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Texas Industries 10-Q 2006
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2006

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-4887

TEXAS INDUSTRIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   75-0832210

(State or Other Jurisdiction of

Incorporation or Organization)

  (IRS Employer Identification No.)
1341 West Mockingbird Lane, Suite 700W, Dallas, Texas   75247-6913
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code (972) 647-6700

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 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. (Check one):

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 Exchange Act). Yes  ¨    No  x

There were 23,978,727 shares of the Registrant’s Common Stock, $1.00 par value, outstanding as of September 25, 2006.

 


 

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Table of Contents

INDEX

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

 

          Page

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Consolidated Balance Sheets — August 31, 2006 and May 31, 2006

   3
  

Consolidated Statements of Operations — three months ended August 31, 2006 and August 31, 2005

   4
  

Consolidated Statements of Cash Flows — three months ended August 31, 2006 and August 31, 2005

   5
  

Notes to Consolidated Financial Statements

   6
  

Report of Independent Registered Public Accounting Firm

   25

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk — the information required by this item is included in Item 2

  

Item 4.

   Controls and Procedures    31

PART II. OTHER INFORMATION

  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    31

Item 6.

   Exhibits    31

SIGNATURES

  

 

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CONSOLIDATED BALANCE SHEETS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

 

In thousands

  

Unaudited

August 31,
2006

    May 31,
2006
 

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 66,300     $ 84,139  

Short-term investments

     39,122       50,606  

Receivables – net

     160,569       132,849  

Inventories

     101,330       102,052  

Deferred income taxes and prepaid expenses

     26,820       33,599  
                

TOTAL CURRENT ASSETS

     394,141       403,245  

OTHER ASSETS

    

Goodwill

     58,395       58,395  

Real estate and investments

     107,604       125,913  

Deferred charges and intangibles

     22,493       22,706  
                
     188,492       207,014  

PROPERTY, PLANT AND EQUIPMENT

    

Land and land improvements

     129,643       128,056  

Buildings

     41,918       42,069  

Machinery and equipment

     691,431       688,255  

Construction in progress

     152,888       95,094  
                
     1,015,880       953,474  

Less depreciation and depletion

     492,569       483,163  
                
     523,311       470,311  
                
   $ 1,105,944     $ 1,080,570  
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 69,866     $ 63,581  

Accrued interest, wages and other items

     44,662       55,059  

Current portion of long-term debt

     680       681  
                

TOTAL CURRENT LIABILITIES

     115,208       119,321  

LONG-TERM DEBT

     251,507       251,505  

CONVERTIBLE SUBORDINATED DEBENTURES

     159,655       159,725  

DEFERRED INCOME TAXES AND OTHER CREDITS

     81,204       76,955  

SHAREHOLDERS’ EQUITY

    

Common stock, $1 par value

     25,864       25,863  

Additional paid-in capital

     335,741       334,054  

Retained earnings

     192,441       169,696  

Cost of common stock in treasury

     (51,220 )     (52,093 )

Pension liability adjustment

     (4,456 )     (4,456 )
                
     498,370       473,064  
                
   $ 1,105,944     $ 1,080,570  
                

See notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

 

    

Three months ended

August 31,

 

In thousands except per share

   2006     2005  

NET SALES

   $ 271,652     $ 241,884  

Cost of products sold

     205,338       194,221  
                

GROSS PROFIT

     66,314       47,663  

Selling, general and administrative

     21,058       23,228  

Interest

     5,542       9,264  

Loss on debt retirements and spin-off charges

     —         112,284  

Other income

     (3,551 )     (4,141 )
                
     23,049       140,635  
                

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     43,265       (92,972 )

Income taxes (benefit)

     13,834       (32,948 )
                

INCOME (LOSS) FROM CONTINUING OPERATIONS

     29,431       (60,024 )

Income from discontinued operations - net of income taxes

     —         8,691  
                

NET INCOME (LOSS)

   $ 29,431     $ (51,333 )
                

Basic earnings (loss) per share

    

Income (loss) from continuing operations

   $ 1.23     $ (2.63 )

Income from discontinued operations

     —         .38  
                

Net income (loss)

   $ 1.23     $ (2.25 )
                

Diluted earnings (loss) per share

    

Income (loss) from continuing operations

   $ 1.12     $ (2.63 )

Income from discontinued operations

     —         .38  
                

Net income (loss)

   $ 1.12     $ (2.25 )
                

Average shares outstanding

    

Basic

     23,959       22,822  

Diluted

     27,515       22,822  
                

Cash dividends per share

   $ .075     $ .075  
                

See notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

 

    

Three months ended

August 31,

 

In thousands

   2006     2005  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 29,431     $ (51,333 )

Adjustments to reconcile net income (loss) to cash provided by continuing operating activities

    

Income from discontinued operations

     —         (8,691 )

Loss on debt retirements

     —         107,001  

Gain on asset disposals

     (490 )     (355 )

Depreciation, depletion and amortization

     11,172       11,185  

Deferred income taxes (benefit)

     3,777       (31,832 )

Stock-based compensation expense

     554       4,714  

Excess tax benefits from stock-based compensation

     (881 )     —    

Other – net

     (175 )     283  

Changes in operating assets and liabilities

    

Receivables – net

     (6,218 )     211  

Inventories

     722       (4,670 )

Prepaid expenses

     953       (956 )

Accounts payable and accrued liabilities

     (2,782 )     (11,198 )
                

Cash provided by continuing operating activities

     36,063       14,359  

Cash used by discontinued operating activities

     —         (6,587 )
                

Net cash provided by operating activities

     36,063       7,772  

INVESTING ACTIVITIES

    

Capital expenditures - expansions

     (47,702 )     (3,599 )

Capital expenditures – other

     (16,416 )     (6,722 )

Proceeds from asset disposals

     987       817  

Purchases of short-term investments

     (8,500 )     —    

Sales of short-term investments

     20,000       —    

Investments in life insurance contracts

     (2,402 )     (1,028 )

Other – net

     297       1,605  
                

Cash used by continuing investing activities

     (53,736 )     (8,927 )

Cash used by discontinued investing activities

     —         (2,712 )
                

Net cash used by investing activities

     (53,736 )     (11,639 )

FINANCING ACTIVITIES

    

Long-term borrowings

     —         250,000  

Debt retirements

     (1 )     (600,009 )

Debt issuance costs

     —         (7,051 )

Debt retirement costs

     —         (96,024 )

Stock option exercises

     752       3,853  

Excess tax benefits from stock-based compensation

     881       —    

Common dividends paid

     (1,798 )     (1,711 )
                

Cash used by continuing financing activities

     (166 )     (450,942 )

Cash provided by discontinued financing activities

     —         340,712  
                

Net cash used by financing activities

     (166 )     (110,230 )
                

Decrease in cash and cash equivalents

     (17,839 )     (114,097 )

Cash and cash equivalents at beginning of period

     84,139       251,600  
                

Cash and cash equivalents at end of period

   $ 66,300     $ 137,503  
                

See notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Texas Industries, Inc. and subsidiaries is a leading supplier of heavy building materials in the United States through three business segments: cement, aggregates and consumer products, which produce and sell cement; stone, sand and gravel and expanded shale and clay aggregate; and ready-mix concrete and packaged concrete and related products, respectively, from facilities concentrated in Texas, Louisiana and California.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended August 31, 2006, are not necessarily indicative of the results that may be expected for the year ended May 31, 2007. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of Texas Industries, Inc. for the year ended May 31, 2006. When used in these notes the terms “Company,” “we,” “us” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise.

Principles of Consolidation. The consolidated financial statements include the accounts of Texas Industries, Inc. and all subsidiaries except a subsidiary trust in which we have a variable interest but are not the primary beneficiary. Discontinued operations relate to our former steel segment which we spun-off in the form of a pro-rata, tax-free dividend to our shareholders on July 29, 2005. Unless otherwise indicated, all amounts in the accompanying notes relate to our continuing operations. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

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.

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. Our 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 sheets. 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 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 a defendant 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.

 

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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.

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 our 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 our products, capital needs, economic trends and other factors. Goodwill having a carrying value of $58.4 million at August 31, 2006 and May 31, 2006 resulted from the acquisition of Riverside Cement Company and is identified with our 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 at August 31, 2006 and May 31, 2006.

Investments are composed primarily of life insurance contracts purchased in connection with certain of our benefit plans. The contracts, recorded at their net cash surrender value, totaled $100.1 million (net of distributions of $1.3 million) at August 31, 2006 and $96.3 million (net of distributions of $1.3 million) at May 31, 2006.

At May 31, 2006, investments included $22.0 million, representing the long-term portion of a note received in connection with the sale of land associated with our expanded shale and clay operations in south Texas. The note, which matures on July 31, 2007, is included in Receivables – net at August 31, 2006.

Deferred Charges and Intangibles. Deferred charges are composed primarily of debt issuance costs that totaled $10.0 million and $10.3 million at August 31, 2006 and May 31, 2006, 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 $1.3 million (net of accumulated amortization of $3.1 million) at August 31, 2006 and $1.4 million (net of accumulated amortization of $3.0 million) at May 31, 2006. Amortization expense incurred was $100,000 in each of the three-month periods ended August 31, 2006 and 2005. Estimated amortization expense for each of the five succeeding years is approximately $300,000 per year.

Other Credits. Other credits of $55.8 million at August 31, 2006 and $55.3 million at May 31, 2006 are composed primarily of liabilities related to our retirement plans, deferred compensation agreements and asset retirement obligations.

Asset Retirement Obligations. 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, 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.

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. 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.

 

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Changes in asset retirement obligations are as follows:

 

    

Three months ended

August 31,

 

In thousands

   2006     2005  

Balance at beginning of period

   $ 4,346     $ 4,655  

Additions

     63       5  

Accretion expense

     105       82  

Settlements

     (209 )     (120 )
                

Balance at end of period

   $ 4,305     $ 4,622  
                

Pension Liability Adjustment. The pension liability adjustment to shareholders’ equity totaled $4.5 million (net of tax of $2.5 million) at August 31, 2006 and May 31, 2006. The adjustment relates to a defined benefit retirement plan covering approximately 600 employees and retirees of our California cement subsidiary. Comprehensive income or loss consists of net income or loss and the pension liability adjustment to shareholders’ equity. Comprehensive income (loss) was the same as net income (loss) for the three-month periods ended August 31, 2006 and 2005.

Net Sales. Sales are recognized when title has transferred and products are delivered. We include delivery fees in the amount we bill customers to the extent needed to recover our 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 $500,000 and $2.2 million in the three-month periods ended August 31, 2006 and 2005, respectively. Interest income totaled $2.1 million and $1.5 million in the three-month periods ended August 31, 2006 and 2005 respectively.

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.

Earnings Per Share (“EPS”). Basic EPS is computed by adjusting net income for the participation in earnings of unvested restricted shares outstanding, then dividing by the weighted-average number of common shares outstanding during the period including contingently issuable shares and excluding outstanding unvested restricted 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.

 

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Basic and Diluted EPS are calculated as follows:

 

    

Three-months ended

August 31,

 

In thousands except per share

   2006     2005  

Basic earnings (loss)

    

Income (loss) from continuing operations

   $ 29,431     $ (60,024 )

Income from discontinued operations

     —         8,691  

Unvested restricted share participation

     (10 )     —    
                

Basic income (loss)

   $ 29,421     $ (51,333 )
                

Diluted earnings (loss)

    

Income (loss) from continuing operations

   $ 29,431     $ (60,024 )

Interest on convertible subordinated debentures - net of tax

     1,427       —    

Unvested restricted share participation

     (10 )     —    
                

Diluted income (loss) from continuing operations

     30,848       (60,024 )

Income (loss) from discontinued operations

     —         8,691  
                

Diluted income (loss)

   $ 30,848     $ (51,333 )
                

Shares

    

Weighted-average shares outstanding

     23,961       22,791  

Contingently issuable shares

     6       31  

Unvested restricted shares

     (8 )     —    
                

Basic weighted-average shares

     23,959       22,822  

Convertible subordinated debentures

     3,113       —    

Stock option, restricted share and award dilution

     443       —    
                

Diluted weighted-average shares*

     27,515       22,822  
                

Basic earnings (loss) per share

    

Income (loss) from continuing operations

   $ 1.23     $ (2.63 )

Income (loss) from discontinued operations

     —         .38  
                

Net income (loss)

   $ 1.23     $ (2.25 )
                

Diluted earnings (loss) per share

    

Income (loss) from continuing operations

   $ 1.12     $ (2.63 )

Income (loss) from discontinued operations

     —         .38  
                

Net income (loss)

   $ 1.12     $ (2.25 )
                

* Shares excluded due to antidilutive effect

    

Convertible subordinated debentures

     —         3,897  

Stock options, restricted stock and awards

     220       928  

Stock-based Compensation. Effective June 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” utilizing the modified prospective transition method. Under this transition method, we account for awards granted prior to adoption, but for which the vesting period is not complete on a prospective basis, with expense being recognized in our statement of operations based on the grant date fair value estimated in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” We use the Black-Scholes option-pricing model to determine the fair value of stock options granted as of the date of grant. We use the average stock price on the date of grant to determine the fair value of restricted stock awards granted. The impact of recognizing compensation expense related to stock options using the fair value recognition provisions of SFAS No. 123R for the three-month period ended August 31, 2006 was $600,000 (net of tax benefit of $100,000) or $.02 per basic and diluted share. The results for periods prior to June 1, 2006 have not been restated.

 

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SFAS No. 123R also requires that the benefits associated with tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as previously required. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts can not be estimated, because they depend on, among other things, when employees exercise stock options. For the three-month period ended August 31, 2006 excess tax benefits recognized in financing cash flows were $900,000.

Prior to June 1, 2006, we accounted for employee stock options using the intrinsic value method prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” as allowed by SFAS No. 123. Generally, no expense was recognized related to our stock options under this method because the exercise price of each option was set at the fair market value of the underlying common stock on the date the option was granted.

In accordance with SFAS No. 123, we disclosed the compensation cost related to our 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. No options were granted during the three-month period ended August 31, 2005.

In addition to grants under our stock option plans, we have 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 was included in the determination of net income as reported in the financial statements over the vesting periods of the related grants.

If we had applied the fair value recognition provision of SFAS No. 123, our net income (loss) and earnings (loss) per share would have been adjusted to the following pro forma amounts for the three-month period ended August 31, 2005.

 

In thousands except per share

   2005  

Net income

  

As reported

   $ (51,333 )

Plus: stock-based compensation included in the determination of net income as reported, net of tax

     3,064  

Less: fair value of stock-based compensation, net of tax

     (2,228 )
        

Pro forma

   $ (50,497 )
        

Basic earnings per share

  

As reported

   $ (2.25 )

Pro forma

     (2.21 )

Diluted earnings per share

  

As reported

   $ (2.25 )

Pro forma

     (2.21 )

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 our 1993 Stock Option Plan.

 

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A summary of option transactions for the three-month period ended August 31, 2006, follows:

 

    

Shares Under

Option

   

Weighted-Average

Option Price

Outstanding at May 31, 2006

   1,583,093     $ 29.48

Exercised

   (31,816 )     24.67

Canceled

   (2,269 )     27.12
            

Outstanding at August 31, 2006

   1,549,008     $ 29.59
            

Exercisable at August 31, 2006

   848,139     $ 25.16
            

The following table summarizes information about stock options outstanding as of August 31, 2006.

 

     Range of Exercise Prices
     $16.04 - $27.85    $31.15 - $38.34    $45.86 - $51.71

Options outstanding

        

Shares outstanding

     882,228      263,629      403,151

Weighted-average remaining life in years

     5.31      2.73      8.92

Weighted-average exercise price

   $ 19.38    $ 33.99    $ 49.05

Options exercisable

        

Shares exercisable

     566,322      247,631      34,186

Weighted-average exercise price

   $ 20.16    $ 33.75    $ 45.87

Outstanding options expire on various dates to January 18, 2016. We have reserved 2,054,496 shares for future awards under the 2004 Plan.

As of August 31, 2006, the aggregate intrinsic value (the difference in the closing market price of our common stock of $46.94 and the exercise price to be paid by the optionee) of stock options outstanding was $27.9 million. The aggregate intrinsic value of exercisable stock options at that date was $18.5 million. During the three-month period ended August 31, 2006, the total intrinsic value for options exercised (the difference in the market price of our common stock on the exercise date and the price paid by the optionee to exercise the option) was $900,000.

As of August 31, 2006, outstanding Stock Appreciation Rights totaled 161,311 shares, deferred compensation agreements payable in cash totaled 98,137 shares, deferred compensation agreements payable in common stock totaled 4,245 shares and stock awards totaled 9,514 shares.

As of August 31, 2006, $8.9 million of total unrecognized compensation cost related to stock options, stock appreciation rights contracts, restricted stock grants and stock awards is expected to be recognized. We currently expect to recognize stock-based compensation expense of approximately $3.5 million in 2007, $2.5 million in 2008, $1.6 million in 2009, $1.0 million in 2010 and $300,000 in 2011, related to these grants and awards.

Total stock-based compensation was $600,000 and $4.7 million in the three-month periods ended August 31, 2006 and 2005, respectively.

Inventory Costs. On June 1, 2006, we adopted SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. 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 did not have an effect on our consolidated financial position or results of operations.

 

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Accounting for Mining Stripping Costs. On June 1, 2006, we adopted, Emerging Issues Task Force Issue 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” which 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. As of May 31, 2006, the balance of our capitalized post-production stripping costs was $7.9 million. In accordance with the transition provision of EITF 04-6, we wrote off these deferred costs, effective June 1, 2006, and recorded a charge to retained earnings of $4.9 million, net of tax benefits of $3.0 million. We will now 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 EITF 04-6 will have a material impact on our financial position or results of operations for periods following adoption.

WORKING CAPITAL

Working capital totaled $278.9 million at August 31, 2006, compared to $283.9 million at May 31, 2006.

Receivables consist of:

 

In thousands

   August 31,
2006
   May 31,
2006

Accounts receivable

   $ 127,951    $ 122,131

Notes receivable

     22,672      1,170

Interest receivables

     402      4

Tax refund claims

     9,544      9,544
             
   $ 160,569    $ 132,849
             

Accounts receivable are presented net of allowances for doubtful receivables of $1.6 million at August 31, 2006 and May 31, 2006. Provisions for bad debts charged to expense were $100,000 and $300,000 for the three-month periods ended August 31, 2006 and 2005, respectively. Uncollectible accounts written off amounted to $100,000 for each of the three-month periods ended August 31, 2006 and 2005. Notes receivable related to routine sales of surplus operating assets and real estate.

Inventories consist of:

 

In thousands

   August 31,
2006
   May 31,
2006

Finished products

   $ 10,133    $ 10,341

Work in process

     41,023      42,384

Raw materials

     13,837      13,881
             

Total inventories at LIFO cost

     64,993      66,606

Parts and supplies

     36,337      35,446
             

Total inventories

   $ 101,330    $ 102,052
             

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. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation. 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 at August 31, 2006 and May 31, 2006.

 

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Accrued interest, wages and other items consist of:

 

In thousands

   August 31,
2006
   May 31,
2006

Interest

   $ 4,007    $ 8,531

Employee compensation

     15,242      33,422

Income taxes

     10,701      2,113

Property taxes and other

     14,712      10,993
             
   $ 44,662    $ 55,059
             

LONG-TERM DEBT

Long-term debt consists of:

 

In thousands

   August 31,
2006
   May 31,
2006

Senior secured revolving credit facility expiring in 2010

   $ —      $ —  

Senior notes due 2013, interest rate 7.25%

     250,000      250,000

Pollution control bonds due through 2007, interest rate 6.19% (75% of prime)

     1,815      1,815

Other

     372      371
             
     252,187      252,186

Less current maturities

     680      681
             
   $ 251,507    $ 251,505
             

7.25% Senior Notes. At any time on or prior to July 15, 2009, we 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, we 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, we 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 we experience a change of control, we 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 our consolidated subsidiaries have unconditionally guaranteed the 7.25% Senior Notes. The indenture governing the notes contains covenants that will limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem our stock, make investments, sell assets, incur liens, enter into agreements restricting our subsidiaries’ ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of our 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 August 31, 2006, $27.3 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. Commitment fees are payable currently at an annual rate of 0.375% on the unused portion of the facility. We may terminate the facility at any time.

All of our consolidated subsidiaries 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.

The credit facility contains covenants restricting, among other things, prepayment or redemption of our 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. At August 31, 2006, we were in compliance with all of our loan covenants.

 

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Refinancing in Connection with the Spin-off of Chaparral. In connection with the spin-off of Chaparral in July 2005, we entered into new financing agreements and purchased the outstanding $600 million aggregate principal amount of our 10.25% senior notes due 2011 (“10.25% Senior Notes”). On July 6, 2005, we issued $250 million aggregate principal amount of our 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 us a dividend of $341.1 million. We used the net proceeds from our offering of notes, the dividend paid by Chaparral and existing cash to purchase for cash all of our outstanding $600 million aggregate principal amount of 10.25% Senior Notes. We 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. We 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 we have no obligations with respect to Chaparral’s long-term debt. Chaparral is not a guarantor of any of our indebtedness nor are we a guarantor of any Chaparral indebtedness.

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 $11.5 million and $37.2 million during the three-month periods ended August 31, 2006 and 2005, respectively. Interest capitalized was $1.8 million during the three-month period ended August 31, 2006. No interest was capitalized during the three-month period ended August 31, 2005.

CONVERTIBLE SUBORDINATED DEBENTURES

On June 5, 1998, we 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 us, 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 us 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 our option. 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 our 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 our common stock for each Preferred Security. At August 31, 2006, 3,193,104 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). We have 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 our obligations 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.

 

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SHAREHOLDERS’ EQUITY

Common stock consists of:

 

In thousands

   August 31,
2006
   May 31,
2006

Shares authorized

   40,000    40,000

Shares outstanding

   23,978    23,945

Shares held in treasury

   1,886    1,918

Shares reserved for stock options and other

   3,617    3,652

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. The 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 August 31, 2006. Pursuant to a Rights Agreement, in November 1996, we distributed a dividend of one preferred share purchase right for each outstanding share of our Common Stock. Each right entitles the holder to purchase from us 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 us pursuant to the Rights Agreement.

LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES

We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions 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 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.

We 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 our consolidated financial position or results of operations.

In connection with our spin-off of Chaparral, we entered into a separation and distribution agreement and a tax sharing and indemnification agreement with Chaparral. In these agreements, we have indemnified Chaparral against, among other things, any liabilities arising out of the businesses, assets or liabilities retained by us and any taxes imposed on Chaparral in connection with the spin-off that result from our breach of our covenants in the tax sharing and indemnification agreement. Chaparral has indemnified us against, among other things, any liabilities arising out of the businesses, assets or liabilities transferred to Chaparral and any taxes imposed on us in connection with the spin-off that result from Chaparral’s breach of its covenants in the tax sharing and indemnification agreement.

 

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We and Chaparral have made certain covenants to each other in connection with the spin-off that prohibit us and Chaparral from taking certain actions. Pursuant to these covenants: (1) neither we 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) we 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 we nor Chaparral will repurchase our stock for two years following the distribution except in certain circumstances permitted by the IRS; (4) we 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 our tax counsel of its tax opinion with respect to the spin-off; and (5) we and Chaparral will not take or fail to take any other action that would result in any tax being imposed on the spin-off. We or Chaparral may take actions inconsistent with these covenants if we obtain 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.

INCOME TAXES

Federal income taxes for the interim periods ended August 31, 2006 and 2005, have been included in the accompanying financial statements on the basis of an estimated annual rate for continuing operations. The estimated annualized rate for continuing operations does not include the tax impact of the loss on debt retirements and Chaparral spin-off charges. The estimated annualized rate for continuing operations excluding these charges is 32.0% for 2006 compared to 29.4% for 2005. The estimated effective rate for discontinued operations was 35% for 2005, and reflects Chaparral’s allocable share of such tax as prescribed in the tax sharing agreement between us and Chaparral. We received income tax refunds of $300,000 during the three-month period ended August 31, 2006 and made income tax payments of $2.2 million during the three-month period ended August 31, 2005.

RETIREMENT PLANS

Riverside Defined Benefit Plans. Approximately 600 employees and retirees of our California cement subsidiary, Riverside Cement 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 for the three-month periods ended August 31, 2006 and 2005, was as follows:

 

     Pension Benefit     Health Benefit  

In thousands

   2006     2005     2006     2005  

Service cost

   $ 123     $ 143     $ 24     $ 27  

Interest cost

     681       624       92       86  

Expected return on plan assets

     (760 )     (691 )     —         —    

Amortization of prior service cost

     —         —         (211 )     (211 )

Amortization of net actuarial loss

     107       264       150       185  
                                
   $ 151     $ 340     $ 55     $ 87  
                                

 

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Financial Security Defined Benefit Plans. We have a series of financial security plans (“FSP”) that are non-qualified defined benefit plans providing retirement and death benefits to substantially all of our executive and key managerial employees. The plans are contributory but not funded.

The amount of FSP benefit expense charged to costs and expenses for the three-month periods ended August 31, 2006 and 2005, was as follows:

 

     FSP Benefit  

In thousands

   2006     2005  

Service cost

   $ 572     $ 487  

Interest cost

     440       418  

Recognized actuarial loss

     254       —    

Participant contributions

     (87 )     (83 )
                
   $ 1,179     $ 822  
                

BUSINESS SEGMENTS

We have three business segments: cement, aggregates and consumer products. Our business segments are managed separately along product lines. Through the cement segment we produce and sell gray portland cement as our principal product, as well as specialty cements. Through the aggregates segment we produce and sell stone, sand and gravel as our principal products, as well as expanded shale and clay aggregates. Through the consumer products segment we produce and sell ready-mix concrete as our principal product, as well as packaged concrete and related products. We account 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 those 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 each segment’s operation. Corporate assets consist primarily of cash and cash equivalents, short-term investments, real estate and other financial assets not identified with a business segment.

The following is a summary of assets used in each of our business segments.

 

In thousands

   August 31,
2006
   May 31,
2006

Identifiable assets

     

Cement

   $ 550,681    $ 511,944

Aggregates

     172,361      166,944

Consumer products

     94,081      90,635

Corporate

     288,821      311,047
             

Total assets

   $ 1,105,944    $ 1,080,570
             

 

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The following is a summary of operating results and certain other financial data for our business segments.

 

    

Three-months ended

August 31,

 

In thousands

   2006     2005  

Net sales

    

Cement

    

Sales to external customers

   $ 116,276     $ 98,733  

Intersegment sales

     21,414       17,469  

Aggregates

    

Sales to external customers

     66,914       59,377  

Intersegment sales

     8,981       8,266  

Consumer products

    

Sales to external customers

     88,462       83,774  

Intersegment sales

     1,083       3,744  

Eliminations

     (31,478 )     (29,479 )
                

Total net sales

   $ 271,652     $ 241,884  
                

Segment operating profit

    

Cement

   $ 40,134     $ 26,341  

Aggregates

     12,582       7,907  

Consumer products

     3,641       4,236  

Unallocated overhead and other income - net

     (1,911 )     (2,393 )
                

Total segment operating profit

     54,446       36,091  

Corporate

    

Selling, general and administrative expense

     (7,747 )     (10,881 )

Interest

     (5,542 )     (9,264 )

Loss on debt retirements and spin-off charges

     —         (112,284 )

Other income

     2,108       3,366  
                

Income (loss) from continuing operations before income taxes

   $ 43,265     $ (92,972 )
                

Depreciation, depletion and amortization

    

Cement

   $ 5,715     $ 5,943  

Aggregates

     3,800       3,334  

Consumer products

     1,542       1,550  

Corporate

     115       358  
                

Total depreciation, depletion and amortization

   $ 11,172     $ 11,185  
                

Capital expenditures

    

Cement

   $ 50,355     $ 7,347  

Aggregates

     9,255       588  

Consumer products

     4,191       2,246  

Corporate

     317       140  
                

Total capital expenditures

   $ 64,118     $ 10,321  
                

Net sales by product

    

Cement

   $ 109,744     $ 92,605  

Stone, sand and gravel

     35,146       32,044  

Ready-mix concrete

     72,345       69,663  

Other products

     32,082       26,678  

Delivery fees

     22,335       20,894  
                

Total net sales

   $ 271,652     $ 241,884  
                

 

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All sales were made in the United States during the periods presented with no single customer representing more than 10 percent of sales.

Cement capital expenditures include $47.7 million and $3.6 million in the three-month periods ended August 31, 2006 and 2005, respectively, incurred in connection with the expansion and modernization of our 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.

DISCONTINUED OPERATIONS

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. Following 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. 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 our note entitled “Legal Proceedings and Contingent Liabilities”.

We 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 $5.3 million in spin-off related charges during the three-month period ended August 31, 2005.

Operations for the three-month period ended August 31, 2005 included discontinued operations through July 29, 2005, as summarized below:

 

In thousands

   2005

Net sales

   $ 198,893

Income before income/taxes

     13,384

Income taxes

     4,693

Income from discontinued operations

     8,691

SUBSEQUENT EVENT

The governments of the U.S. and Mexico have entered into the U.S.-Mexico Agreement on Cement, which settled the 16-year dispute over the U.S. antidumping duty order on imports from Mexico. Pursuant to that agreement and a related agreement among the importers of cement from Mexico and certain producers in the U.S., including us, 50% of the cash deposits of estimated antidumping duties collected from importers of Mexican cement were distributed to the U.S. producers. On September 6, 2006, we received a distribution of $19.6 million, which represents substantially all of the distributions to which we are entitled pursuant to these agreements.

 

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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 Chaparral and its 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.

The 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.

 

In thousands

  

Texas

Industries, Inc.

  

Guarantor

Subsidiaries

  

Non-Guarantor

Subsidiaries

  

Eliminating

Entries

    Consolidated

Condensed consolidating balance sheet at August 31, 2006

             

Cash and cash equivalents

   $ 63,642    $ 2,658    $ —      $ —       $ 66,300

Short-term investments

     39,122      —        —        —         39,122

Receivables - net

     9,543      151,026      —        —         160,569

Intercompany receivables

     1,467      69,408      —        (70,875 )     —  

Inventories

     —        101,330      —        —         101,330

Deferred income taxes and prepaid expenses

     6,409      20,411      —        —         26,820
                                   

Total current assets

     120,183      344,833      —        (70,875 )     394,141

Goodwill

     —        58,395      —        —         58,395

Real estate and investments

     100,141      7,463      —        —         107,604

Deferred charges and intangibles

     16,477      6,016      —        —         22,493

Investment in subsidiaries

     728,538      —        —        (728,538 )     —  

Long-term intercompany receivables

     50,000      —        —        (50,000 )     —  

Property, plant and equipment – net

     —        522,433      —        878       523,311
                                   

Total assets

   $ 1,015,339    $ 939,140    $ —      $ (848,535 )   $ 1,105,944
                                   

Accounts payable

   $ 84    $ 69,782    $ —      $ —       $ 69,866

Intercompany payables

     69,408      1,467      —        (70,875 )     —  

Accrued interest, wages and other items

     18,935      25,727      —        —         44,662

Current portion of long-term debt

     680      —        —        —         680
                                   

Total current liabilities

     89,107      96,976      —        (70,875 )     115,208

Long-term debt

     251,507      —        —        —         251,507

Convertible subordinated debentures

     159,655      —        —        —         159,655

Long-term intercompany payables

     —        50,000      —        (50,000 )     —  

Deferred income taxes and other credits

     16,700      64,504      —        —         81,204

Shareholders’ equity

     498,370      727,660      —        (727,660 )     498,370
                                   

Total liabilities and shareholders’ equity

   $ 1,015,339    $ 939,140    $ —      $ (848,535 )   $ 1,105,944
                                   

 

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Table of Contents

In thousands

  

Texas

Industries, Inc.

  

Guarantor

Subsidiaries

  

Non-Guarantor

Subsidiaries

  

Eliminating

Entries

    Consolidated

Condensed consolidating balance sheet at May 31, 2006

             

Cash and cash equivalents

   $ 78,569    $ 5,570    $ —      $ —       $ 84,139

Short-term investments

     50,606      —        —        —         50,606

Receivables - net

     9,543      123,306      —        —         132,849

Intercompany receivables

     585      93,160      —        (93,745 )     —  

Inventories

     —        102,052      —        —         102,052

Deferred income taxes and prepaid expenses

     6,234      27,365      —        —         33,599
                                   

Total current assets

     145,537      351,453      —        (93,745 )     403,245

Goodwill

     —        58,395      —        —         58,395

Real estate and investments

     96,347      29,566      —        —         125,913

Deferred charges and intangibles

     16,790      5,916      —        —         22,706

Investment in subsidiaries

     699,775      —        —        (699,775 )     —  

Long-term intercompany receivables

     50,000      —        —        (50,000 )     —  

Property, plant and equipment – net

     —        470,311      —        —         470,311
                                   

Total assets

   $ 1,008,449    $ 915,641    $ —      $ (843,520 )   $ 1,080,570
                                   

Accounts payable

   $ 184    $ 63,397    $ —      $ —       $ 63,581

Intercompany payables

     93,160      585      —        (93,745 )     —  

Accrued interest, wages and other items

     14,102      40,957      —        —         55,059

Current portion of long-term debt

     681      —        —        —         681
                                   

Total current liabilities

     108,127      104,939      —        (93,745 )     119,321

Long-term debt

     251,505      —        —        —         251,505

Convertible subordinated debentures

     159,725      —        —        —         159,725

Long-term intercompany payables

     —        50,000      —        (50,000 )     —  

Deferred income taxes and other credits

     16,028      60,927      —        —         76,955

Shareholders’ equity

     473,064      699,775      —        (699,775 )     473,064
                                   

Total liabilities and shareholders’ equity

   $ 1,008,449    $ 915,641    $ —      $ (843,520 )   $ 1,080,570
                                   

 

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Table of Contents

In thousands

  

Texas

Industries,
Inc.

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

  

Eliminating

Entries

    Consolidated  

Condensed consolidating statement of operations for the three months ended August 31, 2006

    

Net sales

   $ —       $ 271,652     $ —      $ —       $ 271,652  

Cost of products sold

     —         205,338       —        —         205,338  
                                       

Gross profit

     —         66,314       —        —         66,314  

Selling, general and administrative

     1,502       19,556       —        —         21,058  

Interest

     6,412       12       —        (882 )     5,542  

Loss on debt retirements and spin-off charges

     —         —         —        —         —    

Other income

     (1,676 )     (1,875 )     —        —         (3,551 )

Intercompany other income

     (882 )     —         —        882       —    
                                       
     5,356       17,693       —        —         23,049  
                                       

Income (loss) before the following items

     (5,356 )     48,621       —        —         43,265  

Income taxes (benefit)

     (2,015 )     15,849       —        —         13,834  
                                       
     (3,341 )     32,772       —        —         29,431  

Income from discontinued operations - net of income taxes

     —         —         —        —         —    

Equity in earnings (loss) of subsidiaries

     32,772       —         —        (32,772 )     —    
                                       

Net income (loss)

   $ 29,431     $ 32,772     $ —      $ (32,772 )   $ 29,431  
                                       

Condensed consolidating statement of operations for the three months ended August 31, 2005

    

Net sales

   $ —       $ 241,884     $ —      $ —       $ 241,884  

Cost of products sold

     —         194,221       —        —         194,221  
                                       

Gross profit

     —         47,663       —        —         47,663  

Selling, general and administrative

     2,795       20,433       —        —         23,228  

Interest

     9,260       886       —        (882 )     9,264  

Loss on debt retirements and spin-off charges

     112,284       —         —        —         112,284  

Other income

     (1,462 )     (2,679 )     —        —         (4,141 )

Intercompany other income

     (882 )     —         —        882       —    
                                       
     121,995       18,640       —        —         140,635  
                                       

Income (loss) before the following items

     (121,995 )     29,023       —        —         (92,972 )

Income taxes (benefit)

     (42,851 )     9,903       —        —         (32,948 )
                                       
     (79,144 )     19,120       —        —         (60,024 )

Income (loss) from discontinued operations - net of income taxes

     —         (176 )     8,867      —         8,691  

Equity in earnings (loss) of subsidiaries

     27,811       —         —        (27,811 )     —    
                                       

Net income (loss)

   $ (51,333 )   $ 18,944     $ 8,867    $ (27,811 )   $ (51,333 )
                                       

 

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Table of Contents

In thousands

  

Texas

Industries, Inc.

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

  

Eliminating

Entries

   Consolidated  

Condensed consolidating statement of cash flows for the three months ended August 31, 2006

     

Operating activities

            

Cash provided by continuing operating activities

   $ (23,859 )   $ 59,922     $ —      $ —      $ 36,063  

Cash used by discontinued operating activities

     —         —         —        —        —    
                                      

Net cash provided by operating activities

     (23,859 )     59,922       —        —        36,063  

Investing activities

            

Capital expenditures - expansions

     —         (47,702 )     —        —        (47,702 )

Capital expenditures - other

     —         (16,416 )     —        —        (16,416 )

Proceeds from asset disposals

     —         987       —        —        987  

Purchases of short-term investments

     (8,500 )     —         —        —        (8,500 )

Sales of short-term investments

     20,000       —         —        —        20,000  

Investments in life insurance contracts

     (2,402 )     —         —        —        (2,402 )

Intercompany investing activities

     —         —         —        —        —    

Other - net

     —         297       —        —        297  
                                      

Cash used by continuing investing activities

     9,098       (62,834 )     —        —        (53,736 )

Cash used by discontinued investing activities

     —         —         —        —        —    
                                      

Net cash used by investing activities

     9,098       (62,834 )     —        —        (53,736 )

Financing activities

            

Long-term borrowings

     —         —         —        —        —    

Debt retirements

     (1 )     —         —        —        (1 )

Debt issuance costs

     —         —         —        —        —    

Debt retirement costs

     —         —         —        —        —    

Stock option exercises

     752       —         —        —        752  

Excess tax benefits from stock-based compensation

     881       —         —        —        881  

Common dividends paid

     (1,798 )     —         —        —        (1,798 )
                                      

Cash used by continuing financing activities

     (166 )     —         —        —        (166 )

Cash provided by discontinued financing activities

     —         —         —        —        —    
                                      

Net cash used by financing activities

     (166 )     —         —        —        (166 )
                                      

Decrease in cash and cash equivalents

     (14,927 )     (2,912 )     —        —        (17,839 )

Cash and cash equivalents at beginning of period

     78,569       5,570       —        —        84,139  
                                      

Cash and cash equivalents at end of period

   $ 63,642     $ 2,658     $ —      $ —      $ 66,300  
                                      

 

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In thousands

  

Texas

Industries, Inc.

   

Guarantor

Subsidiaries

   

Non-Guarantor

Subsidiaries

   

Eliminating

Entries

    Consolidated  

Condensed consolidating statement of cash flows for the three months ended August 31, 2005

 

   

Operating activities

          

Cash provided by continuing operating activities

   $ 7,102     $ (2,469 )   $ —       $ 9,726     $ 14,359  

Cash used by discontinued operating activities

     —         —         3,139       (9,726 )     (6,587 )
                                        

Net cash provided by operating activities

     7,102       (2,469 )     3,139       —         7,772  

Investing activities

          

Capital expenditures – expansions

     —         (3,599 )     —         —         (3,599 )

Capital expenditures - other

     —         (6,722 )     —         —         (6,722 )

Proceeds from asset disposals

     —         817       —         —         817  

Purchases of short-term investments

     —         —         —         —         —    

Sales of short-term investments

     —         —         —         —         —    

Investments in life insurance contracts

     (1,028 )     —         —         —         (1,028 )

Intercompany investing activities

     341,139       —         —         (341,139 )     —    

Other - net

     —         1,605       —         —         1,605  
                                        

Cash used by continuing investing activities

     340,111       (7,899 )     —         (341,139 )     (8,927 )

Cash used by discontinued investing activities

     —         —         (343,851 )     341,139       (2,712 )
                                        

Net cash used by investing activities

     340,111       (7,899 )     (343,851 )     —         (11,639 )

Financing activities

          

Long-term borrowings

     250,000       —         —         —         250,000  

Debt retirements

     (600,009 )     —         —         —         (600,009 )

Debt issuance costs

     (7,051 )     —         —         —         (7,051 )

Debt retirement costs

     (96,024 )     —         —         —         (96,024 )

Stock option exercises

     3,853       —         —         —         3,853  

Excess tax benefits from stock-based compensation

     —         —         —         —         —    

Common dividends paid

     (1,711 )     —         —         —         (1,711 )
                                        

Cash used by continuing financing activities

     (450,942 )     —         —         —         (450,942 )

Cash provided by discontinued financing activities

     —         —         340,712       —         340,712  
                                        

Net cash used by financing activities

     (450,942 )     —         340,712       —         (110,230 )
                                        

Decrease in cash and cash equivalents

     (103,729 )     (10,368 )     —         —         (114,097 )

Cash and cash equivalents at beginning of period

     241,287       10,313       —         —         251,600  
                                        

Cash and cash equivalents at end of period

   $ 137,558     $ (55 )   $ —       $ —       $ 137,503  
                                        

 

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EXHIBIT A

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Texas Industries, Inc.

We have reviewed the accompanying consolidated balance sheet of Texas Industries, Inc. and subsidiaries (the Company) as of August 31, 2006, and the related consolidated statements of operations and cash flows for the three-month periods ended August 31, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Texas Industries, Inc. and subsidiaries as of May 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended [not presented herein], and in our report dated July 19, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of May 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

September 28, 2006

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We are a leading supplier of heavy building construction materials in the United States through 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.

RESULTS OF OPERATIONS

The following table highlights certain of our operating information.

 

    

Three months ended

August 31,

 

In thousands except per unit

   2006     2005  

Sales

    

Cement

   $ 131,157     $ 110,075  

Stone, sand and gravel

     42,723       41,893  

Ready-mix concrete

     72,442       69,753  

Other products

     34,473       28,748  

Interplant

     (31,478 )     (29,479 )

Delivery fees

     22,335       20,894  
                

Net sales

   $ 271,652     $ 241,884  
                

Shipments

    

Cement (tons)

     1,388       1,342  

Stone, sand and gravel (tons)

     6,461       7,313  

Ready-mix concrete (cubic yards)

     980       1,041  

Prices

    

Cement ($/ton)

   $ 94.48     $ 82.02  

Stone, sand and gravel ($/ton)

     6.61       5.73  

Ready-mix concrete ($/cubic yard)

     73.90       66.99  

Cost of sales

    

Cement ($/ton)

   $ 62.97     $ 60.01  

Stone, sand and gravel ($/ton)

     4.97       4.42  

Ready-mix concrete ($/cubic yard)

     70.11       63.52  

 

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Gross profit for the three-month period ended August 31, 2006 was $66.3 million, an increase of $18.7 million from the prior year period. The increase was primarily the result of improved product pricing. During the summer extremely hot weather and water restrictions negatively impacted construction in north Texas, one of our major markets.

Sales. Net sales for the three-month period ended August 31, 2006 were $271.7 million, an increase of $29.8 million from the prior year period. Total cement sales increased $21.1 million on 15% higher average prices and 3% higher shipments. Total stone, sand and gravel sales increased $800,000 on 15% higher average prices and shipments which were down 12% due in part to the expiration of a low margin supply contract and the lack of availability of rail transportation. Total ready-mix concrete sales increased $2.7 million on 10% higher average prices and 6% lower volume. Average prices for our major products have continued to improve. Market conditions have continued to support the current level of pricing.

Cost of Products Sold. Cost of products sold for the three-month period ended August 31, 2006 was $205.3 million, an increase of $11.1 million from the prior year period. Overall energy costs were comparable to the prior year period. Cement unit costs increased 5%. Stone, sand and gravel unit costs increased 12%. Reduced shipments increased overall unit cost of sales. Ready-mix concrete unit costs increased 10% primarily due to the increased cost of its cement and aggregate raw materials.

Selling, General and Administrative. Selling, general and administrative expense for the three-month period ended August 31, 2006 was $21.1 million, a decrease of $2.2 million from the prior year period. Operating selling, general and administrative expense increased $1.0 million primarily due to higher incentive compensation expense. Corporate selling, general and administrative expense decreased $3.2 million primarily due to lower stock-based compensation expense.

Other Income. Other income for the three-month period ended August 31, 2006 was $3.6 million, a decrease of $600,000 from the prior year period. Operating other income increased $700,000 primarily as a result of higher royalty income. Corporate other income decreased $1.3 million primarily as a result of lower real estate income.

Interest Expense

Interest expense for the three-month period ended August 31, 2006 was $5.5 million, a decrease of $3.7 million from the prior year period. Interest expense capitalized in conjunction with our Oro Grande, California cement plant expansion and modernization project reduced the amount of interest expense recognized by $1.8 million in the current period. Total interest expense to be capitalized related to this project during the two year construction period is currently estimated at $25 million. Also contributing to lower interest expense was our prior year debt refinancing in connection with the spin-off of Chaparral Steel Company.

Loss on Debt Retirements and Spin-off Charges

Loss on debt retirements and spin-off charges for the three-month period ended August 31, 2005 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. In addition, we incurred $5.3 million in charges related to the spin-off of Chaparral in July 2005.

Income Taxes

Federal income taxes for the interim periods ended August 31, 2006 and 2005 have been included in the accompanying financial statements on the basis of an estimated annual rate for continuing operations. The estimated annualized rate for continuing operations does not include the tax impact of the loss on debt retirements and Chaparral spin-off charges. The estimated annualized rate for continuing operations excluding these charges is 32.0% for 2006 compared to 29.4% for 2005. The estimated effective rate for discontinued operations is 35% for 2005, and reflects Chaparral’s allocable share of such tax as prescribed in our tax sharing agreement with Chaparral.

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 presented as discontinued operations. The three-month period ended August 31, 2005 includes steel operations through the July 29, 2005 spin-off date.

 

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LIQUIDITY AND CAPITAL RESOURCES

In addition to cash and cash equivalents of $66.3 million at August 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 $39.1million at August 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 August 31, 2006, $27.3 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 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.

The 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. In connection with certain of our benefit plans, we have purchased life insurance contracts having a total cash surrender value of $100.1 million as of August 31, 2006. During fiscal year 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.

Capital Expenditure Commitments. 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 excluding capitalized interest related to the project. We expect our capital expenditures for 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 for the three-month period ended August 31, 2006 was $36.1 million compared to $14.4 million for the prior year period. The increase resulted primarily from increased net income and changes in working capital items. Accounts receivable increased $6.2 million primarily as a result of higher selling prices. Accounts payable and accrued expenses decreased $2.8 million primarily as a result of interest and incentive compensation payments, offset in part by higher income tax accruals.

 

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Net cash used by continuing investing activities for the three-month period ended August 31, 2006 was $53.7 million compared to $8.9 million for the prior year period. Capital expenditures incurred in connection with the expansion and modernization of our Oro Grande, California cement plant were $47.7 million, up $44.1 million from the prior year period. Capital expenditures for normal replacement and technological upgrades of existing equipment and acquisitions to sustain our existing operations were $16.4 million, up $9.7 million from the prior year period. In the current period, we decreased our investment in auction rate securities by $11.5 million.

Net cash used by continuing financing activities for the three-month period ended August 31, 2006 was $200,000 compared to $450.9 million for the prior year period. In the prior year period 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 $7.1 million in debt issuance costs, received a cash dividend of $341.1 million from Chaparral and used $112.0 million of cash and cash equivalents on hand.

Net cash provided by discontinued operations was $331.4 million for the three-month period ended August 31, 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 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 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.

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.

Critical 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. The critical accounting policies that affect the more complex judgments and estimates are described in our Annual Report on Form 10-K for the year ended May 31, 2006.

 

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New Accounting Standards.

Stock-based Compensation. Effective June 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” utilizing the modified prospective transition method. Under this transition method, we account for awards granted prior to adoption, but for which the vesting period is not complete on a prospective basis, with expense being recognized in our statement of operations based on the grant date fair value estimated in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation.” We use the Black-Scholes option-pricing model to determine the fair value of stock options granted as of the date of grant. We use the average stock price on the date of grant to determine the fair value of restricted stock awards granted. The impact of recognizing compensation expense related to stock options using the fair value recognition provisions of SFAS No. 123R for the three-month period ended August 31, 2006 was $600,000 (net of tax benefit of $100,000) or $.02 per basic and diluted share. The results for periods prior to June 1, 2006 have not been restated.

SFAS No. 123R also requires that the benefits associated with tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as previously required. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts can not be estimated, because they depend on, among other things, when employees exercise stock options. For the three-month period ended August 31, 2006 excess tax benefits recognized in financing cash flows were $900,000.

Inventory Costs. On June 1, 2006, we adopted SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. 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 did not have an effect on our consolidated financial position or results of operations.

Accounting for Mining Stripping Costs. On June 1, 2006, we adopted, Emerging Issues Task Force Issue 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” which 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. As of May 31, 2006, the balance of our capitalized post-production stripping costs was $7.9 million. In accordance with the transition provision of EITF 04-6, we wrote off these deferred costs, effective June 1, 2006, and recorded a charge to retained earnings of $4.9 million, net of tax benefits of $3.0 million. We will now 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 EITF 04-6 will have a material impact on our financial position or results of operations for periods following adoption.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

Certain statements contained in this quarterly 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,” of our Annual Report on Form 10-K for the year ended May 31, 2006.

 

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

During the three-month period ended August 31, 2006 we implemented new general ledger and fixed asset systems. We expect these systems to improve our control environment by automating and standardizing manual processes. There were no other significant changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. We did not purchase any of our Common Stock on the open market during the three-month period ended August 31, 2006. However, we repurchased shares of our Common Stock in connection with so-called “stock swap exercises” of employee stock options in which shares are surrendered or deemed surrendered to us to pay the exercise price or to satisfy tax withholding obligations. The following table presents information with respect to such repurchases.

 

Period

  

(a)

Total
Number

of Shares

Purchased

  

(b)

Average

Price Paid

per Share

  

(c)

Total Number

of Shares Purchased
as Part of Publicly
Announced Plans

or Programs

  

(d)

Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans

or Programs

June 1, 2006 - June 30, 2006

   —      $ —      N/A    N/A

July 1, 2006 - July 31, 2006

   605      53.40    N/A    N/A

August 1, 2006 - August 31, 2006

   —        —      N/A    N/A
                     

Total

   605    $ 53.40    N/A    N/A
                     

 

Item 6. Exhibits

The following exhibits are included herein:

 

  (12.1)  Computation of Ratios of Earnings to Fixed Charges

 

  (15.1)  Letter re: Unaudited Interim Financial Information

 

  (31.1)  Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

  (31.2)  Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

  (32.1)  Section 1350 Certification of Chief Executive Officer

 

  (32.2)  Section 1350 Certification of Chief Financial Officer

The remaining exhibits have been omitted because they are not applicable or the information required therein is included elsewhere in the financial statements or notes thereto.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    TEXAS INDUSTRIES, INC.
September 29, 2006     /s/ Richard M. Fowler
    Richard M. Fowler
   

Executive Vice President - Finance and

Chief Financial Officer

(Principal Financial Officer)

September 29, 2006     /s/ James R. McCraw
    James R. McCraw
   

Vice President – Accounting and Risk Management

(Principal Accounting Officer)

 

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INDEX TO EXHIBITS

 

Exhibits     
12.1   

Computation of Ratios of Earnings to Fixed Charges

15.1   

Letter re: Unaudited Interim Financial Information

31.1   

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2   

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1   

Section 1350 Certification of Chief Executive Officer

32.2   

Section 1350 Certification of Chief Financial Officer

 

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