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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 (IRS Employer Identification No.)
incorporation or organization)
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 October 7, 2002, 21,044,710 shares of Registrant's Common Stock,
$1.00 par value, were outstanding.
Page 1 of 24
INDEX
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page
- -----------------------------
Item 1. Financial Statements
Consolidated Balance Sheets -- August 31, 2002 and May 31, 2002 ......................... 3
Consolidated Statements of Income -- three months ended August 31, 2002
and August 31, 2001 ................................................................. 4
Consolidated Statements of Cash Flows -- three months ended August 31, 2002
and August 31, 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 6. Exhibits and Reports on Form 8-K ........................................................ 19
SIGNATURES
- ----------
CERTIFICATIONS
- --------------
-2-
CONSOLIDATED BALANCE SHEETS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited)
August 31, May 31,
- -----------------------------------------------------------------------------------------------------
In thousands 2002 2002
- -----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 7,197 $ 7,430
Receivables 57,633 56,138
Inventories 278,365 276,482
Deferred taxes and prepaid expenses 41,810 31,192
---------- ----------
TOTAL CURRENT ASSETS 385,005 371,242
OTHER ASSETS
Goodwill 146,474 146,474
Real estate and investments 41,869 41,524
Deferred charges and intangibles 32,073 29,679
---------- ----------
220,416 217,677
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 210,358 209,557
Buildings 102,859 102,358
Machinery and equipment 1,790,808 1,779,863
Construction in progress 49,451 45,450
---------- ----------
2,153,476 2,137,228
Less allowances for depreciation 976,112 952,870
---------- ----------
1,177,364 1,184,358
---------- ----------
$ 1,782,785 $ 1,773,277
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 122,482 $ 111,037
Accrued interest, wages and other items 52,852 48,363
Current portion of long-term debt 9,230 9,228
---------- ----------
TOTAL CURRENT LIABILITIES 184,564 168,628
LONG-TERM DEBT 464,917 474,963
DEFERRED INCOME TAXES AND OTHER CREDITS 169,213 167,276
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY HOLDING
SOLELY COMPANY CONVERTIBLE DEBENTURES 200,000 200,000
SHAREHOLDERS' EQUITY
Common stock, $1 par value 25,067 25,067
Additional paid-in capital 260,220 260,091
Retained earnings 571,433 569,096
Accumulated other comprehensive loss (1,073) --
Cost of common stock in treasury (91,556) (91,844)
---------- ----------
764,091 762,410
---------- ----------
$ 1,782,785 $ 1,773,277
========== ==========
See notes to consolidated financial statements.
-3-
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
Three months ended
August 31,
- ---------------------------------------------------------------------------------------------
In thousands except per share 2002 2001
- ---------------------------------------------------------------------------------------------
NET SALES $ 338,955 $ 361,562
COSTS AND EXPENSES (INCOME)
Cost of products sold 296,689 314,641
Selling, general and administrative 26,423 28,212
Interest 8,836 12,364
Other income (1,382) (3,738)
---------- ----------
330,566 351,479
---------- ----------
INCOME BEFORE THE FOLLOWING ITEMS 8,389 10,083
Income taxes 2,686 3,284
---------- ----------
5,703 6,799
Dividends on preferred securities - net of tax (1,788) (1,788)
---------- ----------
NET INCOME $ 3,915 $ 5,011
========== ==========
BASIC
Average shares 21,109 21,014
Earnings per share $ .19 $ .24
========== ==========
DILUTED
Average shares 21,327 21,485
Earnings per share $ .18 $ .23
========== ==========
Cash dividends per share $ .075 $ .075
========== ==========
See notes to consolidated financial statements.
-4-
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
Three months ended
August 31,
- --------------------------------------------------------------------------------------------
In thousands 2002 2001
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 3,915 $ 5,011
Gain on disposal of assets (51) (123)
Non-cash items
Depreciation, depletion and amortization 24,298 27,183
Deferred taxes 1,580 1,494
Other - net 1,115 2,583
Changes in operating assets and liabilities
Receivables (1,694) 3,304
Inventories and prepaid expenses (12,484) 18,123
Accounts payable and accrued liabilities 15,020 23,365
Real estate and investments (580) (329)
--------- ---------
Net cash provided by operations 31,119 80,611
INVESTING ACTIVITIES
Capital expenditures (17,423) (6,759)
Proceeds from disposal of assets 424 3,064
Other - net (2,551) (1,757)
--------- ---------
Net cash used by investing (19,550) (5,452)
FINANCING ACTIVITIES
Proceeds of long-term borrowing 60,630 100,950
Debt retirements (70,675) (170,991)
Purchase of treasury shares (2) (206)
Common dividends paid (1,578) (1,567)
Other - net (177) 1,758
--------- ---------
Net cash used by financing (11,802) (70,056)
--------- ---------
Increase (decrease) in cash (233) 5,103
Cash at beginning of period 7,430 8,734
--------- ---------
Cash at end of period $ 7,197 $ 13,837
========= =========
See notes to consolidated financial statements.
-5-
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 three-month period ended August 31,
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.
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.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and all subsidiaries.
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:
-------------------------------------------------------------------------
In thousands August May
-------------------------------------------------------------------------
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
========= =========
-6-
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
$14.3 million at both August 31, 2002 and May 31, 2002. Investments, composed
primarily of life insurance contracts which may be used to fund certain Company
benefit agreements, totaled $27.6 million and $27.2 million at August 31, 2002
and May 31, 2002, respectively.
Debt Issuance Cost. Debt issuance costs totaling $9.5 million and $9.9
million at August 31, 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
$3.2 million and $3.5 million, net of accumulated amortization of $5.4 million
and $5.1 million at August 31, 2002 and May 31, 2002, respectively. Amortization
expense of $300,000 was incurred in each of the three-month periods ended August
31, 2002 and 2001. Annual amortization expense for each of the five succeeding
years is $800,000, $400,000, $400,000, $300,000 and $300,000.
Other Credits. Other credits totaling $33.1 million and $32.1 million at
August 31, 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 $1.1 million net of tax
of $600,000 at August 31, 2002. Comprehensive income which consists of net
income and the minimum pension liability adjustment to shareholders' equity was
$2.8 million for the three month period ended August 31, 2002.
Net Sales. Sales are recognized when title has transferred and products are
delivered. Sales are presented net of delivery costs as follows:
August 31,
---------------------------------------------------------------------
In thousands 2002 2001
---------------------------------------------------------------------
Revenues including delivery fees $ 365,997 $ 389,435
Freight and delivery costs (27,042) (27,873)
-------- --------
Net sales $ 338,955 $ 361,562
======== ========
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.
-7-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Basic and Diluted EPS are calculated as follows:
August 31,
---------------------------------------------------------------------
In thousands except per share 2002 2001
---------------------------------------------------------------------
Earnings:
Net income $ 3,915 $ 5,011
======= =======
Shares:
Weighted-average shares outstanding 21,035 20,869
Contingently issuable shares 74 145
------- -------
Basic weighted-average shares 21,109 21,014
Stock option and award dilution 218 471
------- -------
Diluted weighted-average shares * 21,327 21,485
======= =======
Basic earnings per share $ .19 $ .24
======= =======
Diluted earnings per share $ .18 $ .23
======= =======
* Shares excluded due to antidilutive effect:
Preferred securities 2,889 2,889
Stock options and awards 990 595
WORKING CAPITAL
Working capital totaled $200.4 million at August 31, 2002 and $202.6
million at May 31, 2002.
Receivables consist of:
---------------------------------------------------------------------
In thousands August May
---------------------------------------------------------------------
Notes and interest receivables $ 12,811 $ 13,100
Tax refund claims 4,364 4,364
Accounts receivable 40,458 38,674
-------- --------
$ 57,633 $ 56,138
======== ========
Accounts receivable are presented net of allowances for doubtful
receivables of $5.0 million at August 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 $125 million at August and 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 $800,000 and $1.4 million are included in
selling, general and administrative expenses in the three-month periods ended
August 31, 2002 and 2001, respectively. The Company, as agent for the purchaser,
retains collection and administration responsibilities for the participating
interests of the defined pool.
-8-
WORKING CAPITAL-Continued
Inventories consist of:
---------------------------------------------------------------------
In thousands August May
---------------------------------------------------------------------
Finished products $ 83,494 $ 85,818
Work in process 58,745 56,504
Raw materials and supplies 136,126 134,160
-------- --------
$ 278,365 $ 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 $6.3 million at August and May.
Accrued interest, wages and other items consist of:
---------------------------------------------------------------------
In thousands August May
---------------------------------------------------------------------
Interest $ 10,709 $ 5,292
Employee compensation 15,788 21,273
Income taxes 1,825 3,778
Other 24,530 18,020
------- --------
$ 52,852 $ 48,363
======= ========
LONG-TERM DEBT
Long-term debt is comprised of the following:
-------------------------------------------------------------------------------------------------
In thousands August May
-------------------------------------------------------------------------------------------------
Revolving credit facility maturing in 2004, interest rates
average 3.79% $ 80,000 $ 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 3.56% (75% of prime) 4,535 4,535
Other, maturing through 2009, interest rates
from 7.5% to 10% 3,112 3,156
-------- ---------
474,147 484,191
Less current maturities 9,230 9,228
-------- ---------
$ 464,917 $ 474,963
======== =========
Annual maturities of long-term debt for each of the five succeeding years
are $9.2, $134.3, $41.2, $45.9 and $40.9 million.
-9-
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. There is
$80.0 million currently outstanding under this facility. In addition, $110.9
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 August 31, 2002,
$160.9 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 August 31,
2002, $44.0 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 three-month periods presented was $2.1
million in 2002 and $6.2 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. 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).
-10-
SHAREHOLDERS' EQUITY
Common stock consists of:
----------------------------------------------------------------------
In thousands August May
----------------------------------------------------------------------
Shares authorized 40,000 40,000
Shares outstanding at end of period 21,042 21,026
Shares held in treasury 4,025 4,041
Shares reserved for stock options and other 3,414 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 three-month period ended August
31, 2002, follows:
------------------------------------------------------------------------
Weighted Average
Shares Under Option Option Price
------------------------------------------------------------------------
Outstanding at June 1 2,399,153 $31.02
Exercised (13,760) 25.86
Cancelled (1,500) 28.55
---------- -----
Outstanding at August 31 2,383,893 $31.05
========== =====
At August 31, 2002, there were 1,565,123 shares exercisable and 941,550
shares available for future grants. Outstanding options expire on various dates
to January 16, 2012.
INCOME TAXES
Federal income taxes for the interim periods ended August 31, 2002 and
2001, have been included in the accompanying financial statements on the basis
of an estimated annual rate. The estimated annualized tax rate is 30.6% for 2002
compared to 31.7% for 2001. The primary reason that these respective tax rates
differ from the 35% statutory corporate rate is due to percentage depletion
which is tax deductible and state income tax expense. The Company made income
tax payments of $2.1 million in the three-month period ended August 31, 2002 and
received income tax refunds of $18.1 million in the three-month period ended
August 31, 2001.
-11-
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.
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.
-12-
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 August 31, 2002 and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended August 31, 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
September 18, 2002
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of operations and financial condition for the three-month period
ended August 31, 2002 to the three-month period ended August 31, 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
August 31,
--------------------------------------------------------------------------------------------
In thousands 2002 2001
--------------------------------------------------------------------------------------------
TOTAL SALES
Cement $ 93,785 $ 94,492
Ready-mix 59,007 65,995
Stone, sand & gravel 28,136 34,555
Structural mills 119,919 127,407
Bar mill 31,085 29,966
UNITS SHIPPED
Cement (tons) 1,327 1,320
Ready-mix (cubic yards) 1,010 1,111
Stone, sand & gravel (tons) 4,951 6,113
Structural mills (tons) 367 404
Bar mill (tons) 99 101
NET SALES
Cement $ 76,417 $ 75,117
Ready-mix 58,925 65,933
Stone, sand & gravel 19,854 25,590
Other products 28,492 32,482
--------- --------
TOTAL CAC 183,688 199,122
Structural mills 119,919 127,407
Bar mill 31,085 29,966
Other 4,263 5,067
--------- --------
TOTAL STEEL 155,267 162,440
--------- --------
TOTAL NET SALES $ 338,955 $ 361,562
========= ========
-14-
Three months ended
August 31,
----------------------------------------------------------------------------------------------
In thousands 2002 2001
----------------------------------------------------------------------------------------------
CAC OPERATIONS
Gross profit $ 51,769 $ 61,514
Less: Depreciation, depletion &
amortization 11,922 12,299
Selling, general & administrative 12,020 12,301
Other income (601) (458)
--------- ---------
OPERATING PROFIT 28,428 37,372
STEEL OPERATIONS
Gross profit 13,986 11,717
Less: Depreciation & amortization 11,938 14,516
Selling, general & administrative 5,978 6,932
Other income (723) (2,837)
--------- ---------
OPERATING LOSS (3,207) (6,894)
--------- ---------
TOTAL OPERATING PROFIT 25,221 30,478
CORPORATE RESOURCES
Other income 58 443
Less: Depreciation & amortization 438 368
Selling, general & administrative 7,616 8,106
--------- ---------
(7,996) (8,031)
INTEREST EXPENSE (8,836) (12,364)
--------- ---------
INCOME BEFORE TAXES & OTHER ITEMS $ 8,389 $ 10,083
========= =========
RESULTS OF OPERATIONS
Operating Profit - August 2002 Quarter Compared to August 2001 Quarter
Operating profit at $25.2 million decreased 17% from the prior year period.
CAC profit declined $8.9 million as lower ready-mix and aggregate shipments were
offset in part by improved cement margins due to lower energy and maintenance
costs. Steel operating results improved $3.7 million as higher realized prices
and lower depreciation expense was offset in part by increased scrap costs and
lower shipments. Although demand for building materials in the Company's CAC
markets has declined it remains at satisfactory levels. Overall demand for
structural steel is down from prior year levels due to the lower level of
non-residential construction. Since it is not possible to predict with any
confidence when these markets will change, the Company is focused on reducing
costs, maintaining desirable market share and continuing to generate operating
cash flows.
Net Sales. Consolidated net sales for the August 2002 quarter were $339.0
million compared to $361.6 million for the prior year period. CAC sales at
$183.7 million were down 8%. Total cement sales declined slightly on 2% lower
average trade prices. Ready-mix sales declined $7.0 million on 9% lower volume
and 2% lower average prices. Aggregate sales declined $6.4 million on 19% lower
shipments and 2% lower average prices. Wet weather and softening demand in the
Company's Texas markets reduced ready-mix and aggregate shipments in the
quarter. Steel sales at $155.3 million were down 4%. Structural steel sales
declined $7.5 million on 9% lower shipments at 4% higher realized prices. Bar
mill sales increased $1.1 million on 6% higher prices.
Operating Costs. Consolidated cost of products sold including depreciation,
depletion and amortization was $296.7 million, a decrease of $17.9 million from
the prior year period. CAC costs were $143.5 million, a decrease of $5.9
million, due to a 7% reduction in unit cement manufacturing costs and lower
ready-mix volume. Steel costs were $153.2 million, a decrease of $12.0 million,
as lower shipments were offset in part by higher scrap costs.
-15-
CAC selling, general and administrative expenses including depreciation and
amortization at $12.4 million decreased $400,000 and Steel expenses at $6.0
million decreased $900,000 due to lower general expenses.
Corporate Resources
Selling, general and administrative expenses including depreciation and
amortization at $8.1 million decreased $400,000 on lower costs associated with
the Company's agreement to sell receivables. Other income decreased $400,000 on
lower interest income.
Interest Expense
Interest expense at $8.8 million decreased $3.5 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
The Company's current effective tax rate is estimated at 30.6% compared to
31.7% in the prior year period. 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.
Dividends on Preferred Securities - Net of Tax
Dividends on preferred securities of subsidiary net of tax benefit amounted
to $1.8 million in each 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 August 31, 2002, $80.0 million was outstanding under
the credit facility and an additional $110.9 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 August 31, 2002, $160.9 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. At August 31,
2002, the entire amount available under this agreement 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 $75 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 $10 million reduction in the outstanding balance on the
revolving credit facility.
The Company expects cash from operations, borrowings under its current or
similar 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.
-16-
Cash Flows
Net cash provided by operating activities was $31.1 million, a decrease of
$49.5 million from the prior year period. The decrease was primarily the result
of changes in Steel inventories and prepaid expenses. In the current period, a
scheduled shutdown to refurbish the Steel production facilities increased
prepaid expenses $10.8 million. In the prior year period, Steel inventories were
reduced $17.2 million as the Company lowered Steel production to bring inventory
levels in line with 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 $16.4 million due to higher shipments.
Net cash used by investing activities was $19.6 million, compared to $5.5
million during the prior year period, consisting principally of capital
expenditures for normal replacement and technological upgrades of existing
equipment and expansions of the Company's operations. Capital expenditures for
these activities in the August 2002 quarter were $17.4 million, an increase of
$10.7 million from the prior year period.
Net cash used by financing activities was $11.8 million, compared to $70.1
million during the prior year period. The outstanding balance on the Company's
revolving credit facility was reduced $10.0 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.
-17-
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.
-18-
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 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 August 31, 2002:
August 22, 2002, reporting (i) 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 Annual Report on Form 10-K for the fiscal
year ended May 31, 2002; and (ii) the sworn statements submitted by the
Principal Executive Officer and Principal Financial Officer pursuant to
the Securities and Exchange Commission Order No. 4-460.
-19-
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.
October 11, 2002 /s/ Richard M. Fowler
- ---------------- ----------------------
Richard M. Fowler
Executive Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
October 11, 2002 /s/ James R. McCraw
- ---------------- --------------------
James R. McCraw
Vice President - Accounting and Information
Services
(Principal Accounting Officer)
-20-
CERTIFICATIONS
I, Robert D. Rogers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas Industries,
Inc.;
2. 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;
3. 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;
4. 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:
a) 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;
b) 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
c) 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;
5. 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):
a) 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
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. 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: October 11, 2002
/s/ Robert D. Rogers
--------------------------------------------
Robert D. Rogers
President and Chief Executive Officer
(Principal Executive Officer)
-21-
I, Richard M. Fowler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas Industries,
Inc.;
2. 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;
3. 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;
4. 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:
a) 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;
b) 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
c) 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;
5. 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):
a) 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
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. 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: October 11, 2002
/s/ Richard M. Fowler
--------------------------------------------
Richard M. Fowler
Executive Vice President - Finance and Chief
Financial Officer
(Principal Financial Officer)
-22-
INDEX TO EXHIBITS
Exhibits Page
15. Letter re: Unaudited Interim Financial Information............... 24
-23-