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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

[] QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly period Ended
December 31, 2002
or
[   ] TRANSITION REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from         to        

Commission File Number 1-12984

Centex Construction Products, Inc.

A Delaware Corporation

IRS Employer Identification No. 75-2520779
2728 N. Harwood
Dallas, Texas 75201
(214) 981-5000

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 [] No [    ]

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Centex Construction Products, Inc. and Subsidiaries
Form 10-Q Table of Contents

December 31, 2002

Table of Contents

Centex Construction Products, Inc. and Subsidiaries

Part I. Financial Information

Consolidated Financial Statements

Item 1.

The consolidated interim financial statements include the accounts of Centex Construction Products, Inc. and subsidiaries (“CXP” or the “Company”), including its pro rata interest in two joint ventures, and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Company suggests that these unaudited consolidated interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. In the opinion of the Company, all adjustments (consisting solely of normal, recurring adjustments) necessary to present fairly the information in the following unaudited consolidated interim financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

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Centex Construction Products, Inc. and Subsidiaries
Consolidated Statements of Earnings
(dollars in thousands, except per share data)
(unaudited)

See notes to unaudited consolidated financial statements.

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Centex Construction Products, Inc. and Subsidiaries
Consolidated Statements of Earnings
(dollars in thousands, except per share data)
(unaudited)

See notes to unaudited consolidated financial statements.

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Centex Construction Products, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)

(*) From Audited Financial Statements.

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Centex Construction Products, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)

See notes to unaudited consolidated financial statements

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Centex Construction Products, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
December 31, 2002

(A) BASIS OF PRESENTATION

     The consolidated interim financial statements include the accounts of Centex Construction Products, Inc. and its majority-owned subsidiaries (“CXP” or the “Company”) after the elimination of all significant intercompany balances and transactions. CXP is a holding company whose assets consist of its investments in its subsidiaries, intercompany balances and holdings of cash and cash equivalents. The businesses of the consolidated group are conducted through CXP’s subsidiaries. In addition, the Company holds 50% joint venture interests in its cement plants in Illinois and Texas and has proportionately consolidated its pro rata interest in the revenues, expenses, assets and liabilities of those extractive industry ventures.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(B) STOCKHOLDERS’ EQUITY

     A summary of changes in stockholders’ equity is presented below:

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(C) STATEMENTS OF CONSOLIDATED CASH FLOWS — SUPPLEMENTAL DISCLOSURES

     Cash payments made for interest were $7.0 million and $12.1 million for the nine months ended December 31, 2002 and 2001, respectively. Net payments made for federal and state income taxes during the nine months ended December 31, 2002 and 2001 were $0.47 million and $0.50 million, respectively.

(D) INVENTORIES

     Inventories are stated at the lower of average cost (including applicable material, labor, depreciation, and plant overhead) or market. Inventories consist of the following:

(E) EARNINGS PER SHARE

     The Company computes earnings per share in accordance with the provisions of Financial Accounting Standards, SFAS No. 128, “Earnings Per Share”. Basic earnings per share are computed using the average number of common shares outstanding in each of the three month and nine month periods ended December 31, 2002 and 2001. Diluted earnings per share for the periods ended December 31, 2002 assume the dilutive impact of 78,245 and 116,431 shares, respectively, of stock options. For the three and nine months ended December 31, 2001, diluted earnings per share assume the dilutive impact of 98,564 and 98,538 shares, respectively. Anti-dilutive options to purchase shares of common stock that were excluded from the computation of diluted earnings per share were 333,000 shares at an average price of $39.33 and 243,000 shares at an average price of $39.96 for the three months and nine months ended December 31, 2002, respectively. For the three months and nine months ended December 31, 2001, 546,000 shares at an average price of $35.61 and 560,000 shares at an average price of $35.65, respectively, were excluded from the computation of diluted earnings per share. All anti-dilutive options have expiration dates ranging from April 2008 to May 2012.

(F) GOODWILL AND OTHER INTANGIBLE ASSETS

     In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which the Company adopted, effective April 1, 2001. SFAS No. 142 requires the recognition separate from goodwill of identifiable intangible assets if certain criteria are met, and eliminates the amortization of goodwill and certain identifiable intangible assets. Under the provisions of

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SFAS No. 142, intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually at the reporting unit level using a two step impairment assessment. Impairment testing must be performed more frequently if events or changes in circumstances indicate that the asset might be impaired. The first step is to identify potential impairment by determining whether the carrying amount of a reporting segment exceeds its fair value. This step must be completed within six months of adoption. If an impairment is identified, the second step of the goodwill impairment test is to measure the amount of impairment loss, if any. During the quarter ended September 30, 2001, the Company completed the first step of the impairment assessment and determined that the fair value of its reporting segments exceeds their carrying amounts. The Company performed the annual impairment analysis on January 1, 2002 and determined that the fair value of the reporting segments exceeds their carrying amounts. There have been no material changes in the carrying amount of the Company’s goodwill during the three months ended fiscal year March 31, 2002 and for the nine months ended December 31, 2002. During the quarter ended June 30, 2002, the Company sold all of its recycled fiber collection centers. Goodwill applicable to the assets sold amounted to $891,000, which was written off in connection with the sale. Identifiable intangible assets subject to amortization are immaterial for purposes of disclosure.

(G) SEGMENT INFORMATION

     The Company operates in four business segments: Cement, Gypsum Wallboard, Recycled Paperboard, and Concrete and Aggregates, with Cement and Gypsum Wallboard being the Company’s principal lines of business. These operations are conducted in the United States and include the following: the mining and extraction of limestone; the manufacture, production, distribution and sale of Portland cement (a basic construction material which is the essential binding ingredient in concrete); the mining and extraction of gypsum and the manufacture and sale of gypsum wallboard; the manufacture and sale of recycled paperboard to the gypsum wallboard industry and other paperboard converters; the sale of ready-mix concrete; and the mining, extraction and sale of aggregates (crushed stone, sand and gravel). These products are used primarily in commercial and residential construction, public construction projects and projects to build, expand and repair roads and highways. Demand for the Company’s products are derived primarily from residential construction, commercial and industrial construction and public (infrastructure) construction which are highly cyclical and are influenced by prevailing economic conditions including interest rates and availability of public funds. Due to the low value-to-weight ratio of cement, concrete and aggregates, these industries are largely regional and local with demand tied to local economic factors that may fluctuate more widely than those of the nation as a whole.

     The following table sets forth certain business segment information:

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     Total assets by segment are as follows:

     Segment operating earnings represent revenues less direct operating expenses, segment depreciation, and segment selling, general and administrative expenses. Intersegment sales are recorded at prices which approximate market prices. Corporate assets consist primarily of cash and cash equivalents, general office assets and miscellaneous other assets. The increase in Corporate and Other assets resulted from a $10.4 million increase in cash. During the quarter ended September 30, 2002, the Company closed its Georgetown, Texas aggregates quarry and crushing plant. Assets written-off as part of the closure totaled $2.6 million. Goodwill at December 31, 2002, and March 31, 2002 was $40.2 million and $41.1 million, respectively. The breakdown of segment goodwill at December 31, 2002 and March 31, 2002 was Gypsum Wallboard of $33.3 million for each period and Paperboard of $6.9 million and $7.8 million, respectively.

     Certain summarized financial information of the two cement joint ventures, in the aggregate, is included below, presenting the applicable financial statement amounts that have been proportionately consolidated into the Company’s financial statements.

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(H) COMPREHENSIVE LOSSES

     Comprehensive losses are defined as the total of net losses and all other non-owner changes in equity. The unrealized loss on hedging instruments represents the deferral in other comprehensive earnings of the unrealized loss on swap agreements designated as cash flow hedges. The accounting for interest rate swaps and other derivative financial instruments is discussed in detail in Note (K) of this Report. The unrealized gains and losses, net of deferred tax, are excluded from earnings and reported in a separate component of stockholders’ equity as “Accumulated Other Comprehensive Losses.”

     During the quarter ended June 30, 2002, the Company recorded a comprehensive loss of $936,000, net of income taxes of $504,000, in connection with recognizing an additional minimum pension liability. Also, as of December 31, 2002, the Company recorded a cumulative comprehensive loss of $1,144,000, net of income taxes of $616,000, in connection with its interest rate swap. See Note (K) of this Report.

(I) RISK FACTORS

     The majority of the Company’s business is seasonal with peak revenues and profits occurring primarily in the months of April through November. Bad weather conditions during this period could adversely affect operating income and cash flow and could therefore have a disproportionate impact on the Company’s results for the full year. Quarterly results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future.

     A majority of the Company’s revenues are from customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions. In addition, since operations occur in a variety of geographic markets, the Company’s business is subject to the economic conditions in each such geographic market. General economic downturns or localized downturns in the regions where the Company has operations, including any downturns in the construction industry, and announced increases in capacity in the gypsum wallboard, paperboard and cement industries, could have a material adverse effect on the Company’s business, financial condition and results of operations.

     The Company’s operations are subject to and affected by federal, state and local laws and regulations including such matters as land usage, street and highway usage, noise level and health, safety and environmental matters. In many instances, various permits are required. Although management believes that the Company is in compliance in all material respects with regulatory requirements, there can be no assurance that the Company will not incur material costs or liabilities in connection with regulatory requirements.

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     Certain of the Company’s operations may from time to time involve the use of substances that are classified as toxic or hazardous substances within the meaning of these laws and regulations. Risk of environmental liability is inherent in the operation of the Company’s business. As a result, it is possible that environmental liabilities could have a material adverse effect on the Company in the future.

(J) NET INTEREST EXPENSE

     The following components are included in interest expense, net:

     Interest income includes interest on investments of excess cash and interest on notes receivable. Components of interest expense include interest associated with the assumed subordinated debt, the new bank credit facility, the trade receivable securitization facility and commitment fees based on the unused portion of the new bank credit facility. Included in interest expense for the three months ended December 31, 2002 is $581,000 of costs resulting from the early termination of one of the Company’s interest rate swaps. See Note K of this Report. Other expenses include amortization of debt issue costs and bank credit facility costs.

(K) DERIVATIVES AND HEDGING

     The Company adopted the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” on April 1, 2001. The effect of the adoption of SFAS No. 133 had no impact on the Company’s operating earnings. The Company does not use derivative financial instruments for trading purposes, but utilizes them to convert a portion of its variable-rate debt to fixed-rate debt and to manage its fixed to variable-rate debt ratio. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive losses and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are immediately recognized in earnings.

     On July 19, 2001, the Company entered into two interest rate swap agreements, designated as cash flow hedges, with two banks for a total notional amount of $100.0 million. These agreements expire on August 28, 2003. The swap agreements can be matched against $100.0 million of variable-rate LIBOR indexed debt principal and will effectively fix the Company’s interest rate on that debt at 4.493%, plus the applicable margin on the Company’s revolving credit facility debt. On November 22, 2002, the Company terminated one of its interest rate swap agreements with a notional amount of $25.0 million. As a result, the Company

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paid $581,000 to the bank counter party for a release of all obligations under the transaction. Additionally, the Company paid down the portion of the debt that was associated with the $25.0 million interest rate swap, and the Company has no intentions of increasing the amounts outstanding under the debt; therefore, the amount recorded in accumulated other comprehensive income was reclassified to earnings during the current quarter. The reclassification is recorded in interest expense. During the three months and nine months ended December 31, 2002, the swap agreements resulted in approximately $658,000 and $2.0 million, respectively, of additional interest expense. As of December 31, 2002, the fair value of the remaining swap agreement was a liability of approximately $1.8 million ($1.1 million net of tax).

(L) COMMITMENTS AND CONTINGENCIES

     The Company has certain deductible limits under its workers’ compensation and liability insurance policies for which reserves are established based on the undiscounted estimated costs of known and anticipated claims. The Company has entered into standby letter of credit agreements relating to workers’ compensation and auto and general liability self-insurance. At December 31, 2002, the Company had contingent liabilities under these outstanding letters of credit of approximately $7.6 million.

     In the normal course of business, the Company is currently contingently liable for performance under $2.9 million in performance bonds required by certain states and municipalities, and their related agencies. The bonds are principally for certain reclamation obligations and mining permits. The Company has indemnified the underwriting insurance company against any exposure under the performance bonds. In the Company’s past experience, no material claims have been made against these financial instruments.

(M) IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS

     In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and the accounting and reporting provision of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transaction.” SFAS No. 144 became effective for the Company on April 1, 2002, and did not have an impact on its financial position or results of operations for the quarter and nine months ended December 31, 2002.

(N) RECLASSIFICATIONS

     Certain fiscal 2002 balances were reclassified to conform with the fiscal 2003 presentation.

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

Overview

     Information presented for the quarter and nine months reflects the grouping of Centex Construction Product’s businesses into four segments, consisting of Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates. Concrete and Aggregates are broken out separately in the segment discussions.

     Commercial construction, which is a significant component of the demand for the Company’s products, has declined dramatically and is expected to remain at its currently depressed level. A large portion of the decline relates to the completion of pre-9/11 projects and the absence of projects to replace them. Infrastructure activity (road building) is performing short of expectations. With state budgets coming under increasing pressure, it is expected that road spending will continue to be delayed in certain states. With funding for highway construction softening, and the downturn in commercial construction activity, U.S. cement consumption through November of calendar 2002 is 3.7% below the same period for last year. The Company is experiencing some softening of cement prices in the Texas and Nevada markets.

     Although new housing and home repair activity remains strong, the gypsum wallboard industry experienced a softening in wallboard pricing and demand during the quarter ended December 31, 2002. Gypsum wallboard consumption for calendar 2002 was 1.8% above demand for calendar 2001, however, monthly demand since August 2002, except for December 2002, has been below the prior year’s same month demand. Although the industry has reported increased annual gypsum wallboard shipments, cumulative production volume at the Company’s Gypsum Wallboard plants is below 70% of total capacity due to an “over capacity” situation in the gypsum wallboard industry. During September 2002, the Company implemented price increases of up to 15%, however, the price increase completely eroded by the end of the quarter ended December 31, 2002. Pricing continued to soften and then stabilized during the first part of January 2003. Longer term, the level of wallboard demand and prices will be determined by the strength of the housing market and wallboard industry utilization levels.

     In Austin, Texas, which is the Company’s primary concrete and aggregates market, the economy has been affected by weakening economic conditions and as a result, concrete and aggregates demand and pricing in the Austin market has been negatively impacted. On September 3, 2002, the company announced the closing of its aggregates facility in Georgetown, Texas.

Results of Operations

     CXP reported a 33% gain in net earnings for the quarter ended December 31, 2002 compared to the same quarter last year as a result of increased Gypsum Wallboard and Paperboard operating earnings and decreased interest expense, partially offset by lower Cement and Concrete and Aggregates operating earnings. The Company’s net earnings of $15,378,000 for the third quarter this year were up $3,788,000 from $11,590,000 for the same quarter last year. Revenues for the third quarter of fiscal 2003 were $119,089,000, up 6% from revenues of $112,750,000 for the same quarter last year. Diluted earnings per share for this fiscal year’s quarter of $0.83 were up 32% from $0.63 per share for the same quarter in fiscal 2002.

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     For the nine months ended December 31, 2002, CXP’s net earnings increased 67% to $48,220,000 or $2.60 per diluted share from $28,925,000 or $1.57 per diluted share for the same period last year. Revenues for the current nine months increased 7% to $383,857,000 from $359,718,000 for the same period last fiscal year. The earnings increase resulted mostly from higher Gypsum Wallboard sales prices, reduced Paperboard cost of sales and lower corporate interest expense.

     The following table compares sales volume, average unit sales prices and unit operating margins for the Company’s operations: