<PAGE>
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, 1999
[ ] 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 8, 1999, 21,030,042 shares of Registrant's Common Stock, $1.00 par
value, were outstanding.
Page 1 of 21
<PAGE>
INDEX
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- -----------------------------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- August 31, 1999 and May 31, 1999.......................... 3
Consolidated Statements of Income -- three months ended August 31, 1999
and August 31, 1998................................................................... 4
Consolidated Statements of Cash Flows -- three months ended August 31, 1999
and August 31, 1998................................................................... 5
Notes to Consolidated Financial Statements............................................... 6
Independent Accountants' Review Report................................................... 12
Item 2. Management's Discussion and Analysis of Operating Results
and Financial Condition............................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk -- the information required
by this item is included in Item 2.................................................... --
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K......................................................... 18
</TABLE>
SIGNATURES
- ----------
-2-
<PAGE>
CONSOLIDATED BALANCE SHEETS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
August 31, May 31,
- -------------------------------------------------------------------------------------------------------
In thousands 1999 1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 7,965 $ 17,652
Notes and accounts receivable 48,299 43,119
Inventories 221,296 230,858
Prepaid expenses 23,913 18,776
---------- ----------
TOTAL CURRENT ASSETS 301,473 310,405
OTHER ASSETS
Real estate and other investments 19,754 19,925
Goodwill and other intangibles 154,047 155,349
Other 38,312 39,150
---------- ----------
212,113 214,424
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 161,635 148,184
Buildings 80,064 75,110
Machinery and equipment 1,433,076 952,657
Construction in progress 117,020 525,439
---------- ----------
1,791,795 1,701,390
Less allowances for depreciation 714,315 695,166
---------- ----------
1,077,480 1,006,224
---------- ----------
$1,591,066 $1,531,053
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 84,793 $ 82,790
Accrued interest, wages and other items 58,383 56,036
Current portion of long-term debt 9,129 9,168
---------- ----------
TOTAL CURRENT LIABILITIES 152,305 147,994
LONG-TERM DEBT 490,691 456,365
DEFERRED FEDERAL INCOME TAXES AND OTHER CREDITS 100,252 94,144
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 257,899 257,773
Retained earnings 455,463 440,645
Cost of common stock in treasury (90,611) (90,935)
---------- ----------
647,818 632,550
---------- ----------
$1,591,066 $1,531,053
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
- ----------------------------------------------------------------------------
In thousands except per share 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
NET SALES $311,895 $299,108
COSTS AND EXPENSES (INCOME)
Cost of products sold 253,543 228,444
Selling, general and administrative 28,319 25,064
Interest 3,375 4,291
Other income (920) (2,424)
-------- --------
284,317 255,375
-------- --------
INCOME BEFORE THE FOLLOWING ITEMS 27,578 43,733
Income taxes 9,396 14,739
-------- --------
18,182 28,994
Dividends on preferred securities - net of tax (1,788) (1,708)
-------- --------
NET INCOME $ 16,394 $ 27,286
======== ========
BASIC
Average shares 21,130 21,321
Earnings per share $ .78 $ 1.28
======== ========
DILUTED
Average shares 24,482 24,825
Earnings per share $ .75 $ 1.17
======== ========
Cash dividends $ .075 $ .075
======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
- -----------------------------------------------------------------------------------------
In thousands 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,394 $ 27,286
Loss (gain) on disposal of assets 2 (220)
Non-cash items
Depreciation, depletion and amortization 21,350 19,033
Deferred taxes 4,465 (420)
Other - net 2,842 53
Changes in operating assets and liabilities
Notes and accounts receivable (8,967) 13,580
Inventories and prepaid expenses 5,705 (57,016)
Accounts payable and accrued liabilities 7,500 23,213
Real estate and investments 171 1,998
------- -------
Net cash provided by operations 49,462 27,507
INVESTING ACTIVITIES
Capital expenditures - expansions (79,638) (94,852)
Capital expenditures - other (11,794) (30,063)
Proceeds from disposal of assets 127 604
Other - net 101 (161)
------- -------
Net cash used by investing (91,204) (124,472)
FINANCING ACTIVITIES
Proceeds of long-term borrowing 54,579 12,000
Net proceeds from issuance of subsidiary preferred securities -- 193,599
Debt retirements (20,301) (94,877)
Purchase of treasury shares (110) (154)
Common dividends paid (1,575) (1,591)
Other - net (538) (455)
------- -------
Net cash provided by financing 32,055 108,522
------- -------
Increase (decrease) in cash (9,687) 11,557
Cash at beginning of period 17,652 16,718
------- -------
Cash at end of period $ 7,965 $ 28,275
======= =======
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
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 its Steel segment, the Company produces and sells structural steel,
specialty bar products, merchant bar-quality rounds, reinforcing bar and
channels for markets in North America and, under certain market conditions,
Europe and Asia.
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,
1999, are not necessarily indicative of the results that may be expected for the
year ended May 31, 2000. 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, 1999.
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.
Intangible Assets. Goodwill and other intangibles is presented net of
accumulated amortization of $29.5 million at August 31, 1999 and $28.1 million
at May 31, 1999. Goodwill resulting from the acquisitions of Chaparral Steel
Company and Riverside Cement Company, totaling $147.9 million at August 31, 1999
and $149.0 million at May 31, 1999 (net of accumulated amortization), is being
amortized currently on a straight-line basis over 40-year periods. Other
intangibles consisting primarily of goodwill and non-compete agreements are
being amortized on a straight-line basis over periods of 2 to 15 years.
Management reviews remaining goodwill and other intangibles with consideration
toward recovery through future operating results (undiscounted) at the current
rates of amortization.
Debt Issuance Cost. Debt issuance costs associated with various debt issues are
being amortized over the terms of the related debt.
Other Credits. Other credits of $31.6 million at August 31, 1999 compared to
$31.2 million at May 31, 1999, are composed primarily of liabilities related to
the Company's retirement plans and deferred compensation agreements.
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.
-6-
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Earnings Per Share ("EPS"). Basic EPS is computed by adjusting net income for
the amortization of additional goodwill in connection with a contingent payment
for the acquisition of Chaparral, then dividing by the weighted average number
of common shares outstanding during the period including certain contingently
issuable shares. Diluted EPS also 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. Stock options to
purchase approximately 419,000 shares in 1999 and 354,000 shares in 1998 were
not included in the computation of diluted EPS because the effect would have
been antidilutive.
Basic and Diluted EPS are calculated as follows:
<TABLE>
<CAPTION>
August 31,
--------------------------------------------------------------------
In thousands except per share 1999 1998
--------------------------------------------------------------------
<S> <C> <C>
Earnings:
Net income $16,394 27,286
Contingent price amortization 58 58
------- -------
Basic earnings 16,452 27,344
Dividends on preferred securities - net of tax 1,788 1,708
------- -------
Diluted earnings $18,240 $29,052
======= =======
Shares:
Weighted-average shares outstanding 21,000 21,207
Contingently issuable shares 130 114
------- -------
Basic weighted-average shares 21,130 21,321
Preferred securities 2,889 2,889
Stock option and award dilution 463 615
------- -------
Diluted weighted-average shares 24,482 24,825
======= =======
Basic earnings per share $ .78 $ 1.28
======= =======
Diluted earnings per share $ .75 $ 1.17
======= =======
</TABLE>
WORKING CAPITAL
Working capital totaled $149.2 million at August 31, 1999, compared to $162.4
million at May 31, 1999.
Notes and accounts receivable of $48.3 million at August and $43.1 million at
May are presented net of allowances for doubtful receivables of $3.1 million at
August and $2.8 million at May.
On March 15, 1999, the Company entered into an agreement to sell, on a revolving
basis, an interest in a defined pool of trade receivables of up to $100 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 sales were reflected as accounts receivable
reductions and as operating cash flows. As collections reduce previously sold
interests, new accounts receivable are customarily sold. A $100 million
interest was outstanding at August 31, 1999 and May 31, 1999. Fees and expenses
of $1.4 million are included in selling, general and administrative expenses in
the three-month period ended August 31, 1999. The Company, as agent for the
purchaser, retains collection and administration responsibilities for the
participating interests of the defined pool.
-7-
<PAGE>
WORKING CAPITAL-Continued
Inventories are summarized as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
In thousands August May
----------------------------------------------------------------------
<S> <C> <C>
Finished products $ 68,597 $ 95,658
Work in process 39,880 37,989
Raw materials and supplies 112,819 97,211
-------- --------
$221,296 $230,858
======== ========
</TABLE>
Inventories are stated at cost (not in excess of market) with approximately 52%
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 $6.0 million at August and May.
LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
In thousands August May
-------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility maturing in 2004, interest rates
average 6.51% $124,500 $ 90,500
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% 40,000 40,000
Variable-rate industrial development revenue bonds
Bonds maturing in 2028, interest rate approximately 3.5% 50,000 50,000
Bonds maturing in 2029, interest rate approximately 3.5%-net 303 103
Bonds maturing in 2029, interest rate approximately 3.5%-net 179 --
Pollution control bonds, due through 2007, interest
rate 6.19% (75% of prime) 6,575 6,575
Other, maturing through 2009, interest rates
from 8% to 10% 3,263 3,355
-------- --------
499,820 465,533
Less current maturities 9,129 9,168
-------- --------
$490,691 $456,365
======== ========
</TABLE>
Annual maturities of long-term debt for each of the five succeeding years are
$9.1, $9.1, $8.9, $8.9 and $178.4 million.
The Company has available a bank-financed $450 million long-term revolving
credit facility. In addition to the $124.5 million currently outstanding under
this facility, $113.6 million has been utilized to support letters of credit.
The Company may select at the time of borrowing an interest rate at either prime
or the applicable margin above LIBOR. Commitment fees at a current annual rate
of .30% are paid on the unused portion of this facility.
On September 22, 1998, the Company issued $50 million variable-rate industrial
development bonds. The proceeds reimbursed the Company for costs incurred in
connection with the construction of sewage and solid waste disposal facilities
at its Virginia steel plant. On May 18, 1999, the Company issued bonds in the
amount of $20.5 million of which $303,000 was funded as of August 31, 1999. The
proceeds are available to reimburse future construction costs at its Midlothian
cement plant. On August 3, 1999, the Company issued additional bonds in the
amount of $25 million of which $179,000 was funded as of August 31, 1999. The
proceeds are available to reimburse construction costs at its Virginia steel
plant.
-8-
<PAGE>
LONG-TERM DEBT-Continued
Loan agreements contain covenants that provide for restrictions on the payment
of dividends on common stock, and limitations on purchases of treasury stock,
incurring certain indebtedness and making certain investments. Under the most
restrictive of these agreements, the aggregate amount of annual cash dividends
on common stock is limited based on the ratio of earnings before interest,
taxes, depreciation and amortization to fixed charges. The Company is in
compliance with all loan covenant restrictions.
The amount of interest paid for the three-month periods presented was $2.5
million in 1999 and $700,000 in 1998. Interest capitalized totaled $6.6 million
and $3.5 million in the 1999 and 1998 periods, respectively.
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, at the option of the Company, in whole
or in part, on or after June 30, 2001, or under certain circumstances relating
to federal income tax matters, 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).
SHAREHOLDERS' EQUITY
Common stock consists of:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
In thousands August May
---------------------------------------------------------------------
<S> <C> <C>
Shares authorized 40,000 40,000
Shares outstanding at end of period 21,011 20,991
Shares held in treasury 4,056 4,076
Shares reserved for stock options and other 3,838 3,853
</TABLE>
-9-
<PAGE>
SHAREHOLDER'S EQUITY-Continued
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.
On March 29, 1996 the Company redeemed and retired all outstanding shares of
such $5 Cumulative Preferred Stock. 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 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. Generally, 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,
1999, follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Weighted Average
Shares Under Option Option Price
-----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 1 2,055,123 $28.31
Exercised (21,440) 22.94
Cancelled (16,650) 35.81
--------- ------
Outstanding at August 31 2,017,033 $28.30
========= ======
</TABLE>
At August 31, 1999, there were 901,303 shares exercisable and 1,657,630 shares
available for future grants. Outstanding options expire on various dates to
January 14, 2009.
INCOME TAXES
Federal income taxes for the interim periods ended August 31, 1999 and 1998,
have been included in the accompanying financial statements on the basis of an
estimated annual rate. The estimated annualized tax rate is 34.0% for 1999
compared with 33.6% for 1998. The primary reason that these respective tax
rates differ from the 35% statutory corporate rate is due to goodwill expense
which is not tax deductible, percentage depletion which is tax deductible and
the state income tax expense. The Company made income tax payments of $654,000
and $5.2 million in the three-month periods ended August 31, 1999 and 1998,
respectively.
-10-
<PAGE>
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 liable
for environment cleanup costs and related damages. Based on its experience, the
Company believes that currently known 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 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 of the Company.
Information regarding the Company's litigation against certain graphite
electrode suppliers is presented on page 16 under "Other Items" of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
-11-
<PAGE>
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 as of August 31, 1999 and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended August 31, 1999 and 1998. 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 generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Texas Industries, Inc. and
subsidiaries as of May 31, 1999, 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 16, 1999, 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, 1999, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
---------------------
September 21, 1999
-12-
<PAGE>
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, 1999 to the three-month period ended August 31, 1998.
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 its Steel
segment, the Company produces and sells structural steel, specialty bar
products, merchant bar-quality rounds, reinforcing bar and channels.
Corporate resources include administration, financial, legal, environmental,
personnel and real estate activities that are not allocated to operations and
are excluded from operating profit.
<TABLE>
<CAPTION>
Three months ended
August 31,
-------------------------------------------------------------
In thousands 1999 1998
-------------------------------------------------------------
<S> <C> <C>
TOTAL SALES
Cement $ 81,051 $ 76,144
Ready-mix 75,369 65,718
Stone, sand & gravel 28,623 27,353
Structural mills 99,670 89,308
Bar mill 25,027 36,970
UNITS SHIPPED
Cement (tons) 1,037 1,001
Ready-mix (cubic yards) 1,178 1,120
Stone, sand & gravel (tons) 5,158 5,314
Structural mills (tons) 340 212
Bar mill (tons) 75 103
NET SALES
Cement $ 59,778 $ 55,502
Ready-mix 75,214 65,529
Stone, sand & gravel 20,495 20,180
Other products 28,232 27,666
------- -------
TOTAL CAC 183,719 168,877
Structural mills 99,670 89,308
Bar mill 25,027 36,970
Transportation service and other 3,479 3,953
------- -------
TOTAL STEEL 128,176 130,231
------- -------
TOTAL NET SALES $ 311,895 $ 299,108
======= =======
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Three months ended
August 31,
-------------------------------------------------------------------------
In thousands 1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
CAC OPERATIONS
Gross profit $ 69,554 $ 63,702
Less: Depreciation, depletion &
amortization 9,749 8,955
Selling, general & administrative 11,354 9,364
Other income (301) (540)
------ ------
OPERATING PROFIT 48,752 45,923
STEEL OPERATIONS
Gross profit 8,814 24,702
Less: Depreciation & amortization 11,366 9,827
Selling, general & administrative 5,756 8,379
Other income (169) (500)
------ ------
OPERATING PROFIT (LOSS) (8,139) 6,996
------ ------
TOTAL OPERATING PROFIT 40,613 52,919
CORPORATE RESOURCES
Other income 450 1,384
Less: Depreciation & amortization 235 251
Selling, general & administrative 9,875 6,028
------ ------
(9,660) (4,895)
INTEREST EXPENSE (3,375) (4,291)
------ ------
INCOME BEFORE TAXES & OTHER ITEMS $ 27,578 $ 43,733
====== ======
</TABLE>
RESULTS OF OPERATIONS
Net Sales. Consolidated net sales for the August 1999 quarter were $311.9
million compared to $299.1 million for the prior year period. CAC sales at
$183.7 million were up 9% from the prior year. Cement sales increased $4.9
million with shipments and the average selling price both up 4%. Ready-mix
sales increased $9.7 million with volumes up 5% and the average selling price up
9%. Aggregate sales increased $1.3 million with average selling prices up 8% on
slightly lower shipments. Steel sales at $128.2 million were $2.1 million lower
than the prior year period. There continues to be strong demand for structural
products in North America. Structural steel shipments increased 60% but at a
30% lower average price. Announced price increases in August and September
should begin to positively impact sales in the second quarter. The bar market
continues to be highly competitive. Bar mill prices were 8% below the prior
year period with shipments 36% lower, although 27% above the May 1999 quarter.
Operating Costs. Consolidated cost of products sold including depreciation,
depletion and amortization was $253.5 million, an increase of $25.1 million over
the prior year period. CAC costs were $122.8 million, an increase of $9.7
million, due to increased cement and ready-mix shipments at higher unit costs
and increased aggregate production. Increased purchases of cement to balance
demand pushed unit cost higher. Steel costs of $130.7 million increased $15.4
million on increased shipments and the first month of operations in Virginia
with expected high cost and low production.
CAC selling, general and administrative expenses including depreciation and
amortization at $12.4 million increased $2.0 million over the prior year period
primarily due to higher incentive accruals. Steel expenses at $5.8 million were
$2.6 million below the prior year period due in part to lower selling expense
and incentive accruals.
-14-
<PAGE>
Operating Profit. Operating profit of $40.6 million for the August 1999 quarter
was $12.3 million below the prior year period. CAC operating profit was up 6%
due to increased cement and ready-mix shipments. Cement profit margins declined
slightly as increased selling prices were offset by higher unit costs. Steel
incurred an operating loss of $8.1 million for the August 1999 quarter compared
to an operating profit of $7.0 million for the prior year period. This reflects
the decline in structural beam prices experienced over the past year. Average
prices continued to decline from the May 1999 quarter as the Company regained
its market share. However, structural steel price increases were announced in
August and September that should have an impact in the second quarter. The
Company's new Virginia steel plant began operations in August 1999. It is
anticipated that start-up costs and higher than normal unit operating costs due
to lower production as the plant is brought on-line could adversely affect near
term results.
Corporate Resources. Selling, general and administrative expenses including
depreciation and amortization at $10.1 million increased $3.8 million due to
the ongoing costs of the Company's agreement to sell receivables, higher real
estate operating expenses and retirement accruals partially offset by lower
incentive accruals. Other income decreased $900,000 due to lower interest
income.
Interest Expense. Interest expense at $3.4 million was $900,000 lower than the
prior year period. The reduction was due to a $3.2 million increase in interest
capitalized that offset a $2.3 million increase in interest resulting from
higher average outstanding debt.
Income Taxes. The Company's current effective tax rate is estimated at 34.0%
compared to 33.6% in the prior year period. The primary reason that the tax
rate differs from the 35% statutory corporate rate is due to goodwill expense
that is not tax deductible, percentage depletion that is tax deductible and
state income tax expense.
Dividends on Preferred Securities - Net of Tax. Dividends on preferred
securities of subsidiary in the amount of $1.8 million net of tax benefit were
incurred due to the issuance of such securities in June 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $49.5 million, an increase of
$22.0 million over the prior year period primarily due to changes in working
capital items and higher depreciation, depletion and amortization expense that
was partially offset by lower net income. During the 1999 period, CAC sales
were up 4% from the May 1999 quarter, increasing receivables $6.6 million.
Inventories grew $4.2 million on increased production. Steel shipments in the
current quarter increased 11% over the May 1999 quarter, increasing receivables
$2.7 million and reducing inventories $13.8 million. During the prior year
period Steel shipments declined 27% from the May 1998 quarter, reducing
receivables $19.2 million and increasing inventories $41.8 million. Accounts
payable and accrued expenses increased $7.5 million in the 1999 period compared
to $23.2 million in the prior year. Due to the timing of scheduled interest and
tax payments, increases in accrued expenses normally occur in the August
quarter.
Net cash used by investing activities was $91.2 million compared to $124.5
million during the prior year period, consisting principally of capital
expenditure items. Historically, capital expenditures have consisted of normal
replacement and technological upgrades of existing equipment. The fiscal year
2000 capital expenditure budget is estimated at $120 million. Expenditures for
these activities were $11.8 million in the current period. Capital expenditures
for plant expansions included $40.2 million in the current period incurred in
completing the Company's Virginia steel facility. Production at this facility
began in August 1999. In addition, $39.4 million was incurred relating to the
expansion of the Company's Midlothian, Texas cement plant. Completion is
expected by the fall of 2000. The project will expand the production of the
plant from 1.3 to 2.8 million tons per year and require a capital commitment of
approximately $250 million.
-15-
<PAGE>
Net cash provided by financing activities was $32.1 million, compared to $108.5
million during the prior year period. During the current quarter, the Company
issued variable-rate industrial development bonds in the amount of $25 million.
The proceeds are available to reimburse construction costs that were incurred at
its Virginia steel plant. The Company also has available $20.2 million from its
May 1999 bond issue to reimburse future construction costs at its Midlothian
cement plant. The Company has a $450 million revolving credit facility that
expires in March 2004. At August 31, 1999, $124.5 million was outstanding under
the credit facility and an additional $113.6 million had been utilized to
support letters of credit. On June 5, 1998, TXI Capital Trust I, a Delaware
business trust wholly owned by the Company, issued 4,000,000 of its 5.5% Shared
Preference Redeemable Securities to the public. Net proceeds amounted to $193.6
million. The Company's quarterly cash dividend at $.075 per common share
remained unchanged from the prior year period.
The Company generally finances its major capital expansion projects with long-
term borrowing. Maintenance capital expenditures and working capital are funded
by cash flow from operations. The Company expects cash from operations,
proceeds from its industrial development bonds and borrowings under its
revolving credit facility to be sufficient to provide funds for capital
expenditures commitments, scheduled debt repayments and working capital needs
during the next two years.
OTHER ITEMS
Litigation. On November 25, 1998, Chaparral Steel Company, a wholly owned
subsidiary, filed an action seeking damages, trebled as allowed by law, plus
interest and costs, in the District Court of Ellis County, Texas against Showa
Denko Carbon, Inc. ("SDC"); Showa Financing, K.K.; Showa Denko, K.K.; The
Carbide/Graphite Group, Inc. ("CGG"); SGL Carbon Aktiengesellschaft; SGL Carbon
Corp.; UCAR Carbon Company, Inc. ("UCAR"), and UCAR International, Inc.
(collectively "Defendants") asserting causes of action for illegal restraints of
trade in the sale of graphite electrodes. In January 1999, SDC and its
affiliates settled with Chaparral Steel Company and were removed from the
action. In related criminal actions, two of the Defendants have pled guilty to
criminal violations of the U.S. Antitrust laws and have paid fines; and a third
Defendant has announced that it has agreed to cooperate with the U.S. Department
of Justice investigation into the graphite electrode industry in exchange for
immunity from criminal prosecution for it and some of its executives. For these
reasons, although the Company's action is still in its preliminary stages, the
Company believes that it should, subject to inherent uncertainties of
litigation, prevail in its claims against the remaining Defendants.
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 liable for environment cleanup costs and related damages.
Based on its experience, the Company believes that currently known 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.
Year 2000 Compliance. The Company created a task force comprised of
representatives from each of its 25 business units to identify Year 2000 issues.
An assessment of both the financial and management information systems and the
manufacturing process control, man-machine-interface and other operational
systems was conducted. Based on the results of that assessment, the task force
determined that modification or upgrading certain equipment and software would
be necessary. The task force members are actively engaged in, but have not yet
completed reviewing, correcting and testing all of the Year 2000 issues. In
addition, written contingency plans have been developed for all business units
and are continually being reassessed and updated.
-16-
<PAGE>
The Company began converting its computerized business systems in 1992 in order
to upgrade system capabilities and utilize current hardware and software
technology. To date, substantially all of these systems have been converted and
the Company believes them to be Year 2000 compliant. The Company has conducted
internal investigations of its manufacturing process control systems and other
devices with embedded microprocessor controls and is substantially complete with
the upgrade or replacement of time sensitive programs or microprocessors and
testing compliance. Completion of all phases of the work is expected by the end
of the November 1999 quarter. The Company believes that neither the cost of its
planned upgrade and modification program nor a failure to complete such program
will have a material impact on the operations or financial condition of the
Company. During 1999 approximately $1.0 million was incurred. Additional Year
2000 expense is estimated at less than $2 million.
To develop contingency plans the Company has contacted its critical suppliers
and others to determine the extent to which the Company would be vulnerable to
those third parties' failure to remediate their own Year 2000 issues. The
Company has received written assurances from the most critical business partners
and has not been informed of any material risks associated with other entities.
While the Company expects that it will not experience a disruption of its
operations, potential problem areas do exist which could materially affect
actual results. This would include the Company's inability to identify and
correct all computer codes or non-complying microprocessors embedded in other
digitally controlled equipment and the significant degree of interdependence
with third party suppliers, service providers and customers. In addition,
problems relating to the Company's dependency on public utilities,
transportation, postal, banking and telecommunication systems which are outside
of its control could disrupt the Company's ability to process orders,
manufacture and deliver finished goods, invoice customers or disburse or receive
funds.
The most reasonably likely worst case scenario with respect to the Company's own
operations would be a shut down of a production system caused by an unforeseen
problem with an automated monitoring or control device. The Company's
contingency planning continues to address risks and possible countermeasures
that include manual operation of control systems and equipment or the
replacement of certain equipment on an emergency basis. It is not possible,
however, to plan for all contingencies. The Company is unable to determine the
impact, material or otherwise, if other companies on which it relies do not
achieve Year 2000 compliance.
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 since May 31, 1999.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. Certain statements contained in this
report are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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 conditions on the
Company's business and its dependence on residential and commercial construction
activity, Year 2000 issues, and the impact of environmental laws and other
regulations.
-17-
<PAGE>
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
(27) Financial Data Schedule
This schedule contains summary financial information extracted from the
Registrant's Unaudited August 31, 1999 Consolidated Financial Statements and is
qualified in its entirety by reference to such financial statements.
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 did not file any reports on Form 8-K during the three-month
period ended August 31, 1999.
-18-
<PAGE>
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 12, 1999 /s/ Richard M. Fowler
- ---------------- ----------------------
Richard M. Fowler
Vice President - Finance and Chief Financial
Officer
(Principal Financial Officer)
October 12, 1999 /s/ James R. McCraw
- ---------------- --------------------
James R. McCraw
Vice President - Accounting and Information
Services
(Principal Accounting Officer)
-19-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Page
<S> <C>
15. Letter re: Unaudited Interim Financial Information................. 21
27. Financial Data Schedule............................................. **
</TABLE>
** Electronically filed only.
-20-
<PAGE>
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 and Post-
Effective Amendment Number 1 to Registration Statement Number 33-53715 on Form
S-8 of Texas Industries, Inc. and in the related Prospectuses of our report
dated September 21, 1999, relating 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, 1999.
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, 1999
Dallas, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED AUGUST 31, 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-END> AUG-31-1999
<CASH> 7,965
<SECURITIES> 0
<RECEIVABLES> 51,382
<ALLOWANCES> 3,083
<INVENTORY> 221,296
<CURRENT-ASSETS> 301,473
<PP&E> 1,791,795
<DEPRECIATION> 714,315
<TOTAL-ASSETS> 1,591,066
<CURRENT-LIABILITIES> 152,305
<BONDS> 490,691
25,067
200,000
<COMMON> 0
<OTHER-SE> 622,751
<TOTAL-LIABILITY-AND-EQUITY> 1,591,066
<SALES> 311,895
<TOTAL-REVENUES> 311,895
<CGS> 253,543
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