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Texas Industries 10-Q 2009 Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One)
For the quarterly period ended November 30, 2008 OR
For the transition period from to Commission File Number 1-4887 TEXAS INDUSTRIES, INC. (Exact Name of Registrant as Specified in Its Charter)
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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 27,663,530 shares of the Registrant’s Common Stock, $1.00 par value, outstanding as of January 5, 2009.
Table of ContentsTEXAS INDUSTRIES, INC. AND SUBSIDIARIES
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Table of ContentsPART I. FINANCIAL INFORMATION
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF OPERATIONS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsCONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
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Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Texas Industries, Inc. and subsidiaries is a leading supplier of heavy construction materials in the United States through our 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 lightweight aggregates, produced and sold through our aggregates segment, and packaged concrete mix, mortar, sand and related products, produced and sold through our consumer products segment. Our facilities are concentrated primarily in Texas, Louisiana and California. When used in these notes the terms “Company,” “we,” “us,” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise. 1. 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 six-month period ended November 30, 2008, are not necessarily indicative of the results that may be expected for the year ended May 31, 2009. 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, 2008. Principles of Consolidation. The consolidated financial statements include the accounts of Texas Industries, Inc. and all subsidiaries. The consolidated financial statements also include the accounts of a qualified intermediary trust, in which we are the primary beneficiary. The trust accounts were established in connection with our tax deferred like-kind-exchange property transactions under Section 1031 of the Internal Revenue Code. 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, investment grade commercial paper issued by major corporations and financial institutions and U.S. treasury obligations. 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. 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.
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Table of ContentsProperty, plant and equipment is recorded at cost. Costs incurred to construct certain long-lived assets include capitalized interest which is amortized over the estimated useful life of the related asset. Interest is capitalized during the construction period of qualified assets based on the average amount of accumulated expenditures and the weighted average interest rate applicable to borrowings outstanding during the period. If accumulated expenditures exceed applicable borrowings outstanding during the period, capitalized interest is allocated to projects under construction on a pro rata basis. Provisions for depreciation are computed generally using the straight-line method. Useful lives for our primary operating facilities range from 10 to 25 years with certain cement facility structures having useful lives of 40 years. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials. The cost of all post-production stripping costs, which represents costs of removing overburden and waste materials to access mineral deposits, is recognized as a cost of the inventory produced during the period the stripping costs are incurred. Maintenance and repairs are charged to expense as incurred. Goodwill. Management tests goodwill for impairment annually by reporting unit in the fourth quarter of our fiscal year. 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 November 30, 2008 and May 31, 2008 resulted from the acquisition of Riverside Cement Company and is identified with our California cement operations. Goodwill having a carrying value of $1.7 million at November 30, 2008 and May 31, 2008 resulted from the acquisition of ready-mix operations in Texas and Louisiana and is identified with our consumer products operations. In light of current market conditions, we assessed our California cement operations for impairment during our November 2008 quarter. Our assessment indicated that there was no impairment of goodwill. The assessment was based in part on assumptions regarding the timing of economic recovery in our California market. The current market conditions and economic climate are very volatile and it is possible that the current recession could last longer and have a bigger impact on our operations than was anticipated. Should the recession become more severe or last longer than anticipated, we could recognize an impairment charge in the future with respect to goodwill. Management will continue to evaluate and monitor the economic environment and perform its annual impairment test in the fourth quarter of our current fiscal year. Real Estate and Investments. Surplus real estate and real estate acquired for development of high quality industrial, office or multi-use parks totaled $6.0 million at both November 30, 2008 and May 31, 2008. Investments include life insurance contracts purchased in connection with certain of our benefit plans. The contracts, recorded at their net cash surrender value, totaled $8.3 million (net of distributions of $93.4 million plus accrued interest) at November 30, 2008 and $6.0 million (net of distributions of $88.1 million plus accrued interest) at May 31, 2008. We can elect to receive distributions chargeable against the cash surrender value of the policies in the form of borrowings or withdrawals or we can elect to surrender the policies and receive their net cash surrender value. Distributions totaling $5.4 million and $70.3 million were received in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Investments at both November 30, 2008 and May 31, 2008 include $19.2 million representing the long-term portion of a note due May 31, 2010. The note was received in connection with the sale of land associated with our expanded shale and clay operations in south Texas in 2006. In addition, investments at May 31, 2008 include $28.7 million of cash investments representing the proceeds from sales of aggregate property which were held in escrow by a qualified intermediary trust for reinvestment in deferred like-kind-exchange transactions. Designated property acquisitions totaling $25.5 million were completed during the six-month period ended November 30, 2008. The remaining $3.2 million of cash investments is no longer designated for property acquisitions and is included in cash and cash equivalents. Deferred Charges and Other. Deferred charges are composed primarily of debt issuance costs that totaled $10.1 million at November 30, 2008 and $6.4 million at May 31, 2008. The costs are amortized over the term of the related debt. Other Credits. Other credits totaled $58.6 million at November 30, 2008 and $66.8 million at May 31, 2008 and are composed primarily of liabilities related to our retirement plans, deferred compensation agreements and asset retirement obligations.
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Table of ContentsAsset Retirement Obligations. We record a liability for legal obligations associated with the retirement of our long-lived assets in the period in which it is incurred if a reasonable estimate of fair value of the obligation can be made. The discounted fair value of the obligation incurred in each period is added to the carrying amount of the associated assets and depreciated over the lives of the assets. 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. Changes in asset retirement obligations are as follows:
Accumulated Other Comprehensive Loss. Amounts recognized in accumulated other comprehensive loss represent adjustments related to a defined benefit retirement plan and a postretirement health benefit plan covering approximately 600 employees and retirees of our California cement subsidiary. The amounts totaled $7.0 million (net of tax of $4.1 million) at November 30, 2008 and $7.1 million (net of tax of $4.2 million) at May 31, 2008. Comprehensive income for the three-month and six-month periods ending November 30, 2008 and November 30, 2007 consisted of net income and amounts in accumulated other comprehensive loss recognized in the periods as components of net periodic postretirement benefit cost, net of tax. Comprehensive income was $3.9 million and $29.3 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $14.7 million and $47.2 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. 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. We have entered into various oil and gas lease agreements on property we own in north Texas. The terms of the agreements include the payment of a lease bonus and royalties on any oil and gas produced. However, we cannot guaranty what the level of royalties, if any, will be. Lease bonus payments received resulted in income of $0.1 million and $0.7 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $4.7 million and $0.7 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Routine sales of surplus operating assets and real estate resulted in gains of $0.1 million and $1.3 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $0.4 million and $2.0 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. In addition, other income in the six-month period ended November 30, 2008 includes a gain of $1.7 million from the sale of emission credits associated with our California cement operations. Income Taxes. Accounting for income taxes uses the liability method of recognizing and classifying deferred income taxes. Texas Industries, Inc. (the parent 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. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense.
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Table of ContentsStock-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. Options with graded vesting are valued as single awards and the related compensation cost is recognized using a straight-line attribution method over the shorter of the vesting period or required service period adjusted for estimated forfeitures. We use the average stock price on the date of grant to determine the fair value of restricted stock awards paid. A liability, which is included in other credits, is recorded for stock appreciation rights, deferred compensation agreements and stock awards expected to be paid in cash, based on the average stock price at the end of each period until such awards are paid. 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 our former stock awards program. The deferred compensation is denominated in shares of our common stock and issued in accordance with the terms of the agreement subsequent to retirement or separation from us. 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 net income and the outstanding shares for the dilutive effect of stock options, restricted shares and awards. Basic and Diluted EPS are calculated as follows:
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Table of ContentsRecent Accounting Developments. In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. We adopted this SFAS effective June 1, 2008. The adoption of SFAS No. 157 did not have a current material impact on our consolidated financial statements. In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” This standard permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. We adopted this SFAS effective June 1, 2008. At this time, we have not elected to use the fair value measures permitted by this standard. 2. Working Capital Working capital totaled $198.5 million at November 30, 2008, compared to $171.7 million at May 31, 2008. Selected components of working capital are summarized below. Receivables consist of:
Accounts receivable are presented net of allowances for doubtful receivables of $2.8 million at November 30, 2008 and $2.1 million at May 31, 2008. Provisions for bad debts charged to expense were $0.9 million and $0.5 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Uncollectible accounts written off totaled $0.2 million and $0.1 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Notes receivable included in current receivables relate to routine sales of surplus operating assets and real estate. Inventories consist of:
Inventories are stated at cost (not in excess of market) with finished products, work in process and raw material inventories using the last-in, first-out (“LIFO”) method and parts and supplies inventories using the average cost method. 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 costs 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 $38.8 million at November 30, 2008 and $32.6 million at May 31, 2008.
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Table of ContentsAccrued interest, wages and other items consist of:
3. Long-Term Debt Long-term debt consists of:
Senior Secured Revolving Credit Facility. On November 21, 2008, we amended our August 15, 2007 credit agreement to, among other things, increase the permitted leverage ratio, secure our obligations under the credit facility and limit the amount that can be borrowed under the credit agreement to the lesser of a borrowing base equal to the sum of 80% of our accounts receivable and 50% of our inventory or the $200 million stated principal amount of the credit agreement. The credit facility expires on August 15, 2012. The borrowing base at November 30, 2008 was $170.8 million. 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. No borrowings were outstanding at November 30, 2008; however, $21.5 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 2.5% to 3.5%, or at a base rate (which is the higher of the federal funds rate plus 0.5%, the prime rate or the one-month LIBOR rate plus 1.0%) plus a margin of 1.5% to 2.5%. The interest rate margins are subject to adjustments based on our leverage ratio. Commitment fees are payable currently at an annual rate of 0.5% 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 interests in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries, if any. The credit facility contains covenants restricting, among other things, prepayment or redemption of the senior notes, distributions, dividends and repurchases of capital stock and other equity interests, acquisitions and investments, indebtedness, liens and affiliate transactions. Cash dividends paid on our common stock are limited to an annual amount of $10.0 million. We are required to comply with certain financial tests and to maintain certain financial ratios, such as leverage and interest coverage ratios. We were in compliance with all of these loan covenants as of November 30, 2008.
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Table of Contents7.25% Senior Notes. On August 18, 2008, we sold $300 million aggregate principal amount of additional 7.25% senior notes at an offering price of 93.25%. The additional notes were issued under our existing indenture dated July 6, 2005. The net proceeds were used to repay our $150 million senior term loan and borrowings outstanding under our senior secured revolving credit facility in the amount of $29.5 million, with additional proceeds available for general corporate purposes. We recognized a loss on debt retirement of $0.9 million representing a write-off of debt issuance costs associated with the mandatory prepayment of the term loan. At November 30, 2008, we had $550 million aggregate principal amount of 7.25% senior notes outstanding. Under the indenture, 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. 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. Other. Maturities of long-term debt, excluding the capital lease obligation, for each of the five years succeeding November 30, 2008 are none for 2009 through 2012 and $550.0 million for 2013. The total amount of interest paid was $15.2 million and $12.2 million during the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Interest capitalized was $5.0 million and $13.3 million during the six-month periods ended November 30, 2008 and November 30, 2007, respectively. 4. Commitments During October 2007, we commenced construction on a project to expand our Hunter, Texas cement plant. As of November 30, 2008, we have expended $193.4 million, excluding capitalized interest of $6.9 million related to the project. In light of current economic and market conditions we plan to delay construction on the project. We believe that if the project were completed when originally scheduled, cement demand levels in Texas would likely not permit the new kiln to operate at a profitable level. We do expect the demand for cement to rebound in the future and to resume construction on the project when warranted by future economic and market conditions. We expect to be able to begin the startup and commissioning of the project within 12 months after resumption of construction. The delay is expected to begin in the May 2009 quarter at which time we expect to have expended approximately $300 million, excluding capitalized interest of approximately $16 million related to the project. The delay is expected to defer approximately $40 million to $60 million of capital expenditures. 5. Shareholders’ Equity Common stock consists of:
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Table of ContentsThere 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 40,000 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 November 30, 2008. Pursuant to a Rights Agreement, in November 2006, 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 one-thousandth of a share of the Series B Junior Participating Preferred Stock at a price of $300, subject to adjustment. The rights will expire on November 1, 2016 unless the date is extended or the rights are earlier redeemed or exchanged by us pursuant to the Rights Agreement. 6. Stock-Based Compensation Plans The Texas Industries, Inc. 2004 Omnibus Equity Compensation Plan (the “2004 Plan”) provides that, in addition to other types of awards, non-qualified and incentive stock options to purchase Common Stock may be granted to employees and non-employee directors at market prices at date of grant. In addition, non-qualified and incentive stock options remain outstanding under our 1993 Stock Option Plan. Options become exercisable in installments beginning one year after the date of grant and expire ten years after the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. Options with graded vesting are 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 adjusted for estimated forfeitures. The weighted-average grant date fair value of options granted during the six-month period ended November 30, 2008 was $23.95 based on weighted average assumptions for expected volatility of .360, expected lives of 10 years, risk-free interest rates of 4.00% and expected dividend yields of .62%. Expected volatility is based on an analysis of historical volatility of our common stock. Expected lives of options are determined based on the historical share option exercise experience of our optionees. Risk-free interest rates are determined using the implied yield currently available for zero coupon U.S. treasury issues with a remaining term equal to the expected life of the options. Expected dividend yields are based on the approved annual dividend rate in effect and the market price of our common stock at the time of grant. A summary of option transactions for the six-month period ended November 30, 2008, follows:
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Table of ContentsThe following table summarizes information about stock options outstanding as of November 30, 2008.
Outstanding options expire on various dates to August 1, 2018. We have reserved 1,630,817 shares for future awards under the 2004 Plan as of November 30, 2008. As of November 30, 2008, the aggregate intrinsic value (the difference in the closing market price of our common stock of $30.86 and the exercise price to be paid by the optionee) of stock options outstanding was $5.0 million. The aggregate intrinsic value of exercisable stock options at that date was $5.0 million. 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 $1.1 million and $0.3 million for the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $1.9 million and $1.7 million for the six-month periods ended November 30, 2008 and November 30, 2007, respectively. We have provided additional stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program. At November 30, 2008, outstanding stock appreciation rights totaled 155,979 shares, deferred compensation agreements to be settled in cash totaled 99,253 shares, deferred compensation agreements to be settled in common stock totaled 7,040 shares, unvested restricted stock payments totaled 8,500 shares and stock awards totaled 5,645 shares. Other credits included $4.7 million at November 30, 2008 and $14.4 million at May 31, 2008 representing accrued stock-based compensation which is expected to be settled in cash. Total stock-based compensation included in selling, general and administrative expense (credit) was $(3.8) million and $0.4 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $(7.8) million and $(1.3) million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. The impact of changes in our company’s stock price on stock-based awards accounted for as liabilities reduced stock-based compensation $4.6 million and $0.8 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $9.7 million and $3.8 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. The total tax expense recognized in our statements of operations for stock-based compensation was $1.6 million and $0.1 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $3.3 million and $0.9 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. The total tax benefit realized for stock-based compensation was $0.6 million and $0.1 million in the three-month periods ended November 30, 2008 and November 30, 2007, respectively, and $1.8 million and $3.4 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. As of November 30, 2008, $8.2 million of total unrecognized compensation cost related to stock options, stock appreciation rights contracts, restricted stock payments and stock awards is expected to be recognized. We currently expect to recognize in the years succeeding November 30, 2008 approximately $3.3 million of this stock-based compensation expense in 2009, $2.5 million in 2010, $1.6 million in 2011, $0.7 million in 2012 and $0.1 million in 2013.
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Table of Contents7. 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 and six-month periods ended November 30, 2008 and November 30, 2007, was as follows:
Financial Security Defined Benefit Plans. We have a series of financial security plans 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 financial security plan benefit expense charged to costs and expenses for the three-month and six-month periods ended November 30, 2008 and November 30, 2007, was as follows:
8. Income Taxes Income taxes for the interim periods ended November 30, 2008 and November 30, 2007 have been included in the accompanying financial statements on the basis of an estimated annual rate. The primary reason that the tax rate differs from the 35% federal statutory corporate rate is due to percentage depletion that is tax deductible, state income taxes and deductions for income from qualified domestic production activities. Our estimated effective tax rate for fiscal year 2009 is 28.3% compared to 31.2% for fiscal year 2008. We made income tax payments of $2.1 million and $21.3 million during the six-month periods ended November 30, 2008 and November 30, 2007, respectively. We received income tax refunds of $0.3 million and $0.6 million during the six-month periods ended November 30, 2008 and November 30, 2007, respectively.
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Table of ContentsEffective June 1, 2007, we adopted Financial Accounting Standards Board Interpretation 48, “Accounting for Uncertainty in Income Taxes.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have no significant reserves for uncertain tax positions and no adjustments to such reserves were required upon adoption of this interpretation. Interest and penalties resulting from audits by tax authorities have been immaterial and are included in income tax expense in the consolidated statements of operations. In addition to our federal income tax return, we file income tax returns in various state jurisdictions. We are no longer subject to federal or state income tax examinations by tax authorities for years prior to 2004. Our federal income tax returns for 2004 through 2006 are currently under examination. We do not anticipate that any adjustments would have a material effect on our financial position. 9. Legal Proceedings and Contingent Liabilities We are subject to federal, state and local environmental laws, regulations and permits concerning, among other matters, air emissions and wastewater discharge. We intend to comply with these laws, regulations and permits. 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 of these laws, regulations and permits, or from private parties alleging that our operations have injured them or their property. 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. In March 2008, the South Coast Air Quality Management District, or SCAQMD, informed one of our subsidiaries, Riverside Cement Company (Riverside), that it believes that dust blowing from open stockpiles of gray clinker or other operations at our Crestmore plant in Riverside, California caused the level of hexavalent chromium, or chrome 6, in the vicinity of the plant to be elevated above ambient air levels. Chrome 6 has been identified by the State of California as a carcinogen. Riverside immediately began taking steps, in addition to its normal dust control procedures, to reduce dust from plant operations and eliminate the use of open clinker stockpiles. The SCAQMD has placed an air monitoring station at the downwind property line closest to the open clinker stockpiles. Over the period of February 12 to June 23, 2008, the average level of chrome 6 reported by the SCAQMD at this station was 1.26 nanograms per cubic meter, or ng/m³. Since that time, the average level has decreased. The average level of chrome 6 reported by the SCAQMD at other air monitoring stations in areas around the plant ranged from 0.10 to 0.59 ng/m³ for the same sampling period. In public presentations, the SCAQMD compared the level of exposure for various time periods at the air monitor on our property line with the following employee exposure standards established by regulatory agencies:
In public meetings conducted by the SCAQMD, it stated that the risk of long term exposure immediately adjacent to the plant is similar to living close to a busy freeway or rail yard, and it estimated an increased risk of 250 to 500 cancers per one million people, assuming continuous exposure for 70 years. Riverside has not determined how this particular risk number was calculated by SCAQMD. However, the Riverside Press Enterprise reported in a May 30, 2008 story that “John Morgan, a public health and epidemiology professor at Loma Linda University, said he looked at cancer cases reported from 1996 to 2005 in the … census [tract] nearest the [plant] and found no excess cases. That includes lung cancer, which is associated with exposure to hexavalent chromium.” In late April 2008, a lawsuit was filed in Riverside County Superior Court of the State of California styled Virginia Shellman, et al. v. Riverside Cement Holdings Company, et al. The lawsuit purports to be a class action complaint for medical monitoring for a putative class defined as individuals who were allegedly exposed to chrome 6 emissions from our Crestmore cement plant. The complaint alleges an increased risk of future illness due to the exposure to chrome 6 and other toxic chemicals. The suit requests, among other things, punitive and exemplary damages and establishment and funding of a medical testing and monitoring program for the class until their exposure to chrome 6 is no longer a threat to their health.
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Table of ContentsIn addition to the Shellman lawsuit, we have been served with three additional lawsuits filed in the same court in mid July 2008. Each purports to be a class action complaint for medical monitoring for a putative class defined as students who attended or presently attend a specified school in the vicinity of our Crestmore plant and who were allegedly exposed to chrome 6 emissions from the plant. The putative class in each of these cases is a subset of the putative class in the Shellman case, and the allegations and request for relief are nearly identical to those in the Shellman case. As a consequence, the court has stayed these three lawsuits until the Shellman lawsuit is finally determined. In August 2008, a lawsuit was filed in the same court against several of our subsidiaries by an individual who, prior to her recent death, had lived in the general vicinity of the Crestmore plant and had suffered strokes and lung cancer. The plaintiff alleges causes of action for nuisance, trespass, negligence, negligence per se, and willful misconduct based on the alleged exposure to chrome 6 and other toxic or harmful substances in the air, surface water and ground water caused by our plant. The plaintiff requests general and punitive damages for property damage, physical injury, emotional distress, medical costs and loss of earnings. In October and November 2008, four additional lawsuits were filed in the same court making allegations similar to the Shellman lawsuit. The four additional suits involve claims for personal injury and wrongful death by approximately 760 individual plaintiffs who were allegedly exposed to chrome 6 emissions from the Crestmore plant. The plaintiffs allege causes of action for, among other things, negligence, intentional and negligent infliction of emotional distress, trespass, public and private nuisance, strict liability, fraudulent concealment, wrongful death and loss of consortium. The plaintiffs request, among other things, general and punitive damages, medical expenses, loss of earnings, property damages and medical monitoring costs. We will vigorously defend all of these suits but we cannot predict what liability, if any, could arise from them. We also cannot predict whether any other suits may be filed against us alleging damages due to injuries to persons or property caused by claimed exposure to chrome 6. On July 3, 2008, the California Attorney General and the Riverside County District Attorney filed a complaint styled The People of the State of California v. TXI Riverside, Inc., TXI California, Inc. and Riverside Cement Holdings Company. The complaint against the two general partners in Riverside Cement Company and a subsidiary of Riverside Cement Company alleges that the defendants failed to warn persons of exposure to chrome 6 under California’s Safe Drinking Water and Toxic Enforcement Act of 1986, which is known as Proposition 65. It further alleges that defendants have known since at least 2006 that the clinker at the Crestmore plant contains chrome 6, causing exposure to persons present in the surrounding area. The complaint also alleges that knowingly and intentionally exposing individuals to chrome 6 without first giving warning to them violates Proposition 65 and constitutes unfair competition within the meaning of the California Business and Professions Code. The complaint requests the award of civil penalties and injunctive relief. We will vigorously defend the suit but no discovery has occurred, and we cannot predict what liability, if any, could arise from the complaint. We are defendants in other lawsuits which arose in the normal course of business. In management’s judgment the ultimate liability, if any, from such other legal proceedings will not have a material effect on our consolidated financial position or results of operations. 10. 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 lightweight aggregates. Through the consumer products segment we produce and sell ready-mix concrete as our principal product, as well as packaged concrete mix, mortar, sand 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, 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, real estate and other financial assets not identified with a business segment. We currently report cement treated material operations and transportation overhead activities, both of which are not significant to operating profit, in our cement segment. Cement treated material operations were previously reported in our aggregate segment. Our transportation overhead activities were previously reported as a part of unallocated overhead and other income-net. Prior period information has been reclassified to conform to the current period presentation.
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Table of ContentsThe following is a summary of operating results and certain other financial data for our business segments.
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Table of ContentsAll sales were made in the United States during the periods presented with no single customer representing more than 10 percent of sales. Other income in the six-month period ended November 30, 2008 includes $4.7 million in lease bonus payments received upon the execution of oil and gas lease agreements on property we own in north Texas, including $2.8 million associated with our cement operations, $0.1 million associated with our aggregate operations, $0.2 million associated with our ready-mix concrete operations and $1.6 million associated with our corporate real estate activities. Other income for the six-month period ended November 30, 2008 also includes a gain of $1.7 million from the sale of emission credits associated with our California cement operations. Cement capital expenditures, including capitalized interest, incurred in connection with the expansion of our Hunter, Texas cement plant was $122.1 million and $21.2 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. In addition, cement capital expenditures, including capitalized interest, incurred in connection with the expansion and modernization of our Oro Grande, California cement plant were $1.3 million and $117.2 million in the six-month periods ended November 30, 2008 and November 30, 2007, respectively. The project was completed in May 2008. Aggregate capital expenditures include $25.3 million in the six-month period ended November 30, 2008 incurred to acquire aggregate operations in central Texas through a deferred like-kind-exchange transaction. Other capital expenditures incurred represent normal replacement and technological upgrades of existing equipment and acquisitions to sustain existing operations in each segment. The following is a summary of assets used in each of our business segments.
All of our identifiable assets are located in the United States. 11. Condensed Consolidating Financial Information On July 6, 2005 and August 18, 2008, Texas Industries, Inc. (the parent company) issued $250 million and $300 million aggregate principal amounts of its 7.25% Senior Notes, respectively. All consolidated subsidiaries of the parent company are 100% owned and 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 and guarantor subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor subsidiaries using the equity method of accounting.
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Table of ContentsREPORT 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 November 30, 2008, and the related consolidated statements of operations for the three- and six-month periods ended November 30, 2008 and 2007 and cash flows for six-month periods ended November 30, 2008 and 2007. 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, 2008, 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 10, 2008, 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, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Fort Worth, Texas January 7, 2009
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RESULTS OF OPERATIONS We are a leading supplier of heavy 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 lightweight aggregates, produced and sold through our aggregates segment, and packaged concrete mix, mortar, sand and related products, produced and sold through our consumer products segment. Our facilities are concentrated primarily in Texas, Louisiana and California. Management uses segment operating profit as its principal measure to assess performance and to allocate resources. Business segment operating profit consists of net sales less operating costs and expenses that are directly attributable to the segment. Unallocated overhead and other income includes income and operating overhead expenses such as environmental, engineering and other administrative activities that directly relate to some or all of our segments and are not allocated. Corporate includes non-operating income and expenses related to administrative, financial, legal, human resources and real estate activities. The following is a summary of operating results for our business segments and certain other operating information related to our principal products. Cement Operations
Three months ended November 30, 2008 Operating profit for the three-month period ended November 30, 2008 was $9.5 million, a decrease of $25.0 million from the prior year period. Total cement sales for the three-month period ended November 30, 2008 decreased $24.2 million from the prior year period as construction activity declined in both our Texas and California market areas. Our Texas market area accounted for approximately 70% of total cement sales in the current period compared to 68% of total cement sales in the prior year period. In our Texas market area cement shipments decreased 19% from the prior year period and average prices increased 3%. In our California market area cement shipments decreased 14% from the prior year period and average prices decreased 14%.
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Table of ContentsCost of products sold for the three-month period ended November 30, 2008 increased $0.6 million from the prior year period. The effect of lower shipments was offset by higher unit costs. Cement unit costs increased 23% from the prior year period. In addition to higher energy costs, scheduled maintenance at our north Texas cement plant of $8.0 million and higher depreciation at our Oro Grande, California cement plant of $3.3 million contributed to increased costs. Selling, general and administrative expense for the three-month period ended November 30, 2008 increased $1.4 million from the prior year period primarily due to higher legal and other professional expenses. Other income for the three-month period ended November 30, 2008 increased $0.3 million from the prior year period primarily due to higher oil and gas royalty income. Six months ended November 30, 2008 Operating profit for the six-month period ended November 30, 2008 was $26.8 million, a decrease of $25.6 million from the prior year period. Total cement sales for the six-month period ended November 30, 2008 decreased $36.2 million from the prior year period as construction activity declined in our California market area. Construction activity also declined in our Texas market area during the November 2008 quarter. Our Texas area accounted for approximately 70% of total cement sales in the current period compared to 65% of total cement sales in the prior year period. In our Texas market area cement shipments decreased 10% from the prior year period and average prices increased 2%. In our California market area cement shipments decreased 16% from the prior year period and average prices decreased 13%. Cost of products sold for the six-month period ended November 30, 2008 decreased $3.9 million from the prior year period. The effect of lower shipments was offset in part by higher unit costs. Cement unit costs increased 10% from the prior year period. In addition to higher energy costs, scheduled maintenance at our cement plants of $4.0 million and higher depreciation at our Oro Grande, California cement plant of $6.6 million contributed to increased costs. The higher energy costs were partially offset by operating efficiencies that lowered the energy usage per ton of clinker produced. Selling, general and administrative expense for the six-month period ended November 30, 2008 increased $1.1 million from the prior year period primarily due to higher legal and other professional expenses offset in part by lower incentive compensation expense. Other income for the six-month period ended November 30, 2008 increased $4.6 million from the prior year period. Other income in the current period includes a lease bonus payment of $2.8 million received upon the execution of an oil and gas lease on property we own in north Texas. In addition, other income in the current period includes a gain of $1.7 million from the sale of emission credits associated with our California cement operations.
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Table of ContentsAggregate Operations
Three months ended November 30, 2008 Operating profit for the three-month period ended November 30, 2008 was $6.7 million, a decrease of $4.2 million from the prior year period as construction activity declined in our market areas. Total segment sales for the three-month period ended November 30, 2008 decreased $13.4 million from the prior year period as total stone, sand and gravel sales were down $7.7 million. Total stone, sand and gravel shipments decreased 21% from the prior year period and average prices increased 5%. Cost of products sold for the three-month period ended November 30, 2008 decreased $8.8 million from the prior year period primarily due to lower shipments. Stone, sand and gravel unit costs increased primarily due to the impact of production levels on unit costs. Selling, general and administrative expense for the three-month period ended November 30, 2008 decreased $0.1 million from the prior year period primarily due to lower incentive compensation expense. Other income for the three-month period ended November 30, 2008 increased $0.2 million from the prior year period primarily due to higher oil and gas income. Six months ended November 30, 2008 Operating profit for the six-month period ended November 30, 2008 was $15.6 million, a decrease of $6.7 million from the prior year period as construction activity declined in our market areas during the November 2008 quarter. Total segment sales for the six-month period ended November 30, 2008 decreased $11.8 million from the prior year period as total stone, sand and gravel sales were down $6.8 million. Total stone, sand and gravel shipments decreased 14% from the prior year period and average prices increased 7%. Cost of products sold for the six-month period ended November 30, 2008 decreased $4.4 million from the prior year period primarily due to lower shipments. Stone, sand and gravel unit costs increased primarily due to the impact of production levels on unit costs. Selling, general and administrative expense for the six-month period ended November 30, 2008 decreased $0.5 million from the prior year period primarily due to lower incentive compensation expense. Other income for the six-month period ended November 30, 2008 increased $0.2 million from the prior year period primarily due to higher oil and gas income.
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Table of ContentsConsumer Products Operations
Three months ended November 30, 2008 Operating profit for the three-month period ended November 30, 2008 was $0.7 million, a decrease of $3.9 million from the prior year period as construction activity declined in our market areas. Total segment sales for the three-month period ended November 30, 2008 decreased $17.4 million as total ready-mix concrete sales were down $19.4 million. Total ready-mix concrete volumes decreased 27% from the prior year period and average prices increased 5%. Cost of products sold for the three-month period ended November 30, 2008 decreased $13.4 million from the prior year period primarily due to lower shipments. Overall ready-mix concrete unit costs increased 9% from the prior year period primarily due to higher raw material costs, as well as higher distribution and transportation costs. Our raw material unit costs in the current period increased approximately 7% from the prior year period. Our cost of diesel fuel per gallon in the current period increased approximately 33% from the prior year period. Selling, general and administrative expense for the three-month period ended November 30, 2008 decreased $0.2 million from the prior year period primarily due to lower incentive compensation expense. Other income for the three-month period ended November 30, 2008 decreased $0.2 million from the prior year period as a result of lower gains from the routine sale of surplus operating assets. Six months ended November 30, 2008 Operating profit for the six-month period ended November 30, 2008 was $0.2 million, a decrease of $8.5 million from the prior year period as construction activity declined in our market areas during the November 2008 quarter. Total segment sales for the six-month period ended November 30, 2008 decreased $16.7 million as total ready-mix concrete sales were down $20.5 million. Total ready-mix concrete volumes decreased 16% from the prior year period and average prices increased 4%. Cost of products sold for the six-month period ended November 30, 2008 decreased $7.4 million from the prior year period primarily due to lower shipments during the November 2008 quarter. Overall ready-mix concrete unit costs increased 9% from the prior year period primarily due to higher raw material costs, as well as higher distribution and transportation costs. Our raw material unit costs in the current period increased approximately 7% from the prior year period. Our cost of diesel fuel per gallon in the current period increased approximately 59% from the prior year period.
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Table of ContentsSelling, general and administrative expense for the six-month period ended November 30, 2008 decreased $0.8 million from the prior year period primarily due to lower incentive compensation expense. Other income for the six-month period ended November 30, 2008 was comparable to the prior year period. Other income in the current period includes lease bonus payments of $0.2 million received upon the execution of oil and gas lease agreements on property we own in north Texas offsetting lower gains from the routine sales of surplus assets. Unallocated Overhead and Other Income
Unallocated overhead and other income relate primarily to certain environmental, engineering and other administrative operating activities not attributable to a specific segment. Corporate
Three months ended November 30, 2008 Other income for the three-month period ended November 30, 2008 decreased $1.5 million from the prior year period. The prior year period includes a gain of $0.8 million from the sale of corporate real estate and a bonus payment of $0.7 million received upon the execution of an oil and gas lease agreement on property formerly owned by us that was not associated with any business segment. Selling, general and administrative expense for the three-month period ended November 30, 2008 decreased $6.3 million from the prior year period. The decrease was primarily the result of $1.4 million lower incentive compensation expense and $4.1 million lower stock-based compensation. Our incentive plans are based on financial performance. Our stock-based compensation includes awards expected to be settled in cash, the expense for which is based on the average stock price at the end of each period until the awards are paid. The impact of changes in our stock price reduced stock-based compensation $4.6 million and $0.8 million during three-month periods ended November 30, 2008 and November 30, 2007, respectively. Six months ended November 30, 2008 Other income for the six-month period ended November 30, 2008 was comparable to that of the prior year period. The current year period includes a bonus payment of $1.6 million received upon the execution of an oil and gas lease agreement on property we own in north Texas that is not associated with any business segment. The prior year period includes a gain of $0.8 million from the sale of corporate real estate and a bonus payment of $0.7 million received upon the execution of an oil and gas lease agreement on property formerly owned by us but not associated with any business segment.
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Table of ContentsSelling, general and administrative expense for the six-month period ended November 30, 2008 decreased $10.2 million from the prior year period. The decrease was primarily the result of $3.8 million lower incentive compensation expense and $6.5 million lower stock-based compensation. Our incentive plans are based on financial performance. Our stock-based compensation includes awards expected to be settled in cash, the expense for which is based on the average stock price at the end of each period until the awards are paid. The impact of changes in our stock price reduced stock-based compensation $9.7 million and $3.8 million during six-month periods ended November 30, 2008 and November 30, 2007, respectively. Interest Interest expense incurred for the three-month period ended November 30, 2008 was $12.5 million, of which $3.2 million was capitalized in connection with our Hunter, Texas cement plant expansion project and $9.3 million was expensed. Interest expense incurred for the three-month period ended November 30, 2007 was $7.2 million, all of which was capitalized in connection with our Hunter, Texas and Oro Grande, California cement plant expansion projects. Interest expense incurred for the six-month period ended November 30, 2008 was $21.5 million, of which $5.0 million was capitalized in connection with our Hunter, Texas cement plant expansion project and $16.5 million was expensed. Interest expense incurred for the six-month period ended November 30, 2007 was $13.3 million, all of which was capitalized in connection with our Hunter, Texas and Oro Grande, California cement plant expansion projects. Interest expense incurred for the three-month and six-month periods ended November 30, 2008 increased from the prior year periods $5.3 million and $8.2 million, respectively. The increases were due to higher average outstanding debt and borrowings on life insurance contracts. An additional $9.1 million in interest expense is currently estimated to be capitalized in connection with our Hunter expansion project during the remainder of our current fiscal year. Loss on Debt Retirements On August 18, 2008, we sold $300 million aggregate principal amount of additional 7.25% senior notes due in 2013 at an offering price of $93.25. The net proceeds were used to repay our $150 million senior term loan and borrowings outstanding under our senior revolving credit facility in the amount of $29.5 million. We recognized a loss on debt retirement of $0.9 million representing a write-off of debt issuance costs associated with the mandatory prepayment of the term loan. Income Taxes Income taxes for the interim periods ended November 30, 2008 and November 30, 2007 have been included in the accompanying financial statements on the basis of an estimated annual rate. The primary reason that the tax rate differs from the 35% federal statutory corporate rate is due to percentage depletion that is tax deductible, state income taxes and deductions for income from qualified domestic production activities. Our estimated effective tax rate for fiscal year 2009 is 28.3% compared to 31.2% for fiscal year 2008. LIQUIDITY AND CAPITAL RESOURCES In addition to cash and cash equivalents of $62.3 million at November 30, 2008, our sources of liquidity include cash from operations and borrowings available under our $200 million senior secured revolving credit facility. Senior Secured Revolving Credit Facility. On November 21, 2008, we amended our August 15, 2007 credit agreement to, among other things, increase the permitted leverage ratio, secure our obligations under the credit facility and limit the amount that can be borrowed under the credit agreement to the lesser of a borrowing base equal to the sum of 80% of our accounts receivable and 50% of our inventory or the $200 million stated principal amount of the credit agreement. The credit facility expires on August 15, 2012. The borrowing base at November 30, 2008 was $170.8 million. 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. No borrowings were outstanding at November 30, 2008; however, $21.5 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 2.5% to 3.5%, or at a base rate (which is the higher of the federal funds rate plus 0.5%, the prime rate or the one-month LIBOR rate plus 1.0%) plus a margin of 1.5% to 2.5%. The interest rate margins are subject to adjustments based on our leverage ratio. Commitment fees are payable currently at an annual rate of 0.5% on the unused portion of the facility. We may terminate the facility at any time.
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Table of ContentsAll 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 interests in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries, if any. The credit facility contains covenants restricting, among other things, prepayment or redemption of the senior notes, distributions, dividends and repurchases of capital stock and other equity interests, acquisitions and investments, indebtedness, liens and affiliate transactions. Cash dividends paid on our common stock are limited to an annual amount of $10.0 million. We are required to comply with certain financial tests and to maintain certain financial ratios, such as leverage and interest coverage ratios. We were in compliance with all of these loan covenants as of November 30, 2008. Contractual Obligations. On August 18, 2008, we sold $300 million aggregate principal amount of additional 7.25% senior notes due in 2013 at an offering price of 93.25%. The additional notes were issued under our existing indenture dated July 6, 2005. The net proceeds were used to repay our $150 million senior term loan and borrowings outstanding under our senior secured revolving credit facility in the amount of $29.5 million, with additional proceeds available for general corporate purposes. The following is a summary of our estimated additional future payments as a result of this new commitment, net of obligations prepaid out of the proceeds of the sale, for fiscal year periods subsequent to May 31, 2008.
In October 2007, we commenced construction on a project to expand our Hunter, Texas cement plant. We are expanding the Hunter plant by approximately 1.4 million tons of advanced dry process annual cement production capacity. The 900,000 tons of existing annual cement production capacity will remain in operation. As of November 30, 2008, we have expended $193.4 million, excluding capitalized interest of $6.9 million related to the project. In light of current economic and market conditions we plan to delay construction on the project. We believe that if the project were completed when originally scheduled, cement demand levels in Texas would likely not permit the new kiln to operate at a profitable level. We do expect the demand for cement to rebound in the future and to resume construction on the project when warranted by future economic and market conditions. We expect to be able to begin the startup and commissioning of the project within 12 months after resumption of construction. The delay is expected to begin in the May 2009 quarter at which time we expect to have expended approximately $300 million, excluding capitalized interest of approximately $16 million related to the project. The delay is expected to defer approximately $40 million to $60 million of capital expenditures. In July 2008, we negotiated three contracts for the purchase of coal for use in our cement and expanded shale and clay lightweight aggregate plants in Texas beginning with calendar year 2009. Each contract requires that we must purchase all of our coal requirements at a fixed price (escalated annually) through calendar year 2011. In September 2008, we negotiated a contract for the purchase of coal for use in our Oro Grande, California cement plant beginning in June 2009. The contract requires that we must purchase all of our coal requirements at a fixed price (escalated annually) through May 2014. These contracts do not require that minimum amounts of material be purchased. We expect cash and cash equivalents, cash from operations and available borrowings under our senior secured revolving credit facility to be sufficient to provide funds for capital expenditure commitments currently estimated at $275 million to $305 million for fiscal year 2009 (including the expansion of the Hunter, Texas plant), scheduled debt payments, working capital needs and other general corporate purposes for at least the next year.
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Table of ContentsCash Flows Net cash provided by operating activities was $38.3 million and $60.5 million for the six-month period ended November 30, 2008 and November 30, 2007, respectively. The decrease was primarily the result of lower income from operations offset in part by higher depreciation due to the completion of our Oro Grande, California cement plant in May 2008. Net cash used by investing activities was $143.3 million and $107.1 million for the six-month period ended November 30, 2008 and November 30, 2007, respectively. Capital expenditures, including capitalized interest, incurred in connection with the expansion of our Hunter, Texas cement plant were $122.1 million and $21.2 million for the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Capital expenditures, including capitalized interest, incurred in connection with the expansion and modernization of our Oro Grande, California cement plant were $1.3 million and $117.2 million for the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Capital expenditures for normal replacement and technological upgrades of existing equipment and acquisitions to sustain our existing operations were $51.9 million and $36.7 million for the six-month periods ended November 30, 2008 and November 30, 2007, respectively. Capital expenditures in the current period include $25.3 million incurred to acquire aggregate operations in central Texas through a deferred like-kind-exchange transaction. Completion of our deferred like-kind-exchange transactions reduced the cash designated for property acquisitions that is being held by a qualified intermediary trust by $28.7 million. Net cash provided by financing activities was $127.7 million and $57.7 million for the six-month period ended November 30, 2008 and November 30, 2007, respectively. On August 18, 2008, we sold $300 million aggregate principal amount of additional 7.25% senior notes due in 2013 at an offering price of 93.25%. The net proceeds were used to repay our $150 million senior term loan and borrowings outstanding under our senior secured revolving credit facility in the amount of $29.5 million. OTHER ITEMS Environmental Matters We are subject to federal, state and local environmental laws, regulations and permits concerning, among other matters, air emissions and wastewater discharge. We intend to comply with these laws, regulations and permits. 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 of these laws, regulations and permits, or from private parties alleging that our operations have injured them or their property. See Note 9 of Notes to Consolidated Financial Statements entitled “Legal Proceedings and Contingent Liabilities” presented in Part I, Item 1 of this report for a description of certain claims. 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. We have generally not entered into any long-term contracts to satisfy our fuel and electricity needs, with the exception of coal which we purchase from specific mines pursuant to long-term contracts. 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 supply of these products could adversely affect our results of operations.
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Table of ContentsCritical Accounting Policies The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. We believe the following critical accounting policies affect management’s more complex judgments and estimates. Receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If we are aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve. Environmental Liabilities. We are subject to environmental laws and regulations established by federal, state and local authorities, and make provision for the estimated costs related to compliance when it is probable that a reasonably estimable liability has been incurred. Legal Contingencies. We are defendants in lawsuits which arose in the normal course of business, and make provision for the estimated loss from any claim or legal proceeding when it is probable that a reasonably estimable liability has been incurred. Long-lived Assets. Management reviews long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. Goodwill. Management tests goodwill for impairment annually by reporting unit in the fourth quarter of our fiscal year. 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. In light of current market conditions, we assessed our California cement operations for impairment during our November 2008 quarter. Our assessment indicated that there was no impairment of goodwill. The assessment was based in part on assumptions regarding the timing of economic recovery in our California market. The current market conditions and economic climate are very volatile and it is possible that the current recession could last longer and have a bigger impact on our operations than was anticipated. Should the recession become more severe or last longer than anticipated, we could recognize an impairment charge in the future with respect to goodwill. Management will continue to evaluate and monitor the economic environment and perform its annual impairment test in the fourth quarter of our current fiscal year. Recent Accounting Developments In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. We adopted this SFAS effective June 1, 2008. The adoption of SFAS No. 157 did not have a current material impact on our consolidated financial statements. In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” This standard permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. We adopted this SFAS effective June 1, 2008. At this time, we have not elected to use the fair value measures permitted by this standard.
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Table of ContentsCautionary 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 cyclical and seasonal nature of our business, the level of construction activity in our markets, abnormal periods of inclement weather, unexpected periods of equipment downtime, unexpected operational difficulties, changes in the cost of raw materials, fuel and energy, changes in interest rates, the timing and amount of federal, state and local funding for infrastructure, delays in announced capacity expansions, ongoing volatility and uncertainty in the capital or credit markets, the impact of environmental laws, regulations and claims and changes in governmental and public policy, and the risks and uncertainties described in our reports on Forms 10-K, 10-Q and 8-K. Forward-looking statements speak only as of the date hereof, and we assume no obligation to publicly update such statements.
The information required by this item is included in Part I, Item 2 of this report.
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. There were no 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.
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Table of ContentsPART II. OTHER INFORMATION
The information required by this item is included in Note 9 of Notes to Consolidated Financial Statements entitled “Legal Proceedings and Contingent Liabilities” presented in Part I, Item 1 of this report and incorporated herein by reference.
The first two risks described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended May 31, 2008 are modified by the discussion in this report about the suspension of the construction project at our Hunter, Texas cement plant and the decline in demand for our products in Texas that we experienced in the quarter ended November 30, 2008 due to the decline in construction activity. A sustained period of declining construction activity in our markets could materially and adversely affect our operating results.
Shares of our common stock, $1 par value, are traded on the New York Stock Exchange (ticker symbol TXI). The restriction on the payment of dividends is included in Note 3 of Notes to Consolidated Financial Statements entitled “Long-Term Debt” presented in Part I, Item 1 of this report and incorporated herein by reference.
The following provides information concerning matters submitted to a vote at the Annual Meeting of Shareholders on October 21, 2008. Proposal No. 1. Shareholders elected Sam Coats as a director of the Company for a term of office expiring at the Annual Meeting of Shareholders in 2011 with 11,322,256 shares for and 10,743,163 shares withheld. Shareholders elected Thomas R. Ransdell as a director of the Company for a term of office expiring at the Annual Meeting of Shareholders in 2011 with 11,329,410 shares for and 10,736,009 shares withheld. Terms of office expire for the continuing directors Gordon E. Forward, Keith W. Hughes and Henry H. Mauz, Jr. in 2009 and for the continuing directors Mel G. Brekhus, Robert D. Rogers and Ronald G. Steinhart in 2010. Proposal No. 2. Shareholders approved the selection of Ernst & Young LLP as independent auditors of the Company to audit its consolidated financial statements for fiscal year 2009 with 21,702,969 shares for, 357,857 shares against and 4,593 shares abstained. Proposal No. 3. Shareholders did not approve the shareholder proposal regarding the preparation of a sustainability report with 2,039,501 shares for, 18,152,839 shares against, 929,564 shares abstained and 943,515 broker non-votes.
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The following exhibits are included herein:
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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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Table of ContentsPursuant 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.
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Table of ContentsINDEX TO EXHIBITS
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Table of ContentsIndex to Exhibits-(Continued)
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Table of ContentsIndex to Exhibits-(Continued)
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