these categories, investments are allocated to multiple asset classes. The expected long-term rate of return on plan assets of 8.5% for 2006 was determined by considering historical and expected returns for each asset class and the effect of periodic asset rebalancing and, for underperforming assets, reallocation. The current allocation of plan assets has both a long-term and a short-term historical rate of return that exceeds the plan objectives. While historical returns are not guarantees of future performance, these allocations are expected to meet the objectives of the plan.
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Table of ContentsThe actual defined benefit pension plan asset allocation at May 31, 2006 and 2005, and the target asset allocation for 2007, by asset category were as follows:
The health benefit plan provisions were amended in 2003 for non-union active employees such that a non-union active employee who did not retire on or before December 31, 2003 is no longer eligible for any postretirement medical and/or life insurance benefits. Additional plan changes effective January 1, 2005 and January 1, 2007 reduce the percentage of the annual cost of the retiree’s and dependent’s health insurance to be paid by the Company and set a limit on the total annual cost the Company will incur. The assumed health care cost trend rates attributed to all participant age groups were 10% for 2006 and 9% for 2007, declining to an ultimate trend rate of 6% in 2009. Increasing or decreasing health care cost trend rates by one percentage point would have increased or decreased the health benefit obligation at May 31, 2006 by approximately $250,000 and the 2006 plan expense by approximately $25,000. The estimated future benefit payments under the health benefit plan for each of the five succeeding years are $400,000 per year and for the five-year period thereafter an aggregate of $2.2 million. Financial Security Defined Benefit Plans. The Company has a series of financial security plans (“FSP”) that are non-qualified defined benefit plans providing retirement and death benefits to substantially all of the Company’s executive and certain managerial employees. The plans are contributory but not funded. The amount of FSP benefit expense and the projected FSP benefit obligation are determined using assumptions as of the end of the year. The weighted-average discount rate used was 6% in 2006 and 2005. Actuarial gains or losses are recognized when incurred, and therefore, the end of year benefit obligation is the same as the accrued benefit costs recognized in the balance sheet. The amount of FSP benefit expense charged to costs and expenses was as follows:
The following provides a reconciliation of the FSP benefit obligation.
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Table of ContentsThe estimated future benefit payments under the financial security plans for each of the five succeeding years are $2.2 million, $2.3 million, $2.8 million, $3.1 million and $3.5 million and for the five-year period thereafter an aggregate of $18.7 million. DISCONTINUED OPERATIONS On December 15, 2004, the Company’s board of directors adopted a plan to spin-off the Company’s steel operations, which was completed on July 29, 2005. In anticipation of the spin-off, the Company entered into the following transactions: The Company formed Chaparral Steel Company as a wholly-owned subsidiary. On June 25, 2005, the Company contributed to Chaparral all of its subsidiaries engaged in the steel business. On July 6, 2005, the Company contributed or transferred to Chaparral real estate and transportation assets used in the steel business. Chaparral assumed all liabilities arising out of the steel business and the transferred assets. At various times the Company settled intercompany indebtedness between and among the Company and its subsidiaries, including its subsidiaries engaged in the steel business. The Company settled these accounts through offsets, contributions of such indebtedness to the capital of the debtor subsidiaries and other non-cash transfers. By the effective date of the spin-off, the Company had contributed to the capital of Chaparral and its subsidiaries the net intercompany indebtedness owed to it by Chaparral and its subsidiaries. On July 6, 2005, the Company issued $250 million principal amount of its 7.25% Senior Notes, entered into a new $200 million senior secured revolving credit facility with a syndicate of lenders, and terminated its then existing credit facility. The Company received net proceeds from the note offering of $245.0 million. The terms of the new 7.25% Senior Notes and credit facility are more fully described in the “Long-term Debt” footnote on pages 11 and 12. On July 6, 2005, Chaparral issued $300 million principal amount of senior notes and entered into a new $150 million credit facility. Chaparral used the net proceeds from its note offering and borrowings under its credit facility to pay the Company a dividend of $341.1 million. On July 6, 2005, the Company used the net proceeds from its offering of notes, the dividend paid by Chaparral and existing cash to purchase for cash all of its outstanding $600 million principal amount of 10.25% Senior Notes. The Company paid a total of $699.5 million to the holders of the 10.25% Senior Notes, which was comprised of $600 million of principal, $3.6 million of accrued interest and $95.9 million of premiums and consent fees. As a consequence of the spin-off: On July 29, 2005, Chaparral became an independent, public company. The Company has no further ownership interest in Chaparral or in any steel business, and Chaparral has no ownership interest in the Company. In addition, Chaparral is not a guarantor of any of the Company’s indebtedness nor is the Company a guarantor of any Chaparral indebtedness. The Company’s relationship with Chaparral is now governed by a separation and distribution agreement and the ancillary agreements described in that agreement. The terms of the agreements are more fully described in the “Legal Proceedings and Contingent Liabilities” note on page 16. The Company recorded a charge of approximately $107.0 million related to the early retirement of the 10.25% Senior Notes and old credit facility and incurred $5.4 million in spin-off related charges. As a result of the spin-off of Chaparral, the consolidated balance sheets of the Company as of May 31, 2005, the related consolidated statements of operations and cash flows for the years ended May 31, 2005 and 2004, and the related notes thereto have been reclassified to present the steel business as a discontinued operation. Interest expense has been allocated to discontinued operations based on the amount of the Company’s consolidated debt attributable to the steel operations. The total amount of interest allocated was $5.4 million in 2006, $47.3 million in 2005 and $49.6 million in 2004.
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Table of ContentsSummarized financial information for discontinued operations is presented below:
The following is a summary of the assets and liabilities of discontinued operations as of the July 29, 2005 spin-off and May 31, 2005.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION On July 6, 2005, Texas Industries, Inc. (the parent company) issued $250 million principal amount of its 7.25% Senior Notes. All existing consolidated subsidiaries of the parent company are 100% owned and, excluding its Chaparral subsidiaries, provide a joint and several, full and unconditional guarantee of the securities. There are no significant restrictions on the parent company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the parent company or its direct or indirect subsidiaries.
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Table of ContentsThe following condensed consolidating balance sheets, statements of operations and statements of cash flows are provided for the parent company, all guarantor subsidiaries and all non-guarantor subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.
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