Texas Industries (NYSE: TXI) is a supplier of heavy construction materials in the United States, producing cement, aggregates and consumer products. TXI produces produces gray portland cement (the most commonly used type of cement in the world) and specialty cements, and selling the cement primarily in Texas and California, the two largest cement markets in the United States, with one quarter of the country's cement demand between them. TXI's aggregates segment produces natural aggregates, including sand, gravel and crushed limestone, as well as specialty lightweight aggregates. TXI also makes consumer products such as ready-mix concrete and packaged products. TXI's cement, aggregates, and consumer products are all used in construction. End markets include public works (infrastructure), as well as residential, commercial, and industrial construction. The company operates primarily in Texas and California, as well as other states in the southwestern United States.
TXI's products are used in construction projects funded by the government. As a result, government budget constraints and funding reallocation have a large effect on whether certain construction projects go forward. For example, funds distributed under multi-year federal highway legislation historically comprised a majority of California and Texas’ public works spending. Significant decreases in public works spending in either state negatively affects TXI's business.
The subprime mortgage crisis resulted in a significant decline in demand for cement used in residential and non-residential construction in California since its historic high in 2005. Residential construction has declined to a lesser degree in Texas, but has not had a significant impact on total cement demand.
As of May 31, 2010, TXI had 85 manufacturing facilities in six states. In fiscal year 2010 (TXI's fiscal year ends on May 31 of each year), TXI shipped 3.2 million tons of finished cement, 11.4 million tons of natural aggregates, 1.0 million cubic yards of lightweight aggregates and 2.1 million cubic yards of ready-mix concrete.
In 2009, TXI earned a total of $621 million in total revenues. This was a significant decline from its 2008 total revenues of $839 million. As a result, TXI's net income was adversely affected. Between 2009 and 2010, TXI's net income declined from a net loss of $17.6 million in 2008 to a net loss of $38.9 million in 2010.
TXI breaks down its business by operating segment.
40.2% of net sales originated from the Cement segment, which produces and sells gray portland cement, as well as specialty cements such as masonry cement and oil well cement.
This segment produces and sells stone, sand and gravel as its principal products, as well as "light aggregates" such as expanded shale and clay aggregates.
This produces and sells ready-mix concrete as the principal product, as well as packaged concrete and related products.
TXI earns over 80% of its revenue in Texas. California is the second largest source of revenues; the balance is made up by Louisiana, Oklahoma, Nevada, and Arizona. TXI believes that it is the largest supplier of expanded shale and clay specialty aggregate products west of the Mississippi River, the second largest supplier of stone, sand and gravel natural aggregate products in North Texas, one of the largest suppliers of ready-mix concrete in North Texas and one of the largest suppliers of sand and gravel aggregate products and ready-mix concrete in northern Louisiana.
In May 2008, TXI completed its expanded and modernized Oro Grande, California cement plant. The plant is an advanced dry process facility designed to efficiently produce approximately 2.3 million tons of cement annually, as compared to previously existing, less efficient 1.3 million tons of production capacity. The company expects to become the second largest producer of cement in southern California because of this increase. Similarly, in October 2007 TXI commenced construction of a project to expand the capacity of its Hunter, Texas cement plant by approximately 1.4 million tons, on top of the plant's already-present capacity of 900,000 tons. When completed in 2010, the Hunter plant will be a modern, low cost facility, similar to the Midlothian, TX and Oro Grande dry process facilities.
All of TXI's products are expensive to transport, particularly aggregates, which due to their high weight to value ratio, limits marketing to areas within approximately 100 miles of the plant sites. To reduce the costs of transport, TXI endeavors to use rail transport whenever possible; its cement is distributed by rail or truck to eight distribution terminals located throughout marketing areas. For aggregates as well, direct rail links are established between production facilities and key markets to reduce the cost of transportation. Rail loops provide rapid loading and unloading of products, and also give TXI cost advantage over competing suppliers who rely more heavily on truck transportation.
TXI's two largest markets are California and Texas, the largest cement markets in the United States, with 11% and 13% market share, respectively. Texas Industries is the largest producer of cement in Texas, with 30% of the state's total production capacity. As mentioned above, with the completion of the Oro Grande plant expansion, TXI expects to become the second largest producer of cement in California. Both of these markets are targeted by TXI because they are large, have above average long-term growth population growth, strong economic activity and a year-round building season.
Cement, aggregate and concrete markets are generally regional because of high transportation costs. Demand for these products, then, comes primarily from specific regional public (infrastructure), residential and non-residential construction markets. Furthermore, construction activity in these markets is influenced by prevailing economic conditions, including availability of public funds, interest rate levels, inflation, consumer spending habits and employment. These factors fluctuate more widely in regional markets than in the United States as a whole. As a result, significant declines in the level of general construction activity in TXI's markets negatively affects business. In particular, because most of TXI's cement is sold in Texas and California, and because cement contributes more to TXI's sales than any other product line, a significant decline in cement demand in Texas or California will negatively impact the company.
All of the product markets in which TXI participates are highly competitive, but each market has its own set of competitors. Market competitors break down as follows.
As previously mentioned, these markets are generally regional due to high transportation costs. As a result, in TXI's aggregates and consumer products markets, there is little competition from imported products. However, the cement segment does compete with imported cement because of the higher value of the product. Due to the lack of product differentiation, competition for all of TXI's products is based largely on price and, to a lesser extent, quality of product and service.