10-K 1 a2013053110k.htm 10-K 2013.05.31 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-K
 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2013
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 1-4887
TEXAS INDUSTRIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
 
75-0832210
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
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
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $1.00 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ý
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 ý No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
Accelerated Filer
¨
Non-accelerated Filer
o
Smaller Reporting Company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $1,335,904,339, computed by reference to the price at which the common stock was last sold on the New York Stock Exchange as of November 30, 2012, the last business day of the Registrant’s most recently completed second fiscal quarter.
There were 28,576,319 shares of the Registrant’s common stock outstanding as of July 9, 2013.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy statement for the 2013 annual meeting of shareholders are incorporated by reference into Part III.



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
PART III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
PART IV
 
 
 
 
Item 15.
 
 
 




PART I
ITEM 1.    BUSINESS
When used in the Report, the terms “Company,” “we,” “us,” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise.
General
We are a leading supplier of heavy construction materials in the southwestern United States through our three business segments: cement, aggregates and consumer products. Our cement segment produces gray portland cement and specialty cements. Our cement production and distribution facilities are concentrated primarily in Texas and California, the two largest cement markets in the United States. Based on production capacity, we are the largest producer of cement in Texas with a 32% share in that state. Our aggregates segment produces natural aggregates, including sand, gravel and crushed limestone. Our consumer products segment produces ready-mix concrete. We are a major supplier of natural aggregates and ready-mix concrete in Texas and northern Louisiana and, to a lesser extent, in Oklahoma and Arkansas. For financial information about our business segments, see Note 11 of Notes to Consolidated Financial Statements in Item 8 of this Report.
As of May 31, 2013, we had 123 manufacturing facilities in five states. In fiscal year 2013, our net sales were $697.1 million, of which 48% was generated by our cement segment, 19% by our aggregates segment, and 33% by our consumer products segment. During the year, we shipped 4.4 million tons of finished cement, 14.6 million tons of natural aggregates and 2.8 million cubic yards of ready-mix concrete. We also shipped 1.0 million cubic yards of lightweight aggregates before we transferred our lightweight aggregate production facilities to a subsidiary of Trinity Industries, Inc. in the asset exchange transaction described below.
During fiscal year 2013, we saw an increasing level of construction activity in the Texas area and, to a lesser extent, in California, although activity remained at levels significantly below those experienced prior to the recent recession. We have intensified our efforts on reducing costs, conserving cash and continuously improving our operations and sales. This will remain our focus as construction activity improves.
On April 1, 2011 we entered into an asset exchange transaction in which we acquired the ready-mix operations of Transit Mix Concrete and Materials Company, a subsidiary of Trinity Industries, Inc., that serve the central Texas market from north of San Antonio to Hillsboro, Texas. In exchange for the ready-mix facilities, we transferred to Trinity Materials, Inc., also a subsidiary of Trinity Industries, Inc., the aggregate operations at the Anacoco sand and gravel plant, which serves the southwest Louisiana and southeast Texas markets, and the Paradise and Beckett sand and gravel plants, which both serve the north Texas market.
On July 29, 2011, we acquired from CEMEX, USA three ready mix concrete plants and one sand and gravel plant in the Austin metropolitan market, adding to our existing ready mix and aggregate presence in the region. As a part of the transaction, we transferred to CEMEX USA seven ready mix concrete plants in the Houston market.
On November 18, 2011, we entered into a joint venture agreement with Ratliff Ready-Mix , L.P., a ready mix operator based in Waco, Texas. We contributed seven of our central Texas ready-mix plants and certain related assets to the joint venture in return for a 40% equity interest. We also guaranteed approximately $13 million of joint venture debt.
On April 16, 2012, we sold our Texas based packaged products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities in the Dallas-Fort Worth Metroplex, the Houston metro area, and the Austin/Central Texas region. We entered into a long-term cement supply agreement with Bonsal as a part of the transaction.
On April 20, 2012, we sold our aggregate rail distribution terminal including 154 acres of land and associated assets in Stafford, Texas, south of Houston, to Lex Missouri City, LP. We continue to supply aggregates to the Houston market through our aggregate distribution terminal in Katy, Texas, west of Houston.
On March 22, 2013, we exchanged our expanded shale and clay manufacturing facilities in Texas, Colorado and California, our DiamondPro® product line and related assets for 42 ready-mix concrete plants stretching from Texarkana to Beaumont in east Texas and in southwestern Arkansas, two aggregate distribution facilities in Beaumont and Port Arthur, Texas, $8.5 million in cash and related assets owned by subsidiaries of Trinity Industries, Inc.

During the spring of 2013 we completed the commissioning of our new cement kiln and related production equipment at our Hunter, Texas cement plant. The new kiln has annual cement production capacity of approximately 1.4 million tons. The total capital cost of the project was approximately $374.1 million, excluding capitalized interest of $105.2 million related to the project. Concurrently with the commissioning of the new kiln, we shut down our existing kiln for installation of a new baghouse in order to meet the requirements of new federal environmental regulations, and to make other repairs and equipment upgrades. The original kiln has annual cement production capacity of approximately .9 million tons, and is expected to be ready to return to production in the first calendar quarter of 2014.

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We expect our capital expenditures in fiscal year 2014 to be $30 million to $40 million.
Our Competitive Strengths and Strategies
We believe the following competitive strengths and strategies are key to our ability to grow and compete successfully:
Leading Market Positions.    We strive to be a major supplier in markets that have attractive characteristics, such as large market size, above average long-term projected population growth, strong economic activity and a year-round building season. Based on production capacity, we are the largest producer of cement in Texas with a 32% share of total production capacity, and the second largest producer of cement in southern California. We believe we are also the second largest supplier of stone, sand and gravel natural aggregate products in North Texas, one of the largest suppliers of ready-mix concrete in north Texas, east Texas and the central Texas/Austin region, and one of the largest suppliers of sand and gravel aggregate products and ready-mix concrete in northern Louisiana. We believe our leadership in these markets enhances our competitive position.
Integrated Operations.    Historically, a significant part of our operating approach has focused on the synergies available from operating in the cement, aggregate and ready-mix businesses. We plan to continue to assess opportunities to enhance our operations in similar ways.
Low Cost Supplier.    We strive to be a low cost supplier in our markets. We believe we have some of the most efficient cement production capacity in the industry. We focus on optimizing the use of our equipment, enhancing our productivity and exploring new technologies to further improve our unit cost of production at each of our facilities. Efficient plant designs, high productivity rates and innovative manufacturing processes are all results of our focus on being a low cost supplier.
Strategic Locations and Markets.    The strategic locations of our facilities near our customer base and sources of raw materials allow us to access the largest cement consuming markets in the United States. Our cement manufacturing facilities are located in Texas and California, the two largest U.S. cement markets. During calendar year 2012, Texas and California accounted for approximately 13.6 million and 8.3 million tons, respectively, of cement consumption or approximately 15% and 10%, respectively, of total U.S. cement consumption. California and Texas have also been the largest beneficiaries of federal transportation funding during the last several years. Funds distributed under federal highway legislation historically have comprised a majority of California and Texas’ public works spending. Additionally, Texas utilizes private sources of funds for highway construction through public-private partnerships.
Diversified Product Mix and Broad Range of End-User Markets.    Our revenue streams are derived from multiple end-user markets, including the public works, residential, commercial, industrial and institutional construction sectors, as well as the oil and gas industry. Accordingly, we have a broad and diverse customer base. Our diversified mix of products provides access to this broad range of end-user markets and helps mitigate the exposure to cyclical downturns in any one product or end-user market. No one customer accounted for more than 10% of our net sales in fiscal year 2013.
Long-Standing Customer Relationships.    We have established a solid base of long-standing customer relationships. For example, our ten largest customers during fiscal year 2013 have done business with us for an average of 15 years. We strive to achieve customer loyalty by delivering superior customer service and maintaining an experienced sales force with in-depth market knowledge. We believe our long-standing relationships and our leading market positions help to provide additional stability to our operating performance and make us a preferred supplier.
Experienced Management Team.    Mel Brekhus, our chief executive officer, Ken Allen, our chief financial officer, Jamie Rogers, our chief operating officer, and the vice presidents for the cement, aggregates and consumer products segments have an average of almost 25 years of industry experience. Our management team has led our company through several industry cycles and has demonstrated the ability to successfully complete and operate major expansion projects.
Products
Cement Segment
Our cement operations produce gray portland cement as our principal product. We also produce specialty cements such as masonry and oil well cements. Our cement production facilities are located at Midlothian, Texas, south of Dallas/Fort Worth, Hunter, Texas, between Austin and San Antonio; and Oro Grande, California, near Los Angeles. The limestone reserves used as the primary raw material are located on property we own adjacent to each of the plants. We also operate a cement terminal and packaging facility at our Crestmore plant near Riverside, California, and we operate its gray portland cement grinding facility on an as needed basis. Additional information about our cement production facilities and associated limestone reserves is provided in Item 2, Properties, of this Report.
We produced approximately 4.3 million tons of finished cement during fiscal year 2013. We shipped approximately 4.4 million tons during the year, of which 3.8 million tons were shipped to outside trade customers. At May 31, 2013, our backlog was approximately 1.0 million tons, approximately .4 million tons of which we do not expect to fill in fiscal year 2014. At May 31, 2012, our backlog was approximately .9 million tons.

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During the recent recession, we modified our operating processes in order to reduce costs and more closely match cement production to demand in our markets. We expect to realize the benefits that come with the normal operation of our cement production facilities as construction activity improves in our markets. However we will continue to temporarily idle our cement kilns to the extent necessary to control inventories.
In July 2010 we decided to surrender the operating permits for the four wet kilns at our Midlothian plant, which had a rated annual production capacity of 600,000 tons of clinker. We plan to replace the production capacity of the wet kilns by increasing the much more efficient capacity of the large modern dry process kiln at the plant. Closing the four wet kilns allowed us to obtain the permits needed to enhance and optimize the dry kiln. We do not yet have a schedule to construct the enhancements, so we cannot yet estimate the cost for the enhancements.
The primary fuel source for all of our facilities is coal, which can be supplemented with natural gas, petroleum coke, tires and other fuels at some of our locations. Our facilities also consume large amounts of electricity. We believe that adequate supplies of both fuel and electricity are available.
We market our cement products in the southwestern United States. Our principal marketing area includes the states of Texas, Louisiana, Oklahoma, California, Nevada and Arizona. Sales offices are maintained in the marketing area and sales are made primarily to numerous customers in the construction industry, no one of which would be considered material to our business.
Cement is distributed by rail or truck to 5 distribution terminals located throughout the marketing area. Transportation costs vary depending on the mode of transportation utilized.
Aggregates Segment
Natural Aggregates.    Our natural aggregate operations produce sand, gravel and crushed limestone. These operations are conducted from facilities primarily serving the Dallas/Fort Worth and Austin areas in Texas; the southern Oklahoma area; and the Alexandria and Monroe areas in Louisiana. Additional information about our natural aggregates production facilities and associated reserves is provided in Item 2, Properties, of this Report.
We produced approximately 14.2 million tons of natural aggregates during fiscal year 2013. We shipped approximately 14.8 million tons of natural aggregates during fiscal year 2013, of which 11.3 million tons were shipped to outside trade customers. At May 31, 2013, our backlog was approximately 1.5 million tons, approximately 1.4 million tons of which we expect to ship in fiscal year 2014. At May 31, 2012, our backlog was approximately 1.4 million tons.
The cost of transportation limits the marketing of aggregate products to the areas within approximately 100 miles of the plant or terminal sites. Sales are therefore related to the level of construction activity near the plants and terminals. The products are marketed by our sales organization located in the areas served by the plants and terminals and are sold to numerous customers, no one of which would be considered material to our business.
Products are distributed to trade customers principally by contract or customer-owned haulers or through rail distribution facilities. To enhance our efficiency and competitiveness, particularly in sales of crushed stone, we strive to establish direct rail links between production facilities and our key markets, reducing the cost of transportation. We have installed rail capacity at our crushed stone plants and 6 rail terminals close to major markets, which allows rapid loading and unloading of product. In local areas surrounding our rail terminals, we believe we have a transportation cost advantage over some competing suppliers who rely to a greater extent on truck transportation.
Lightweight Aggregates.    Until March 2013 we manufactured expanded shale and clay lightweight aggregates at production facilities located in Texas, California and Colorado. On March 22, 2013 we transferred our lightweight aggregates facilities to a subsidiary of Trinity Industries, Inc. in connection with the asset exchange transaction described above. Prior to the transaction, we produced approximately 0.9 million cubic yards of lightweight aggregates during fiscal year 2013. We shipped approximately 1.0 million cubic yards of lightweight aggregates during fiscal year 2013, of which approximately 0.9 million cubic yards were shipped to outside trade customers.
Consumer Products Segment
Ready-mix Concrete.    Our ready-mix concrete operations are situated in three areas in Texas (the Dallas/Fort Worth/Denton area of north Texas, the Austin area of central Texas and from Beaumont to Texarkana in east Texas), in north and central Louisiana, and in southwestern Arkansas. We acquired 39 of the locations in east Texas and 3 in Arkansas on March 22, 2013, as part of the asset exchange transaction described above. We are also a 40% partner in a joint venture that has ready mix concrete operations in the northern part of central Texas area centered around Waco, Texas. Additional information about our ready mix concrete production facilities is provided in Item 2, Properties, of this Report.
We shipped approximately 2.8 million cubic yards of ready-mix concrete during fiscal year 2013. At May 31, 2013, our backlog was approximately 2.4 million cubic yards, approximately 1.7 million cubic yards of which we expect to ship in fiscal year 2014. At May 31, 2012, our backlog was approximately 1.8 million cubic yards.

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We manufacture and supply a substantial amount of the cement and aggregates raw materials used by our ready-mix plants. The remainder is purchased from outside suppliers. Ready-mix concrete is sold to various contractors in the construction industry, no one of which would be considered material to our business. We believe that we are a significant participant in the Texas and Louisiana concrete products markets in which we operate. Because we are a producer of cement and aggregates, the primary components of concrete, we believe that our customers view us as a reliable supplier of quality concrete, particularly during times that the supply of raw materials is tight.
Other Products.    Until April 2012, we manufactured and marketed packaged concrete mix, mortar, sand and related packaged products from bagging plants and distribution sites we owned in the Dallas/Fort Worth, Austin and Houston areas in Texas. We also marketed our Maximizer packaged concrete mixes in southern California. On April 16, 2012 we sold our Texas based packaged products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities in the Dallas-Fort Worth Metroplex, the Houston metro area, and the Austin/Central Texas region, and included rights to the Maximizer name and technology. We entered into a long-term cement supply agreement with Bonsal as a part of the transaction.
Competition
All of the product segments and markets in which we participate are highly competitive. These markets are also generally regional because transportation costs are high relative to the value of the product. Ready-mix concrete also competes in relatively small geographic areas due to delivery time constraints associated with pre-mixed concrete after the addition of water. As a result, in our aggregates and consumer products markets, there is little competition from imported products. However, our cement segment does compete with imported cement because of the higher value of the product and the existence of major ports in some of our markets.
The nature of our competition varies among our product lines due to the widely differing amounts of capital necessary to build production facilities. Construction of cement production facilities is highly capital intensive and requires long lead times to complete engineering design, obtain regulatory permits, acquire equipment and construct a plant. Most domestic producers of cement are owned by large foreign companies operating in multiple international markets. Many of these producers maintain the capability to import cement from foreign production facilities.
Sand and gravel production by dredging, or crushed stone production from stone quarries, is moderately capital intensive. Our major competitors in the aggregates markets are typically large vertically integrated companies.
Ready-mix concrete production requires relatively small amounts of capital to build a concrete batching plant and acquire delivery trucks. As a result, in each local market we face competition from numerous small producers as well as large vertically integrated companies with facilities in many markets.
Due to the lack of product differentiation, competition for all of our products is based largely on price and, to a lesser extent, quality of product and service. As a result, the prices that we charge our customers are not likely to be materially different from the prices charged by other producers in the same markets. Accordingly, our profitability is generally dependent on the level of demand for cement, aggregates and concrete products in the local markets we serve, and on our ability to control operating costs.
Employees
At May 31, 2013, we had approximately 2,040 employees. Approximately 140 employees at our Oro Grande, California cement plant are covered by a collective bargaining agreement with an expiration date in June 2015. Approximately 37 employees at our Crestmore plant near Riverside, California are covered by a collective bargaining agreement that expires in August 2013. We expect to reach agreement on a new collective bargaining agreement, but we cannot guarantee this result, nor can we predict what action the union may take if we cannot reach agreement.
We believe our relationship with our employees is good.

Legal Proceedings
In March 2008, the South Coast Air Quality Management District, or SCAQMD, informed one of our subsidiaries, Riverside Cement Company (Riverside), that it believed that operations at the Crestmore cement plant in Riverside, California caused the level of hexavalent chromium, or chrome 6, in the air in the vicinity of the plant to be elevated above ambient air levels. Chrome 6 has been identified by the State of California as a carcinogen. Riverside immediately began taking steps, in addition to its normal dust control procedures, to reduce dust from plant operations and eliminate the use of open clinker stockpiles. In February 2008, the SCAQMD placed an air monitoring station at the downwind property line closest to the open clinker stockpiles. In the SCAQMD’s first public report of the results of its monitoring, over the period of February 12 to April 9, 2008, the average level of chrome 6 was 2.43 nanograms per cubic meter, or ng/m³. Since that time, the average level has decreased. The average levels of chrome 6 reported by the SCAQMD at all of the air monitoring stations in areas around

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the plant, over the entire period of time they have operated those stations, including the station at the property line, average below 1.0 ng/m³ over the entire period of time it has operated the stations. The SCAQMD compared the level of exposure at the air monitor on our property line with the following employee exposure standards established by regulatory agencies:
 
 
 
 
 
Occupational Safety and Health Administration
  
 
5,000 ng/m³
  
National Institute for Occupational Safety and Health
  
 
1,000 ng/m³
  
California Environmental Protection Agency
  
 
200 ng/m³
  

In public meetings conducted by the SCAQMD, it stated that the risk of long term exposure immediately adjacent to the plant is similar to living close to a busy freeway or rail yard, and it estimated an increased risk of 250 to 500 cancers per one million people, assuming continuous exposure for 70 years. Riverside has not determined how this particular risk number was calculated by SCAQMD. However, the Riverside Press Enterprise reported in a May 30, 2008 story that “John Morgan, a public health and epidemiology professor at Loma Linda University, said he looked at cancer cases reported from 1996 to 2005 in the census [tract] nearest the [plant] and found no excess cases. That includes lung cancer, which is associated with exposure to hexavalent chromium.”
In late April 2008, a lawsuit was filed in Riverside County Superior Court of the State of California styled Virginia Shellman, et al. v. Riverside Cement Holdings Company, et al. The lawsuit against three of our subsidiaries purports to be a class action complaint for medical monitoring for a putative class defined as individuals who were allegedly exposed to chrome 6 emissions from our Crestmore cement plant. The complaint alleges an increased risk of future illness due to the exposure to chrome 6 and other toxic chemicals. The suit requests, among other things, establishment and funding of a medical testing and monitoring program for the class until their exposure to chrome 6 is no longer a threat to their health, as well as punitive and exemplary damages.
Since the Shellman lawsuit was filed, five additional putative class action lawsuits have been filed in the same court. The putative class in each of these cases is the same as or a subset of the putative class in the Shellman case, and the allegations and requests for relief are similar to those in the Shellman case. As a consequence, the court has stayed four of these lawsuits until the Shellman lawsuit is finally determined.
Since August 2008, additional lawsuits have been filed in the same court against Texas Industries, Inc. or one or more of our subsidiaries containing allegations of personal injury and wrongful death by approximately 3,000 individual plaintiffs who were allegedly exposed to chrome 6 and other toxic or harmful substances in the air, water and soil caused by emissions from the Crestmore plant. The court has dismissed Texas Industries, Inc. from the suits, and our subsidiaries operating in Texas have been dismissed by agreement with the plaintiffs. Most of our subsidiaries operating in California remain as defendants. The court has dismissed from these suits plaintiffs that failed to provide required information, leaving approximately 2,000 plaintiffs.
Since January 2009, additional lawsuits have been filed against Texas Industries, Inc. or one or more of our subsidiaries in the same court involving similar allegations, causes of action and requests for relief, but with respect to our Oro Grande, California cement plant instead of the Crestmore plant. The suits involve approximately 300 individual plaintiffs. Texas Industries, Inc. and our subsidiaries operating in Texas have been similarly dismissed from these suits. The court has dismissed from these suits plaintiffs that failed to provide required information, leaving approximately 250 plaintiffs. Prior to the filing of the lawsuits, the air quality management district in whose jurisdiction the plant lies conducted air sampling from locations around the plant. None of the samples contained chrome 6 levels above 1.0 ng/m³.
The plaintiffs allege causes of action that are similar from suit to suit. Following dismissal of certain causes of action by the court and amendments by the plaintiffs, the remaining causes of action typically include, among other things, negligence, intentional and negligent infliction of emotional distress, trespass, public and private nuisance, strict liability, willful misconduct, fraudulent concealment, unfair business practices, wrongful death and loss of consortium. The plaintiffs generally request, among other things, general and punitive damages, medical expenses, loss of earnings, property damages and medical monitoring costs. At the date of this report, none of the plaintiffs in these cases has alleged in their pleadings any specific amount or range of damages. Some of the suits include additional defendants, such as the owner of another cement plant located approximately four miles from the Crestmore plant or former owners of the Crestmore and Oro Grande plants. We will vigorously defend all of these suits but we cannot predict what liability, if any, could arise from them. We also cannot predict whether any other suits may be filed against us alleging damages due to injuries to persons or property caused by claimed exposure to chrome 6.
We are defendants in other lawsuits that arose in the ordinary course of business. In our judgment the ultimate liability, if any, from such legal proceedings will not have a material effect on our consolidated financial position or results of operations.

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Environmental
We are subject to various federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern, among other things:
air emissions,
wastewater discharges,
generation, use, handling, storage, transportation and disposal of hazardous substances and wastes,
investigation and remediation of contamination existing at current and former properties, and at third-party waste disposal sites,
exposure limits of our employees and others to dust, silica and other substances, and
safety standards for operating our quarries and plant equipment.
Sources of air emissions and wastewater discharges at our facilities are regulated by a combination of permit limitations and emission standards of national and statewide application. The laws and regulations requiring permits and establishing emission standards have tended to become increasingly stringent over time. In addition, permits are subject to modification, renewal and revocation requirements, which allow issuing agencies to tighten the permit limitations.
Many of the raw materials, products and by-products associated with the operation of any industrial facility, including those for the production of cement or concrete products, contain chemical elements or compounds that can be designated as hazardous. An example is the metals present in cement kiln dust, or CKD. Currently, CKD is exempt from hazardous waste management standards under the Resource Conservation and Recovery Act, or RCRA, if certain tests are satisfied. We have demonstrated that the CKD we generate satisfies these tests, but there can be no guarantee that the tests will not be changed in the future.
Like others in our business, we expend substantial amounts to comply with these environmental, health and safety laws, regulations and permit limitations, including amounts for pollution control equipment required to monitor and regulate air emissions and wastewater discharges. Since many of these requirements are subjective and therefore not quantifiable, or are presently not determinable, or are likely to be affected by future legislation or rule making by government agencies, it is not possible to accurately predict the aggregate future costs of compliance and their affect on our future results of operations or financial condition.
For additional information about the environmental, health and safety risks inherent in our operations, see “Legal Proceedings” above and Item 1A, Risk Factors, in this Report.
Intellectual Property
We own trademarks such as TXI® and certain process patents. We believe that none of our active trademarks or patents are essential to our business as a whole.
Real Estate
We own significant amounts of land that was acquired for our business purposes such as mining limestone, sand, gravel and clay. When mining is completed or land becomes surplus for other reasons, we sell it for development or, in some instances, develop it ourselves. We are involved in the sale of land in a high quality industrial and multi-use park that we developed in the metropolitan area of Dallas/Fort Worth, Texas, and we are developing plans for a multi-use development in the Austin, Texas area.
Research and Development
We incurred no research and development cost for any of the past three fiscal years. All of our innovations are developed through the production process.
Executive Officers of the Registrant
Following is information as of June 30, 2013 about our executive officers:
Mel G. Brekhus, age 64, has been President and Chief Executive Officer since June 1, 2004. From 1998 through May 2004, he was Executive Vice President, Cement, Aggregate and Concrete. He joined us in 1989 as Vice President, Cement Production and within a short period became Vice President, Cement. His career in the cement industry began in 1972 when he joined Lehigh Portland Cement Company (1972-1983). While at Lehigh, he held various positions throughout the United States as Chemist, Production Manager and Plant Manager. He was Technical Manager and Plant Manager for Missouri Portland

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Cement Company (1984-1989) in their Midwest operations. His professional affiliations include the Portland Cement Association, where he is Past Chairman and presently a Director.
Kenneth R. Allen, age 55, has been Vice President, Finance and Chief Financial Officer since August 1, 2008. Mr. Allen joined us in 1985 and became Treasurer in 1991 and Vice President and Treasurer in 1999. He continued to serve as Treasurer until July 2008, and from September 2009 until April 2011. Mr. Allen is a director of The Empire District Electric Company.
Frederick G. Anderson, age 62, has been Vice President, General Counsel and Secretary since November 2004. He has been a practicing attorney for over 30 years. From March 2003 until November 2004 he engaged in the private practice of law, including as of counsel to Davis Munck P.C., a Dallas, Texas based law firm. Prior to March 2003, he was Senior Vice President, General Counsel and Secretary of two public companies and a partner in a large international law firm. Mr. Anderson maintains membership in the State Bar of Texas and Dallas Bar Association. He is a former Chairman of the Legal Counsels Committee of the Portland Cement Association.
Barry M. Bone, age 55, has been Vice President-Real Estate since 1995 and President of Brookhollow Corporation, our real estate subsidiary, since 1991. He joined us in 1982 and has served in various real estate positions since then.
Michael P. Collar, age 60, has been Vice President-Human Resources of the Company since June 1, 2010. From June 2002 until June 2010, he was Director, Human Resources of the Company. Prior to joining the Company in 2002, Mr. Collar had over 20 years of human resources experience with companies such as Ford Motor Company and Atlantic Richfield Company. Mr. Collar is a member of the Executive Committee of the Cement Employers Association.
James B. Rogers, age 46, has been Vice President and Chief Operating Officer since June 1, 2011. From August 2002 through May 2011, he was Vice President-Consumer Products. He joined us in 1996 and has held various positions in our cement, aggregates and concrete operations since then. He is a director of the National Ready-Mix Concrete Association and the Texas Aggregates and Concrete Association.
T. Lesley Vines, Jr. age 50, has been Vice President-Corporate Controller since 2004 and Treasurer since April 2011. He was Assistant Treasurer from September 2009 to April 2011. He joined us in November 1995 as the Corporate Tax Manager and later became our Director of Accounting and Tax prior to becoming the Vice President-Corporate Controller. Prior to 1995, he was a Senior Manager with Ernst & Young. Mr. Vines is a Certified Public Accountant.
Executive officers are elected annually by the board of directors and serve at the pleasure of the board.
Available Information
Our company was incorporated in Delaware in 1951. Our internet address is www.txi.com. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. The SEC maintains an internet web site that contains our reports, proxy statements and other information that is filed electronically with the SEC, which may be accessed at http://www.sec.gov. You may read and copy our reports, proxy statements and other information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the Public Reference Room.
We make available, free of charge, through our investor relations website at http://investorrelations.txi.com our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. Our annual report to shareholders and Code of Ethics for the CEO and Senior Financial Officers are also available at this website. We intend to disclose amendments and waivers of our Code of Ethics on this website.


ITEM 1A.    RISK FACTORS
In addition to the risks discussed elsewhere in this annual report, you should carefully consider the risks described below before making an investment decision. If any such risks materialize, our business, results of operations, financial condition and cash flow could be materially and adversely affected. This could cause the trading price of our securities to decline, and you might lose all or part of your investment.
The availability and pricing of energy could materially and adversely affect our results of operations.
We are dependent upon energy sources, including electricity and fossil fuels, in our manufacturing and product delivery processes. We have generally not entered into any long-term contracts to satisfy our fuel and electricity needs, with the exception of some of our coal needs, which we obtain from specific mines pursuant to contracts that expire on December 31, 2016. Despite our long-term coal contracts, we expect our coal supplies could be interrupted in the event of rail service disruptions or mining difficulties. If we are unable to meet our requirements for fuel and electricity, we may experience interruptions in our production.

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The cost of energy is one of our largest expenses. Prices for energy are subject to market forces largely beyond our control and can be quite volatile. Price increases that we are unable to pass through in the form of price increases for our products, or disruption of the uninterrupted supply of fuel and electricity, could adversely affect us.
Unexpected equipment failures, catastrophic events and scheduled maintenance may lead to production curtailments or shutdowns.
Our manufacturing processes are dependent upon critical pieces of equipment, such as our kilns and finishing mills. This equipment, on occasion, may be out of service as a result of unanticipated failures or damage during accidents. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our operations in California are also susceptible to damage from earthquakes, for which we maintain only a limited amount of earthquake insurance and, therefore, we are not fully insured against earthquake risk. We also have one to two-week scheduled outages at least once a year to refurbish our cement production facilities. Any significant interruption in production capability may require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenue due to lost production time.

We are dependent on information technology to support many facets of our business.
If our information systems are breached or destroyed or fail due to cyber-attack, unauthorized access, natural disaster, or equipment breakdown, our business could be interrupted, proprietary information could be lost or stolen, and our reputation could be damaged.  We take measures to protect our information systems from such occurrences, but we cannot assure you that our efforts will always prevent them.  Our business could be negatively affected by any such occurrences.

Our future success depends upon attracting, developing and retaining qualified key personnel.
Our success in attracting qualified key personnel, particularly in leadership positions, is affected by the availability of a pool of workers with the training and skills necessary to fill the available positions, our ability to offer competitive compensation and benefit packages and our ability to effectively develop and train our employees.
Third-party truck and rail transportation is subject to delays and rate fluctuations.
We rely heavily on third-party truck and rail transportation to ship our products to customers and coal to our plants. Rail and trucking operations are subject to capacity constraints, high fuel costs and various hazards, including extreme weather conditions and slowdowns due to labor strikes and other work stoppages. In Texas, we compete for third party trucking services with operations in the oil and gas fields, which can significantly constrain the availability of those services to us. If there are material changes in the availability or cost of rail or trucking services, we may not be able to arrange alternative and timely means to ship our products or coal at a reasonable cost, which could lead to interruptions or slowdowns in our businesses or increases in our costs.
Our business is seasonal and inclement weather can affect our quarterly results.
Our operating profit is generally lower in our fiscal third quarter ending on the last day of February than it is in our other fiscal quarters because of the impact of winter weather on construction activity. Although southern California and Texas are regions characterized by longer periods of favorable weather than in many parts of the U.S., extended periods of inclement weather in one of our market regions can reduce construction activity at any time of the year and negatively affect our financial results in the periods in which the inclement weather occurs.
Our business is cyclical and regional in nature. Some of our competitors may cope better than we can with adverse economic and market conditions.
Demand for our products is derived primarily from public (infrastructure), residential and non-residential construction activity in our markets in the Texas region and the southern California region. Construction activity in each of these markets is cyclical due to its sensitivity to economic conditions in these markets. During the recent economic recession, we experienced significant declines in both sales volumes and prices for our products in all of our market areas. Due to the high fixed-cost nature of our business, our profitability can be significantly and negatively affected by declining volumes, and decreasing prices exacerbate the affect. During fiscal year 2013, we saw an increasing level of construction activity in our markets in the Texas area and, to a lesser extent, in California, although activity remained at levels significantly below those experienced prior to the recent recession. As a result we reported losses in the first three fiscal quarters of 2013.
The cement, aggregate and concrete markets are generally regional because transportation costs are high relative to the value of the product. Economic factors may fluctuate more widely in regional markets than in the United States as a whole. As a result, our operating results are subject to significant fluctuation from one region to another. Because we sell most of our cement in Texas and southern California, and because cement sales have historically contributed more to our profitability than

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any other product line, significant declines in cement demand or prices in Texas or southern California could have a negative impact on us.
Some of our competitors are larger and more profitable than we are, and have greater financial resources or less financial leverage than we do. As a result, these competitors may cope better than we can with adverse economic or market conditions that may cause downward pressure on prices or volumes or upward pressure on costs. They may have an advantage over us in negotiating advantageous terms with vendors and customers, attracting and retaining key employees or in other ways.

Our business is sensitive to governmental budget constraints.
Our customers engage in a substantial amount of construction in which government funding is an important component. The level of public construction activity is subject to government budget constraints and political shifts, which can result in funding reductions or reallocations.
Federal funding has historically comprised a majority of California and Texas’ public works spending. Federal highway funding has typically been provided through multi-year highway funding authorization bills.. After a series of short-term extensions of the previous transportation funding bill, a new funding bill was signed by the President in July 2012. The bill authorizes approximately $118 billion of funding for surface transportation programs for the 27 month period ending September 30, 2014. Spending constraints resulting from budget negotiations in Congress may limit expenditure of the authorized funding or amounts authorized in any future funding bills.
State budgets in Texas and California were constrained by the recent recession, which negatively affected state funding for public works projects. A significant decrease in public works spending in either Texas or California for any reason could have an adverse impact on us.
Climate change could impact our business and financial results in ways that cannot be accurately predicted.
Except for the potential impact on us of legal or regulatory limits on emissions of greenhouse gases, which are discussed elsewhere in this report, we do not expect the effects of climate change to have a significant impact on us in the near term. Over the longer term, such effects are highly uncertain. On one hand, we expect that the impact of future climate change laws and regulations on energy producers and other vendors could increase our energy and other costs. Changes in rainfall and other weather patterns could result in localized shortages of water, a critical resource in our manufacturing processes. Since the process of manufacturing cement produces carbon dioxide, a greenhouse gas, researchers could develop alternative manufacturing processes or products that produce reduced or no greenhouse gases. If such processes or products were successful in the marketplace, the impact on us could be either positive or negative, depending on whether we could economically use the process or produce the product. On the other hand, it is possible that demand for our products could increase as certain geographic areas or industries cope with other impacts of climate change. All of these potential impacts are speculative, however, and the ultimate effects on our business and financial results cannot be accurately predicted.
The enforcement of environmental, health and safety laws and regulations may result in liability for civil or criminal fines or penalties or curtailment or suspension of our operations. We may become liable for environmental injury to persons or property.
We are subject to various federal, state and local environmental, health and safety laws, regulations and permits as described more fully under the caption “Environmental Matters” in Item 1, Business. The U.S. Environmental Protection Agency, the Occupational Safety and Health Administration, the Mining Safety and Health Administration and various state agencies are charged with enforcing these laws, regulations and permits. These agencies can impose substantial civil and criminal fines and penalties, as well as curtail or suspend our operations, for violations and non-compliance. Moreover, private parties may bring civil actions against us for injuries to persons and damages to property allegedly caused by our products or operations. We intend to comply with these laws, regulations and permits. However, from time to time we receive claims from federal and state regulatory agencies asserting that we are or may be in violation of certain of these laws, regulations and permits, or from private parties alleging that our products or operations have injured them or their property. See “Legal Proceedings” in Item 1, Business, for a description of certain claims. If violations of law, injury to persons, damage to property or contamination of the environment has been or is caused by the conduct of our business or hazardous substances or wastes used, generated or disposed of by us, we may be liable for such violations, injuries and damages and be required to pay the cost of investigation and remediation of such contamination.

Implementation of federal and state laws and regulations, changes in laws or regulations or permits, or discovery of currently unknown conditions could increase our cost of compliance, require additional capital expenditures, reduce or shut down production or hinder our ability to expand or build new production facilities.
California Climate Change Regulations.    The “California Global Warming Solutions Act of 2006” required the California Air Resources Board, or CARB, to implement rules designed to achieve a statewide reduction in emissions of

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greenhouse gases, or GHGs, in California to 1990 levels by 2020. In response, CARB adopted rules that establish a market-based cap-and-trade program beginning on January 1, 2013. The rules apply to our cement plant in Oro Grande, California.
The rules establish a statewide cap on the level of GHG emissions from covered industries for each year from 2013 to 2020. The cap will decline approximately 2% to 3% per year. Individual facilities such as ours will not be assigned a specific limit on GHG emissions. Instead, we will be required to surrender allowances (each covering the equivalent of one ton of carbon dioxide) equal to our total GHG emissions. CARB will allocate allowances equal to the declining cap in a manner prescribed by the rules. To provide a gradual transition, CARB will provide significant free allowances to cement plants because they are energy intensive and trade exposed businesses. If our emissions exceed the number of allowances we receive, we may purchase additional allowances in the open market, buy them at a regular quarterly auction conducted by CARB or purchase them from a state price containment reserve. The rules establish a minimum price of $10 per ton for 2013, and actual prices will depend on market conditions.
Our allocation of free allowances will be based on our annual GHG intensity (i.e., our GHG emissions per unit of production) compared to the California cement sector intensity benchmark determined by CARB. Our level of free allowances will be reduced over time with the implementation of a cap adjustment factor intended to gradually reduce the statewide cap over time. We expect that the number of free allowances allocated to us will not be sufficient to cover all of our GHG emissions, but we will be unable to determine the total number of allowances that we will be required to purchase for any fiscal period until the period ends and our total GHG emissions for the period are determined. We have begun to purchase allowances to cover GHG emissions that we expect will exceed our free allowances.
We expect to incur additional costs because of these regulations. In addition to the cost of purchasing allowances, we also expect that our energy costs will increase due to the impact of these regulations on the electric utility industry. The California cement industry is discussing a number of issues with CARB, including a California border adjustment mechanism to help create a level playing field with imported cement, but it is uncertain whether such a mechanism will be implemented. The validity of the law and rules remains under attack in several lawsuits, the results of which remain uncertain. As a result of these and other uncertainties, at this time we cannot predict the ultimate cost or effect of the rules on our business.
Federal Climate Change Regulations.    In May 2010, the EPA issued a final rule that requires us to incorporate best available GHG control technology in any new cement plant that we propose to build and in our existing cement plants when we propose to modify them in a manner that would increase GHG emissions (in our case, principally carbon dioxide emissions) by more than 75,000 tons per year. This rule was challenged in court by many public and private parties, but in June 2012 the U.S. Circuit Court for the District of Columbia upheld the GHG rules. The court's decision has been appealed to the U.S. Supreme Court, but the Court has not yet ruled on whether it will hear the case.
No technologies or methods of operation for reducing or capturing GHGs such as carbon dioxide have been proven successful in large scale applications other than improvements in fuel efficiency. In the event we propose to modify a plant in a way that would trigger the new rules, we do not currently know what the EPA will require as best available control technology for our cement plants or what conditions it will require to be added to our operating permits . In addition, we cannot predict the ultimate outcome of the appeal of the circuit court's decision upholding the GHG rules or the outcome of the policy debates in the U.S. Congress regarding the regulation of GHGs. Therefore, at this time, it is impossible to predict what the ultimate cost or effect of the EPA’s GHG rules will be on our business.
Regional Climate Change Initiatives.    Various states have banded together in initiatives to develop regional strategies to address climate change. Certain western states, including California, and Canadian provinces have formed the Western Climate Initiative. Some Midwestern states and a Canadian province are members of the Midwestern Greenhouse Gas Reduction Accord. Several northeastern and mid-Atlantic states have joined the Regional Greenhouse Gas Initiative. These initiatives call for establishing goals for reduction of greenhouse gas emissions in the member states and designing market-based mechanisms to help achieve these reduction goals. California’s climate change laws and regulations are designed to coordinate with the Western Climate Initiative. Other states may join these initiatives or form additional initiatives or coalitions intended to regulate the emission of GHGs.
Federal Air Emission Regulations.    In 2010 the EPA issued rules that dramatically reduced the permitted emissions of mercury, total hydrocarbons, particulate matter and hydrochloric acid from cement plants. After a court remanded the rules to the EPA for further action, revised final rules were issued in December 2012. The revised rules extended the compliance date from September 2013 to September 2015. Several environmental groups have challenged in court the extension of the compliance date, but we believe this challenge is unlikely to succeed.
We have conducted tests to analyze the current level of compliance of our cement plants with the standards in the revised rule. Based on information currently available to us, we believe that our plant in Oro Grande, California will not meet the mercury emission standard or the hydrochloric acid standard, The older kiln at our plant in Hunter, Texas will not meet the particulate matter standard. We expect that the new kiln at the Hunter plant, will meet the particulate matter and other

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standards. Although we believe that our plants meet the other emission requirements in the revised rules, we cannot yet assure you that this will be the case.
For the Oro Grande plant, we have identified mercury monitoring and control equipment that we believe will comply with the mercury standard, and we continue to evaluate other control methods that may comply with the standard at a lower cost. We also have identified equipment that we believe will comply with the hydrochloric acid standard. We are constructing a new bag house that we expect will bring the original kiln at the Hunter plant into compliance with the particulate matter standard. We currently believe the cost for installing monitoring and control equipment at both plants will be in the range of $25 million to $35 million. 
It is our intention to comply with these rules, but at this time we cannot assure you that new equipment will be available and installed before the new standards take effect, or that such equipment, when installed, will reduce emissions sufficiently to meet the new standards.
Future litigation could affect our profitability.
The nature of our business exposes us to various litigation matters. These matters may include claims by private parties or governmental entities seeking compensatory and punitive damages, environmental clean up costs, penalties, injunctive relief or other types of recovery. The types of claims to which we may be subject include:
Product liability claims that our products have caused injuries to persons or buildings, roadways, oil wells, or other structures to fail or not comply with specifications.
Contract claims that we have breached a legally enforceable agreement in a manner that has damaged one or more other parties.
Employment claims that we violated anti-discrimination, wage and hour, fair labor standards or other employment related laws, regulations or contracts.
Claims by regulatory or administrative bodies that we have violated specified laws, regulations or permit conditions.
Environmental claims that we have exposed individuals to or contaminated property with toxic or hazardous substances.
Other tort claims that our actions or omissions caused damage to persons or property.
See “Legal Proceedings” in Item 1, Business, for a description of certain legal proceedings. We contest these matters vigorously and make insurance claims where appropriate. However, litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome of existing or future litigation. Although we make accruals as we believe warranted and in accordance with generally accepted accounting principles, the amounts that we accrue could vary significantly from any amounts we actually pay due to the inherent uncertainties and shortcomings in the estimation process. Future litigation costs, settlements or judgments could adversely affect us.
Our capital expenditures for expansion of our business or improvement of efficiencies may not strengthen our competitive position.
In order to strengthen our competitive position, in recent years we have made significant capital expenditures to expand our facilities. We expect to continue to enter into projects to expand production or improve efficiencies. Future projects could experience construction delays or cost overruns for many reasons, including inclement weather, unavailability of materials or equipment, unanticipated site conditions and unanticipated problems in obtaining required permits during construction, startup and commissioning. We cannot assure you that market conditions will be favorable, that the actual cost of the any projects will not exceed our cost projections or that additional financing, if required, will be available on acceptable terms. We cannot assure you that any new or expanded plant, when completed, will operate in accordance with its design specifications. If it does not, we could incur additional costs or production delays while problems are corrected. As we do not have control over the cost or the outcome of these factors, we cannot assure you that any planned expansion will occur on schedule or within budget.
As a result of these or other unanticipated factors, any future projects and related capital expenditures may not improve our competitive position and business prospects as anticipated.
Transactions we enter into to implement our business strategy involve risks.
As part of our growth strategy, we may expand existing facilities, build additional plants, acquire more reserves or operations, enter into joint ventures or form strategic alliances that we believe will expand or complement our existing business. If any of these transactions occur, they will likely involve some or all of the following risks:
the potential disruption of our ongoing business;

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the diversion of resources and management’s time and attention;
the inability of management to maintain uniform standards, controls, procedures and policies;
the difficulty of managing the operations of a larger company;
the risk of becoming involved in labor, commercial or regulatory disputes or litigation related to the new enterprise;
the risk of contractual or operational liability to joint venture participants or to third parties as a result of our participation;
the difficulty of competing for acquisitions and other growth opportunities with companies having greater financial resources than we have; and
the difficulty of integrating acquired operations and personnel into our existing business.
Pursuing our growth strategy may be required for us to remain competitive, but we may not be able to complete any such transactions or obtain financing, if necessary, for such transactions on favorable terms or at all. Future transactions may not improve our competitive position and business prospects as anticipated. They could reduce our sales or profit margins or increase our costs if they are not successful.
We have a substantial amount of debt which will require a significant amount of cash to service and which could have important consequences for us. Our ability to generate cash from operations or borrowing depends on many factors beyond our control.
Our debt could have important consequences for us. For example, it could:
make it more difficult for us to satisfy our other obligations;
increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to service our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, investments and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business, the cement, aggregate and concrete industry or the markets in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt or debt with less restrictive terms; and
limit, among other things, our ability to borrow additional funds, even when necessary to maintain adequate liquidity.
Our ability to make payments on, or repay or refinance, our debt and to fund planned capital expenditures will depend largely upon the availability of financing and our future operating performance. In three out of the last five fiscal years we incurred a net loss. Our future operating performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future if needed to make payments on our debt will depend on our satisfaction of the covenants in our senior secured credit facility and our other current and future debt agreements. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our senior secured credit facility or from other sources in an amount sufficient to pay our debt or to fund our other liquidity needs. If we are unable to generate sufficient cash flow to meet our debt service requirements, we may have to renegotiate the terms of our debt or obtain additional financing. We cannot assure you that we will be able to refinance any of our debt or obtain additional financing on commercially reasonable terms or at all. If we were unable to meet our debt service requirements or obtain new financing under these circumstances, we would have to consider other options, such as:
sales of certain assets to meet our debt service obligations;
sales of equity; and
negotiations with our lenders to restructure the applicable debt.

Our debt agreements may restrict, or market or business conditions may limit, our ability to do any of these things.
The financing agreements governing our debt contain various covenants that limit our discretion in the operation of our business and could lead to acceleration of debt and foreclosure on collateral.
Our financing agreements impose operating and financial restrictions on our activities. Restrictions contained in these financing agreements also limit or prohibit our ability and certain of our subsidiaries ability to, among other things:
pay dividends to our stockholders;
make certain investments and capital expenditures;
incur additional debt or sell preferred stock;

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create liens;
restrict dividend payments or other payments from subsidiaries to us;
engage in consolidations and mergers or sell or transfer assets;
engage in transactions with our affiliates; and
sell stock in our subsidiaries.
We are not required to maintain any financial ratios or covenants unless an event of default occurs or the unused portion of our borrowing base under our senior secured credit facility is less than $25 million, in which case we must comply with a fixed charge coverage ratio of 1.0 to 1.0.
At May 31, 2013 we were in compliance with our loan covenants. Various risks and events beyond our control could in the future affect our ability to comply with these covenants and maintain financial tests and ratios. If we cannot comply with the fixed charge coverage ratio in our senior secured credit facility and the unused portion of our borrowing base falls below $25 million, we may not be able to borrow under this facility. At May 31, 2013, our fixed charge coverage ratio was .40 to 1.0. Given this ratio, we may use only $111.9 million of the borrowing base as of such date. Because $32.6 million of the borrowing base was used to support letters of credit, the maximum amount we could borrow as of May 31, 2013 was $79.3 million.
Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements, terminate any commitments they made to supply us with further funds and foreclose on collateral. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by our financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we would be able to obtain waivers or amendments of our financing agreements, if necessary, on acceptable terms or at all.
Our business could suffer if cement imports from other countries significantly increase or are sold in the U.S. in violation of U.S. fair trade laws.
The cement industry has in the past obtained antidumping orders imposing duties on imports of cement and clinker from other countries that violated U.S. fair trade laws. Currently, an antidumping order against cement and clinker from Japan will expire in 2016 unless it is extended by the Federal Trade Commission. As has always been the case, cement operators with import facilities can purchase cement from other countries, such as those in Latin America and Asia, which could compete with domestic producers. In addition, if environmental regulations increase the costs of domestic producers compared to foreign producers that are not subject to similar regulations, imported cement could achieve a significant cost advantage over domestically produced cement. An influx of cement or clinker products from countries not subject to antidumping orders, or sales of imported cement or clinker in violation of U.S. fair trade laws, could adversely affect us.


ITEM 1B.     UNRESOLVED STAFF COMMENTS
None.

ITEM 2.    PROPERTIES
General
As of May 31, 2013, we:
manufactured cement at three facilities in Texas and California using limestone from adjacent quarries,
produced natural aggregates (sand, gravel and crushed limestone) from 9 mines in Texas, Louisiana and Oklahoma, and
manufactured ready-mix concrete at 103 plants in Texas, Louisiana and Arkansas.
In addition, we operated 5 cement distribution terminals, 6 aggregate distribution terminals, and 1 cement packaging facility.

The following map shows the locations of our cement, aggregate and ready-mix manufacturing and distribution facilities at May 31, 2013, all of which are in the United States.


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Reserves are estimated by our geological and mine services group based upon drilling and testing data sufficient to elevate reserves to probable status. The estimates of reserves are of recoverable stone, sand and gravel of suitable quality for economic extraction, recognizing reasonable economic and operating constraints as to excavation, maximum depth of overburden, permit or zoning restrictions and lease terms on any leased property. Aggregate resource holdings are generally not reported as reserves until a recovery plan has been developed. The average estimated minimum reserves in years shown below are based on normalized annual rates of production. Certain individual locations may be subject to more limited reserves.

Cement
Our cement production facilities are located at three sites in Texas and California: Midlothian, Texas, south of Dallas/Fort Worth; Hunter, Texas, between Austin and San Antonio; and Oro Grande, California, near Los Angeles. The following table summarizes certain information about our cement manufacturing facilities at May 31, 2013:

Plant
 
Rated Annual
Productive Capacity—
Tons of Clinker
 
Manufacturing
Process
 
Service
Date
 
Internally Estimated
Minimum
Reserves—Years
Midlothian, TX
 
2,200,000

 
Dry
 
2001
 
58

Hunter, TX
 
2,250,000

 
Dry
 
2013 and 1981
 
100

Oro Grande, CA
 
2,200,000

 
Dry
 
2008
 
66

Total
 
6,650,000

 
 
 
 
 
 
Reserves identified with the facilities shown above are contained on approximately 5,579 acres of land we own. At May 31, 2013, we estimate our total proven and probable limestone reserves to be approximately 892 million tons.

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Our cement manufacturing facilities include kilns, crushers, pre-heaters/calciners, coolers, finish mills and other equipment used to process limestone and other raw materials into cement, as well as equipment used to extract and transport the limestone from the adjacent quarries. The cement manufacturing facilities are served by rail and truck. We believe the facilities are generally in good condition and suitable for the purposes for which they are used.
Natural Aggregates
Our natural aggregate operations are conducted from facilities primarily serving the Dallas/Fort Worth and Austin areas in Texas; the southern Oklahoma area; and the Alexandria and Monroe areas in Louisiana. The following table summarizes certain information about our natural aggregate production facilities at May 31, 2013.
Type of Facility and General Location
 
Number of
Plants
 
Rated Annual
Productive Capacity
 
Internally
Estimated Minimum
Reserves—Years
Crushed Limestone:
 
 
 
 
 
 
North Central Texas
 
1

 
9.0 million tons
 
30

Oklahoma
 
1

 
6.0 million tons
 
90

Sand & Gravel:
 
 
 
 
 
 
North Central Texas
 
2

 
2.3 million tons
 
15

Central Texas
 
2

 
2.3 million tons
 
25

Louisiana
 
3

 
0.9 million tons
 
10

Reserves identified with the facilities shown above and additional reserves available to support future plant sites are contained on approximately 19,646 acres of land, of which we own approximately 15,266 acres and lease the remainder. We typically acquire an option on a property prior to lease or purchase. At May 31, 2013, we estimate our total proven and probable aggregate reserves to be approximately 789 million tons, of which 83% are owned and 17% are leased.
Our crushed limestone production facilities include primary and secondary crushers used to process limestone extracted from quarries we own adjacent to each plant, as well as equipment to produce manufactured sand at each site. The stone facilities are served by rail and truck. Our sand and gravel production facilities include excavating or dredging equipment used to extract sand and gravel from open pits owned or leased near each plant. The sand and gravel facilities are served by truck. We use mining contractors to provide blasting services at our stone quarries and to extract limestone to fulfill certain sales contracts for larger specialty products such as rip rap used in erosion control. We believe the facilities are generally in good condition and suitable for the purposes for which they are used.

Ready-Mix Concrete
Our ready-mix concrete operations are situated in three areas in Texas (Dallas/Fort Worth/Denton, central Texas and east Texas), in north and central Louisiana, and southern Arkansas. The following table summarizes certain information about our ready-mix concrete facilities at May 31, 2013.
Location
 
Number of Plants
 
Number of Trucks
Texas
 
90

 
481

Louisiana
 
12

 
78

Arkansas
 
4

 
9

We hold approximately 810 acres for our current and future ready-mix concrete operations, of which we own approximately 683 acres and lease approximately 127 additional acres.
Our ready-mix concrete manufacturing facilities include batch plants and other equipment in addition to the delivery trucks listed above. The ready-mix concrete facilities are served by truck. We believe the facilities are generally in good condition and suitable for the purposes for which they are used.
Other
See “Intellectual Property” and “Real Estate” in Item 1, Business.


ITEM 3.    LEGAL PROCEEDINGS
The information required by this item is included in “Legal Proceedings” in Item 1 of this Report and in Note 10 to Consolidated Financial Statements in Item 8 of this Report.

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ITEM 4.    MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in exhibit 95.1 to this report.


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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Shareholder Information
Shares of our common stock, $1 par value, are traded on the New York Stock Exchange (ticker symbol TXI). There were 1,348 shareholder accounts of record as of June 30, 2013. Restrictions on the payment of dividends are described in Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Report. On October 12, 2011, the Company suspended payment of its quarterly cash dividend. The following table sets forth for each of the fiscal quarterly periods ending with the month indicated the high and low prices per share for our common stock as reported on the New York Stock Exchange and cash dividends declared per share.
Per share
 
Aug.
 
Nov.
 
Feb.
 
May
2013
 
 
 
 
 
 
 
 
Stock prices: High
 
$
45.68

 
$
47.33

 
$
60.79

 
$
75.30

 Low
 
30.10

 
38.14

 
45.90

 
56.28

Cash dividends declared
 

 

 

 

2012
 
 
 
 
 
 
 
 
Stock prices:    High
 
$
43.09

 
$
39.34

 
$
36.18

 
$
38.66

 Low
 
30.11

 
21.89

 
24.73

 
30.77

Cash dividends declared
 
0.075

 

 

 

Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of May 31, 2013.
Plan Category
 
Number of securities  to
be issued upon exercise
of outstanding options,
warrants and rights
 
Weighted  average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders(1)
 
1,508,533

 
$
40.68

 
2,767,638

Equity compensation plans not approved by security holders(2)
 
4,635

 

 

Total
 
1,513,168

 
$
40.56

 
2,767,638

(1)
Our equity compensation plans are described in Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Report.
(2)
Represents common stock issuable under deferred compensation agreements in which directors elected to defer their fees. Compensation so deferred is denominated in shares of our common stock determined by reference to the average market price as specified by the terms of the individual agreement. Dividends are credited to the account denominated in shares of our common stock at a value equal to the fair market value of the stock on the date of payment of such dividend.
All shares of common stock issuable under our compensation plans are subject to adjustment to reflect any increase or decrease in the number of shares outstanding as a result of stock splits, combination of shares, recapitalizations, mergers or consolidations.

Recent Sales of Unregistered Securities
We did not sell unregistered equity securities during fiscal year 2013 that were not reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Issuer Purchases of Equity Securities
We are restricted by our loan covenants from purchasing our Common Stock on the open market. However, in connection with so-called "stock swap exercises" of employee stock options, shares are surrendered or deemed surrendered to

- 17 -


the Company to pay the exercise price or to satisfy tax withholding obligations. The following table presents information with respect to such transactions which occurred during the three-month period ended May 31, 2013.

 
 
(a)
 
(b)
 
(c)
 
(d)
Period
 
Total Number of Shares Purchased
 
Average Price Paid per share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
March 1, 2013-March 31, 2013
 
 
 
 
April 1, 2013-April 30, 2013
 
 
 
 
May 1, 2013-May 31, 2013
 
16,575
 
65.82

 
 
Total
 
16,575
 
65.82

 
 

- 18 -


ITEM 6.    SELECTED FINANCIAL DATA

$ In thousands except per share
 
2013
 
2012
 
2011
 
2010
 
2009
FOR THE YEAR
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
697,081

 
$
594,105

 
$
571,906

 
$
571,684

 
$
770,823

Net income (loss) from continuing operations
 
(10,494
)
 
1,928

 
(69,472
)
 
(44,702
)
 
(26,960
)
Net income (loss) from discontinuing operations
 
35,044

 
5,548

 
4,559

 
5,849

 
9,313

Net income (loss)
 
24,550

 
7,476

 
(64,913
)
 
(38,853
)
 
(17,647
)
Capital expenditures
 
92,518

 
105,983

 
44,637

 
12,840

 
286,451

PER SHARE INFORMATION
 
 
 
 
 
 
 
 
 
 
Net income (loss) (diluted)
 
 
 
 
 
 
 
 
 
 
Continuing Operations
 
$
(0.37
)
 
$
0.07

 
$
(2.49
)
 
$
(1.61
)
 
$
(0.98
)
Discontinuing Operations
 
$
1.24

 
$
0.20

 
$
0.16

 
$
0.21

 
$
0.34

Total Operations
 
$
0.87

 
$
0.27

 
$
(2.33
)
 
$
(1.40
)
 
$
(0.64
)
Cash dividends
 

 
0.075

 
0.30

 
0.30

 
0.30

Book value
 
26.75

 
24.87

 
24.94

 
27.39

 
28.98

YEAR END POSITION
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,635,825

 
$
1,576,928

 
$
1,551,011

 
$
1,531,747

 
$
1,572,544

Net working capital
 
187,297

 
218,299

 
260,822

 
257,684

 
232,704

Long-term debt
 
657,935

 
656,949

 
652,403

 
538,620

 
541,540

Shareholders’ equity
 
753,464

 
696,271

 
695,582

 
761,248

 
803,145

Return on average common equity
 
3.4
%
 
1.1
%
 
(9.0
)%
 
(4.9
)%
 
(2.1
)%
OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
Diluted average common shares outstanding (in thousands)
 
28,163

 
28,016

 
27,825

 
27,744

 
27,614

Common stock prices
 
 
 
 
 
 
 
 
 
 
High
 
$
75.30

 
$
43.09

 
$
47.42

 
$
48.70

 
$
74.75

Low
 
30.10

 
21.89

 
27.28

 
27.36

 
12.58



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
When used in this report the terms “Company,” “we,” “us” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise.
We are a leading supplier of heavy construction materials in the southwestern United States through our three business segments: cement, aggregates and consumer products. Our principal products are gray portland cement, produced and sold through our cement segment; stone, sand and gravel, produced and sold through our aggregates segment; and ready-mix concrete, produced and sold through our consumer products segment. Our facilities are concentrated primarily in Texas, Louisiana and California.
Construction activity has continued to show a positive trend though levels remain well below pre-recession highs in both our Texas and California market areas. We have remained focused on increasing efficiency, reducing costs, and on managing our cash position as well as production levels, which we believe has had a significant positive impact on our operating results
In October 2007 we commenced construction on a project to expand our Hunter, Texas cement plant. In May 2009 we temporarily halted construction on the project because we believed that economic and market conditions made it unlikely that cement demand levels in Texas at that time would permit the new kiln to operate profitably if the project was completed as originally scheduled. We resumed construction in October 2010 and completed the commissioning phase at the end of April

- 19 -


2013. The total capital cost of the project was $374.1 million, excluding capitalized interest of $105.2 million related to the project.
In April 2011 we entered into an asset exchange transaction in which we acquired the ready-mix operations of Transit Mix Concrete and Materials Company, a subsidiary of Trinity Industries, Inc., that serve the central Texas market from north of San Antonio to Hillsboro, Texas. In exchange for the ready-mix facilities, we transferred to Trinity Materials, Inc., also a subsidiary of Trinity Industries, Inc., the aggregate operations at the Anacoco sand and gravel plant, which serves the southwest Louisiana and southeast Texas markets, and the Paradise and Beckett sand and gravel plants, which both serve the north Texas market. The exchange resulted in the acquisition of ready-mix property, plant and equipment of $17.4 million and the recognition of a gain of $12.0 million in 2011. The gain from the transaction is reported in our aggregates segment, and the operating results of the acquired ready-mix operations are reported in our consumer products segment.
In July 2011 we entered into an asset exchange transaction with CEMEX USA in which we acquired three ready-mix concrete plants and a sand and gravel plant that serve the Austin, Texas metropolitan market. In exchange, we transferred to CEMEX USA seven ready-mix concrete plants in the Houston, Texas market, and we designated four non-operating ready-mix plant sites in the Houston area as surplus real estate. The exchange resulted in the acquisition of ready-mix and aggregate property, plant and equipment of $6.1 million and the recognition of a gain of $1.6 million in 2012. The gain from the transaction and the operating results of the acquired ready-mix operations are reported in our consumer products segment, and the operating results of the acquired sand and gravel operations are reported in our aggregates segment.
In November 2011 we entered into a joint venture agreement with Ratliff Ready-Mix, L.P., a ready-mix operator based in Waco, Texas. We contributed seven of our central Texas ready-mix plants and certain related assets to the joint venture and guaranteed 50%, or $13.0 million of the debt of the joint venture. The joint venture was in compliance with all the terms of the debt as of May 31, 2013. The fair value of our 40% equity interest in the joint venture was $13.0 million which resulted in the recognition of a gain of $8.9 million in 2012. The gain from the transaction and our proportional share of the joint venture operating results are reported in our consumer products segment. The day to day business operations are managed by the 60% partner in the venture. The joint venture currently owns a total of twenty three ready-mix plants and serves the central Texas market. We supply cement to the joint venture.
In April 2012 we sold our Texas-based package products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities that serve the Texas market from the Dallas-Fort Worth area of north Texas to the Houston area of south Texas and extending through Austin and central Texas. The sale resulted in the recognition of a gain of $30.9 million in 2012. As a part of the agreement, we have entered into a long-term cement supply agreement with Bonsal American. The gain from the transaction is reported in our consumer products segment.
In April 2012 we sold our aggregate rail distribution terminal and associated assets located in Stafford, Texas to Lex Missouri City, LP, which resulted in the recognition of a gain of $20.8 million in 2012 that is reported in our aggregates segment.
On March 22, 2013, our subsidiaries exchanged their expanded shale and clay lightweight aggregates manufacturing business for the ready-mix concrete business of subsidiaries of Trinity Industries, Inc. in east Texas and southwest Arkansas. Pursuant to the agreements, we transferred our expanded shale and clay manufacturing facilities in Streetman, Texas; Boulder, Colorado and Frazier Park, California; and our DiamondPro® product line in exchange for 42 ready-mix concrete plants stretching from Texarkana to Beaumont in east Texas and in southwestern Arkansas, two aggregate distribution facilities in Beaumont and Port Arthur, Texas, $8.5 million in cash, and related assets. The exchange resulted in the acquisition of ready-mix property, plant and equipment of $25.3 million, $38.9 million in goodwill, and the recognition of a gain of $41.1 million. The operating results of the acquired ready-mix operations are reported in our consumer products segment. The gain resulting from the sale of the expanded shale and clay lightweight aggregates manufacturing business along with its operational results are reported as discontinued operations for the periods represented in this filing. See discussion in note 2 to our Consolidated Financial Statements in Item 8 of this Report.

- 20 -



RESULTS OF OPERATIONS
Management uses segment operating profit as its principal measure to assess performance and to allocate resources. Business segment operating profit consists of net sales less operating costs and expenses that are directly attributable to the segment. Corporate includes non-operating income and expenses related to administrative, financial, legal, human resources, environmental and real estate activities.
Consolidated sales for fiscal year 2013 were $697.1 million, an increase of $103.0 million from the prior year. Consolidated cost of products sold was $629.8 million, an increase of $69.2 million from the prior year. Increased sales were primarily due to higher shipments in all major products and higher average prices in all major products. Increase in cost of products sold is primarily due to cost associated with higher shipments and cement repair and maintenance costs. Consolidated gross profit was $67.3 million, an increase of $33.8 million from the prior fiscal year.
Consolidated sales for fiscal year 2012 were $594.1 million, an increase of $22.2 million from the prior fiscal year. Consolidated cost of products sold was $560.6 million, an increase of $3.7 million from the prior fiscal year. Consolidated gross profit was $33.5 million, an increase of $18.5 million from the prior fiscal year.
Consolidated selling, general and administrative expense for fiscal year 2013 was $67.7 million, a decrease of $0.7 million from the prior fiscal year. Consolidated selling, general and administrative expense for fiscal year 2012 was $68.4 million, a decrease of $3.6 million from the prior fiscal year. We recognized $1.5 million incentive compensation in 2013 compared to a $5.1 million incentive compensation expense in 2012. We recognized $1.3 million in expense associated with the acquisition of ready-mix operating assets through an asset exchange transaction in 2011. Bad debt expense increased $0.6 million in 2013 and decreased $3.1 million in 2012. Insurance expense decreased $1.4 million in 2013 and decreased $0.8 million in 2012 from prior fiscal year. Our stock-based compensation included awards that were expected to be settled in cash the expense for which is based on their fair value at the end of each period until the awards are paid. The impact of changes in our stock price on the fair value of these awards added $7.3 million to expense in 2013 and subtracted $3.4 million from expense in 2012. Effective January 4, 2013 the outstanding stock appreciation rights agreement was extended and modified to require settlement in shares instead of cash. Also effective December 28, 2012, deferred compensation agreements totaling 101,790 shares were settled in shares. As a result of these changes, the Company will no longer face volatility in compensation expense due to changes in the Company's stock price. Our financial security plan postretirement benefit obligations are determined using assumptions as of the end of the year. Actuarial gains or losses are recognized when incurred. Financial security plan postretirement benefit expense excluding this adjustment decreased $1.0 million in 2013 from the prior fiscal year.
Consolidated other income for fiscal year 2013 was $8.9 million, a decrease of $64.2 million from the prior fiscal year. Consolidated other income for fiscal year 2012 was $73.1 million, an increase of $52.2 million from the prior fiscal year. Consolidated other income includes gains from the sale or exchange of operating assets, royalties, joint venture income and emission credits of $7.7 million in 2013, $70.1 million in 2012 and $15.4 million in 2011. The sale of our Texas-based package products operations and aggregate rail distribution terminal and associated assets resulted in gains of $30.9 million and $20.8 million in 2012. Routine sales of surplus operating assets and real estate resulted in gains of $5.4 million in 2012, $1.7 million in 2011. Sales of emission credits associated with our Crestmore cement plant in Riverside, California resulted in gains of $2.5 million in 2012, $1.7 million in 2011. We also entered into ready-mix and aggregate asset exchange transactions and a joint venture agreement that resulted in the recognition of gains of $10.5 million in 2012 and $12.0 million in 2011.
In addition, we have entered into various oil and gas lease agreements on property we own in north Texas. The terms of the agreements include the payment of a lease bonus and royalties on any oil and gas produced. Lease bonus payments and royalties on oil and gas produced resulted in income of $1.3 million in 2012, $3.1 million in 2011 and $1.1 million in 2010.
Net income, before tax, from discontinued operations for fiscal year 2013 was $52.6 million including the gain of $41.1 million relating to the sale of our expanded shale and clay lightweight aggregates manufacturing business. This is an increase of $44.4 million from fiscal year 2012. The remaining increase comes from higher shipments over the prior year of expanded shale and clay lightweight aggregates.
Net income, before tax, from discontinued operations for fiscal year 2012 was $8.2 million, and increase of $1.6 million from the prior year on higher shipments of expanded shale and clay lightweight aggregates.
Consolidated operating profit for fiscal years 2013, 2012 and 2011 was $48.4 million, $70.9 million and ($5.3) million, respectively.
The following is a summary of operating results for our business segments and certain other information related to our principal products and non-operating income and expenses.


- 21 -


Cement Operations
 
 
Year ended May 31,
In thousands except per unit
 
2013
 
2012
 
2011
Operating Results
 
 
 
 
 
 
Cement sales
 
$
345,958

 
$
278,413

 
$
256,385

Other sales and delivery fees
 
35,547

 
36,880

 
30,909

Total segment sales
 
381,505

 
315,293

 
287,294

Cost of products sold
 
327,428

 
286,125

 
283,407

Gross profit
 
54,077

 
29,168

 
3,887

Selling, general and administrative
 
(13,170
)
 
(16,531
)
 
(18,967
)
Restructuring charges
 

 
(1,074
)
 

Other income
 
3,155

 
8,925

 
4,831

Operating Profit (Loss)
 
$
44,062

 
$
20,488

 
$
(10,249
)
Cement
 
 
 
 
 
 
Shipments (tons)
 
4,385

 
3,580

 
3,301

Prices ($/ton)
 
$
78.90

 
$
77.75

 
$
77.68

Cost of sales ($/ton)
 
$
67.40

 
$
70.09

 
$
77.29

Fiscal Year 2013 Compared to Fiscal Year 2012
Cement operating profit for fiscal year 2013 was $44.1 million, an increase of $23.6 million from the prior fiscal year.
Total segment sales for fiscal year 2013 were $381.5 million compared to $315.3 million for the prior fiscal year. Cement sales increased $66.2 million from the prior fiscal year on higher shipments. Our Texas market area accounted for approximately 70% of cement sales in the current fiscal year and 68% in the prior fiscal year. Cement shipments increased 23% in our Texas market area and 22% in our California market area from the prior fiscal year. Average prices increased 4% in our Texas market area and decreased 3% in our California market area from the prior fiscal year.
Cost of products sold for fiscal year 2013 increased $41.3 million from the prior fiscal year primarily due to higher shipments. Cement unit costs decreased 4% from the prior fiscal year due to higher cement production volumes.
Selling, general and administrative expense for fiscal year 2013 decreased $3.4 million from the prior fiscal year. The decrease was primarily due to $3.1 million in lower compensation and benefit expenses.
Restructuring charges of $1.1 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Other income for fiscal year 2013 decreased $5.8 million from the prior fiscal year. The decrease was primarily due to $3.0 million in higher gains from routine sales of surplus operating assets and $2.5 million in higher gains from sales of emissions credits associated with our Crestmore cement plant in 2012.

Fiscal Year 2012 Compared to Fiscal Year 2011
Cement operating profit for fiscal year 2012 was $20.5 million. Cement operating loss for fiscal year 2011 was $10.2 million. Cement operating profit for fiscal year 2012 increased $30.7 million from the prior fiscal year.
Total segment sales for fiscal year 2012 were $315.3 million compared to $287.3 million for the prior fiscal year. Cement sales increased $22.0 million from the prior fiscal year on higher shipments. Our Texas market area accounted for approximately 68% of cement sales in the current fiscal year compared to 71% of cement sales in the prior fiscal year. Cement shipments increased 3% in our Texas market area and 21% in our California market area from the prior fiscal year. Average prices increased 1% in our Texas market area and decreased 2% in our California market area from the prior fiscal year.
Cost of products sold for fiscal year 2012 increased $2.7 million from the prior fiscal year. The effect of higher shipments was offset in part by the effect of higher cement production and lower cement unit costs. Cement unit costs decreased 9% from the prior fiscal year on lower energy and supplies and maintenance costs. Supplies and maintenance costs related to scheduled maintenance at our three cement plants decreased approximately $1 million from the prior fiscal year.

- 22 -


Selling, general and administrative expense for fiscal year 2012 decreased $2.4 million from the prior fiscal year. The decrease was primarily due to $1.2 million lower controllable expenses, $1.4 million lower bad debt expense and $1.4 million lower insurance expense offset in part by $1.5 million higher incentive compensation expense.
Restructuring charges of $1.1 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.

Other income for fiscal year 2012 increased $4.1 million from the prior fiscal year. The increase was primarily due to $3.0 million higher gains from routine sales of surplus operating assets and $0.8 million higher in gains from sales of emissions credits associated with our Crestmore cement plant in Riverside, California.

Aggregates Operations
 
 
 
Year ended May 31,
In thousands except per unit
 
2013
 
2012
 
2011
Operating Results
 
 
 
 
 
 
Stone, sand and gravel sales
 
$
110,039

 
$
85,537

 
$
89,045

Other sales and delivery fees
 
45,567

 
31,821

 
29,308

Total segment sales
 
155,606

 
117,358

 
118,353

Cost of products sold
 
138,840

 
107,858

 
108,352

Gross profit
 
16,766

 
9,500

 
10,001

Selling, general and administrative
 
(3,619
)
 
(5,874
)
 
(7,020
)
Restructuring charges
 

 
(373
)
 

Other income
 
1,296

 
22,117

 
13,115

Operating Profit
 
$
14,443

 
$
25,370

 
$
16,096

Stone, sand and gravel
 
 
 
 
 
 
Shipments (tons)
 
14,793

 
11,838

 
12,065

Prices ($/ton)
 
$
7.44

 
$
7.23

 
$
7.38

Cost of sales ($/ton)
 
$
6.26

 
$
6.44

 
$
6.72


Fiscal Year 2013 Compared to Fiscal Year 2012
Aggregate operating profit for fiscal year 2013 was $14.4 million, a decrease of $11.0 million from the prior fiscal year. Operating profit for fiscal year 2012 includes a gain of $20.8 million from the sale of our aggregate rail distribution terminal and associated assets located in Stafford, Texas. Excluding these gains operating profit increased $9.8 million from the prior fiscal year.
Total segment sales for fiscal year 2013 were $155.6 million compared to $117.4 million for the prior fiscal year. Stone, sand and gravel sales from current operations increased $38.2 million from the prior fiscal year on 25% higher shipments and 3% higher average prices.
Cost of products sold for fiscal year 2013 increased $31.0 million from the prior fiscal year. Cost of products sold from current operations increased primarily due to higher stone, sand and gravel shipments and higher freight costs. Stone, sand and gravel unit costs decreased 3% from the prior year period due to increased production volumes.

Selling, general and administrative expense for fiscal year 2013 decreased $2.3 million from the prior fiscal year. The decrease was primarily due to $1.3 million lower controllable expenses, $0.6 million lower bad debt expense and $0.3 million lower incentive compensation expense.
Restructuring charges of $0.4 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Other income for fiscal year 2013 decreased $20.8 million. Other income in 2012 includes a gain of $20.8 million from the sale of our aggregate rail distribution terminal and associated assets located in Stafford, Texas.


Fiscal Year 2012 Compared to Fiscal Year 2011
Aggregate operating profit for fiscal year 2012 was $25.4 million, an increase of $9.3 million from the prior fiscal year. Operating profit for fiscal year 2012 includes a gain of $20.8 million from the sale of our aggregate rail distribution terminal

- 23 -


and associated assets located in Stafford, Texas. Operating profit for fiscal year 2011 includes a gain of $12.0 million recognized in connection with the exchange of aggregate operating assets for ready-mix operating assets. Excluding these gains operating profit increased $0.5 million from the prior fiscal year.
Total segment sales for fiscal year 2012 were $117.4 million compared to $118.4 million for the prior fiscal year. The effect of the disposition of aggregate operating assets through the asset exchange transaction completed in April 2011 decreased sales $7.2 million, shipments 7% and average prices 2% from the prior fiscal year. Segment sales from current operations increased from the prior fiscal year on 5% higher shipments and comparable average prices.
Cost of products sold for fiscal year 2012 decreased $0.5 million from the prior fiscal year. The effect of the disposition of aggregate operating assets through the asset exchange transaction completed in April 2011 decreased stone, sand and gravel cost of products sold $7.2 million in 2012. Stone, sand and gravel unit costs decreased 4% from the prior year period primarily due to the effect on unit costs of the disposition of aggregate operating assets through the asset exchange transaction completed in April 2011.
Selling, general and administrative expense for fiscal year 2012 decreased $1.1 million from the prior fiscal year. The decrease was primarily due to $1.2 million lower controllable expenses and $0.3 million lower bad debt expense offset in part by $0.8 million higher incentive compensation expense.
Restructuring charges of $0.4 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Other income for fiscal year 2012 increased $9.0 million. Other income in 2012 includes a gain of $20.8 million from the sale of our aggregate rail distribution terminal and associated assets located in Stafford, Texas. Other income in 2011 includes a gain of $12.0 million from the exchange of aggregate operating assets for ready-mix operating assets.

Consumer Products Operations
 
 
Year ended May 31,
In thousands except per unit
 
2013
 
2012
 
2011
Operating Results
 
 
 
 
 
 
Ready-mix concrete sales
 
$
231,358

 
$
182,478

 
$
180,826

Other sales and delivery fees
 
371

 
49,250

 
55,322

Total segment sales
 
231,729

 
231,728

 
236,148

Cost of products sold
 
235,294

 
236,863

 
235,055

Gross profit (loss)
 
(3,565
)
 
(5,135
)
 
1,093

Selling, general and administrative
 
(10,739
)
 
(10,846
)
 
(12,773
)
Restructuring charges
 

 
(536
)
 

Other income
 
4,172

 
41,552

 
529

Operating Profit (Loss)
 
$
(10,132
)
 
$
25,035

 
$
(11,151
)
Ready-mix concrete
 
 
 
 
 
 
Shipments (cubic yards)
 
2,801

 
2,399

 
2,415

Prices ($/cubic yard)
 
$
82.62

 
$
76.06

 
$
74.87

Cost of sales ($/cubic yard)
 
$
83.85

 
$
80.54

 
$
77.89

Fiscal Year 2013 Compared to Fiscal Year 2012
Consumer products operating loss for fiscal year 2013 was ($10.1) million. Consumer products operating profit for fiscal year 2012 was $25.0 million. Consumer products operating profit for fiscal year 2012 includes a gain from the sale of our Texas-based package products operations of $30.9 million and gains from exchanges of operating assets of $10.5 million. Consumer products operating results improved $6.3 million from the prior fiscal year excluding the 2012 related gains.
Total segment sales were $231.7 million for both fiscal years 2013 and 2012, as an increase of $48.9 million in ready-mix concrete sales were offset by the loss of sales from the Texas-based package products operations that were sold in May, 2012.
Cost of products sold for fiscal year 2013 decreased $1.6 million from the prior fiscal year as an increase in cost of sales attributable to higher shipments and unit costs in fiscal year 2013 was offset by the effect of the disposition of the Texas-based package products operations in fiscal year 2012.
Selling, general and administrative expense for fiscal year 2013 decreased $0.1 million from the prior fiscal year.

- 24 -


Restructuring charges of $0.5 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Other income for fiscal year 2013 decreased $37.4 million from the prior fiscal year. Other income in 2012 includes a gain of $30.9 million from the sale of our Texas-based package products operations. In addition, we entered into ready-mix and aggregate asset exchange transactions and a joint venture agreement that resulted in the recognition of gains of $10.5 million in 2012.

Fiscal Year 2012 Compared to Fiscal Year 2011
Consumer products operating profit for fiscal year 2012 was $25.0 million. Consumer products operating loss for fiscal year 2011 was $11.2 million. Consumer products operating profit for fiscal year 2012 includes a gain from the sale of our Texas-based package products operations of $30.9 million and gains from exchanges of operating assets of $10.5 million. Consumer products operating loss increased $3.0 million from the prior fiscal year excluding these gains and the related $2.2 million lower package products operating profit.
Total segment sales for fiscal year 2012 were $231.7 million compared to $236.1 million for the prior fiscal year. Ready-mix concrete sales increased $1.7 million from the prior fiscal year. The net effect of the asset exchange transactions completed in April and July 2011 increased sales $7.2 million, shipments 3% and average prices 1% from the prior fiscal year. Ready-mix concrete sales excluding the net effect of the asset exchange transactions decreased $5.5 million from the prior fiscal year on 4% lower shipments and 1% higher average prices.
Cost of products sold for fiscal year 2012 increased $1.8 million from the prior fiscal year. Cost of products sold increased $6.6 million due to the net effect of the asset exchange transactions completed in April and July 2011. Cost of products sold for package products operations decreased $3.1 million. Cost of products sold excluding these effects decreased $1.7 million from the prior fiscal year primarily due to lower shipments. Ready-mix concrete unit costs increased 3% from the prior fiscal year primarily due to higher diesel costs.
Selling, general and administrative expense for fiscal year 2012 decreased $1.9 million from the prior fiscal year. In addition to $1.3 million in expenses associated with the acquisition of ready-mix operating assets through as asset exchange transaction recognized in 2011, the decrease was primarily due to $1.0 million lower controllable expenses and $1.4 million lower bad debt expense offset in part by $1.0 million higher insurance expense and $1.1 million higher incentive compensation expense.
Restructuring charges of $0.5 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Other income for fiscal year 2012 increased $41.0 million from the prior fiscal year. Other income in 2012 includes a gain of $30.9 million from the sale of our Texas-based package products operations. In addition, we entered into ready-mix and aggregate asset exchange transactions and a joint venture agreement that resulted in the recognition of gains of $10.5 million in 2012.
Corporate
 
 
Year ended May 31,
In thousands
 
2013
 
2012
 
2011
Other income
 
$
302

 
$
511

 
$
2,448

Selling, general and administrative
 
(40,128
)
 
(35,113
)
 
(33,291
)
Restructuring charges
 

 
(1,169
)
 

 
 
$
(39,826
)
 
$
(35,771
)
 
$
(30,843
)
Fiscal Year 2013 Compared to Fiscal Year 2012
Corporate other income for fiscal year 2013 decreased $0.2 million from the prior fiscal year.
Corporate general and administrative expense for fiscal year 2013 increased $5.0 million from the prior fiscal year. In addition to $4.1 million in costs related to the centralization of our purchasing and accounting functions, the impact of changes in our stock price on the fair value of our awards expected to be settled in cash increased $7.3 million over the prior year. These increases were somewhat offset by $4.6 million decrease in our financial security plan postretirment benefit expense and $1.3 million decrease in incentive compensation expense.
Restructuring charges of $1.2 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.

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Fiscal Year 2012 Compared to Fiscal Year 2011
Corporate other income for fiscal year 2012 decreased $1.9 million from the prior fiscal year primarily due to $1.8 million lower oil and gas lease bonus and royalty payments and $0.1 million lower interest income.
Corporate selling, general and administrative expense for fiscal year 2012 increased $1.8 million from the prior fiscal year. In addition to $1.3 million higher controllable expenses, we recognized $1.8 million incentive compensation expense in 2012. Our stock-based compensation includes awards expected to be settled in cash, the expense for which is based on their fair value at the end of each period until the awards are paid. The impact of changes in our stock price on the fair value of these awards decreased expense $3.4 million. Our financial security plan postretirement benefit obligations are determined using assumptions as of the end of the year. Actuarial gains or losses are recognized when incurred. Financial security plan postretirement benefit expense increased $2.2 million.
Restructuring charges of $1.2 million were recorded in fiscal year 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Interest
Interest expense incurred for fiscal year 2013 was $69.3 million, of which $36.5 million was capitalized in connection with our Hunter, Texas cement plant expansion project and $32.8 million was expensed. Interest expense incurred for fiscal year 2012 was $68.5 million, of which $33.7 million was capitalized in connection with our Hunter, Texas cement plant expansion project and $34.8 million was expensed.
Interest expense incurred for fiscal year 2013 increased $0.8 million from the prior fiscal year. The increase in 2013 was primarily the result of higher average outstanding debt at higher interest rates. Interest expense incurred for fiscal year 2012 increased $2.2 million from the prior fiscal year. The increases in 2012 was primarily the result of higher average outstanding debt at higher interest rates due to the August 2010 refinancing of our senior notes.
Loss on Debt Retirements
On July 27, 2010, we commenced a cash tender offer for all of the outstanding $550 million aggregate principal amount of our 7.25% senior notes due 2013 and a solicitation of consents to amend the indenture governing the 7.25% notes. Pursuant to the tender offer and consent solicitation, we purchased $536.6 million aggregate principal amount of the 7.25% notes, and paid an aggregate of $547.7 million in purchase price and consent fees. On September 9, 2010, we redeemed the remaining $13.4 million aggregate principal amount of the 7.25% notes at a price of 101.813% of the principal amount thereof, plus accrued and unpaid interest on the 7.25% notes to the redemption date. We used the net proceeds from the issuance and sale of $650 million aggregate principal amount of our 9.25% senior notes to pay the purchase or redemption price of the 7.25% notes and the consent fees and to increase working capital. We recognized a loss on debt retirement of $29.6 million representing $11.4 million in consent fees, redemption price premium and transaction costs and a write-off of $18.2 million of unamortized debt discount and original issuance costs associated with the 7.25% notes in fiscal year 2011.
Income Taxes
Our effective tax rate for continuing operations was 56.7% in 2013, (572%) in 2012 and 38.7% in 2011. The primary reason that the effective tax rate differed from the 35% statutory corporate rate was due to additional percentage depletion that is tax deductible, non-taxable insurance benefits, stock-based compensation, state income taxes, and valuation allowance.
As of May 31, 2013, we had an alternative minimum tax credit carryforward of $28.8 million. The credit, which does not expire, is available for offset against future regular federal income tax. We had $143.1 million in federal net operating loss carryforwards. The federal net operating losses, which begin to expire in 2030, may be carried forward twenty years and offset against future federal taxable income. We had $5.0 million in state net operating loss carryforwards. The state net operating losses, which begin to expire in 2014, may be carried forward from five to twenty years depending on the state jurisdiction.
Management reviews our deferred tax position and in particular our deferred tax assets whenever circumstances indicate that the assets may not be realized in the future and records a valuation allowance unless such deferred tax assets are deemed more likely than not to be recoverable. The ultimate realization of these deferred tax assets depends upon various factors including the generation of taxable income during future periods. The Company’s deferred tax assets exceeded deferred tax liabilities as of May 31, 2012 and May 31, 2011. Management has concluded that the sources of taxable income we are permitted to consider do not assure the realization of the entire amount of our net deferred tax assets. Accordingly, a valuation allowance was required due to the uncertainty of realizing the deferred tax assets. We have $3.6 million in valuation allowances recorded against our net deferred tax assets as of May 31, 2013.
CRITICAL ACCOUNTING POLICIES

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The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. We believe the following critical accounting policies affect management’s more complex judgments and estimates.
Receivables.    Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If we are aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve.
Environmental Liabilities.    We are subject to environmental laws and regulations established by federal, state and local authorities, and make provision for the estimated costs related to compliance when it is probable that an estimable liability has been incurred.
Legal Contingencies.    We are defendants in lawsuits which arose in the normal course of business, and make provision for the estimated loss from any claim or legal proceeding when it is probable that an estimable liability has been incurred.
Inventories.    Inventories are stated at the lower of cost or market. We use the last-in, first out (“LIFO”) method to value finished products, work in process and raw material inventories excluding natural aggregate inventories. We use the average cost method to value other inventories that include natural aggregate, parts and supplies, and emission allowance credits. Our natural aggregate inventory excludes volumes in excess of an average twelve-month period of actual sales.
We recognize the emission allowance credits issued by the regulatory agency (CARB) at zero cost and average them with the cost of additional credits that we purchase from state approved sources.
Long-lived Assets.    Management reviews long-lived assets on a facility by facility basis for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. Estimates of future cash flows reflect Management’s belief that it operates in a cyclical industry and that we are beginning to recover from a low point of a cycle.
Income Taxes.    Texas Industries, Inc. (the parent company) joins in filing a consolidated return with its subsidiaries based on federal and certain state tax filing requirements. Certain subsidiaries also file separate state income tax returns. 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. We recognize and classify deferred income taxes using an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by current enacted tax rates.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the year the tax returns are filed.
The amount of income tax we pay is subject to ongoing audits by federal and state authorities which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for these uncertain tax issues using a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step determines if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step measures the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates, or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters differs from the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate including related interest and penalties.
Management reviews our deferred tax position and in particular our deferred tax assets whenever circumstances indicate that the assets may not be realized in the future and would record a valuation allowance unless such deferred tax assets were deemed more likely than not to be recoverable. The ultimate realization of these deferred tax assets is dependent upon various factors including the generation of taxable income during future periods. In determining the need for a valuation allowance, we consider such factors as historical earnings, the reversal of existing temporary differences, prior taxable income (if carryback is permitted under the tax law), and prudent and feasible tax planning strategies. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination. If we later determine that it is

- 27 -


more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time.
RECENTLY ISSUED ACCOUNTING GUIDANCE
In June 2011, the Financial Accounting Standards Board issued new accounting guidance that requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. In December 2011, the Financial Accounting Standards Board issued an amendment to an existing accounting standard which defers the requirement to present reclassification adjustments for each component of other comprehensive income on the face of the income statement. The new guidance was effective for us on June 1, 2012 and has not had a material impact on our consolidated financial statements.
In July 2012, the Financial Accounting Standards Board issued new accounting guidance that allows entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. This new guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. This new guidance becomes effective for us in the first quarter of our fiscal 2014, and provides permission for early adoption. We are currently evaluating the impact of the new guidance, and do not expect it to have a material effect on our consolidated financial statements.
In February 2013, the Financial Accounting Standards Board issued new accounting guidance aimed at improving the reporting of reclassifications out of accumulated other comprehensive income. This new guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This new guidance becomes effective for us in the first quarter of our fiscal 2014 and provides permission for early adoption, which should be applied prospectively. We are currently evaluating the impact of the new guidance, and do not expect it to have a material effect on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES

In addition to cash and cash equivalents of $61.3 million at May 31, 2013, our sources of liquidity include cash from operations and borrowings available under our senior secured revolving credit facility.
Senior Secured Revolving Credit Facility.    On August 25, 2011, we amended and restated our credit agreement and the associated security agreement. The credit agreement continues to provide for a $200 million senior secured revolving credit facility with a $50 million sub-limit for letters of credit and a $15 million sub-limit for swing line loans. The credit facility matures on August 25, 2016. Amounts drawn under the credit facility bear annual interest either at the LIBOR rate plus a margin of 2.0% to 2.75% or at a base rate plus a margin of 1.0% to 1.75%. The base rate is the higher of the federal funds rate plus 0.5%, the prime rate established by Bank of America, N.A. or the one-month LIBOR rate plus 1.0%. The interest rate margins are determined based on the Company’s fixed charge coverage ratio. The commitment fee calculated on the unused portion of the credit facility ranges from 0.375% to 0.50% per year based on the Company’s average daily loan balance. We may terminate the credit facility at any time.
The amount that can be borrowed under the credit facility is limited to an amount called the borrowing base. The borrowing base may be less than the $200 million stated principal amount of the credit facility. The borrowing base is calculated based on the value of our accounts receivable, inventory and mobile equipment in which the lenders have a security interest. In addition, by mortgaging tracts of its real property to the lenders, the Company may increase the borrowing base by an amount beginning at $20 million and declining to $10.7 million at the maturity of the credit facility.

The borrowing base under the agreement was $136.9 million as of May 31, 2013. We are not required to maintain any financial ratios or covenants unless an event of default occurs or the unused portion of the borrowing base is less than $25 million, in which case we must maintain a fixed charge coverage ratio of at least 1.0 to 1.0. At May 31, 2013, our fixed charge coverage ratio was .40 to 1.0. Given this ratio, we may use only $111.9 million of the borrowing base as of such date. No borrowings were outstanding at May 31, 2013; however, $32.6 million of the borrowing base was used to support letters of credit. As a result, the maximum amount we could borrow as of May 31, 2013 was $79.3 million.

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All of our consolidated subsidiaries have guaranteed our obligations under the credit facility. The credit facility is secured by first priority security interests in all or most of our existing and future consolidated accounts, inventory, equipment, intellectual property and other personal property, and in all of our equity interests in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries, if any.
The credit agreement contains a number of covenants restricting, among other things, prepayment or redemption of our senior notes, distributions and dividends on and repurchases of our capital stock, acquisitions and investments, indebtedness, liens and affiliate transactions. We are permitted to pay cash dividends on our common stock as long as the credit facility is not in default, the fixed charge coverage ratio is greater than 1.0 to 1.0 and borrowing availability under the borrowing base is more than $40 million. When our fixed charge coverage ratio is less than 1.0 to 1.0, we are permitted to pay cash dividends on our common stock not to exceed $2.5 million in any single instance (which shall not occur more than four times in any calendar year) or $10 million in the aggregate during any calendar year as long as the credit facility is not in default and borrowing availability is more than the greater of $60 million or 30% of the aggregate commitments of all lenders. For this purpose, borrowing availability is equal to the borrowing base less the amount of outstanding borrowings less the amount used to support letters of credit. We were in compliance with all of our loan covenants as of May 31, 2013.
9.25% Senior Notes.    On August 10, 2010, we sold $650 million aggregate principal amount of our 9.25% senior notes due 2020 at an offering price of 100%. The notes were issued under an indenture dated as of August 10, 2010. The net proceeds were used to purchase or redeem all of our outstanding 7.25% senior notes due 2013, with additional proceeds available for general corporate purposes.
At May 31, 2013, we had $650 million aggregate principal amount of 9.25% senior notes outstanding. Under the indenture, at any time on or prior to August 15, 2015, we may redeem the notes at a redemption price equal to the sum of the principal amount thereof, plus accrued interest and a make-whole premium. On and after August 15, 2015, we may redeem all or a part of the notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest if redeemed during the twelve-month period beginning on August 15 of the years indicated below:

 
Year
Percentage
2015
104.625
%
2016
103.083
%
2017
101.542
%
2018 and thereafter
100.000
%
In addition, prior to August 15, 2013, we may redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 109.250% of the principal amount thereof, plus accrued interest with the net cash proceeds from certain equity offerings. If we experience a change of control, we may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued interest.
All of our consolidated subsidiaries have unconditionally guaranteed the 9.25% senior notes. The indenture governing the notes contains affirmative and negative covenants that, among other things, limit our and our subsidiaries’ ability to pay dividends on or redeem or repurchase stock, make certain investments, incur additional debt or sell preferred stock, create liens, restrict dividend payments or other payments from subsidiaries to the Company, engage in consolidations and mergers or sell or transfer assets, engage in sale and leaseback transactions, engage in transactions with affiliates, and sell stock in our subsidiaries. We are not required to maintain any affirmative financial ratios or covenants. We were in compliance with all of our covenants as of May 31, 2013.
Guarantee of Joint Venture Debt.    We have guaranteed 50%, or $10.7 million, of the debt of an unconsolidated joint venture which matures November 18, 2013. The joint venture was in compliance with all the terms of the debt as of May 31, 2013. See further discussion of the joint venture under Investment in Joint Venture in Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Report.
Contractual Obligations.    The following is a summary of our estimated future payments under our material contractual obligations as of May 31, 2013.

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Future Payments by Period
In thousands
 
Total
 
2014
 
2015
 
2016
 
2017-2018
 
After 2018
Borrowings
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt excluding capital leases(1)
 
$
657,749

 
$
1,787

 
$
1,806

 
$
1,879

 
$
2,032

 
$
650,245

Interest
 
451,565

 
60,390

 
60,322

 
60,240

 
120,300

 
150,313

Operating leases(2)
 
44,601

 
9,668

 
8,125

 
5,644

 
10,704

 
10,460

Supply and service contracts(3)
 
26,864

 
6,270

 
6,306

 
6,306

 
7,982

 

Capital lease and maintenance service contract(4)
 
5,306

 
379

 
379

 
379

 
758

 
3,411

Asset retirement obligations(5)
 
13,616

 
931

 

 
446

 
184

 
12,055

Defined benefit plans(6)(7)
 
153,035

 
3,761

 
4,212

 
4,649

 
9,495

 
130,918

 
 
$
1,352,736

 
$
83,186

 
$
81,150

 
$
79,543

 
$
151,455

 
$
957,402

(1)
See Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Report for information regarding our long-term debt. Our outstanding letters of credit issued under the senior secured revolving credit facility only collateralize payment of recorded liabilities.
(2)
We lease certain mobile and other equipment, office space and other items used in our operations under operating leases that in the normal course of business may be renewed or replaced by subsequent leases. Future payments under leases exclude mineral rights which are insignificant and are generally required only for products produced.
(3)
We purchase coal for use in our operations under long-term supply contracts that, in certain cases, require minimum amounts of materials be purchased or are subject to minimum transportation charges. In addition, we purchase mining services at our north Texas cement plant under a long-term contract that contains provisions for minimum payments. We expect to utilize these required amounts of materials and services in the normal course of business operations.
(4)
We entered into a long-term contract with a power supplier during the construction of our Oro Grande, California cement plant, which included the construction of certain power facilities located at the plant. We recognized a capital lease obligation of $2.4 million related to payment obligations under the power supply contract related to these facilities. The total future commitment under the contract includes maintenance services to be provided by the power supplier.
(5)
We incur legal obligations for asset retirement as part of our normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures.
(6)
We pay benefits under a series of non-qualified defined benefit plans. See Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Report for information regarding our retirement plans.
(7)
We pay benefits under a health benefit plan covering approximately 600 employees and retirees of our California cement subsidiary. These employees are also covered by a qualified defined benefit pension plan.
    
We contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus additional amounts considered appropriate. We expect to make plan contributions of $2.3 million in fiscal year 2013.
Cash Flows
Net cash provided by operating activities for fiscal years 2013, 2012 and 2011 was $33.3 million, $10.2 million and $9.2 million, respectively.
Net cash provided by operating activities for fiscal year 2013 increased $23.1 million from fiscal year 2012. The increase was primarily the result of improved operations and changes in working capital items including decreases in inventories and increases in accounts payable and accrued liabilities offset in part by increases in receivables.
Net cash provided by operating activities for fiscal year 2012 increased $0.9 million from fiscal year 2011. The increase was primarily the result of higher income from operations and changes in working capital items including decreases in inventories and increases in accounts payable and accrued liabilities offset in part by increases in receivables.
Net cash used by investing activities for fiscal year 2013, 2012 and 2011 was $72.0 million, $36.4 million and $36.7 million, respectively.
Capital expenditures incurred in connection with the expansion of our Hunter, Texas cement plant for fiscal years 2013, 2012 and 2011 were $75.3 million, $72.9 million and $25.4 million, respectively, of which $38.5 million in 2013, $32.3 million in 2012 and $11.0 million in 2011 was capitalized interest paid.

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Capital expenditures for normal replacement and upgrades of existing equipment and acquisitions to sustain our existing operations for fiscal years 2013, 2012 and 2011 were $25.4 million, $33.4 million, and $20.3 million, respectively, of which $18.0 million was incurred to acquire aggregate reserves in 2012.
Proceeds from asset disposals for fiscal year 2012 include the sales of our Texas-based package products operations and our Stafford, Texas aggregate rail distribution terminal. Proceeds from asset disposals for fiscal year 2010 include $19.2 million representing the outstanding principal amount of a note receivable we sold on December 18, 2009. The note was received in connection with the sale of land associated with our expanded shale and clay operations in south Texas in 2006 and had been scheduled to mature on May 31, 2010.
We have elected to receive distributions from life insurance contracts purchased in connection with certain of our benefit plans. Proceeds from distributions and policy settlements for fiscal years 2013, 2012 and 2011 were $7.7 million, $7.3 million, and $7.8 million, respectively, which were offset in part by premiums and fees paid to maintain the policies.
Net cash provided by financing activities for fiscal year 2013 was $11.9 million. Net cash used by financing activities for fiscal year 2012 was $2.2 million. Net cash provided by financing activities for fiscal year 2011 was $69.0 million.

On July 27, 2010, we commenced a cash tender offer for all of the outstanding $550 million aggregate principal amount of our 7.25% senior notes due 2013 and a solicitation of consents to amend the indenture governing the 7.25% notes. Pursuant to the tender offer and consent solicitation, we purchased $536.6 million aggregate principal amount of the 7.25% notes, and paid an aggregate of $547.7 million in purchase price and consent fees. On September 9, 2010, we redeemed the remaining $13.4 million aggregate principal amount of the 7.25% notes at a price of 101.813% of the principal amount thereof, plus accrued and unpaid interest on the 7.25% notes to the redemption date. We used the net proceeds from the issuance and sale of $650 million aggregate principal amount of our 9.25% senior notes to pay the purchase or redemption price of the 7.25% notes and the consent fees and to increase working capital. We recognized a loss on debt retirement of $29.6 million representing $11.4 million in consent fees, redemption price premium and transaction costs and a write-off of $18.2 million of unamortized debt discount and original issuance costs associated with the 7.25% notes in fiscal year 2011.
Proceeds from stock option exercises and the related tax benefits for fiscal years 2013, 2012 and 2011 were $14.6 million, $2.0 million and $1.5 million, respectively. Dividends paid on our common stock in fiscal years 2012 and 2011 were $2.1 million and $8.4 million, respectively. On October 12, 2011, the Company suspended payment of its quarterly cash dividend.
OTHER ITEMS
Environmental Matters
We are subject to federal, state and local environmental laws, regulations and permits concerning, among other matters, air emissions and wastewater discharge. We intend to comply with these laws, regulations and permits. However, from time to time we receive claims from federal and state environmental regulatory agencies and entities asserting that we are or may be in violation of certain of these laws, regulations and permits, or from private parties alleging that our operations have injured them or their property. See Note 10 of Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report for a description of certain claims. It is possible that we could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us.
Market Risk
Historically, we have not entered into derivatives or other financial instruments for trading or speculative purposes. Because of the short duration of our investments, changes in market interest rates would not have a significant impact on their fair value. The fair value of fixed rate debt will vary as interest rates change.
The estimated fair value of each class of financial instrument as of May 31, 2013 and May 31, 2012 approximates its carrying value except for long-term debt having fixed interest rates. The fair value of our long-term debt is estimated based on broker/dealer quoted market prices. As of May 31, 2013, the fair value of our long-term debt, including the current portion, was approximately $723.2 million compared to the carrying amount of $659.8 million. As of May 31, 2012, the fair value of our long-term debt, including the current portion, was approximately $646.8 million compared to the carrying amount of $658.2 million.
Our operations require large amounts of energy and are dependent upon energy sources, including electricity and fossil fuels. Prices for energy are subject to market forces largely beyond our control. We have generally not entered into any long-term contracts to satisfy our fuel and electricity needs, with the exception of coal which we purchase from specific mines pursuant to long-term contracts. However, we continually monitor these markets and we may decide in the future to enter into additional long-term contracts. If we are unable to meet our requirements for fuel and electricity, we may experience

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interruptions in our production. Price increases or disruption of the uninterrupted supply of these products could adversely affect our results of operations.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the
Private Securities Litigation Reform Act of 1995
Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan,” “anticipate,” and other similar words. Such statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the impact of competitive pressures and changing economic and financial conditions on our business, the cyclical and seasonal nature of our business, the level of construction activity in our markets, abnormal periods of inclement weather, unexpected periods of equipment downtime, unexpected operational difficulties, changes in the cost of raw materials, fuel and energy, changes in cost or availability of transportation, changes in interest rates, the timing and amount of federal, state and local funding for infrastructure, delays in announced capacity expansions, ongoing volatility and uncertainty in the capital or credit markets, the impact of environmental laws, regulations and claims, changes in governmental and public policy, and the risks and uncertainties described in our reports on Forms 10-K, 10-Q and 8-K. Forward-looking statements speak only as of the date hereof, and we assume no obligation to publicly update such statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Item 7 of this Report.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


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CONSOLIDATED BALANCE SHEETS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
 

In thousands except per share
 
May 31, 2013
 
May 31, 2012
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
61,296

 
$
88,027

Receivables – net
 
126,922

 
98,836

Inventories
 
105,054

 
99,441

Deferred income taxes and prepaid expenses
 
27,294

 
19,007

Discontinued operations held for sale
 

 
40,344

TOTAL CURRENT ASSETS
 
320,566

 
345,655

PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Land and land improvements
 
172,780

 
168,173

Buildings
 
50,968

 
49,567

Machinery and equipment
 
1,647,460

 
1,142,439

Construction in progress
 
16,642

 
436,552

 
 
1,887,850

 
1,796,731

Less depreciation and depletion
 
661,454

 
611,406

 
 
1,226,396

 
1,185,325

OTHER ASSETS
 
 
 
 
Goodwill
 
40,575

 
1,715

Real estate and investments
 
29,471

 
20,865

Deferred income taxes and other charges
 
18,817

 
23,368

 
 
88,863

 
45,948

 
 
$
1,635,825

 
$
1,576,928

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
69,061

 
$
64,825

Accrued interest, compensation and other
 
62,336

 
61,317

Current portion of long-term debt
 
1,872

 
1,214

TOTAL CURRENT LIABILITIES
 
133,269

 
127,356

LONG-TERM DEBT
 
657,935

 
656,949

OTHER CREDITS
 
91,157

 
96,352

SHAREHOLDERS’ EQUITY
 
 
 
 
Common stock, $1 par value; authorized 100,000 shares; issued and outstanding 28,572 and 27,996 shares, respectively
 
28,572

 
27,996

Additional paid-in capital
 
514,560

 
488,637

Retained earnings
 
228,686

 
204,136

Accumulated other comprehensive loss
 
(18,354
)
 
(24,498
)
 
 
753,464

 
696,271

 
 
$
1,635,825

 
$
1,576,928

See notes to consolidated financial statements.

- 33 -


CONSOLIDATED STATEMENTS OF OPERATIONS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
 
Year Ended May 31
In thousands except per share
 
2013
 
2012
 
2011
NET SALES
 
$
697,081

 
$
594,105

 
$
571,906

Cost of products sold
 
629,803

 
560,573

 
556,925

GROSS PROFIT
 
67,278

 
33,532

 
14,981

Selling, general and administrative
 
67,657

 
68,363

 
72,049

Restructuring charges
 

 
3,153

 

Interest
 
32,807

 
34,835

 
47,583

Loss on debt retirements
 

 

 
29,619

Other income
 
(8,926
)
 
(73,106
)
 
(20,921
)
 
 
91,538

 
33,245

 
128,330

INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS
 
(24,260
)
 
287

 
(113,349
)
Income taxes (benefit)
 
(13,766
)
 
(1,641
)
 
(43,877
)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
 
$
(10,494
)
 
$
1,928

 
$
(69,472
)
NET INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX
 
35,044

 
5,548

 
4,559

NET INCOME (LOSS)
 
$
24,550

 
$
7,476

 
$
(64,913
)
NET INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
 
 
 
 
 
 
Basic
 
$
(0.37
)
 
$
0.07

 
$
(2.49
)
Diluted
 
$
(0.37
)
 
$
0.07

 
$
(2.49
)
NET INCOME FROM DISCONTINUED OPERATIONS:
 
 
 
 
 
 
Basic
 
$
1.24

 
$
0.20

 
$
0.16

Diluted
 
$
1.24

 
$
0.20

 
$
0.16

NET INCOME (LOSS) PER SHARE:
 
 
 
 
 
 
Basic
 
$
0.87

 
$
0.27

 
$
(2.33
)
Diluted
 
$
0.87

 
$
0.27

 
$
(2.33
)
AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
Basic
 
28,163

 
27,914

 
27,825

Diluted
 
28,163

 
28,016

 
27,825

See notes to consolidated financial statements.

- 34 -



CONSOLIDATED STATEMENTS OF CASH FLOWS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
 
Year Ended May 31,
In thousands
 
2013
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
 
 
 
Net income (loss)
 
$
24,550

 
$
7,476

 
$
(64,913
)
Adjustments to reconcile net income (loss) to cash provided by operating
activities
 
 
 
 
 
 
Depreciation, depletion and amortization
 
59,865

 
60,952

 
64,297

(Gains), net on asset disposals
 
(64,425
)
 
(67,610
)
 
(13,638
)
Deferred income tax (benefit) expense
 
3,423

 
(88
)
 
(42,875
)
Stock-based compensation expense
 
9,513

 
2,387

 
5,581

Loss on debt retirements
 

 

 
29,619

Other – net
 
(6,965
)
 
1,223

 
3,158

Changes in operating assets and liabilities
 
 
 
 
 
 
Receivables – net
 
(27,138
)
 
(13,303
)
 
13,379

Inventories
 
21,433

 
10,829

 
2,164

Prepaid expenses
 
(238
)
 
1,385

 
1,301

Accounts payable and accrued liabilities
 
13,282

 
6,923

 
11,172

Net cash provided by operating activities
 
33,300

 
10,174

 
9,245

INVESTING ACTIVITIES
 
 
 
 
 
 
Capital expenditures – expansions
 
(67,426
)
 
(72,906
)
 
(25,430
)
Capital expenditures – other
 
(25,395
)
 
(33,430
)
 
(20,253
)
Proceeds from asset disposals
 
18,481

 
66,845

 
3,596

Investments in life insurance contracts
 
2,467

 
3,354

 
4,073

Other – net
 
(102
)
 
(245
)
 
1,266

Net cash used by investing activities
 
(71,975
)
 
(36,382
)
 
(36,748
)
FINANCING ACTIVITIES
 
 
 
 
 
 
Long-term borrowings
 

 

 
650,000

Debt payments
 
(2,684
)
 
(300
)
 
(561,627
)
Debt issuance costs
 

 
(1,829
)
 
(12,492
)
Stock option exercises
 
14,628

 
2,023

 
1,462

Excess tax benefits from stock-based compensation
 

 

 

Common dividends paid
 

 
(2,091
)
 
(8,354
)
Net cash provided (used) by financing activities
 
11,944

 
(2,197
)
 
68,989

Increase (decrease) in cash and cash equivalents
 
(26,731
)
 
(28,405
)
 
41,486

Cash and cash equivalents at beginning of period
 
88,027

 
116,432

 
74,946

Cash and cash equivalents at end of period
 
$
61,296

 
$
88,027

 
$
116,432

See notes to consolidated financial statements.

- 35 -



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
Year Ended May 31,
In thousands
 
2013
 
2012
 
2011
Net income (loss)
 
$
24,550

 
$
7,476

 
$
(64,913
)
Other comprehensive income (loss)
 
 
 
 
 
 
Unrealized actuarial gains (losses) of defined benefit plans net of tax expense (benefit) or $3,126 and $1,568 and $102, respectively
 
5,432

 
(13,449
)
 
178

 
 


 


 


Reclassification adjustment for losses (gains) benefit plans net of tax benefit (expense) of $409, $(200) and $697, respectively
 
712

 
1,713

 
1,210

Total other comprehensive income (loss)
 
6,144

 
(11,736
)

1,388

Comprehensive income (loss)
 
$
30,694

 
$
(4,260
)

$
(63,525
)
See notes to consolidated financial statements.

- 36 -


CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

 
 
Year Ended May 31,
In thousands except per share
 
2013
 
2012
 
2011
COMMON STOCK ($1 par value)
 
 
 
 
 
 
Balance at the beginning of the year
 
$
27,996

 
$
27,887

 
$
27,796

Stock issued to employees and non-employee directors related to stock compensation plans
 
576

 
109

 
91

Balance at the end of the year
 
28,572

 
27,996

 
27,887

ADDITIONAL PAID-IN CAPITAL
 
 
 
 
 
 
Balance at the beginning of the year
 
488,637

 
481,706

 
475,584

Stock-based compensation
 
11,271

 
5,003

 
4,729

Stock issued to employees and non-employee directors related to stock compensation plans
 
14,652

 
1,928

 
1,393

Balance at the end of the year
 
514,560

 
488,637

 
481,706

RETAINED EARNINGS
 
 
 
 
 
 
Balance at the beginning of the year
 
204,136

 
198,751

 
272,018

Net income (loss)
 
24,550

 
7,476

 
(64,913
)
Common dividends paid—$.075 per share in 2012 and $.30 per share in 2011
 

 
(2,091
)
 
(8,354
)
Balance at the end of the year
 
228,686

 
204,136

 
198,751

ACCUMULATED OTHER COMPREHENSIVE LOSS
 
 
 
 
 
 
Balance at the beginning of the year
 
(24,498
)
 
(12,762
)
 
(14,150
)
Postretirement benefit obligation adjustments—net of tax expense (benefit) of $3,538 in 2013, $(1,367) in 2012 and $800 in 2011
 
6,144

 
(11,736
)
 
1,388

Balance at the end of the year
 
(18,354
)
 
(24,498
)
 
(12,762
)
TOTAL SHAREHOLDERS’ EQUITY
 
$
753,464

 
$
696,271

 
$
695,582

See notes to consolidated financial statements.


- 37 -


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Texas Industries, Inc. and subsidiaries is a leading supplier of heavy construction materials in the southwestern United States through our three business segments: cement, aggregates and consumer products. Our principal products are gray portland cement, produced and sold through our cement segment; stone, sand and gravel, produced and sold through our aggregates segment; and ready-mix concrete, produced and sold through our consumer products segment. Our facilities are concentrated primarily in Texas, Louisiana and California. When used in these notes the terms “Company,” “we,” “us” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise.
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of Texas Industries, Inc. and all subsidiaries except for a joint venture in which the Company has a 40% equity interest. The joint venture is accounted for using the equity method. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Discontinued Operations Held for Sale. The prior period consolidated financial statements in this Form 10-K have been reclassified to reflect the businesses held for sale and discontinued operations as discussed in Note 2 - Discontinued Operations and Held for Sale Businesses.
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.
Fair Value of Financial Instruments. The estimated fair value of each class of financial instrument as of May 31, 2013 and May 31, 2012 approximates its carrying value except for long-term debt having fixed interest rates. The fair value of our long-term debt is estimated based on broker/dealer quoted market prices, which are level two inputs. As of May 31, 2013, the fair value of our long-term debt, including the current portion, was approximately $723.2 million compared to the carrying amount of $659.8 million. As of May 31, 2012, the fair value of our long-term debt, including the current portion, was approximately $646.8 million compared to the carrying amount of $658.2 million.
Cash and Cash Equivalents. Investments with maturities of less than 90 days when purchased are classified as cash equivalents and consist primarily of money market funds and investment grade commercial paper issued by major corporations and financial institutions.
Receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If we are aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve.
Environmental Liabilities. We are subject to environmental laws and regulations established by federal, state and local authorities, and make provision for the estimated costs related to compliance when it is probable that an estimable liability has been incurred.
Legal Contingencies. We are a defendant in lawsuits which arose in the normal course of business, and make provision for the estimated loss from any claim or legal proceeding when it is probable that an estimable liability has been incurred.
Inventories. Inventories are stated at the lower of cost or market. We use the last-in, first out (“LIFO”) method to value finished products, work in process and raw material inventories excluding natural aggregate inventories. We use the average cost method to value other inventories that include natural aggregate, parts and supplies, and emission allowance credits. Our natural aggregate inventory excludes volumes in excess of an average twelve-month period of actual sales.
We recognize the emission allowance credits issued by the regulatory agency (CARB) at zero cost and average them with the cost of additional credits that we purchase from state approved sources.

Long-lived Assets. Management reviews long-lived assets on a facility by facility basis for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. Estimates of future cash flows reflect Management’s belief that it operates in a cyclical industry, and that we are beginning to recover from a low point of a cycle.

- 38 -


Property, plant and equipment is recorded at cost. Costs incurred to construct certain long-lived assets include capitalized interest which is amortized over the estimated useful life of the related asset. Interest is capitalized during the construction period of qualified assets based on the average amount of accumulated expenditures and the weighted average interest rate applicable to borrowings outstanding during the period. If accumulated expenditures exceed applicable borrowings outstanding during the period, capitalized interest is allocated to projects under construction on a pro rata basis. Provisions for depreciation are computed generally using the straight-line method. Useful lives for our primary operating facilities range from 10 to 25 years with certain cement facility structures having useful lives of 40 years. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials. The costs of removing overburden and waste materials to access mineral deposits are referred to as stripping costs. All production phase stripping costs are recognized as costs of the inventory produced during the period the stripping costs are incurred. Maintenance and repairs are charged to expense as incurred.
Goodwill and Goodwill Impairment. Management tests goodwill for impairment annually by reporting unit in the fourth quarter of our fiscal year using a two-step process. The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value including goodwill. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
Goodwill resulting from the acquisitions of ready-mix operations in Texas, Arkansas, and Louisiana and identified with our consumer products operations has a carrying value of $40.6 million at May 31, 2013 and $1.7 million at May 31, 2012, all of which is amortizable for income tax purposes. Based on an impairment test performed as of March 31, 2013, the fair value of the reporting unit exceeds its carrying value, and therefore, no potential impairment was identified. Goodwill increased from the prior year as a result of the acquisition of ready-mix concrete operations from subsidiaries of Trinity Industries, Inc.
On March 22, 2013, our subsidiaries exchanged their expanded shale and clay lightweight aggregates manufacturing business for the ready-mix concrete business of subsidiaries of Trinity Industries, Inc. in east Texas and southwest Arkansas. Pursuant to the agreements, we transferred our expanded shale and clay manufacturing facilities in Streetman, Texas; Boulder, Colorado and Frazier Park, California; and our DiamondPro® product line in exchange for 42 ready-mix concrete plants stretching from Texarkana to Beaumont in east Texas and in southwestern Arkansas, two aggregate distribution facilities in Beaumont and Port Arthur, Texas, and related assets. The exchange resulted in the acquisition of ready-mix property, plant and equipment of $25.3 million and $38.9 million in goodwill fully amortizable for income tax purposes. These values reflect the fair value determinations using inputs classified as level two and three. The goodwill represents the excess of the fair value of the purchase consideration over the net tangible assets acquired in the exchange, and constitutes a combination of factors including operational synergies, increased vertical integration, and the entrance into new geographical markets. The operating results of the acquired ready-mix operations are reported in our consumer products segment. Proforma financial information has not been provided or presented as management of the Company does not believe it is material.
Income Taxes. Texas Industries, Inc. (the parent company) joins in filing a consolidated return with its subsidiaries based on federal and certain state tax filing requirements. Certain subsidiaries also file separate state income tax returns. 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. We recognize and classify deferred income taxes using an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by current enacted tax rates.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the year the tax returns are filed.

The amount of income tax we pay is subject to ongoing audits by federal and state authorities which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We account for these uncertain tax issues using a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step determines if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step measures the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust

- 39 -


reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates, or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters differs from the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate including related interest and penalties.
Management reviews our deferred tax position and in particular our deferred tax assets whenever circumstances indicate that the assets may not be realized in the future and recognizes a valuation allowance unless such deferred tax assets were deemed more likely than not to be recoverable. The ultimate realization of these deferred tax assets is dependent upon various factors including the generation of taxable income during future periods. In determining the need for a valuation allowance, we consider such factors as historical earnings, the reversal of existing temporary differences, prior taxable income (if carryback is permitted under the tax law), and prudent and feasible tax planning strategies. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time. See further discussion in note 9.
Real Estate and Investments. Surplus real estate and real estate acquired for development of high quality industrial, office or multi-use parks totaled $7.3 million at May 31, 2013 and $7.6 million at May 31, 2012.
Investments include life insurance contracts purchased in connection with certain of our benefit plans. The contracts, recorded at their net cash surrender value, totaled $1.1 million (net of distributions of $99.8 million plus accrued interest and fees) at May 31, 2013 and $0.7 million (net of distributions of $94.4 million plus accrued interest and fees) at May 31, 2012. We can elect to receive distributions chargeable against the cash surrender value of the policies in the form of borrowings or withdrawals or we can elect to surrender the policies and receive their net cash surrender value.
Investment in Joint Venture. In November 2011 we entered into a joint venture agreement with a ready-mix operator based in Waco, Texas. We contributed certain of our central Texas ready-mix plants and related assets to the joint venture in return for a 40% equity interest. The joint venture operates ready-mix plants serving the central Texas market. The day to day business operations are managed by the 60% partner in the venture. We supply cement to the joint venture. The debt of the joint venture is secured by the underlying assets of the joint venture. In addition, we have guaranteed 50% and our partner has guaranteed 100% of the debt of the joint venture. Our investment totaled $14.9 million at May 31, 2013 and $13.0 million at May 31, 2012. Our equity in income from the joint venture was $2.7 million in 2013 and a loss of $0.5 million in 2012.
Deferred Other Charges. Deferred other charges totaled $18.8 million at May 31, 2013 and $20.4 million at May 31, 2012 and are composed primarily of debt issuance costs that totaled $11.1 million at May 31, 2013 and $13.0 million at May 31, 2012. The costs are amortized over the term of the related debt.
Other Credits. Other credits totaled $91.2 million at May 31, 2013 and $96.4 million at May 31, 2012 and are composed primarily of liabilities related to our retirement plans, deferred compensation agreements and asset retirement obligations.

Asset Retirement Obligations. We record a liability for legal obligations associated with the retirement of our long-lived assets in the period in which it is incurred if an estimate of fair value of the obligation can be made. The discounted fair value of the obligations incurred in each period are added to the carrying amount of the associated assets and depreciated over the lives of the assets. The liability is accreted at the end of each period through a charge to operating expense. A gain or loss on settlement is recognized if the obligation is settled for other than the carrying amount of the liability.
We incur legal obligations for asset retirement as part of our normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. Determining the amount of an asset retirement liability requires estimating the future cost of contracting with third parties to perform the obligation. The estimate is significantly impacted by, among other considerations, management’s assumptions regarding the scope of the work required, labor costs, inflation rates, market-risk premiums and closure dates.
Changes in asset retirement obligations are as follows:
 

- 40 -


 
 
May 31,
 
May 31,
In thousands
 
2013
 
2012
Balance at beginning of period
 
$
3,879

 
$
4,455

Additions
 
80

 
287

Accretion expense
 
175

 
175

Settlements
 
(1,481
)
 
(1,038
)
Balance at end of period
 
$
2,653

 
$
3,879

Accumulated Other Comprehensive Loss. Amounts recognized in accumulated other comprehensive loss represent adjustments related to a defined benefit retirement plan and a postretirement health benefit plan covering approximately 600 employees and retirees of our California cement subsidiary. The amounts totaled $18.4 million (net of tax of $3.5 million) at May 31, 2013 and $24.5 million (net of tax of $1.4 million) at May 31, 2012.
Net Sales. Sales are recognized when title has transferred and products are delivered. We include delivery fees in the amount we bill customers to the extent needed to recover our cost of freight and delivery. Net sales are presented as revenues and include these delivery fees.
Other Income. Other income includes gains from the sale or exchange of operating assets, royalties, joint venture income and emission credits. Other income in total was $8.9 million in 2013, $73.1 million in 2012 and $20.9 million in 2011.
In April 2011 we entered into an asset exchange transaction in which we acquired the ready-mix operations of Transit Mix Concrete and Materials Company, a subsidiary of Trinity Industries, Inc., that serve the central Texas market from north of San Antonio to Hillsboro, Texas. In exchange for the ready-mix facilities, we transferred to Trinity Materials, Inc., also a subsidiary of Trinity Industries, Inc., the aggregate operations at the Anacoco sand and gravel plant, which serves the southwest Louisiana and southeast Texas markets, and the Paradise and Beckett sand and gravel plants, which both serve the north Texas market. The exchange resulted in the acquisition of ready-mix property, plant and equipment of $17.4 million and the recognition of a gain of $12.0 million in 2011. The gain from the transaction is reported in our aggregates segment and the operating results of the acquired ready-mix operations are reported in our consumer products segment.
In July 2011 we entered into an asset exchange transaction with CEMEX USA in which we acquired three ready-mix concrete plants and a sand and gravel plant that serve the Austin, Texas metropolitan market. In exchange, we transferred to CEMEX USA seven ready-mix concrete plants in the Houston, Texas market, and we designated four non-operating ready-mix plant sites in the Houston area as surplus real estate. The exchange resulted in the acquisition of ready-mix and aggregate property, plant and equipment of $6.1 million and the recognition of a gain of $1.6 million in 2012. The gain from the transaction and the operating results of the acquired ready-mix operations are reported in our consumer products segment, and the operating results of the acquired sand and gravel operations are reported in our aggregates segment.
In November 2011 we entered into a joint venture agreement with Ratliff Ready-Mix, L.P., a ready-mix operator based in Waco, Texas. We contributed seven of our central Texas ready-mix plants and certain related assets to the joint venture. The fair value of our 40% equity interest in the joint venture was $13.0 million which resulted in the recognition of a gain of $8.9 million in 2012. The gain from the transaction and our proportional share of the joint venture operating results are reported in our consumer products segment.
In April 2012 we sold our Texas-based package products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities that serve the Texas market from the Dallas-Fort Worth area of north Texas to the Houston area of south Texas and extending through Austin and central Texas. The sale resulted in the recognition of a gain of $30.9 million in 2012. As a part of the agreement, we have entered into a long-term cement supply agreement with Bonsal American and will continue to produce and sell packaged cement and masonry cements in the Texas region. The gain from the transaction is reported in our consumer products segment.
In April 2012 we sold our aggregate rail distribution terminal and associated assets located in Stafford, Texas to Lex Missouri City, LP which resulted in the recognition of a gain of $20.8 million in 2012 that is reported in our aggregates segment.
Routine sales of surplus operating assets and real estate resulted in gains of $2.8 million in 2013, $5.4 million in 2012, and $1.7 million in 2011. We have sold emissions credits associated with our Crestmore cement plant in Riverside, California resulting in gains of $2.5 million in 2012, and $1.7 million in 2011.
In addition, we have entered into various oil and gas lease agreements on property we own in north Texas. The terms of the agreements include the payment of a lease bonus and royalties on any oil and gas produced on the properties. Lease bonus

- 41 -


payments and royalties on oil and gas produced resulted in income of $1.3 million in 2012, and $3.1 million in 2011. We cannot predict what the level of future royalties, if any, will be.
Restructuring Charges. We recorded restructuring charges of $3.2 million in 2012. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Financial-based Incentive Plans.    All personnel employed as of May 31 and not participating in a production-based incentive awards plan share in our pretax income for the year then ended based on predetermined formulas. The duration of most of the plans is one year. Certain executives are additionally covered under a three-year plan. All plans are subject to annual review by the Compensation Committee of the Board of Directors. The amount of financial-based incentive compensation included in selling, general and administrative expense was $1.5 million in 2013, $5.0 million in 2012 and none in 2011.
Stock-based Compensation. We have provided stock-based compensation to employees and non-employee directors in the form of non-qualified and incentive stock options, restricted stock, stock appreciation rights, deferred compensation agreements and stock awards. In addition the Company began issuing time-lapse restricted stock units for the first time to employees in 2013. We use the Black-Scholes option-pricing model to determine the fair value of stock options granted as of the date of grant. Options with graded vesting are valued as single awards and the related compensation cost is recognized using a straight-line attribution method over the shorter of the vesting period or required service period adjusted for estimated forfeitures. We use the closing stock price on the date of grant to determine the fair value of restricted stock units. The restricted stock units have cliff vesting at the end of a four year term, and we valued them as a single award with the related compensation cost recognized using a straight-line method over the vesting period adjusted for estimated forfeitures. We use the average stock price on the date of grant to determine the fair value of restricted stock awards paid. A liability, which was included in other credits as of May 31, 2012, was recorded for stock appreciation rights, deferred compensation agreements and stock awards expected to be settled in cash, based on their fair value at the end of each period until such awards are paid. For additional discussion on the settlement of this liability see Note 7.

Earnings Per Share (“EPS”). Income or loss allocated to common shareholders adjusts net income or loss for the participation in earnings of unvested restricted shares and restricted stock units outstanding.
Basic weighted-average number of common shares outstanding during the period includes contingently issuable shares and excludes outstanding unvested restricted shares. Contingently issuable shares outstanding at May 31, 2013 relate to deferred compensation agreements in which directors elected to defer their fees. The deferred compensation is denominated in shares of our common stock and issued in accordance with the terms of the agreement subsequent to retirement or separation from us. The shares are considered contingently issuable because the director has an unconditional right to the shares to be issued.
Diluted weighted-average number of common shares outstanding during the period adjusts basic weighted-average shares for the dilutive effect of stock options, restricted shares and awards.
Basic and Diluted EPS are calculated as follows:
 

- 42 -


In thousands except per share
 
2013
 
2012
 
2011
Earnings
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(10,494
)
 
$
1,928

 
$
(69,472
)
Net income from discontinued operations
 
35,044

 
5,548

 
4,559

Unvested restricted share and unit participation
 

 
(3
)
 
31

Income (loss) allocated to common shareholders
 
$
24,550

 
$
7,473

 
$
(64,882
)
Shares
 
 
 
 
 
 
Weighted-average shares outstanding
 
28,175

 
27,927

 
27,836

Contingently issuable shares
 
4

 
2

 
2

Unvested restricted shares
 
(16
)
 
(15
)
 
(13
)
Basic weighted-average shares
 
28,163

 
27,914

 
27,825

Stock option, restricted share, unit, and award dilution
 

 
102

 

Diluted weighted-average shares (1)
 
28,163

 
28,016

 
27,825

Net income (loss) from continuing operations
 
 
 
 
 
 
Basic
 
$
(0.37
)
 
$
0.07

 
$
(2.49
)
Diluted
 
$
(0.37
)
 
$
0.07

 
$
(2.49
)
Net income (loss) from discontinued operations
 
 
 
 
 
 
Basic
 
$
1.24

 
$
0.20

 
$
0.16

Diluted
 
$
1.24

 
$
0.20

 
$
0.16

Net income (loss) per share
 
 
 
 
 
 
Basic
 
$
0.87

 
$
0.27

 
$
(2.33
)
Diluted
 
$