-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D14kWEiVp88WSObiBz/91GzD7ON0m2gQixoxxcFcc+YcVER/9W0wiztZq5B239uG v0WS/2qU+4uMDBycp0r5zg== 0001021408-02-012458.txt : 20021011 0001021408-02-012458.hdr.sgml : 20021011 20021011115337 ACCESSION NUMBER: 0001021408-02-012458 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021011 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS INDUSTRIES INC CENTRAL INDEX KEY: 0000097472 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 750832210 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04887 FILM NUMBER: 02787137 BUSINESS ADDRESS: STREET 1: 1341 W MOCKINGBIRD LN STREET 2: STE 700W CITY: DALLAS STATE: TX ZIP: 75247-6913 BUSINESS PHONE: 9726476700 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 1-4887 TEXAS INDUSTRIES, INC. (Exact name of registrant as specified in the charter) Delaware 75-0832210 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1341 West Mockingbird Lane, Suite 700W, Dallas, Texas 75247-6913 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (972) 647-6700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ As of October 7, 2002, 21,044,710 shares of Registrant's Common Stock, $1.00 par value, were outstanding. Page 1 of 24 INDEX TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION Page - ----------------------------- Item 1. Financial Statements Consolidated Balance Sheets -- August 31, 2002 and May 31, 2002 ......................... 3 Consolidated Statements of Income -- three months ended August 31, 2002 and August 31, 2001 ................................................................. 4 Consolidated Statements of Cash Flows -- three months ended August 31, 2002 and August 31, 2001 ................................................................. 5 Notes to Consolidated Financial Statements .............................................. 6 Independent Accountants' Review Report .................................................. 13 Item 2. Management's Discussion and Analysis of Operating Results and Financial Condition ............................................................. 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk -- the information required by this item is included in Item 2 .................................................. -- Item 4. Controls and Procedures ................................................................. 19 PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K ........................................................ 19 SIGNATURES - ---------- CERTIFICATIONS - --------------
-2- CONSOLIDATED BALANCE SHEETS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
(Unaudited) August 31, May 31, - ----------------------------------------------------------------------------------------------------- In thousands 2002 2002 - ----------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 7,197 $ 7,430 Receivables 57,633 56,138 Inventories 278,365 276,482 Deferred taxes and prepaid expenses 41,810 31,192 ---------- ---------- TOTAL CURRENT ASSETS 385,005 371,242 OTHER ASSETS Goodwill 146,474 146,474 Real estate and investments 41,869 41,524 Deferred charges and intangibles 32,073 29,679 ---------- ---------- 220,416 217,677 PROPERTY, PLANT AND EQUIPMENT Land and land improvements 210,358 209,557 Buildings 102,859 102,358 Machinery and equipment 1,790,808 1,779,863 Construction in progress 49,451 45,450 ---------- ---------- 2,153,476 2,137,228 Less allowances for depreciation 976,112 952,870 ---------- ---------- 1,177,364 1,184,358 ---------- ---------- $ 1,782,785 $ 1,773,277 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 122,482 $ 111,037 Accrued interest, wages and other items 52,852 48,363 Current portion of long-term debt 9,230 9,228 ---------- ---------- TOTAL CURRENT LIABILITIES 184,564 168,628 LONG-TERM DEBT 464,917 474,963 DEFERRED INCOME TAXES AND OTHER CREDITS 169,213 167,276 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY HOLDING SOLELY COMPANY CONVERTIBLE DEBENTURES 200,000 200,000 SHAREHOLDERS' EQUITY Common stock, $1 par value 25,067 25,067 Additional paid-in capital 260,220 260,091 Retained earnings 571,433 569,096 Accumulated other comprehensive loss (1,073) -- Cost of common stock in treasury (91,556) (91,844) ---------- ---------- 764,091 762,410 ---------- ---------- $ 1,782,785 $ 1,773,277 ========== ==========
See notes to consolidated financial statements. -3- (Unaudited) CONSOLIDATED STATEMENTS OF INCOME TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
Three months ended August 31, - --------------------------------------------------------------------------------------------- In thousands except per share 2002 2001 - --------------------------------------------------------------------------------------------- NET SALES $ 338,955 $ 361,562 COSTS AND EXPENSES (INCOME) Cost of products sold 296,689 314,641 Selling, general and administrative 26,423 28,212 Interest 8,836 12,364 Other income (1,382) (3,738) ---------- ---------- 330,566 351,479 ---------- ---------- INCOME BEFORE THE FOLLOWING ITEMS 8,389 10,083 Income taxes 2,686 3,284 ---------- ---------- 5,703 6,799 Dividends on preferred securities - net of tax (1,788) (1,788) ---------- ---------- NET INCOME $ 3,915 $ 5,011 ========== ========== BASIC Average shares 21,109 21,014 Earnings per share $ .19 $ .24 ========== ========== DILUTED Average shares 21,327 21,485 Earnings per share $ .18 $ .23 ========== ========== Cash dividends per share $ .075 $ .075 ========== ==========
See notes to consolidated financial statements. -4- (Unaudited) CONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
Three months ended August 31, - -------------------------------------------------------------------------------------------- In thousands 2002 2001 - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 3,915 $ 5,011 Gain on disposal of assets (51) (123) Non-cash items Depreciation, depletion and amortization 24,298 27,183 Deferred taxes 1,580 1,494 Other - net 1,115 2,583 Changes in operating assets and liabilities Receivables (1,694) 3,304 Inventories and prepaid expenses (12,484) 18,123 Accounts payable and accrued liabilities 15,020 23,365 Real estate and investments (580) (329) --------- --------- Net cash provided by operations 31,119 80,611 INVESTING ACTIVITIES Capital expenditures (17,423) (6,759) Proceeds from disposal of assets 424 3,064 Other - net (2,551) (1,757) --------- --------- Net cash used by investing (19,550) (5,452) FINANCING ACTIVITIES Proceeds of long-term borrowing 60,630 100,950 Debt retirements (70,675) (170,991) Purchase of treasury shares (2) (206) Common dividends paid (1,578) (1,567) Other - net (177) 1,758 --------- --------- Net cash used by financing (11,802) (70,056) --------- --------- Increase (decrease) in cash (233) 5,103 Cash at beginning of period 7,430 8,734 --------- --------- Cash at end of period $ 7,197 $ 13,837 ========= =========
See notes to consolidated financial statements. -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Texas Industries, Inc. ("TXI" or the "Company") is a leading supplier of construction materials through two business segments: cement, aggregate and concrete products (the "CAC" segment) and structural steel and specialty bar products (the "Steel" segment). Through the CAC segment, the Company produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate and concrete products from facilities concentrated in Texas, Louisiana, and California, with several products marketed throughout the United States. Through the Steel segment, the Company produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels from facilities located in Texas and Virginia, for markets in North America. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended August 31, 2002, are not necessarily indicative of the results that may be expected for the year ended May 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended May 31, 2002. Estimates. The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and all subsidiaries. Cash Equivalents. For cash flow purposes, temporary investments which have maturities of less than 90 days when purchased are considered cash equivalents. Property, Plant and Equipment. Property, plant and equipment is recorded at cost. Provisions for depreciation are computed generally using the straight-line method. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials. Useful lives for the Company's primary operating facilities range from 10 to 20 years. Maintenance and repairs are charged to expense as incurred. Costs incurred for scheduled shut-downs to refurbish Steel facilities are amortized over the production period, typically 12 to 24 months. Goodwill. Goodwill identified with CAC resulted from the acquisition of Riverside Cement Company. Goodwill identified with Steel resulted from the acquisition of Chaparral Steel Company. Goodwill is tested for impairment annually by each reporting unit. An independent evaluation determined that in each case the fair value of the respective reporting unit exceeds its carrying value. The carrying value of goodwill by business segment is summarized as follows: ------------------------------------------------------------------------- In thousands August May ------------------------------------------------------------------------- CAC Gross carrying value $ 66,766 66,766 Accumulated amortization (5,458) (5,458) --------- --------- 61,308 61,308 Steel Gross carrying value 112,265 112,265 Accumulated amortization (27,099) (27,099) --------- --------- 85,166 85,166 --------- --------- $ 146,474 $ 146,474 ========= ========= -6- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued Real Estate and Investments. Surplus real estate and real estate acquired for development of high quality industrial, office and multi-use parks totaled $14.3 million at both August 31, 2002 and May 31, 2002. Investments, composed primarily of life insurance contracts which may be used to fund certain Company benefit agreements, totaled $27.6 million and $27.2 million at August 31, 2002 and May 31, 2002, respectively. Debt Issuance Cost. Debt issuance costs totaling $9.5 million and $9.9 million at August 31, 2002 and May 31, 2002, respectively, are associated with various debt issues and amortized over the terms of the related debt. Intangibles. Intangibles include non-compete agreements and other intangibles with finite lives being amortized on a straight-line basis over periods of 5 to 15 years. Their carrying value, adjusted for write-offs, totaled $3.2 million and $3.5 million, net of accumulated amortization of $5.4 million and $5.1 million at August 31, 2002 and May 31, 2002, respectively. Amortization expense of $300,000 was incurred in each of the three-month periods ended August 31, 2002 and 2001. Annual amortization expense for each of the five succeeding years is $800,000, $400,000, $400,000, $300,000 and $300,000. Other Credits. Other credits totaling $33.1 million and $32.1 million at August 31, 2002 and May 31, 2002, respectively, are composed primarily of liabilities related to the Company's retirement plans and deferred compensation agreements. Accumulated Other Comprehensive Loss. Accumulated other comprehensive loss represents a minimum pension liability adjustment related to a defined benefit retirement plan covering certain employees and retirees of an acquired subsidiary. The minimum pension liability adjustment was $1.1 million net of tax of $600,000 at August 31, 2002. Comprehensive income which consists of net income and the minimum pension liability adjustment to shareholders' equity was $2.8 million for the three month period ended August 31, 2002. Net Sales. Sales are recognized when title has transferred and products are delivered. Sales are presented net of delivery costs as follows: August 31, --------------------------------------------------------------------- In thousands 2002 2001 --------------------------------------------------------------------- Revenues including delivery fees $ 365,997 $ 389,435 Freight and delivery costs (27,042) (27,873) -------- -------- Net sales $ 338,955 $ 361,562 ======== ======== Income Taxes. Accounting for income taxes uses the liability method of recognizing and classifying deferred income taxes. The Company joins in filing a consolidated return with its subsidiaries. Current and deferred tax expense is allocated among the members of the group based on a stand-alone calculation of the tax of the individual member. Earnings Per Share ("EPS"). Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period including certain contingently issuable shares. Diluted EPS adjusts net income for the net dividends on preferred securities of subsidiary and the outstanding shares for the dilutive effect of the preferred securities, stock options and awards. -7- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued Basic and Diluted EPS are calculated as follows: August 31, --------------------------------------------------------------------- In thousands except per share 2002 2001 --------------------------------------------------------------------- Earnings: Net income $ 3,915 $ 5,011 ======= ======= Shares: Weighted-average shares outstanding 21,035 20,869 Contingently issuable shares 74 145 ------- ------- Basic weighted-average shares 21,109 21,014 Stock option and award dilution 218 471 ------- ------- Diluted weighted-average shares * 21,327 21,485 ======= ======= Basic earnings per share $ .19 $ .24 ======= ======= Diluted earnings per share $ .18 $ .23 ======= ======= * Shares excluded due to antidilutive effect: Preferred securities 2,889 2,889 Stock options and awards 990 595 WORKING CAPITAL Working capital totaled $200.4 million at August 31, 2002 and $202.6 million at May 31, 2002. Receivables consist of: --------------------------------------------------------------------- In thousands August May --------------------------------------------------------------------- Notes and interest receivables $ 12,811 $ 13,100 Tax refund claims 4,364 4,364 Accounts receivable 40,458 38,674 -------- -------- $ 57,633 $ 56,138 ======== ======== Accounts receivable are presented net of allowances for doubtful receivables of $5.0 million at August and $4.7 million at May. The Company has an agreement to sell, on a revolving basis, an interest in a defined pool of trade receivables of up to $125 million. The agreement is subject to annual renewal. The maximum amount outstanding varies based upon the level of eligible receivables. Fees are variable and follow commercial paper rates. The interest sold totaled $125 million at August and May. The sales are reflected as accounts receivable reductions and as operating cash flows. As collections reduce previously sold interests, new accounts receivable are customarily sold. Fees and expenses of $800,000 and $1.4 million are included in selling, general and administrative expenses in the three-month periods ended August 31, 2002 and 2001, respectively. The Company, as agent for the purchaser, retains collection and administration responsibilities for the participating interests of the defined pool. -8- WORKING CAPITAL-Continued Inventories consist of: --------------------------------------------------------------------- In thousands August May --------------------------------------------------------------------- Finished products $ 83,494 $ 85,818 Work in process 58,745 56,504 Raw materials and supplies 136,126 134,160 -------- -------- $ 278,365 $ 276,482 ======== ======== Inventories are stated at cost (not in excess of market) with a majority of inventories using the last-in first-out method (LIFO). If the average cost method (which approximates current replacement cost) had been used, inventory values would have been higher by $6.3 million at August and May. Accrued interest, wages and other items consist of: --------------------------------------------------------------------- In thousands August May --------------------------------------------------------------------- Interest $ 10,709 $ 5,292 Employee compensation 15,788 21,273 Income taxes 1,825 3,778 Other 24,530 18,020 ------- -------- $ 52,852 $ 48,363 ======= ======== LONG-TERM DEBT Long-term debt is comprised of the following:
------------------------------------------------------------------------------------------------- In thousands August May ------------------------------------------------------------------------------------------------- Revolving credit facility maturing in 2004, interest rates average 3.79% $ 80,000 $ 90,000 Senior notes Notes due through 2017, interest rates average 7.28% 200,000 200,000 Notes due through 2008, interest rates average 7.28% 75,000 75,000 Notes due through 2004, interest rates average 10.2% 16,000 16,000 Variable-rate industrial development revenue bonds Bonds maturing in 2028, interest rate approximately 2.5% 50,000 50,000 Bonds maturing in 2029, interest rate approximately 2.5% 25,000 25,000 Bonds maturing in 2029, interest rate approximately 2.5% 20,500 20,500 Pollution control bonds, due through 2007, interest rate 3.56% (75% of prime) 4,535 4,535 Other, maturing through 2009, interest rates from 7.5% to 10% 3,112 3,156 -------- --------- 474,147 484,191 Less current maturities 9,230 9,228 -------- --------- $ 464,917 $ 474,963 ======== =========
Annual maturities of long-term debt for each of the five succeeding years are $9.2, $134.3, $41.2, $45.9 and $40.9 million. -9- LONG-TERM DEBT-Continued The Company has available a bank-financed $350 million long-term revolving credit facility. An interest rate at the applicable margin above either prime or LIBOR is selected at the time of each borrowing. Commitment fees at a current annual rate of .3% are paid on the unused portion of this facility. There is $80.0 million currently outstanding under this facility. In addition, $110.9 million has been utilized to support letters of credit issued primarily to secure the Company's variable-rate industrial development revenue bonds, which allows the interest rates on these bonds to closely follow the tax-exempt commercial paper rates. Loan agreements contain covenants that provide for restrictions on the payment of dividends on common stock and place limitations on incurring certain indebtedness, purchasing treasury stock, and making capital expenditures and certain investments. Under the most restrictive of these agreements, the Company's total debt is limited based on the ratio of debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"). At August 31, 2002, $160.9 million of additional debt could have been incurred. In addition, the aggregate amount of annual fixed charges which includes cash dividends on common stock is limited based on the ratio of EBITDA to fixed charges. At August 31, 2002, $44.0 million of additional fixed charges could have been incurred. The Company is in compliance with all loan covenant restrictions. The amount of interest paid for the three-month periods presented was $2.1 million in 2002 and $6.2 million in 2001. PREFERRED SECURITIES OF SUBSIDIARY On June 5, 1998, TXI Capital Trust I (the "Trust"), a Delaware business trust wholly owned by the Company, issued 4,000,000 of its 5.5% Shared Preference Redeemable Securities ("Preferred Securities") to the public for gross proceeds of $200 million. The combined proceeds from the issuance of the Preferred Securities and the issuance to the Company of the common securities of the Trust were invested by the Trust in $206.2 million aggregate principal amount of 5.5% convertible subordinated debentures due June 30, 2028 (the "Debentures") issued by the Company. The Debentures are the sole assets of the Trust. Holders of the Preferred Securities are entitled to receive cumulative cash distributions at an annual rate of $2.75 per Preferred Security (equivalent to a rate of 5.5% per annum of the stated liquidation amount of $50 per Preferred Security). The Company has guaranteed, on a subordinated basis, distributions and other payments due on the Preferred Securities, to the extent the Trust has funds available therefor and subject to certain other limitations (the "Guarantee"). The Guarantee, when taken together with the obligations of the Company under the Debentures, the Indenture pursuant to which the Debentures were issued, and the Amended and Restated Trust Agreement of the Trust (including its obligations to pay costs, fees, expenses, debts and other obligations of the Trust [other than with respect to the Preferred Securities and the common securities of the Trust]), provide a full and unconditional guarantee of amounts due on the Preferred Securities. The Debentures are redeemable for cash under certain circumstances relating to federal income tax matters, or at the option of the Company, in whole or in part, at par, plus accrued and unpaid interest. Upon any redemption of the Debentures, a like aggregate liquidation amount of Preferred Securities will be redeemed. The Preferred Securities do not have a stated maturity date, although they are subject to mandatory redemption upon maturity of the Debentures on June 30, 2028, or upon earlier redemption. Each Preferred Security is convertible at any time prior to the close of business on June 30, 2028, at the option of the holder into shares of the Company's common stock at a conversion rate of .72218 shares of the Company's common stock for each Preferred Security (equivalent to a conversion price of $69.235 per share of TXI Common Stock). -10- SHAREHOLDERS' EQUITY Common stock consists of: ---------------------------------------------------------------------- In thousands August May ---------------------------------------------------------------------- Shares authorized 40,000 40,000 Shares outstanding at end of period 21,042 21,026 Shares held in treasury 4,025 4,041 Shares reserved for stock options and other 3,414 3,503 There are authorized 100,000 shares of Cumulative Preferred Stock, no par value, of which 20,000 shares are designated $5 Cumulative Preferred Stock (Voting), redeemable at $105 per share and entitled to $100 per share upon dissolution. An additional 25,000 shares are designated Series B Junior Participating Preferred Stock. The Series B Preferred Stock is not redeemable and ranks, with respect to the payment of dividends and the distribution of assets, junior to (i) all other series of the Preferred Stock unless the terms of any other series shall provide otherwise and (ii) the $5 Cumulative Preferred Stock. Pursuant to a Rights Agreement, in November 1996, the Company distributed a dividend of one preferred share purchase right for each outstanding share of the Company's Common Stock. Each right entitles the holder to purchase from the Company one two-thousandth of a share of the Series B Junior Participating Preferred Stock at a price of $122.50, subject to adjustment. The rights will expire on November 1, 2006 unless the date is extended or the rights are earlier redeemed or exchanged by the Company pursuant to the Rights Agreement. STOCK OPTION PLAN The Company's stock option plan as approved by shareholders provides that non-qualified and incentive stock options to purchase Common Stock may be granted to directors, officers and key employees at market prices at date of grant. Outstanding options become exercisable in installments beginning one year after date of grant and expire ten years later. A summary of option transactions for the three-month period ended August 31, 2002, follows: ------------------------------------------------------------------------ Weighted Average Shares Under Option Option Price ------------------------------------------------------------------------ Outstanding at June 1 2,399,153 $31.02 Exercised (13,760) 25.86 Cancelled (1,500) 28.55 ---------- ----- Outstanding at August 31 2,383,893 $31.05 ========== ===== At August 31, 2002, there were 1,565,123 shares exercisable and 941,550 shares available for future grants. Outstanding options expire on various dates to January 16, 2012. INCOME TAXES Federal income taxes for the interim periods ended August 31, 2002 and 2001, have been included in the accompanying financial statements on the basis of an estimated annual rate. The estimated annualized tax rate is 30.6% for 2002 compared to 31.7% for 2001. The primary reason that these respective tax rates differ from the 35% statutory corporate rate is due to percentage depletion which is tax deductible and state income tax expense. The Company made income tax payments of $2.1 million in the three-month period ended August 31, 2002 and received income tax refunds of $18.1 million in the three-month period ended August 31, 2001. -11- LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES The Company is subject to federal, state and local environmental laws and regulations concerning among other matters, air emissions, furnace dust disposal and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations, however, from time to time the Company receives claims from federal and state environmental regulatory agencies and entities asserting that the Company is or may be in violation of certain environmental laws and regulations. Based on its experience and the information currently available to it, the Company believes that such claims will not have a material impact on its financial condition or results of operations. Despite the Company's compliance and experience, it is possible that the Company could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by the Company. The Company and subsidiaries are defendants in lawsuits which arose in the normal course of business. In management's judgment (based on the opinion of counsel) the ultimate liability, if any, from such legal proceedings will not have a material effect on the consolidated financial position or results of operations of the Company. BUSINESS SEGMENTS The Company has two reportable segments: cement, aggregate and concrete products (the "CAC" segment) and steel (the "Steel" segment). The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because of significant differences in manufacturing processes, distribution and markets served. Through the CAC segment the Company produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate and concrete products. Through the Steel segment, the Company produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels. Operating profit is net sales less operating costs and expenses, excluding general corporate expenses and interest expense. Operating results and certain other financial data for the Company's business segments are presented on pages 14 and 15 under "Business Segments" of Management's Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated herein by reference. -12- EXHIBIT A INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors Texas Industries, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Texas Industries, Inc. and subsidiaries (the Company) as of August 31, 2002 and the related condensed consolidated statements of income and cash flows for the three-month periods ended August 31, 2002 and 2001. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Texas Industries, Inc. and subsidiaries as of May 31, 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended [not presented herein] and in our report dated July 9, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP --------------------- Dallas, Texas September 18, 2002 -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of operations and financial condition for the three-month period ended August 31, 2002 to the three-month period ended August 31, 2001. BUSINESS SEGMENTS The Company is a leading supplier of construction materials through two business segments: cement, aggregate and concrete products (the "CAC" segment); and structural steel and specialty bar products (the "Steel" segment). Through the CAC segment, the Company produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate and concrete products. Through the Steel segment, the Company produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels. Corporate resources include administration, financial, legal, environmental, human resources and real estate activities that are not allocated to operations and are excluded from operating profit.
Three months ended August 31, -------------------------------------------------------------------------------------------- In thousands 2002 2001 -------------------------------------------------------------------------------------------- TOTAL SALES Cement $ 93,785 $ 94,492 Ready-mix 59,007 65,995 Stone, sand & gravel 28,136 34,555 Structural mills 119,919 127,407 Bar mill 31,085 29,966 UNITS SHIPPED Cement (tons) 1,327 1,320 Ready-mix (cubic yards) 1,010 1,111 Stone, sand & gravel (tons) 4,951 6,113 Structural mills (tons) 367 404 Bar mill (tons) 99 101 NET SALES Cement $ 76,417 $ 75,117 Ready-mix 58,925 65,933 Stone, sand & gravel 19,854 25,590 Other products 28,492 32,482 --------- -------- TOTAL CAC 183,688 199,122 Structural mills 119,919 127,407 Bar mill 31,085 29,966 Other 4,263 5,067 --------- -------- TOTAL STEEL 155,267 162,440 --------- -------- TOTAL NET SALES $ 338,955 $ 361,562 ========= ========
-14-
Three months ended August 31, ---------------------------------------------------------------------------------------------- In thousands 2002 2001 ---------------------------------------------------------------------------------------------- CAC OPERATIONS Gross profit $ 51,769 $ 61,514 Less: Depreciation, depletion & amortization 11,922 12,299 Selling, general & administrative 12,020 12,301 Other income (601) (458) --------- --------- OPERATING PROFIT 28,428 37,372 STEEL OPERATIONS Gross profit 13,986 11,717 Less: Depreciation & amortization 11,938 14,516 Selling, general & administrative 5,978 6,932 Other income (723) (2,837) --------- --------- OPERATING LOSS (3,207) (6,894) --------- --------- TOTAL OPERATING PROFIT 25,221 30,478 CORPORATE RESOURCES Other income 58 443 Less: Depreciation & amortization 438 368 Selling, general & administrative 7,616 8,106 --------- --------- (7,996) (8,031) INTEREST EXPENSE (8,836) (12,364) --------- --------- INCOME BEFORE TAXES & OTHER ITEMS $ 8,389 $ 10,083 ========= =========
RESULTS OF OPERATIONS Operating Profit - August 2002 Quarter Compared to August 2001 Quarter Operating profit at $25.2 million decreased 17% from the prior year period. CAC profit declined $8.9 million as lower ready-mix and aggregate shipments were offset in part by improved cement margins due to lower energy and maintenance costs. Steel operating results improved $3.7 million as higher realized prices and lower depreciation expense was offset in part by increased scrap costs and lower shipments. Although demand for building materials in the Company's CAC markets has declined it remains at satisfactory levels. Overall demand for structural steel is down from prior year levels due to the lower level of non-residential construction. Since it is not possible to predict with any confidence when these markets will change, the Company is focused on reducing costs, maintaining desirable market share and continuing to generate operating cash flows. Net Sales. Consolidated net sales for the August 2002 quarter were $339.0 million compared to $361.6 million for the prior year period. CAC sales at $183.7 million were down 8%. Total cement sales declined slightly on 2% lower average trade prices. Ready-mix sales declined $7.0 million on 9% lower volume and 2% lower average prices. Aggregate sales declined $6.4 million on 19% lower shipments and 2% lower average prices. Wet weather and softening demand in the Company's Texas markets reduced ready-mix and aggregate shipments in the quarter. Steel sales at $155.3 million were down 4%. Structural steel sales declined $7.5 million on 9% lower shipments at 4% higher realized prices. Bar mill sales increased $1.1 million on 6% higher prices. Operating Costs. Consolidated cost of products sold including depreciation, depletion and amortization was $296.7 million, a decrease of $17.9 million from the prior year period. CAC costs were $143.5 million, a decrease of $5.9 million, due to a 7% reduction in unit cement manufacturing costs and lower ready-mix volume. Steel costs were $153.2 million, a decrease of $12.0 million, as lower shipments were offset in part by higher scrap costs. -15- CAC selling, general and administrative expenses including depreciation and amortization at $12.4 million decreased $400,000 and Steel expenses at $6.0 million decreased $900,000 due to lower general expenses. Corporate Resources Selling, general and administrative expenses including depreciation and amortization at $8.1 million decreased $400,000 on lower costs associated with the Company's agreement to sell receivables. Other income decreased $400,000 on lower interest income. Interest Expense Interest expense at $8.8 million decreased $3.5 million from the prior year period due primarily to lower average borrowings under the Company's revolving credit facility and to a lesser extent lower interest rates. Income Taxes The Company's current effective tax rate is estimated at 30.6% compared to 31.7% in the prior year period. The primary reason that the tax rate differs from the 35% statutory corporate rate is due to percentage depletion that is tax deductible and state income tax expense. Dividends on Preferred Securities - Net of Tax Dividends on preferred securities of subsidiary net of tax benefit amounted to $1.8 million in each period. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of liquidity, in addition to cash from operations, include a credit facility and an agreement to sell trade accounts receivable. The Company has available a $350 million revolving credit facility that expires in March 2004. At August 31, 2002, $80.0 million was outstanding under the credit facility and an additional $110.9 million had been utilized to support letters of credit. The credit facility agreement limits the Company's total debt based on the ratio of debt to earnings before interest, taxes, depreciation and amortization. At August 31, 2002, $160.9 million of additional debt could have been incurred. The Company has an agreement to sell, on a revolving basis, an interest in a defined pool of trade accounts receivable of up to $125 million. At August 31, 2002, the entire amount available under this agreement had been sold. The Company historically has financed its major capital expansion projects with cash from operations and long-term borrowing. Working capital requirements and capital expenditures for normal replacement and technological upgrades of existing equipment and expansions of its operations are funded with cash from operations. The fiscal year 2003 capital expenditure budget for these activities is estimated currently at approximately $75 million. In addition, the Company leases certain mobile and other equipment used in its operations under operating leases that in the normal course of business are renewed or replaced by other leases. The Company's contractual obligations for long-term debt, operating leases and preferred securities of subsidiary are essentially unchanged from May 31, 2002 except for the $10 million reduction in the outstanding balance on the revolving credit facility. The Company expects cash from operations, borrowings under its current or similar revolving credit facility and its agreement to sell trade accounts receivable to be sufficient to provide funds for capital expenditure commitments, scheduled debt repayments and working capital needs. -16- Cash Flows Net cash provided by operating activities was $31.1 million, a decrease of $49.5 million from the prior year period. The decrease was primarily the result of changes in Steel inventories and prepaid expenses. In the current period, a scheduled shutdown to refurbish the Steel production facilities increased prepaid expenses $10.8 million. In the prior year period, Steel inventories were reduced $17.2 million as the Company lowered Steel production to bring inventory levels in line with market conditions. The prior year period operating cash flow also included the collection of a tax refund claim of $18.1 million that offset an increase in Steel receivables of $16.4 million due to higher shipments. Net cash used by investing activities was $19.6 million, compared to $5.5 million during the prior year period, consisting principally of capital expenditures for normal replacement and technological upgrades of existing equipment and expansions of the Company's operations. Capital expenditures for these activities in the August 2002 quarter were $17.4 million, an increase of $10.7 million from the prior year period. Net cash used by financing activities was $11.8 million, compared to $70.1 million during the prior year period. The outstanding balance on the Company's revolving credit facility was reduced $10.0 million. The Company's quarterly cash dividend of $.075 per common share remained unchanged from the prior year. OTHER ITEMS Environmental Matters The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, furnace dust disposal and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations, however, from time to time the Company receives claims from federal and state environmental regulatory agencies and entities asserting that the Company is or may be in violation of certain environmental laws and regulations. Based on its experience and the information currently available to it, the Company believes that such claims will not have a material impact on its financial condition or results of operations. Despite the Company's compliance and experience, it is possible that the Company could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by the Company. Market Risk The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. Because of the short duration of the Company's investments, changes in market interest rates would not have a significant impact on their fair value. The current fair value of the Company's long-term debt, including current maturities, does not exceed its carrying value. Market risk, when estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the Company's weighted average long-term borrowing rate, would not have a significant impact on the carrying value of long-term debt. Expected maturity dates and average interest rates of long-term debt are essentially unchanged from May 31, 2002. Critical Accounting Policies The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. The critical accounting policies that affect its more complex judgments and estimates are described in the Company's Annual Report on Form 10-K for the year ended May 31, 2002. -17- New Accounting Pronouncements Effective June 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Its adoption did not have an immediate effect on the financial statements of the Company. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 Certain statements contained in this quarterly report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the impact of competitive pressures and changing economic and financial conditions on the Company's business, construction activity in the Company's markets, abnormal periods of inclement weather, changes in the cost of raw materials, fuel, and energy and the impact of environmental laws and other regulations. For further information refer to the Company's Annual Report on Form 10-K for the year ended May 31, 2002. -18- Item 4. Controls and Procedures Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer believe the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K The following exhibits are included herein: (15) Letter re: Unaudited Interim Financial Information The remaining exhibits have been omitted because they are not applicable or the information required therein is included elsewhere in the financial statements or notes thereto. The Registrant filed the following report on Form 8-K during the three-month period ended August 31, 2002: August 22, 2002, reporting (i) the certifications made by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) to accompany the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 2002; and (ii) the sworn statements submitted by the Principal Executive Officer and Principal Financial Officer pursuant to the Securities and Exchange Commission Order No. 4-460. -19- SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEXAS INDUSTRIES, INC. October 11, 2002 /s/ Richard M. Fowler - ---------------- ---------------------- Richard M. Fowler Executive Vice President - Finance and Chief Financial Officer (Principal Financial Officer) October 11, 2002 /s/ James R. McCraw - ---------------- -------------------- James R. McCraw Vice President - Accounting and Information Services (Principal Accounting Officer) -20- CERTIFICATIONS I, Robert D. Rogers, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Texas Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 11, 2002 /s/ Robert D. Rogers -------------------------------------------- Robert D. Rogers President and Chief Executive Officer (Principal Executive Officer) -21- I, Richard M. Fowler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Texas Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 11, 2002 /s/ Richard M. Fowler -------------------------------------------- Richard M. Fowler Executive Vice President - Finance and Chief Financial Officer (Principal Financial Officer) -22- INDEX TO EXHIBITS Exhibits Page 15. Letter re: Unaudited Interim Financial Information............... 24 -23- EX-15 3 dex15.txt LETTER RE:UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15 Board of Directors Texas Industries, Inc. We are aware of the incorporation by reference in the Post-Effective Amendment Number 9 to Registration Statement Number 2-48986 on Form S-8, Registration Statement Number 33-53715 on Form S-8 and Registration Statement Number 333-11604 on Form S-8 of Texas Industries, Inc. and in the related Prospectuses of our report dated September 18, 2002, with respect to the unaudited condensed consolidated interim financial statements of Texas Industries, Inc. which are included in its Form 10-Q for the quarter ended August 31, 2002. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not part of the Registration Statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. /s/ Ernst & Young LLP --------------------- October 11, 2002 Dallas, Texas -----END PRIVACY-ENHANCED MESSAGE-----