TEXAS INDUSTRIES INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2002

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

For the transition period from to

Commission File Number 1-4887

TEXAS INDUSTRIES, INC.

(Exact name of registrant as specified in the charter)

Delaware		75-0832210
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1341 West Mockingbird Lane, Suite 700W, Dallas, Texas		75247-6913
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (972) 647-6700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

As of December 27, 2002, 21,050,710 shares of Registrant’s Common Stock, $1.00 par value, were outstanding.

Page 1 of 24

INDEX

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets — November 30, 2002 and May 31, 2002	3

	Consolidated Statements of Operations — three months and six months ended November 30, 2002 and November 30, 2001	4

	Consolidated Statements of Cash Flows — six months ended November 30, 2002 and November 30, 2001	5

	Notes to Consolidated Financial Statements	6

	Independent Accountants’ Review Report	13

Item 2.	Management’s Discussion and Analysis of Operating Results and Financial Condition	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk — the information required by this item is included in Item 2	—

Item 4.	Controls and Procedures	19

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 4.	Submission of Matters to a Vote of Security Holders	19

Item 6.	Exhibits and Reports on Form 8-K	19

SIGNATURES

CERTIFICATIONS

CONSOLIDATED BALANCE SHEETS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

	(Unaudited) November 30, 2002			May 31, 2002
	In thousands
ASSETS
CURRENT ASSETS
Cash	$	4,471		$	7,430
Receivables		39,849			56,138
Inventories		277,053			276,482
Deferred taxes and prepaid expenses		42,327			31,192

TOTAL CURRENT ASSETS		363,700			371,242

OTHER ASSETS
Goodwill		146,474			146,474
Real estate and investments		44,663			41,524
Deferred charges and intangibles		24,846			29,679

		215,983			217,677

PROPERTY, PLANT AND EQUIPMENT
Land and land improvements		213,058			209,557
Buildings		103,644			102,358
Machinery and equipment		1,781,779			1,779,863
Construction in progress		52,561			45,450

		2,151,042			2,137,228
Less allowances for depreciation		982,340			952,870

		1,168,702			1,184,358

	$	1,748,385		$	1,773,277


LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	127,030		$	111,037
Accrued interest, wages and other items		54,514			48,363
Current portion of long-term debt		9,236			9,228

TOTAL CURRENT LIABILITIES		190,780			168,628

LONG-TERM DEBT		434,509			474,963

DEFERRED INCOME TAXES AND OTHER CREDITS		163,680			167,276

COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY HOLDING SOLELY COMPANY CONVERTIBLE DEBENTURES		199,937			200,000

SHAREHOLDERS’ EQUITY
Common stock, $1 par value		25,067			25,067
Additional paid-in capital		260,259			260,091
Retained earnings		566,515			569,096
Accumulated other comprehensive loss		(860	)		—
Cost of common stock in treasury		(91,502	)		(91,844	)

		759,479			762,410

	$	1,748,385		$	1,773,277

See notes to consolidated financial statements.

(Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

	Three months ended November 30,						Six months ended November 30,
	2002			2001			2002			2001
	In thousands except per share
NET SALES	$	310,488		$	335,487		$	649,443		$	697,049

COSTS AND EXPENSES (INCOME)
Cost of products sold		288,257			280,507			584,946			595,148
Selling, general and administrative		21,410			28,009			47,833			56,221
Interest		8,556			10,697			17,392			23,061
Other income		(1,124	)		(10,669	)		(2,506	)		(14,407	)

		317,099			308,544			647,665			660,023

INCOME (LOSS) BEFORE THE FOLLOWING ITEMS		(6,611	)		26,943			1,778			37,026

Income taxes (benefit)		(5,057	)		8,566			(2,371	)		11,850

		(1,554	)		18,377			4,149			25,176

Dividends on preferred securities—net of tax		(1,786	)		(1,787	)		(3,574	)		(3,575	)

NET INCOME (LOSS)	$	(3,340	)	$	16,590		$	575		$	21,601

BASIC
Average shares		21,118			21,068			21,114			21,041

Earnings (loss) per share	$	(.16	)	$	.79		$	.03		$	1.03


DILUTED
Average shares		21,118			24,284			21,272			21,440

Earnings (loss) per share	$	(.16	)	$	.76		$	.03		$	1.01


Cash dividends per share	$	.075		$	.075		$	.15		$	.15

See notes to consolidated financial statements.

(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

	Six months ended November 30,
	2002			2001
	In thousands
OPERATING ACTIVITIES
Net income	$	575		$	21,601
Loss (gain) on disposal of assets		317			(858	)
Non-cash items
Depreciation, depletion and amortization		48,733			53,061
Deferred taxes		(4,677	)		6,343
Other—net		2,229			615
Changes in operating assets and liabilities
Receivables sold		(5,695	)		—
Receivables		12,436			20,292
Inventories and prepaid expenses		(11,623	)		11,581
Accounts payable and accrued liabilities		21,611			9,324
Real estate and investments		699			(1,321	)

Net cash provided by operations		64,605			120,638

INVESTING ACTIVITIES
Capital expenditures		(33,502	)		(10,880	)
Proceeds from disposal of assets		10,061			4,957
Other—net		59			(1,326	)

Net cash used by investing		(23,382	)		(7,249	)

FINANCING ACTIVITIES
Proceeds of long-term borrowing		104,630			181,850
Debt retirements		(145,082	)		(287,349	)
Purchase of treasury shares		(2	)		(206	)
Common dividends paid		(3,156	)		(3,136	)
Other—net		(572	)		1,575

Net cash used by financing		(44,182	)		(107,266	)

Increase (decrease) in cash		(2,959	)		6,123

Cash at beginning of period		7,430			8,734

Cash at end of period	$	4,471		$	14,857

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Texas Industries, Inc. (“TXI” or the “Company”) is a leading supplier of construction materials through two business segments: cement, aggregate and concrete products (the “CAC” segment) and structural steel and specialty bar products (the “Steel” segment). Through the CAC segment, the Company produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate and concrete products from facilities concentrated in Texas, Louisiana, and California, with several products marketed throughout the United States. Through the Steel segment, the Company produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels from facilities located in Texas and Virginia, for markets in North America.

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 with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes 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, 2002, are not necessarily indicative of the results that may be expected for the year ended May 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended May 31, 2002.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all subsidiaries. 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 Equivalents. For cash flow purposes, temporary investments which have maturities of less than 90 days when purchased are considered cash equivalents.

Property, Plant and Equipment. Property, plant and equipment is recorded at cost. Provisions for depreciation are computed generally using the straight-line method. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials. Useful lives for the Company’s primary operating facilities range from 10 to 20 years. Maintenance and repairs are charged to expense as incurred. Costs incurred for scheduled shut-downs to refurbish Steel facilities are amortized over the production period, typically 12 to 24 months.

Goodwill. Goodwill identified with CAC resulted from the acquisition of Riverside Cement Company. Goodwill identified with Steel resulted from the acquisition of Chaparral Steel Company. Goodwill is tested for impairment annually by each reporting unit. An independent evaluation determined that in each case the fair value of the respective reporting unit exceeds its carrying value. The carrying value of goodwill by business segment is summarized as follows:

	November			May
	In thousands
CAC
Gross carrying value	$	66,766		$	66,766
Accumulated amortization		(5,458	)		(5,458	)

		61,308			61,308
Steel
Gross carrying value		112,265			112,265
Accumulated amortization		(27,099	)		(27,099	)

		85,166			85,166

	$	146,474		$	146,474

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued

Real Estate and Investments. Surplus real estate and real estate acquired for development of high quality industrial, office and multi-use parks totaled $12.4 million and $14.3 million at November 30, 2002 and May 31, 2002, respectively. Investments, composed primarily of life insurance contracts which may be used to fund certain Company benefit agreements, totaled $32.3 million and $27.2 million at November 30, 2002 and May 31, 2002, respectively.

Debt Issuance Cost. Debt issuance costs totaling $9.1 million and $9.9 million at November 30, 2002 and May 31, 2002, respectively, are associated with various debt issues and amortized over the terms of the related debt.

Intangibles. Intangibles include non-compete agreements and other intangibles with finite lives being amortized on a straight-line basis over periods of 5 to 15 years. Their carrying value, adjusted for write-offs, totaled $3.0 million and $3.5 million, net of accumulated amortization of $5.6 million and $5.1 million at November 30, 2002 and May 31, 2002, respectively. Amortization expense of $500,000 and $600,000 was incurred in the six-month periods ended November 30, 2002 and 2001, respectively. Annual amortization expense for each of the five succeeding years is $600,000, $400,000, $300,000, $300,000 and $300,000.

Other Credits. Other credits totaling $33.6 million and $32.1 million at November 30, 2002 and May 31, 2002, respectively, are composed primarily of liabilities related to the Company’s retirement plans and deferred compensation agreements.

Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss represents a minimum pension liability adjustment related to a defined benefit retirement plan covering certain employees and retirees of an acquired subsidiary. The minimum pension liability adjustment was $900,000 net of tax of $400,000 at November 30, 2002. Comprehensive loss which consists of net income and the minimum pension liability adjustment to shareholders’ equity was $300,000 for the six-month period ended November 30, 2002.

Net Sales. Sales are recognized when title has transferred and products are delivered. Sales are presented net of delivery costs as follows:

	Three months ended November 30,						Six months ended November 30,
	2002			2001			2002			2001
	In thousands
Revenues including delivery fees	$	337,670		$	360,733		$	703,667		$	750,168
Freight and delivery costs		(27,182	)		(25,246	)		(54,224	)		(53,119	)

Net sales	$	310,488		$	335,487		$	649,443		$	697,049

Income Taxes. Accounting for income taxes uses the liability method of recognizing and classifying deferred income taxes. The Company joins in filing a consolidated return with its subsidiaries. Current and deferred tax expense is allocated among the members of the group based on a stand-alone calculation of the tax of the individual member.

Earnings Per Share (“EPS”). Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period including certain contingently issuable shares. Diluted EPS adjusts net income for the net dividends on preferred securities of subsidiary and the outstanding shares for the dilutive effect of the preferred securities, stock options and awards.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued

Basic and Diluted EPS are calculated as follows:

	Three months ended November 30,					Six months ended November 30,
	2002			2001		2002		2001
	In thousands except per share
Earnings:
Net income (loss)	$	(3,340	)	$	16,590	$	575	$	21,601

Basic earnings (loss)		(3,340	)		16,590		575		21,601
Dividends on preferred securities—net of tax		—			1,787		—		—

Diluted earnings (loss)	$	(3,340	)	$	18,377	$	575	$	21,601

Shares:
Weighted-average shares outstanding		21,043			20,923		21,039		20,896
Contingently issuable shares		75			145		75		145

Basic weighted-average shares		21,118			21,068		21,114		21,041
Preferred securities		—			2,889		—		—
Stock option and award dilution		—			327		158		399

Diluted weighted-average shares *		21,118			24,284		21,272		21,440


Basic earnings (loss) per share	$	(.16	)	$	.79	$	.03	$	1.03


Diluted earnings (loss) per share	$	(.16	)	$	.76	$	.03	$	1.01


* Shares excluded due to antidilutive effect:
Preferred securities		2,888			—		2,888		2,889
Stock options and awards		2,402			584		1,490		589

WORKING CAPITAL

Working capital totaled $172.9 million at November 30, 2002 and $202.6 million at May 31, 2002.

Receivables consist of:

	November		May
	In thousands
Notes and interest receivable	$	3,002	$	13,100
Tax refund claims		4,364		4,364
Accounts receivable		32,483		38,674

	$	39,849	$	56,138

Accounts receivable are presented net of allowances for doubtful receivables of $5.3 million at November and $4.7 million at May.

The Company has an agreement to sell, on a revolving basis, an interest in a defined pool of trade receivables of up to $125 million. The agreement is subject to annual renewal. The maximum amount outstanding varies based upon the level of eligible receivables. Fees are variable and follow commercial paper rates. The interest sold totaled $119.3 million at November and $125 million at May. The sales are reflected as accounts receivable reductions and as operating cash flows. As collections reduce previously sold interests, new accounts receivable are customarily sold. Fees and expenses of $1.6 million and $2.6 million are included in selling, general and administrative expenses in the six-month periods ended November 30, 2002 and 2001, respectively. The Company, as agent for the purchaser, retains collection and administration responsibilities for the participating interests of the defined pool.

WORKING CAPITAL-Continued

Inventories consist of:

	November		May
	In thousands
Finished products	$	85,295	$	85,818
Work in process		57,214		56,504
Raw materials and supplies		134,544		134,160

	$	277,053	$	276,482

Inventories are stated at cost (not in excess of market) with a majority of inventories using the last-in, first-out method (LIFO). If the average cost method (which approximates current replacement cost) had been used, inventory values would have been higher by $7.7 million at November and $6.3 million at May.

Accrued interest, wages and other items consist of:

	November		May
	In thousands
Interest	$	5,117	$	5,292
Employee compensation		20,787		21,273
Income taxes		1,679		3,778
Property taxes and other		26,931		18,020

	$	54,514	$	48,363

LONG-TERM DEBT

Long-term debt is comprised of the following:

	November		May
	In thousands
Revolving credit facility maturing in 2004, interest rates average 3.55%	$	50,000	$	90,000
Senior notes
Notes due through 2017, interest rates average 7.28%		200,000		200,000
Notes due through 2008, interest rates average 7.28%		75,000		75,000
Notes due through 2004, interest rates average 10.2%		16,000		16,000
Variable-rate industrial development revenue bonds
Bonds maturing in 2028, interest rate approximately 2.5%		50,000		50,000
Bonds maturing in 2029, interest rate approximately 2.5%		25,000		25,000
Bonds maturing in 2029, interest rate approximately 2.5%		20,500		20,500
Pollution control bonds, due through 2007, interest rate 3.19% (75% of prime)		4,195		4,535
Other, maturing through 2009, interest rates from 7.5% to 10%		3,050		3,156

		443,745		484,191
Less current maturities		9,236		9,228

	$	434,509	$	474,963

Annual maturities of long-term debt for each of the five succeeding years are $9.2, $104.3, $41.2, $45.9 and $41.7 million.

LONG-TERM DEBT-Continued

The Company has available a bank-financed $350 million long-term revolving credit facility. An interest rate at the applicable margin above either prime or LIBOR is selected at the time of each borrowing. Commitment fees at a current annual rate of .3% are paid on the unused portion of this facility. At November 30, 2002, $50.0 million was outstanding under this facility. In addition, $114.4 million has been utilized to support letters of credit issued primarily to secure the Company’s variable-rate industrial development revenue bonds, which allows the interest rates on these bonds to closely follow the tax-exempt commercial paper rates.

Loan agreements contain covenants that provide for restrictions on the payment of dividends on common stock and place limitations on incurring certain indebtedness, purchasing treasury stock, and making capital expenditures and certain investments. Under the most restrictive of these agreements, the Company’s total debt is limited based on the ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). At November 30, 2002, $62.8 million of additional debt could have been incurred. In addition, the aggregate amount of annual fixed charges which includes cash dividends on common stock is limited based on the ratio of EBITDA to fixed charges. At November 30, 2002, $27.7 million of additional fixed charges could have been incurred. The Company is in compliance with all loan covenant restrictions.

The amount of interest paid for the six-month periods presented was $18.3 million in 2002 and $25.5 million in 2001.

PREFERRED SECURITIES OF SUBSIDIARY

On June 5, 1998, TXI Capital Trust I (the “Trust”), a Delaware business trust wholly owned by the Company, issued 4,000,000 of its 5.5% Shared Preference Redeemable Securities (“Preferred Securities”) to the public for gross proceeds of $200 million. The combined proceeds from the issuance of the Preferred Securities and the issuance to the Company of the common securities of the Trust were invested by the Trust in $206.2 million aggregate principal amount of 5.5% convertible subordinated debentures due June 30, 2028 (the “Debentures”) issued by the Company. At November 30, 2002, 3,998,744 Preferred Securities and $206.1 million aggregate principal amount of Debentures were outstanding. The Debentures are the sole assets of the Trust.

Holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of $2.75 per Preferred Security (equivalent to a rate of 5.5% per annum of the stated liquidation amount of $50 per Preferred Security). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Preferred Securities, to the extent the Trust has funds available therefor and subject to certain other limitations (the “Guarantee”). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Trust Agreement of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust [other than with respect to the Preferred Securities and the common securities of the Trust]), provide a full and unconditional guarantee of amounts due on the Preferred Securities.

The Debentures are redeemable for cash under certain circumstances relating to federal income tax matters, or at the option of the Company, in whole or in part, at par, plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of Preferred Securities will be redeemed. The Preferred Securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 30, 2028, or upon earlier redemption.

Each Preferred Security is convertible at any time prior to the close of business on June 30, 2028, at the option of the holder into shares of the Company’s common stock at a conversion rate of .72218 shares of the Company’s common stock for each Preferred Security (equivalent to a conversion price of $69.235 per share of TXI Common Stock).

SHAREHOLDERS’ EQUITY

Common stock consists of:

	November	May
	In thousands
Shares authorized	40,000	40,000
Shares outstanding at end of period	21,045	21,026
Shares held in treasury	4,022	4,041
Shares reserved for stock options and other	3,413	3,503

There are authorized 100,000 shares of Cumulative Preferred Stock, no par value, of which 20,000 shares are designated $5 Cumulative Preferred Stock (Voting), redeemable at $105 per share and entitled to $100 per share upon dissolution. An additional 25,000 shares are designated Series B Junior Participating Preferred Stock. The Series B Preferred Stock is not redeemable and ranks, with respect to the payment of dividends and the distribution of assets, junior to (i) all other series of the Preferred Stock unless the terms of any other series shall provide otherwise and (ii) the $5 Cumulative Preferred Stock. Pursuant to a Rights Agreement, in November 1996, the Company distributed a dividend of one preferred share purchase right for each outstanding share of the Company’s Common Stock. Each right entitles the holder to purchase from the Company one two-thousandth of a share of the Series B Junior Participating Preferred Stock at a price of $122.50, subject to adjustment. The rights will expire on November 1, 2006 unless the date is extended or the rights are earlier redeemed or exchanged by the Company pursuant to the Rights Agreement.

STOCK OPTION PLAN

The Company’s stock option plan as approved by shareholders provides that non-qualified and incentive stock options to purchase Common Stock may be granted to directors, officers and key employees at market prices at date of grant. Outstanding options become exercisable in installments beginning one year after date of grant and expire ten years later.

A summary of option transactions for the six-month period ended November 30, 2002, follows:

	Shares Under Option		Weighted Average Option Price
Outstanding at June 1	2,399,153		$	31.02
Granted	15,000			23.86
Exercised	(15,760	)		24.52
Cancelled	(6,950	)		33.38

Outstanding at November 30	2,391,443		$	31.01

At November 30, 2002, there were 1,577,673 shares exercisable and 932,000 shares available for future grants. Outstanding options expire on various dates to October 15, 2012.

INCOME TAXES

Federal income taxes for the interim periods ended November 30, 2002 and 2001, 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% statutory corporate rate is due to percentage depletion that is tax deductible and state income tax expense. Applying these differences to the estimated current year pre-tax income resulted in an estimated annualized effective tax rate for 2002 of 115.4% compared to 31.5% for 2001. The tax benefit attributed to dividends on preferred securities is based on the incremental tax rate of 35%. The Company made income tax payments of $2.5 million and $600,000 in the six-month periods ended November 30, 2002 and 2001, respectively and received income tax refunds of $18.1 million in the six-month period ended November 30, 2001.

LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES

The Company is subject to federal, state and local environmental laws and regulations concerning among other matters, air emissions, furnace dust disposal and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations, however, from time to time the Company receives claims from federal and state environmental regulatory agencies and entities asserting that the Company is or may be in violation of certain environmental laws and regulations. Based on its experience and the information currently available to it, the Company believes that such claims will not have a material impact on its financial condition or results of operations. Despite the Company’s compliance and experience, it is possible that the Company could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by the Company.

A wholly owned subsidiary of the Company based in California received a complaint from the California air regulatory authorities in connection with its manufacturing operations. The subsidiary makes lightweight clay aggregate by heating clay pellets in two natural gas-fired kilns. The complaint alleges violations of the subsidiary’s air emissions permit, but does not specify the amount of any monetary sanction which may be sought. The amount of any possible sanctions is not currently estimable. The Company believes that the subsidiary is in substantial compliance with its permit limitations.

The Company and subsidiaries are defendants in lawsuits which arose in the normal course of business. In management’s judgment (based on the opinion of counsel) the ultimate liability, if any, from such legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Company.

BUSINESS SEGMENTS

The Company has two reportable segments: cement, aggregate and concrete products (the “CAC” segment) and steel (the “Steel” segment). The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because of significant differences in manufacturing processes, distribution and markets served. Through the CAC segment, the Company produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate and concrete products. Through the Steel segment, the Company produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels. Operating profit is net sales less operating costs and expenses, excluding general corporate expenses and interest expense. Operating results and certain other financial data for the Company’s business segments are presented on pages 14 and 15 under “Business Segments” of Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated herein by reference.

EXHIBIT A

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

Board of Directors

Texas Industries, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of Texas Industries, Inc. and subsidiaries (the Company) as of November 30, 2002 and the related condensed consolidated statements of operations for the three-month and six-month periods ended November 30, 2002 and 2001, and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2002 and 2001. These financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Texas Industries, Inc. and subsidiaries as of May 31, 2002, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended [not presented herein] and in our report dated July 9, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Dallas, Texas

December 19, 2002

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of operations and financial condition for the three-month and six-month periods ended November 30, 2002 to the three-month and six-month periods ended November 30, 2001.

BUSINESS SEGMENTS

The Company is a leading supplier of construction materials through two business segments: cement, aggregate and concrete products (the “CAC” segment); and structural steel and specialty bar products (the “Steel” segment). Through the CAC segment, the Company produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate and concrete products. Through the Steel segment, the Company produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels.

Corporate resources include administration, financial, legal, environmental, human resources and real estate activities that are not allocated to operations and are excluded from operating profit.

	Three months ended November 30,				Six months ended November 30,
	2002		2001		2002		2001
	In thousands
TOTAL SALES
Cement	$	82,919	$	86,236	$	176,704	$	180,728
Ready-mix		52,268		58,287		111,275		124,282
Stone, sand & gravel		25,854		29,761		53,990		64,316
Structural mills		117,580		129,166		237,499		256,573
Bar mill		26,360		27,572		57,445		57,538

UNITS SHIPPED
Cement (tons)		1,200		1,183		2,527		2,503
Ready-mix (cubic yards)		909		983		1,919		2,094
Stone, sand & gravel (tons)		4,661		5,027		9,612		11,140
Structural mills (tons)		378		384		745		788
Bar mill (tons)		81		91		180		192

NET SALES
Cement	$	67,431	$	66,705	$	143,848	$	141,822
Ready-mix		52,235		58,218		111,160		124,151
Stone, sand & gravel		17,554		21,788		37,408		47,378
Other products		25,048		25,816		53,540		58,298

TOTAL CAC		162,268		172,527		345,956		371,649

Structural mills		117,580		129,166		237,499		256,573
Bar mill		26,360		27,572		57,445		57,538
Other		4,280		6,222		8,543		11,289

TOTAL STEEL		148,220		162,960		303,487		325,400

TOTAL NET SALES	$	310,488	$	335,487	$	649,443	$	697,049

	Three months ended November 30,						Six months ended November 30,
	2002			2001			2002			2001
	In thousands
CAC OPERATIONS
Gross profit	$	42,579		$	52,793		$	94,348		$	114,307
Less: Depreciation, depletion & amortization		11,966			10,995			23,888			23,294
Selling, general & administrative		9,465			11,680			21,485			23,981
Other income		(477	)		(1,196	)		(1,078	)		(1,654	)

OPERATING PROFIT		21,625			31,314			50,053			68,686

STEEL OPERATIONS
Gross profit		3,276			27,214			17,262			38,931
Less: Depreciation & amortization		12,017			14,509			23,955			29,025
Selling, general & administrative		4,604			8,936			10,582			15,868
Other income		539			(8,911	)		(184	)		(11,748	)

OPERATING PROFIT (LOSS)		(13,884	)		12,680			(17,091	)		5,786

TOTAL OPERATING PROFIT		7,741			43,994			32,962			74,472

CORPORATE RESOURCES
Other income		1,186			562			1,244			1,005
Less: Depreciation & amortization		452			374			890			742
Selling, general & administrative		6,530			6,542			14,146			14,648

		(5,796	)		(6,354	)		(13,792	)		(14,385	)

INTEREST EXPENSE		(8,556	)		(10,697	)		(17,392	)		(23,061	)

INCOME (LOSS) BEFORE TAXES & OTHER ITEMS	$	(6,611	)	$	26,943		$	1,778		$	37,026

RESULTS OF OPERATIONS

Operating Profit – November 2002 Periods Compared to November 2001 Periods

Operating profit for the current quarter was $7.7 million, compared to $44.0 million for the prior year quarter. Operating profit for the current six-month period was $33.0 million, compared to $74.5 million for the prior year period.

CAC profit declined $9.7 million for the quarter and $18.6 million for the six-month period. Wet weather and softening demand in the Company’s Texas markets reduced ready-mix and aggregate shipments. Cement margins for the six-month period remain in line with the prior year period as lower unit manufacturing costs were offset by lower trade prices.

Steel operating profit excluding pre-tax income of $8.5 million in the November 2001 quarter and six-month period from the Company’s litigation against certain graphite electrode suppliers declined $18.1 million for the quarter and $14.4 million for the six-month period. The impact of imports has resulted in a very competitive market. Realized prices for structural steel have declined significantly as the Company has sought to maintain market share.

Net Sales. Consolidated net sales for the current quarter were $310.5 million, compared to $335.5 million for the prior year quarter. Consolidated net sales for the current six-month period were $649.4 million, compared to $697.0 million for the prior year period.

CAC net sales were down from the prior year periods, 6% for the quarter and 7% for the six-month period, reflecting somewhat lower cement prices and decreased ready-mix and aggregate shipments. Total cement sales decreased from the prior year periods as average trade prices declined 3% in the current quarter and 2% in the current six-month period on comparable shipments. Ready-mix sales decreased from the prior year periods on 8% lower volume in both the current quarter and six-month period. Average trade prices were 3% lower in the current quarter and 2% lower in the current six-month period. Aggregate sales decreased from the prior year periods on 7% lower shipments in the current quarter and 14% lower shipments in the current six-month period. Aggregate trade prices were comparable to the prior year periods.

Steel sales were down from the prior year periods, 9% for the quarter and 7% for the six-month period, reflecting lower realized prices. Structural steel sales decreased from the prior year periods as realized prices declined 8% in the current quarter and 2% in the current six-month period on lower shipments. Bar mill sales in the current quarter decreased 4% on 11% lower shipments at 7% higher prices.

Operating Costs. Consolidated cost of products sold including depreciation, depletion and amortization for the current quarter was $288.3 million, an increase of $7.8 million from the prior year period. Consolidated cost of products sold for the current six-month period was $584.9 million, a decrease of $10.2 million from the prior year period. CAC costs increased from the prior year $1.1 million in the quarter and decreased $4.9 million in the six-month period due to lower ready-mix volume offset by higher aggregate production. Steel costs increased from the prior year $6.7 million in the quarter and decreased $5.3 million in the six-month period as lower shipments were offset by higher scrap costs and the effect of lower realized prices on structural steel inventory valuations.

CAC selling, general and administrative expenses including depreciation and amortization decreased from the prior year, $2.3 million in the quarter and $2.7 million in the six-month period primarily due to lower incentive compensation and bad debt expense. Steel expenses decreased from the prior year, $4.3 million in the quarter and $5.3 million in the six-month period primarily due to lower incentive compensation, bad debt and general expenses.

CAC other income includes routine sales of surplus operating assets. Sales decreased from the prior year $600,000 in the quarter and $700,000 in the six-month period. Steel other income in the prior year periods included $8.5 million from the Company’s litigation against certain graphite electrode suppliers.

Corporate Resources

Selling, general and administrative expenses including depreciation and amortization increased from the prior year $100,000 in the quarter and decreased $400,000 in the six-month period as lower costs associated with the Company’s agreement to sell receivables were offset by higher non-qualified retirement plan expense. Other income increased from the prior year due to higher interest income.

Interest Expense

Interest expense for the current six-month period at $17.4 million decreased $5.7 million from the prior year period due primarily to lower average borrowings under the Company’s revolving credit facility and to a lesser extent lower interest rates.

Income Taxes

Federal income taxes for the interim periods ended November 30, 2002 and 2001, are based on an estimated annual rate. The primary reason that the tax rate differs from the 35% statutory corporate rate is due to percentage depletion that is tax deductible and state income tax expense. Applying these differences to the estimated current year pre-tax income resulted in an estimated annualized effective tax rate for 2002 of 115.4% compared to 31.5% for 2001. The tax benefit attributed to dividends on preferred securities is based on the incremental tax rate of 35%.

Dividends on Preferred Securities – Net of Tax

Dividends on preferred securities of subsidiary net of tax benefit amounted to $3.6 million in each six-month period.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s sources of liquidity, in addition to cash from operations, include a credit facility and an agreement to sell trade accounts receivable.

The Company has available a $350 million revolving credit facility that expires in March 2004. At November 30, 2002, $50.0 million was outstanding under the credit facility and an additional $114.4 million had been utilized to support letters of credit. The credit facility agreement limits the Company’s total debt based on the ratio of debt to earnings before interest, taxes, depreciation and amortization. At November 30, 2002, $62.8 million of additional debt could have been incurred.

The Company has an agreement to sell, on a revolving basis, an interest in a defined pool of trade accounts receivable of up to $125 million. The maximum amount outstanding varies based upon the level of eligible receivables. At November 30, 2002, the maximum amount of eligible receivables, $119.3 million, had been sold.

The Company historically has financed its major capital expansion projects with cash from operations and long-term borrowing. Working capital requirements and capital expenditures for normal replacement and technological upgrades of existing equipment and expansions of its operations are funded with cash from operations. The fiscal year 2003 capital expenditure budget for these activities is estimated currently at approximately $50 million. In addition, the Company leases certain mobile and other equipment used in its operations under operating leases that in the normal course of business are renewed or replaced by other leases. The Company’s contractual obligations for long-term debt, operating leases and preferred securities of subsidiary are essentially unchanged from May 31, 2002 except for the $40 million reduction in the outstanding balance on the revolving credit facility.

The Company expects cash from operations, borrowings under its revolving credit facility and its agreement to sell trade accounts receivable to be sufficient to provide funds for capital expenditure commitments, scheduled debt repayments and working capital needs.

Cash Flows

Net cash provided by operating activities for the current six-month period was $64.6 million, a decrease of $56.0 million from the prior year period. The decrease in operating cash flow was primarily the result of lower operating profit and changes in Steel inventories and prepaid expenses. In the current period, a scheduled shutdown to refurbish the Steel production facilities increased prepaid expenses $10.4 million. In the prior year period, Steel inventories were reduced $14.6 million as the Company lowered Steel production to bring inventory levels in line with the market conditions. The prior year period operating cash flow also included the collection of a tax refund claim of $18.1 million that offset an increase in Steel receivables of $12.9 million due to higher shipments.

Net cash used by investing activities for the current six-month period was $23.4 million, compared to $7.2 million during the prior year period, consisting principally of capital expenditures for normal replacement and technological upgrades of existing equipment and expansion of the Company’s operations. Capital expenditures for these activities were $33.5 million, an increase of $22.6 million from the prior year. Proceeds from disposal of assets increased $5.1 million. Lower current sales of surplus assets were offset by the collection of notes receivable related to disposals in 2001.

Net cash used by financing activities for the current six-month period was $44.2 million, compared to $107.3 million during the prior year period. The outstanding balance on the Company’s revolving credit facility was reduced $40.0 million. The Company’s quarterly cash dividend of $.075 per common share remained unchanged from the prior year.

OTHER ITEMS

Environmental Matters

The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, furnace dust disposal and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations, however, from time to time the Company receives claims from federal and state environmental regulatory agencies and entities asserting that the Company is or may be in violation of certain environmental laws and regulations. Based on its experience and the information currently available to it, the Company believes that such claims will not have a material impact on its financial condition or results of operations. Despite the Company’s compliance and experience, it is possible that the Company could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by the Company.

Market Risk

The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. Because of the short duration of the Company’s investments, changes in market interest rates would not have a significant impact on their fair value. The current fair value of the Company’s long-term debt, including current maturities, does not exceed its carrying value. Market risk, when estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the Company’s weighted average long-term borrowing rate, would not have a significant impact on the carrying value of long-term debt. Expected maturity dates and average interest rates of long-term debt are essentially unchanged from May 31, 2002.

Critical Accounting Policies

The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. The critical accounting policies that affect its more complex judgments and estimates are described in the Company’s Annual Report on Form 10-K for the year ended May 31, 2002.

New Accounting Pronouncements

Effective June 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Its adoption did not have an immediate effect on the financial statements of the Company.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the

Private Securities Litigation Reform Act of 1995

Certain statements contained in this quarterly report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the impact of competitive pressures and changing economic and financial conditions on the Company’s business, construction activity in the Company’s markets, abnormal periods of inclement weather, changes in the cost of raw materials, fuel, and energy and the impact of environmental laws and other regulations. For further information refer to the Company’s Annual Report on Form 10-K for the year ended May 31, 2002.

Item 4. Controls and Procedures

Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in the Company’s internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is included in the section of the Notes to Consolidated Financial Statements entitled “Legal Proceedings and Contingent Liabilities” presented in Part I on page 12 and incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders

At the Annual Meeting of the Shareholders held October 15, 2002, shareholders elected as Directors of the Company, Robert Alpert, Eugenio Clariond Reyes, and Elizabeth C. Williams to terms expiring in 2005. Votes cast to elect Robert Alpert were 19,041,827 affirmative, 206,456 opposed and 1,787,520 abstained or non-voted. Votes cast to elect Eugenio Clariond Reyes were 18,946,336 affirmative, 301,947 opposed and 1,787,520 abstained or non-voted. Votes cast to elect Elizabeth C. Williams were 18,946,619 affirmative, 301,664 opposed and 1,787,520 abstained or non-voted. Terms of office expire for the continuing directors, John M. Belk, Gordon E. Forward and James M. Hoak, Jr. in 2003 and for the continuing directors, Gerald R. Heffernan, David A. Reed, Robert D. Rogers and Ian Wachtmeister in 2004.

Item 6. Exhibits and Reports on Form 8-K

The following exhibits are included herein:

(15) Letter re: Unaudited Interim Financial Information

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.

The Registrant filed the following report on Form 8-K during the three-month period ended November 30, 2002:

October 11, 2002, reporting the certifications made by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) to accompany the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended August 31, 2002.

SIGNATURES

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

		TEXAS INDUSTRIES, INC.

December 30, 2002		/s/ Richard M. Fowler
		Richard M. Fowler
		Executive Vice President – Finance and Chief Financial Officer
		(Principal Financial Officer)

December 30, 2002		/s/ James R. McCraw
		James R. McCraw
		Vice President – Accounting and Information Services
		(Principal Accounting Officer)

CERTIFICATIONS

I, Robert D. Rogers, certify that:

I have reviewed this quarterly report on Form 10-Q of Texas Industries, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: December 30, 2002

/s/ Robert D. Rogers
Robert D. Rogers President and Chief Executive Officer (Principal Executive Officer)

I, Richard M. Fowler, certify that:

I have reviewed this quarterly report on Form 10-Q of Texas Industries, Inc.;

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: December 30, 2002

/s/ Richard M. Fowler
Richard M. Fowler Executive Vice President – Finance and Chief Financial Officer (Principal Financial Officer)

INDEX TO EXHIBITS

Exhibits		Page

15.	Letter re: Unaudited Interim Financial Information	24

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