10-Q 1 txi2012113010q.htm 10-Q TXI 2012.11.30 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2012
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
 
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 (§ 232.405 of this chapter) 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 Exchange Act).    Yes  ¨    No  ý
There were 28,135,910 shares of the Registrant’s Common Stock, $1.00 par value, outstanding as of January 7, 2013.



INDEX
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 

- 2 -


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
 
(Unaudited)
 
 
In thousands
 
November 30,
2012
 
May 31,
2012
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
71,782

 
$
88,027

Receivables – net
 
107,760

 
98,836

Inventories
 
85,530

 
99,441

Deferred income taxes and prepaid expenses
 
16,672

 
19,007

Discontinued Operations Held for Sale
 
39,360

 
40,344

TOTAL CURRENT ASSETS
 
321,104

 
345,655

PROPERTY, PLANT AND EQUIPMENT
 
 
 
 
Land and land improvements
 
169,925

 
168,173

Buildings
 
49,608

 
49,567

Machinery and equipment
 
1,146,301

 
1,142,439

Construction in progress
 
472,185

 
436,552

 
 
1,838,019

 
1,796,731

Less depreciation and depletion
 
633,973

 
611,406

 
 
1,204,046

 
1,185,325

OTHER ASSETS
 
 
 
 
Goodwill
 
1,715

 
1,715

Real estate and investments
 
23,168

 
20,865

Deferred income taxes and other charges
 
23,234

 
23,368

 
 
48,117

 
45,948

 
 
$
1,573,267

 
$
1,576,928

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
64,520

 
$
64,825

Accrued interest, compensation and other
 
67,712

 
61,317

Current portion of long-term debt
 
1,432

 
1,214

TOTAL CURRENT LIABILITIES
 
133,664

 
127,356

LONG-TERM DEBT
 
657,269

 
656,949

OTHER CREDITS
 
95,995

 
96,352

SHAREHOLDERS’ EQUITY
 
 
 
 
Common stock, $1 par value; authorized 100,000 shares; issued and outstanding 28,056 and 27,996 shares, respectively
 
28,056

 
27,996

Additional paid-in capital
 
491,959

 
488,637

Retained earnings
 
190,357

 
204,136

Accumulated other comprehensive loss
 
(24,033
)
 
(24,498
)
 
 
686,339

 
696,271

 
 
$
1,573,267

 
$
1,576,928

See notes to consolidated financial statements.

- 3 -


(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
  
 
Three months ended November 30,
 
Six months ended November 30,
In thousands except per share
 
2012
 
2011
 
2012
 
2011
NET SALES
 
$
167,693

 
$
146,172

 
$
342,216

 
$
313,802

Cost of products sold
 
155,939

 
144,689

 
315,262

 
301,690

GROSS PROFIT
 
11,754

 
1,483

 
26,954

 
12,112

Selling, general and administrative
 
17,067

 
12,781

 
34,623

 
29,511

Restructuring charges
 

 
3,153

 

 
3,153

Interest
 
7,457

 
8,838

 
15,235

 
18,298

Loss on debt retirements
 

 

 

 

Other income
 
(1,924
)
 
(1,522
)
 
(4,525
)
 
(7,393
)
 
 
22,600

 
23,250

 
45,333

 
43,569

LOSS BEFORE INCOME TAXES FROM CONTINUING OPERATIONS
 
(10,846
)
 
(21,767
)
 
(18,379
)
 
(31,457
)
Income taxes (benefit)
 
(657
)
 
(1,144
)
 
(796
)
 
(1,453
)
NET LOSS FROM CONTINUING OPERATIONS
 
$
(10,189
)
 
$
(20,623
)
 
$
(17,583
)
 
$
(30,004
)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX
 
(933
)
 
(414
)
 
3,805

 
1,547

NET LOSS
 
$
(11,122
)
 
$
(21,037
)
 
$
(13,778
)
 
$
(28,457
)
NET LOSS PER SHARE FROM CONTINUING OPERATIONS:
 
 
 
 
 
 
 
 
Basic
 
$
(0.36
)
 
$
(0.73
)
 
$
(0.63
)
 
$
(1.08
)
Diluted
 
$
(0.36
)
 
$
(0.73
)
 
$
(0.63
)
 
$
(1.08
)
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
 
 
 
 
 
 
 
 
Basic
 
$
(0.04
)
 
$
(0.02
)
 
$
0.14

 
$
0.06

Diluted
 
$
(0.04
)
 
$
(0.02
)
 
$
0.14

 
$
0.06

NET LOSS PER SHARE:
 
 
 
 
 
 
 
 
Basic
 
$
(0.40
)
 
$
(0.75
)
 
$
(0.49
)
 
$
(1.02
)
Diluted
 
$
(0.40
)
 
$
(0.75
)
 
$
(0.49
)
 
$
(1.02
)
AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 
Basic
 
28,030

 
27,882

 
28,014

 
27,878

Diluted
 
28,030

 
27,882

 
28,014

 
27,878

CASH DIVIDENDS DECLARED PER SHARE
 
$

 
$

 
$

 
$
0.075

See notes to consolidated financial statements.

- 4 -


(Unaudited)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
 
Three months ended November 30,
 
Six months ended November 30,
In thousands
 
2012
 
2011
 
2012
 
2011
Net loss
 
$
(11,122
)
 
$
(21,037
)
 
$
(13,778
)
 
$
(28,457
)
Other comprehensive income
 

 

 
 
 
 
Net actuarial gains (losses) of defined postretirement benefit plans
 

 

 
 
 
 
Reclassification of recognized transactions, net of tax
 
20

 
363

 
565

 
725

Adjustment, net of tax
 

 

 
(55
)
 

Prior service cost of defined postretirement benefit plans
 

 

 
 
 
 
Reclassification of recognized transactions, net of taxes
 
77

 
(123
)
 
(45
)
 
(246
)
Total other comprehensive income
 
97

 
240

 
465

 
479

Comprehensive loss
 
$
(11,025
)
 
$
(20,797
)
 
$
(13,313
)
 
$
(27,978
)
See notes to consolidated financial statements.

- 5 -


(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
 
 
 
Six months ended November 30,
In thousands
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
 
Net loss
 
$
(13,778
)
 
$
(28,457
)
Adjustments to reconcile net loss to cash provided by operating
activities
 
 
 
 
Depreciation, depletion and amortization
 
28,543

 
31,385

Gains on asset disposals
 
(2,879
)
 
(2,751
)
Deferred income tax (benefit) expense
 
957

 
(945
)
Stock-based compensation expense
 
5,505

 
(1,229
)
Other – net
 
(8,469
)
 
(5,185
)
Changes in operating assets and liabilities
 
 
 
 
Receivables – net
 
(8,488
)
 
3,696

Inventories
 
13,967

 
12,189

Prepaid expenses
 
1,687

 
2,854

Accounts payable and accrued liabilities
 
7,933

 
930

Net cash provided by operating activities
 
24,978

 
12,487

INVESTING ACTIVITIES
 
 
 
 
Capital expenditures – expansions
 
(36,118
)
 
(35,966
)
Capital expenditures – other
 
(10,845
)
 
(26,300
)
Proceeds from asset disposals
 
3,958

 
1,649

Investments in life insurance contracts
 
2,366

 
2,989

Other – net
 
(88
)
 
(128
)
Net cash used by investing activities
 
(40,727
)
 
(57,756
)
FINANCING ACTIVITIES
 
 
 
 
Debt payments
 
(1,585
)
 
(36
)
Debt issuance costs
 

 
(1,732
)
Stock option exercises
 
1,089

 
158

Common dividends paid
 

 
(2,091
)
Net cash used by financing activities
 
(496
)
 
(3,701
)
Decrease in cash and cash equivalents
 
(16,245
)
 
(48,970
)
Cash and cash equivalents at beginning of period
 
88,027

 
116,432

Cash and cash equivalents at end of period
 
$
71,782

 
$
67,462

See notes to consolidated financial statements.

- 6 -


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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, gravel and lightweight aggregates, 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
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended November 30, 2012, are not necessarily indicative of the results that may be expected for the year ended May 31, 2013. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of Texas Industries, Inc. for the year ended May 31, 2012.
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-Q 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 November 30, 2012 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 is level two inputs. As of November 30, 2012, the fair value of our long-term debt, including the current portion, was approximately $705.8 million compared to the carrying amount of $658.7 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. Natural aggregate inventories and parts and supplies inventories are valued using the average cost method. Our natural aggregate inventory excludes volumes in excess of an average twelve-month period of actual sales.


- 7 -


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.
In the fourth quarter of our prior fiscal year, management evaluated the Hunter, Texas cement plant, including the capitalized construction and interest costs associated with the expansion. We expect the Texas market to recover to pre-recession levels and to complete the expansion project. Based on historical margins, we believe the undiscounted cash flows over the remaining life of the Hunter plant after completion of the expansion will significantly exceed the current investment in the plant as well as the remaining costs of the expansion and future capital expenditures necessary to achieve these cash flows.
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 acquisition of ready-mix operations in Texas and Louisiana and identified with our consumer products operations has a carrying value of $1.7 million at both November 30, 2012 and May 31, 2012. Based on an impairment test performed as of March 31, 2012, the fair value of the reporting unit exceeds its carrying value, and therefore, no potential impairment was identified.
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

- 8 -


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 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 November 30, 2012 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 $2.2 million (net of distributions of $99.4 million plus accrued interest and fees) at November 30, 2012 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 $13.6 million at November 30, 2012 and $12.5 million at May 31, 2012. Our equity in income of the joint venture was $1.1 million for the six-month period ended November 30, 2012.
Deferred Other Charges. Deferred other charges totaled $20.8 million at November 30, 2012 and $20.4 million at May 31, 2012 and are composed primarily of debt issuance costs that totaled $12.0 million at November 30, 2012 and $13.0 million at May 31, 2012. The costs are amortized over the term of the related debt.
Other Credits. Other credits totaled $95.9 million at November 30, 2012 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.






- 9 -


Changes in asset retirement obligations are as follows:
 
 
 
Six months ended
November 30,
In thousands
 
2012
 
2011
Balance at beginning of period
 
$3,879
 
$4,455
Additions
 
305

 
287

Accretion expense
 
86

 
89

Settlements
 
(1,617
)
 
(713
)
Balance at end of period
 
$2,653
 
$4,118
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 $24.0 million (net of tax of $5.7 million) at November 30, 2012 and $24.5 million (net of tax of $6.0 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. Routine sales of surplus operating assets and real estate resulted in gains of $0.4 million and $0.4 million in the three-month periods ended November 30, 2012 and November 30, 2011 and $2.9 million and $0.7 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively. In addition, we sold emissions credits associated with our Crestmore cement plant in Riverside, California resulting in a gain of $2.5 million in the six-month period ended November 30, 2011.
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 $2.1 million in the six-month period ended November 30, 2011. 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.
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. 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 average stock price on the date of grant to determine the fair value of restricted stock awards paid. A liability, which is included in other credits, is 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. See further discussion in 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 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 November 30, 2012 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.


- 10 -



Basic and Diluted EPS are calculated as follows:
 
 
 
Three months ended
November 30,
 
Six months ended
November 30,
In thousands except per share
 
2012
 
2011
 
2012
 
2011
Earnings
 
 
 
 
 
 
 
 
Net loss from continuing operations
 
$
(10,189
)
 
$
(20,623
)
 
$
(17,583
)
 
$
(30,004
)
Net income (loss) from discontinued operations
 
$
(933
)
 
$
(414
)
 
$
3,805

 
$
1,547

Unvested restricted share participation
 
6

 
9

 
11

 
14

Loss allocated to common shareholders
 
$
(11,116
)
 
$
(21,028
)
 
$
(13,767
)
 
$
(28,443
)
Shares
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
28,043

 
27,892

 
28,028

 
27,890

Contingently issuable shares
 
3

 
2

 
3

 
2

Unvested restricted shares
 
(16
)
 
(12
)
 
(17
)
 
(14
)
Basic weighted-average shares
 
28,030

 
27,882

 
28,014

 
27,878

Stock option, restricted share and award dilution
 

 

 

 

Diluted weighted-average shares (1)
 
28,030

 
27,882

 
28,014

 
27,878

Net loss from continuing operations
 
 
 
 
 
 
 
 
Basic
 
$
(0.36
)
 
$
(0.73
)
 
$
(0.63
)
 
$
(1.08
)
Diluted
 
$
(0.36
)
 
$
(0.73
)
 
$
(0.63
)
 
$
(1.08
)
Net income (loss) from discontinued operations
 
 
 
 
 
 
 
 
Basic
 
(0.04
)
 
(0.02
)
 
0.14

 
0.06

Diluted
 
(0.04
)
 
(0.02
)
 
0.14

 
0.06

Net loss per share
 
 
 
 
 
 
 
 
Basic
 
(0.40
)
 
(0.75
)
 
(0.49
)
 
(1.02
)
Diluted
 
(0.40
)
 
(0.75
)
 
(0.49
)
 
(1.02
)
(1)    Shares excluded due to antidilutive effect of stock options, restricted shares and awards
 
826

 
1,514

 
978

 
1,359


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 is effective for us on June 1, 2012 and has not had a material impact on our consolidated financial statements.

2. Discontinued Operations and Held for Sale Businesses

On December 4, 2012, our subsidiaries entered into agreements to exchange 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 will transfer 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, as well as two aggregate distribution facilities in Beaumont and Port Arthur, Texas, and related assets. We anticipate recognizing a gain on the transaction, the amount of which will be determined after the transaction closes and valuations of the assets are obtained. Closing is subject to negotiations of ancillary agreements, satisfactory completion of due diligence, receipt of required consents, approvals and permit amendments and other customary conditions.



- 11 -


The following table summarizes the assets and liabilities of all discontinued operations held for sale as of November 30, 2012 and reclassified as assets held for sale on May 31, 2012.

In thousands
 
November 30,
 
May 31,
 
 
2012
 
2012
Assets:
 
 
 
 
Inventory
 
$
29,720

 
$
30,072

Property Plant and Equipment
 
9,640

 
10,272

Total Assets in Discontinued Operations Held for Sale
 
$
39,360

 
$
40,344



The following table summarizes the revenue, earnings before and net of income tax expense on all discontinued operations held for sale for the three-months and six-months ended November 30, 2012 and 2011:

In thousands
 
Three months ended November 30,
Six months ended November 30,
Discontinued Operations
 
2012
 
2011
2012
 
2011
Revenue
 
$
11,629

 
$
9,899

$
28,914

 
$
24,009

Earnings on discontinued operations, before taxes
 
$
843

 
$
108

$
5,865

 
$
2,231

Earnings on discontinued operations, net of tax
 
$
(933
)
 
$
(414
)
$
3,805

 
$
1,547


3. Working Capital
Working capital totaled $187.4 million at November 30, 2012 compared to $218.3 million at May 31, 2012. Selected components of working capital are summarized below.
Receivables consist of:
 
 
 
November 30,
 
May 31,
In thousands
 
2012
 
2012
Trade notes and accounts receivable
 
$
106,937

 
$
97,621

Other
 
823

 
1,215

 
 
$
107,760

 
$
98,836

Trade notes and accounts receivable are presented net of allowances for doubtful receivables of $2.8 million at November 30, 2012 and $2.5 million at May 31, 2012. Provisions for bad debts charged to expense were $0.4 million and $0.2 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively. Uncollectible accounts written off totaled less than $0.2 million and $0.2 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively.
Inventories consist of:
 

- 12 -


 
 
November 30,
 
May 31,
In thousands
 
2012
 
2012
Finished products
 
$
6,516

 
$
7,664

Work in process
 
8,019

 
12,505

Raw materials
 
7,504

 
9,449

Total inventories at LIFO cost
 
22,039

 
29,618

Finished products
 
18,668

 
23,451

Raw materials
 
422

 
229

Parts and supplies
 
44,401

 
46,143

Total inventories at average cost
 
63,491

 
69,823

Total inventories
 
$
85,530

 
$
99,441

All inventories are stated at the lower of cost or market. Finished products, work in process and raw material inventories, excluding natural aggregate inventories, are valued using the last-in, first-out (“LIFO”) method. Natural aggregate finished products and raw material inventories and parts and supplies inventories are valued using the average cost method. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. If the average cost method (which approximates current replacement cost) had been used for all of these inventories, inventory values would have been higher by $36.8 million at November 30, 2012 and $37.5 million at May 31, 2012.

Accrued interest, compensation and other consist of:
 
 
 
November 30,
 
May 31,
In thousands
 
2012
 
2012
Interest
 
$
17,801

 
$
17,810

Compensation and employee benefits
 
15,849

 
18,103

Casualty insurance claims
 
14,908

 
14,004

Income taxes
 
4,806

 
4,500

Property taxes and other
 
14,348

 
6,900

 
 
$
67,712

 
$
61,317

4. Long-Term Debt
Long-term debt consists of:
 
 
 
November 30,
 
May 31,
In thousands
 
2012
 
2012
Senior secured revolving credit facility expiring in 2016
 
$

 
$

9.25% Senior notes due 2020 issued August 10, 2010 at par value
 
650,000

 
650,000

Other
 
6,359

 
5,778

 
 
656,359

 
655,778

Capital lease obligations
 
2,097

 
2,136

Other contract obligations
 
245

 
249

 
 
658,701

 
658,163

Less current portion
 
1,432

 
1,214

 
 
$
657,269

 
$
656,949

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 2.00% 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

- 13 -


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 $147.8 million as of November 30, 2012. 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 November 30, 2012, our fixed charge coverage ratio was .01 to 1.0. Given this ratio, we may use only $122.8 million of the borrowing base as of such date. No borrowings were outstanding at November 30, 2012; however, $31.1 million of the borrowing base was used to support letters of credit. As a result, the maximum amount we could borrow as of November 30, 2012 was $91.6 million.
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 November 30, 2012.
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 November 30, 2012, 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

- 14 -


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 November 30, 2012.
Other. Principal payments due on long-term debt, excluding capital lease and other contract obligations, during each of the five years subsequent to November 30, 2012 are $1.4 million, $1.5 million, $1.6 million, $1.6 million and $0.7 million. The total amount of interest incurred was $17.8 million and $17.1 million in the three-month periods ended November 30, 2012 and November 30, 2011, respectively, of which $9.9 million and $8.3 million was capitalized. The total amount of interest incurred was $34.5 million and $34.4 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively, of which $19.2 million and $16.1 million was capitalized. The total amount of interest paid in cash was $35.5 million and $35.4 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively.
Guarantee of Joint Venture Debt. We have guaranteed 50%, or $12.2 million, of an unconsolidated joint venture’s debt which matures November 18, 2013. The joint venture was in compliance with all the terms of the debt as of November 30, 2012. See further discussion of the joint venture under Investment in Joint Venture in note 1.

5. Commitments
During 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 began commissioning in November 2012 and should be complete in the spring of 2013. The total capital cost of the project is expected to be between $370 million and $375 million, excluding capitalized interest. As of November 30, 2012, we have incurred $367.9 million, excluding capitalized interest of $87.9 million related to the project, of which $362.1 million has been paid.
6. Shareholders’ Equity
There are authorized 100,000 shares of Cumulative Preferred Stock, no par value, of which 20,000 shares are designated $5 Cumulative Preferred Stock (Voting), redeemable at $105 per share and entitled to $100 per share upon dissolution. An additional 40,000 shares are designated Series B Junior Participating Preferred Stock. The Series B Preferred Stock is not redeemable and ranks, with respect to the payment of dividends and the distribution of assets, junior to (i) all other series of the Preferred Stock unless the terms of any other series shall provide otherwise and (ii) the $5 Cumulative Preferred Stock. No shares of $5 Cumulative Preferred Stock or Series B Junior Participating Preferred Stock were outstanding as of November 30, 2012.
7. Stock-Based Compensation Plans
The Texas Industries, Inc. 2004 Omnibus Equity Compensation Plan (the “2004 Plan”) provides that, in addition to other types of awards, non-qualified and incentive stock options to purchase Common Stock may be granted to employees and non-employee directors at market prices at date of grant. In addition, non-qualified and incentive stock options remain outstanding under our 1993 Stock Option Plan.
Options become exercisable in installments beginning one year after the date of grant and expire 10 years after the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. Options with graded vesting are valued as single awards and the compensation cost recognized using a straight-line attribution method over the shorter of the vesting period or required service period adjusted for estimated forfeitures. No options were granted during the six-month period ended November 30, 2012. The following table sets forth the information about the weighted-average grant date fair value of options granted during the six-month period ended November 30, 2011 and the weighted-average assumptions used for such grants.
 

- 15 -


 
Six months ended November 30,
 
 
2011
Weighted average grant date fair value
 
$
19.72

Weighted average assumptions used:
 
 
Expected volatility
 
.411

Expected option term in years
 
10

Risk-free interest rate
 
2.97
%
Expected dividend yield
 
.56
%
Expected volatility is based on an analysis of historical volatility of our common stock. Expected option term is the period of time that options granted are expected to be outstanding and is derived by analyzing the historical option exercise experience of our optionees. Risk-free interest rate is determined using the implied yield currently available for zero coupon U.S. treasury issues with a remaining term equal to the expected term of the option. Expected dividend yield is based on the approved annual dividend rate in effect and the market price of our common stock at the time of grant.

A summary of option transactions for the six-month periods ended November 30, 2012, follows:
 
 
 
Shares Under
Option
 
Weighted-Average
Option Price
Outstanding at May 31, 2012
 
2,145,570

 
$
38.54

Exercised
 
(55,332
)
 
24.42

Canceled
 
(25,820
)
 
45.10

Outstanding at November 30, 2012
 
2,064,418

 
$
38.83

Exercisable at November 30, 2012
 
1,099,138

 
$
43.33

The following table summarizes information about stock options outstanding as of November 30, 2012.
 
 
 
Range of Exercise Prices
 
 
$16.04 - $29.38
 
$33.57 - $48.60
 
$50.63 - $70.18
Options outstanding
 
 
 
 
 
 
Shares outstanding
 
768,531

 
781,717

 
514,100

Weighted-average remaining life in years
 
6.34

 
6.15

 
3.61

Weighted-average exercise price
 
$
25.54

 
$
39.71

 
$
57.40

Options exercisable
 
 
 
 
 
 
Shares exercisable
 
286,828

 
345,280

 
480,890

Weighted-average remaining life in years
 
3.17

 
4.63

 
3.56

Weighted-average exercise price
 
$
21.10

 
$
41.15

 
$
57.87

Outstanding options expire on various dates to January 11, 2022. As of November 30, 2012, there were 355,585 shares available for future awards under the 2004 Plan.
As of November 30, 2012, the aggregate intrinsic value (the difference in the closing market price of our common stock of $46.42 and the exercise price to be paid by the optionee) of stock options outstanding was $21.3 million. The aggregate intrinsic value of exercisable stock options at that date was $8.9 million. The total intrinsic value for options exercised (the difference in the market price of our common stock on the exercise date and the price paid by the optionee to exercise the option) was $0.3 million and less than $0.1 million for the three-month periods ended November 30, 2012 and November 30, 2011, respectively and $1.0 million and $0.1 million for the six-month periods ended November 30, 2012 and November 30, 2011, respectively.
We have provided additional stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program which was settled during fiscal year 2012. At November 30, 2012, outstanding stock appreciation rights totaled 133,315 shares, deferred compensation agreements to be settled in cash totaled 101,790 shares, deferred compensation agreements to be settled in common stock totaled 2,995 shares and unvested restricted stock payments totaled 14,331 shares. Other credits include $7.3

- 16 -


million at November 30, 2012 and $4.1 million at May 31, 2012 representing accrued stock-based compensation which is accounted for as liabilities and expected to be settled in cash. Common stock totaling 2.4 million shares at November 30, 2012 and 2.5 million shares at May 31, 2012 have been reserved for the settlement of stock-based compensation.

Total stock-based compensation included in selling, general and administrative expense (credit) was $2.7 million and $(1.3) million in the three-month periods ended November 30, 2012 and November 30, 2011, respectively and $5.5 million and $(1.2) million in the six-month periods ended November 30, 2012 and November30, 2011, respectively. The impact of changes in our company's stock price on stock-based awards accounted for as liabilities increased stock-based compensation $1.6 million in the the three-month period ended November 30, 2012 and reduced stock-based compensation $2.7 million in the three-month period ended November 30, 2011. The impact of changes in our company’s stock price on stock-based awards accounted for as liabilities increased stock-based compensation $3.2 million in the six-month period ended November 30, 2012 and reduced stock-based compensation $3.8 million in the six-month period ended November 30, 2011.
Total tax expense or benefit recognized in our statements of operations for stock-based compensation was an expense of less than $0.1 million in the three-month periods ended November 30, 2012 and November 30, 2011 and an expense less than $0.1 million in the six-month periods ended November 30, 2012 and November 30, 2011. No cash tax benefit was realized for stock-based compensation in the six-month periods ended November 30, 2012 and November 30, 2011.
As of November 30, 2012, and prior to the subesquent changes described below, the total unrecognized stock-based compensation expense was $9.9 million. We currently expect to recognize in the years succeeding November 30, 2012 approximately $4.1 million of this stock-based compensation expense in 2013, $2.9 million in 2014, $1.9 million in 2015 and $1.0 million in 2016.
Effective January 4, 2013 the stock appreciation rights agreement was extended and modified to require settlement in shares instead of cash. Also effective December 28, 2012, the deferred compensation agreements totaling 101,790 shares were settled with shares. The Company is in the process of obtaining the valuations required for amended terms of these agreements, but does not expect the modifications to result in a significant gain or loss in the third quarter. These changes will reduce the Company's exposure to future volatility caused by the previous awards being accounted for as liabilities and reflecting changes in the Company's stock price.
8. Retirement Plans
Riverside Defined Benefit Plans. Approximately 600 employees and retirees of our subsidiary, Riverside Cement Company, are covered by a defined benefit pension plan and a postretirement health benefit plan. Unrecognized prior service costs and actuarial gains or losses for these plans are recognized in a systematic manner over the remaining service periods of active employees expected to receive benefits under these plans. The amount of the defined benefit pension plan and postretirement health benefit plan expense charged to costs and expenses for the three-month and six-month periods ended November 30, 2012 and November 30, 2011, was as follows:
 
 
 
Three months ended
November 30,
 
Six months ended
November 30,
In thousands
 
2012
 
2011
 
2012
 
2011
Defined benefit pension plan
 
 
 
 
 
 
 
 
Service cost
 
$
61

 
$
134

 
$
216

 
$
268

Interest cost
 
635

 
760

 
1,343

 
1,520

Expected return on plan assets
 
(770
)
 
(777
)
 
(1,518
)
 
(1,554
)
Amortization of net actuarial loss
 
217

 
430

 
948

 
861

 
 
$
143

 
$
547

 
$
989

 
$
1,095

Postretirement health benefit plan
 
 
 
 
 
 
 
 
Service cost
 
$
27

 
$
25

 
$
54

 
$
50

Interest cost
 
88

 
104

 
176

 
208

Amortization of prior service cost
 
(194
)
 
(194
)
 
(388
)
 
(388
)
Amortization of net actuarial loss
 
129

 
141

 
258

 
282

 
 
$
50

 
$
76

 
$
100

 
$
152

The Riverside defined benefit pension plan (“Pension Plan”) was amended during the first quarter of fiscal year 2013. This amendment provides that all benefit accruals under the Pension Plan shall cease effective December 31, 2012 and the Pension Plan will be frozen as of that date. The amendment was designed to reduce future pension costs and provide that,

- 17 -


effective December 31, 2012, all future benefit accruals under the Pension Plan will automatically cease for all participants, and the accrued benefits under the Pension Plan will be determined and frozen as of that date. Accordingly, as a result of these amendments, accrued pension liability was reduced by $2.2 million with an offsetting reduction in the funded status of pension liability included in accumulated other comprehensive loss.

Financial Security Defined Benefit Plans. Substantially all of our executive and certain managerial employees are covered by a series of financial security plans that are non-qualified defined benefit plans. The financial security plans require deferral of a portion of a participant’s salary and provide retirement, death and disability benefits to participants. The financial security plans are unfunded and benefits are paid as they become due. Actuarial gains or losses are recognized when incurred. The amount of financial security plan benefit expense charged to costs and expenses for the three-month and six-month periods ended November 30, 2012 and November 30, 2011, was as follows:
 
 
 
Three months ended
November 30,
 
Six months ended
November 30,
In thousands
 
2012
 
2011
 
2012
 
2011
Service cost
 
$
593

 
$
537

 
$
1,186

 
$
1,074

Interest cost
 
591

 
629

 
1,182

 
1,258

 
 
$
1,184

 
$
1,166

 
$
2,368

 
$
2,332


The financial security defined benefit plans were amended during the second quarter of fiscal year 2013. This amendment provides that effective December 31, 2012 the Plans were frozen.
9. Income Taxes
Income taxes for the interim periods ended November 30, 2012 and November 30, 2011 have been included in the accompanying financial statements on the basis of an estimated annual rate. The tax rate differs from the 35% federal statutory corporate rate primarily due to percentage depletion that is tax deductible, state income taxes and valuation allowances against deferred tax assets. The estimated annualized rate for continuing operations is 4.3% for fiscal year 2013 compared to 4.6% for fiscal year 2012. We made no income tax payments in the six-month periods ended November 30, 2012 and November 30, 2011. We received income tax refunds of less than $0.1 million in the six-month period ended November 30, 2011.
Net deferred tax assets totaled $12.5 million at November 30, 2012 and $13.7 million at May 31, 2012, of which $10.0 million at November 30, 2012 and $10.7 million at May 31, 2012 were classified as current. 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 November 30, 2012 and May 31, 2012 primarily as a result of recent losses. 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 is required due to the uncertainty of realizing the deferred tax assets. We recorded a valuation allowance of $5.2 million in fiscal year 2012 through a charge to other comprehensive loss given the increase in actuarial losses in our retirement plans in 2012. We will continue to record additional valuation allowance against additions to our net deferred tax assets for fiscal year 2013 until Management believes it is more likely than not the deferred tax assets will be realized.
The amount of income tax we pay is subject to ongoing audits by federal and state authorities which may result in proposed assessments. 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 a matter differs from the amount recorded, such difference generally will impact our provision for income taxes in the period that includes its final resolution. We have no significant reserves for uncertain tax positions including related interest and penalties.
In addition to our federal income tax return, we file income tax returns in various state jurisdictions. We are no longer subject to income tax examinations by federal tax authorities for years prior to 2007 and state tax authorities for years prior to 2007. Our federal income tax returns for 2007 through 2010 are currently under examination. We do not anticipate that any adjustments that may result from this examination would have a material effect on our financial position or results of operations.




- 18 -


10. Legal Proceedings and Contingent Liabilities
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. 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.
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 the plant, including the station at the property line, are 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

- 19 -


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.
11. Business Segments
We have three business segments: cement, aggregates and consumer products. Our business segments are managed separately along product lines. Through the cement segment we produce and sell gray portland cement as our principal product, as well as specialty cements. Through the aggregates segment we produce and sell stone, sand and gravel as our principal products. Previously, the aggregates segment included our expanded shale and clay lightweight aggregates which has been classified as discontinued operations in the current period and all prior periods. Therefore, amounts for these operations are not included in the information presented below. Through the consumer products segment we produce and sell ready-mix concrete as our principal product. We account for intersegment sales at market prices. Segment operating profit consists of net sales less operating costs and expenses. Corporate includes those administrative, financial, legal, human resources, environmental and real estate activities which are not allocated to operations and are excluded from segment operating profit. Identifiable assets by segment are those assets that are used in each segment’s operation. Corporate assets consist primarily of cash and cash equivalents, real estate and other financial assets not identified with a business segment. The following is a summary of operating results and certain other financial data for our business segments.


- 20 -


 
 
Three months ended November 30,
 
Six months ended November 30,
In thousands
 
2012
 
2011
 
2012
 
2011
Net sales
 
 
 
 
 
 
 
 
Cement
 
 
 
 
 
 
 
 
Sales to external customers
 
$
80,991

 
$
65,639

 
$
168,118

 
$
137,697

Intersegment sales
 
10,452

 
11,595

 
20,530

 
25,174

Aggregates
 
 
 
 
 
 
 
 
Sales to external customers
 
33,899

 
23,114

 
69,299

 
48,505

Intersegment sales
 
6,313

 
5,736

 
11,894

 
10,661

Consumer products
 
 
 
 
 
 
 
 
Sales to external customers
 
52,803

 
57,419

 
104,799

 
127,600

Intersegment sales
 
62

 
702

 
111

 
1,545

Eliminations
 
(16,827
)
 
(18,033
)
 
(32,535
)
 
(37,380
)
Total net sales
 
$
167,693

 
$
146,172

 
$
342,216

 
$
313,802

Segment operating profit (loss)
 
 
 
 
 
 
 
 
Cement
 
$
6,057

 
$
(5,355
)
 
$
14,479

 
$
1,162

Aggregates
 
3,520

 
1,991

 
7,518

 
3,783

Consumer products
 
(2,607
)
 
(3,606
)
 
(4,515
)
 
(5,946
)
Total segment operating profit
 
6,970

 
$
(6,970
)
 
17,482

 
(1,001
)
Corporate
 
(10,359
)
 
(5,959
)
 
(20,626
)
 
(12,158
)
Interest
 
(7,457
)
 
(8,838
)
 
(15,235
)
 
(18,298
)
Loss before income taxes
 
$
(10,846
)
 
$
(21,767
)
 
$
(18,379
)
 
$
(31,457
)
Depreciation, depletion and amortization
 
 
 
 
 
 
 
 
Cement
 
$
8,429

 
$
8,897

 
$
16,893

 
$
17,824

Aggregates
 
3,347

 
3,494

 
6,674

 
7,290

Consumer products
 
1,981

 
2,326

 
3,847

 
4,890

Corporate
 
229

 
314

 
446

 
608

Total depreciation, depletion and amortization
 
$
13,986

 
$
15,031

 
$
27,860

 
$
30,612

Capital expenditures
 
 
 
 
 
 
 
 
Cement
 
$
11,052

 
$
14,193

 
$
40,785

 
$
39,889

Aggregates
 
2,278

 
1,061

 
2,601

 
19,364

Consumer products
 
351

 
611

 
2,246

 
2,042

Corporate
 
645

 
637

 
1,019

 
793

Total capital expenditures
 
$
14,326

 
$
16,502

 
$
46,651

 
$
62,088

Net sales by product
 
 
 
 
 
 
 
 
Cement
 
$
72,169

 
$
57,400

 
$
149,404

 
$
119,799

Stone, sand and gravel
 
21,428

 
15,257

 
43,997

 
32,532

Ready-mix concrete
 
52,712

 
44,578

 
104,582

 
100,801

Other products
 
2,648

 
13,692

 
5,515

 
28,699

Delivery fees
 
18,736

 
15,245

 
38,718

 
31,971

Total net sales
 
$
167,693

 
$
146,172

 
$
342,216

 
$
313,802

All sales were made in the United States during the periods presented with no single customer representing more than ten percent of sales.

Cement segment operating profit includes a gain from the sales of emission credits associated with our Crestmore cement plant in Riverside, California of of $2.5 million in the six-month period ended November 30, 2011.
Consumer products operating profit includes a gain of $2.1 million in the six-month period ended November 30, 2011 from the exchange of certain ready-mix operations in Houston, Texas for ready-mix and aggregates operations that serve the Austin, Texas metropolitan market.

- 21 -



Operating profit includes $2.0 million in restructuring charges in the three-month and six-month periods ended November 30, 2011, including $1.1 million associated with our cement operations, $0.4 million associated with our aggregate operations, $0.5 million associated with our ready-mix concrete operations. An additional $1.2 million in restructuring charges in the periods is associated with our corporate activities.
Capital expenditures incurred in connection with the expansion of our Hunter, Texas cement plant were $36.1 million and $36.0 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively, of which $18.4 million and $15.5 million was capitalized interest paid in the six-month periods ended November 30, 2012 and November 30, 2011, respectively. Capital expenditures for normal replacement and upgrades of existing equipment and acquisitions to sustain existing operations were $10.8 million and $26.3 million in the six-month periods ended November 30, 2012 and November 30, 2011, respectively, of which $18.0 million was incurred to acquire aggregate reserves in the six-month period ended November 30, 2011.
The following is a summary of assets used in each of our business segments.
 
In thousands
 
November 30,
2012
 
May 31,
2012
Identifiable assets
 
 
 
 
Cement
 
$
1,149,700

 
$
1,135,336

Aggregates
 
168,999

 
178,730

Consumer products
 
98,995

 
90,717

Corporate
 
116,213

 
131,801

Total assets
 
$
1,533,907

 
$
1,536,584

All of our identifiable assets are located in the United States.
12. Condensed Consolidating Financial Information
On August 10, 2010, Texas Industries, Inc. (the parent company) issued $650 million aggregate principal amount of its 9.25% senior notes due 2020. All existing consolidated subsidiaries of the parent company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. There are no significant restrictions on the parent company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the parent company or its direct or indirect subsidiaries.
The following condensed consolidating balance sheets, statements of operations and statements of cash flows are provided for the parent company and guarantor subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor subsidiaries using the equity method of accounting. Prior period information has been reclassified to conform to the current period presentation.

- 22 -


In thousands
 
Texas
Industries, Inc.
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Condensed consolidating balance sheet at November 30, 2012
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
68,356

 
$
3,426

 
$

 
$
71,782

Receivables – net
 

 
107,760

 

 
107,760

Inventories
 

 
85,530

 

 
85,530

Deferred income taxes and prepaid expenses
 
115

 
16,825

 
(268
)
 
16,672

Discontinued Operations Held for Sale
 

 
39,360

 

 
39,360

Total current assets
 
68,471

 
252,901

 
(268
)
 
321,104

Property, plant and equipment – net
 

 
1,204,046

 

 
1,204,046

Goodwill
 

 
1,715

 

 
1,715

Real estate and investments
 
2,242

 
20,926

 

 
23,168

Deferred income taxes and other charges
 
122,901

 
8,666

 
(108,333
)
 
23,234

Investment in subsidiaries
 
1,011,244

 

 
(1,011,244
)
 

Long-term intercompany receivables
 
230,814

 
18,740

 
(249,554
)
 

Total assets
 
$
1,435,672

 
$
1,506,994

 
$
(1,369,399
)
 
$
1,573,267

Accounts payable
 
$
34

 
$
64,486

 
$

 
$
64,520

Accrued interest, compensation and other
 
26,213

 
41,767

 
(268
)
 
67,712

Current portion of long-term debt
 

 
1,432

 

 
1,432

Total current liabilities
 
26,247

 
107,685

 
(268
)
 
133,664

Long-term debt
 
650,245

 
7,024

 

 
657,269

Long-term intercompany payables
 
18,740

 
230,814

 
(249,554
)
 

Deferred income taxes
 

 
108,333

 
(108,333
)
 

Other credits
 
54,101

 
41,894

 

 
95,995

Shareholders’ equity
 
686,339

 
1,011,244

 
(1,011,244
)
 
686,339

Total liabilities and shareholders’ equity
 
$
1,435,672

 
$
1,506,994

 
$
(1,369,399
)
 
$
1,573,267

 

- 23 -


In thousands
 
Texas
Industries, Inc.
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Condensed consolidating balance sheet at May 31, 2012
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
84,713

 
$
3,314

 
$

 
$
88,027

Receivables – net
 

 
98,836

 

 
98,836

Inventories
 

 
99,441

 

 
99,441

Deferred income taxes and prepaid expenses
 
99

 
18,908

 

 
19,007

Discontinued Operations Held for Sale
 

 
40,344

 

 
40,344

Total current assets
 
84,812

 
260,843

 

 
345,655

Property, plant and equipment – net
 

 
1,185,325

 

 
1,185,325

Goodwill
 

 
1,715

 

 
1,715

Real estate and investments
 
664

 
20,201

 

 
20,865

Deferred income taxes and other charges
 
123,734

 
7,356

 
(107,722
)
 
23,368

Investment in subsidiaries
 
987,519

 

 
(987,519
)
 

Long-term intercompany receivables
 
246,298

 
18,747

 
(265,045
)
 

Total assets
 
$
1,443,027

 
$
1,494,187

 
$
(1,360,286
)
 
$
1,576,928

Accounts payable
 
$
108

 
$
64,717

 
$

 
$
64,825

Accrued interest, compensation and other
 
25,829

 
35,488

 

 
61,317

Current portion of long-term debt
 
4

 
1,210

 

 
1,214

Total current liabilities
 
25,941

 
101,415

 

 
127,356

Long-term debt
 
650,245

 
6,704

 

 
656,949

Long-term intercompany payables
 
18,747

 
246,298

 
(265,045
)
 

Deferred income taxes
 

 
107,722

 
(107,722
)
 

Other credits
 
51,823

 
44,529

 

 
96,352

Shareholders’ equity
 
696,271

 
987,519

 
(987,519
)
 
696,271

Total liabilities and shareholders’ equity
 
$
1,443,027

 
$
1,494,187

 
$
(1,360,286
)
 
$
1,576,928


- 24 -


In thousands
 
Texas
Industries, Inc.
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Condensed consolidating statement of comprehensive income for the three months ended November 30, 2012
Net sales
 
$

 
$
167,693

 
$

 
$
167,693

Cost of products sold
 

 
155,939

 

 
155,939

 
 

 
11,754

 

 
11,754

Selling, general and administrative
 
2,330

 
14,737

 

 
17,067

Interest
 
17,248

 

 
(9,791
)
 
7,457

Other income
 
(26
)
 
(1,898
)
 

 
(1,924
)
Intercompany other income
 
(874
)
 
(8,917
)
 
9,791

 

 
 
18,678

 
3,922

 

 
22,600

Income (loss) from continuing operations before the following items
 
(18,678
)
 
7,832

 

 
(10,846
)
Income taxes (benefit)
 
(143
)
 
(514
)
 

 
(657
)
 
 
(18,535
)
 
8,346

 

 
(10,189
)
Equity in earnings of subsidiaries
 
7,413

 

 
(7,413
)
 

Net income (loss)
 
$
(11,122
)
 
$
8,346

 
$
(7,413
)
 
$
(10,189
)
Net income (loss) from discontinued operations, net of tax
 
$

 
$
(933
)
 
$

 
$
(933
)
Net income (loss)
 
$
(11,122
)
 
$
7,413

 
$
(7,413
)
 
$
(11,122
)
Comprehensive loss
 
$
(11,025
)
 
$
7,509

 
$
(7,509
)
 
$
(11,025
)
 

In thousands
 
Texas
Industries, Inc.
 
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Condensed consolidating statement of comprehensive income for the three months ended November 30, 2011
Net sales
 
$

 
$
146,172

 
$

 
$
146,172

Cost of products sold
 

 
144,689

 

 
144,689

 
 

 
1,483

 

 
1,483

Selling, general and administrative
 
228

 
12,553

 

 
12,781

Restructuring charges
 

 
3,153

 

 
3,153

Interest
 
17,008

 

 
(8,170
)
 
8,838

Other income
 
(14
)
 
(1,508
)
 

 
(1,522
)
Intercompany other income
 
(873
)
 
(7,297
)
 
8,170

 

 
 
16,349

 
6,901

 

 
23,250

Income (loss) from continuing operations before the following items
 
(16,349
)
 
(5,418
)
 

 
(21,767
)
Income taxes (benefit)
 
(1,404
)
 
260

 

 
(1,144
)
 
 
(14,945
)
 
(5,678
)
 

 
(20,623
)
Equity in earnings of subsidiaries
 
(5,158
)
 

 
5,158

 

Net income (loss)
 
$
(20,103
)
 
$
(5,678
)
 
$
5,158

 
$
(20,623
)
Net income (loss) from discontinued operations, net of tax
 
$

 
$
(414