Texas Industries 10-Q 2006 Q3 Quarterly report

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 February 28, 2006

¨ 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 incorporation or organization)	(IRS Employer Identification No.)

1341 West Mockingbird Lane, Suite 700W, Dallas, Texas 75247-6913

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (972) 647-6700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  x Accelerated Filer  ¨ Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 23,135,179 shares of the Registrant’s Common Stock, $1.00 par value, outstanding as of March 27, 2006.

INDEX

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – February 28, 2006 and May 31, 2005	3
	Consolidated Statements of Operations — three months and nine months ended February 28, 2006 and February 28, 2005	4
	Consolidated Statements of Cash Flows — nine months ended February 28, 2006 and February 28, 2005	5
	Notes to Consolidated Financial Statements	6
	Report of Independent Registered Public Accounting Firm	26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
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	34
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	35
SIGNATURES		36

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CONSOLIDATED BALANCE SHEETS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

	(Unaudited)
In thousands	February 28, 2006			May 31, 2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	80,194		$	251,600
Short-term investments		48,584			—
Accounts receivable – net		110,019			117,363
Inventories		103,553			83,291
Deferred income taxes and prepaid expenses		26,946			28,754
TOTAL CURRENT ASSETS		369,296			481,008
OTHER ASSETS
Goodwill		58,395			61,307
Real estate and investments		104,508			100,200
Deferred income taxes, intangibles and other charges		38,790			27,571
Net assets of discontinued operations		—			836,100
		201,693			1,025,178
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements		132,923			131,911
Buildings		45,235			45,847
Machinery and equipment		688,580			682,962
Construction in progress		62,415			22,096
		929,153			882,816
Less depreciation and depletion		490,132			470,163
		439,021			412,653
	$	1,010,010		$	1,918,839
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	75,111		$	58,022
Accrued interest, wages and other items		33,412			49,449
Current portion of long-term debt		683			688
TOTAL CURRENT LIABILITIES		109,206			108,159
LONG-TERM DEBT		251,848			603,126
CONVERTIBLE SUBORDINATED DEBENTURES		199,937			199,937
DEFERRED INCOME TAXES AND OTHER CREDITS		61,079			80,050
SHAREHOLDERS’ EQUITY
Common stock, $1 par value		25,067			25,067
Additional paid-in capital		293,688			285,313
Retained earnings		129,576			686,476
Cost of common stock in treasury		(52,668	)		(61,566	)
Pension liability adjustment		(7,723	)		(7,723	)
		387,940			927,567
	$	1,010,010		$	1,918,839

See notes to consolidated financial statements.

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(Unaudited)

CONSOLIDATED STATEMENTS OF OPERATIONS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

	Three months ended February 28,						Nine months ended February 28,
In thousands except per share	2006			2005			2006			2005
NET SALES	$	216,763		$	181,039		$	679,411		$	584,710
COSTS AND EXPENSES (INCOME)
Cost of products sold		179,397			164,238			571,553			508,005
Selling, general and administrative		20,487			17,515			58,547			57,028
Interest		7,340			5,648			24,455			15,822
Loss on debt retirements and spin-off charges		—			314			112,391			314
Other income		(5,274	)		(7,008	)		(17,576	)		(20,470	)
		201,950			180,707			749,370			560,699
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS		14,813			332			(69,959	)		24,011
Income taxes (benefit)		3,502			(1,150	)		(27,440	)		5,260
INCOME (LOSS) FROM CONTINUING     OPERATIONS		11,311			1,482			(42,519	)		18,751
Income from discontinued operations – net of income taxes		—			14,508			8,691			64,079
NET INCOME (LOSS)	$	11,311		$	15,990		$	(33,828	)	$	82,830
Basic earnings (loss) per share
Income (loss) from continuing operations	$	.49		$	.06		$	(1.85	)	$	.86
Income from discontinued operations		—			.65			.38			2.93
Net income (loss)	$	.49		$	.71		$	(1.47	)	$	3.79
Diluted earnings (loss) per share
Income (loss) from continuing operations	$	.47		$	.06		$	(1.85	)	$	.83
Income from discontinued operations		—			.63			.38			2.82
Net income (loss)	$	.47		$	.69		$	(1.47	)	$	3.65
Average shares outstanding
Basic		23,117			22,413			22,986			21,858
Diluted		27,628			23,231			22,986			22,674
Cash dividends per share	$	.075		$	.075		$	.225		$	.225

See notes to consolidated financial statements.

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(Unaudited)

CONSOLIDATED STATEMENTS OF CASH FLOWS

TEXAS INDUSTRIES, INC. AND SUBSIDIARIES

	Nine months ended February 28,
In thousands	2006			2005
CONTINUING OPERATIONS
Operating Activities
Income (loss) from continuing operations	$	(42,519	)	$	18,751
Adjustments to reconcile income (loss) from continuing operations to cash provided by continuing operating activities
Loss on debt retirements		107,006			—
Gain on asset disposals		(9,277	)		(6,154	)
Depreciation, depletion and amortization		33,373			34,728
Deferred income taxes (benefit)		(26,632	)		16,233
Income tax benefit from stock option exercises		—			8,000
Other - net		990			586
Changes in operating assets and liabilities
Accounts receivable - net		7,239			11,189
Inventories		(20,262	)		1,135
Prepaid expenses		393			1,463
Accounts payable and accrued liabilities		(512	)		6,277
Other credits		4,201			2,020
Cash provided by continuing operating activities		54,000			94,228
Investing Activities
Capital expenditures – expansions		(36,061	)		(1,518	)
Capital expenditures – other		(27,512	)		(31,583	)
Proceeds from asset disposals		14,509			6,444
Purchases of short-term investments		(48,500	)		(500	)
Investments in life insurance contracts		(4,071	)		(58,676	)
Other - net		(2,015	)		(659	)
Cash used by continuing investing activities		(103,650	)		(86,492	)
Financing Activities
Long-term borrowings		250,000			—
Debt retirements		(600,353	)		(357	)
Debt issuance costs		(7,356	)		—
Debt retirement costs		(96,029	)		—
Interest rate swap terminations		—			(6,315	)
Stock option exercises		7,028			39,565
Common dividends paid		(5,172	)		(4,939	)
Other - net		—			—
Cash provided (used) by continuing financing activities		(451,882	)		27,954
Net Cash Provided (Used) by Continuing Operations		(501,532	)		35,690
DISCONTINUED OPERATIONS
Cash provided (used) by discontinued operating activities		(7,704	)		7,313
Cash used by discontinued investing activities		(2,757	)		(15,932	)
Cash provided by discontinued financing activities		340,587			—
Net Cash Provided (Used) by Discontinued Operations		330,126			(8,619	)
Increase (Decrease) in Cash and Cash Equivalents		(171,406	)		27,071
Cash and Cash Equivalents at Beginning of Period		251,600			133,053
Cash and Cash Equivalents at End of Period	$	80,194		$	160,124

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Texas Industries, Inc. and subsidiaries (unless the context indicates otherwise, collectively, the “Company” or “TXI”) is a leading supplier of construction materials. On July 29, 2005, the Company completed the spin-off of its steel segment in the form of a pro-rata, tax-free dividend to the Company’s shareholders of one share of Chaparral Steel Company (“Chaparral”) common stock for each share of the Company’s stock that was owned on July 20, 2005. The Company’s continuing operations constitute a single business segment which produces and sells cement, stone, sand and gravel, ready-mix concrete, expanded shale and clay aggregate, and other products from facilities concentrated in Texas, Louisiana and California.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and 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 nine-month period ended February 28, 2006, are not necessarily indicative of the results that may be expected for the year ended May 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Current Report on Form 8-K dated November 15, 2005.

Principles of Consolidation. The consolidated financial statements include the accounts of Texas Industries, Inc. and all subsidiaries except a subsidiary trust in which the Company has a variable interest but is not the primary beneficiary. As a result of the spin-off of the steel segment the prior period financial statements have been reclassified to present the steel segment as discontinued operations. See “Discontinued Operations” footnote on pages 18 and 19. Unless otherwise indicated, all amounts in the accompanying footnotes relate to continuing operations.

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.

Cash and Cash Equivalents. Investments with maturities of less than 90 days when purchased are classified as cash equivalents and consist primarily of money market funds and investment grade commercial paper issued by major corporations and financial institutions.

Short-Term Investments.The Company’s short-term investments consist of investment grade auction rate securities with an active resale market to ensure liquidity and the ability to be readily converted into cash to fund current operations, or satisfy other cash requirements as needed. These securities have legal maturities ranging from 19 to 38 years, but have their interest rates reset at predetermined intervals, typically less than 30 days, through an auction process. These securities are expected to be sold within one year, regardless of their legal maturity date. Accordingly, these securities have been classified as available-for-sale and as current assets in the consolidated balance sheet as of February 28, 2006. The auction rate securities are stated at cost plus accrued interest which approximates fair value. Net unrealized gains and losses, net of deferred taxes, are not significant due to the short duration between interest rate reset dates. Purchase and sale activity of short-term investments is presented as cash flows from investing activities in the consolidated statements of cash flows.

Receivables.Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If the Company is aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve.

Environmental Liabilities.The Company is subject to environmental laws and regulations established by federal, state and local authorities, and makes provision for the estimated costs related to compliance when it is probable that a reasonably estimable liability has been incurred.

Legal Contingencies.The Company and its subsidiaries are defendants in lawsuits which arose in the normal course of business, and make provision for the estimated loss from any claim or legal proceeding when it is probable that a reasonably estimable liability has been incurred.

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Long-lived Assets.Management reviews long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by estimates of future prices for the Company’s products, capital needs, economic trends and other factors.

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 25 years. Maintenance and repairs are charged to expense as incurred.

Goodwill. Management tests goodwill for impairment at least annually by reporting unit. If the carrying amount of the goodwill exceeds its fair value an impairment loss is recognized. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for the Company’s products, capital needs, economic trends and other factors. Goodwill having a carrying value of $58.4 million at February 28, 2006 and $61.3 million at May 31, 2005 resulted from the acquisition of Riverside Cement Company and is identified with the Company’s California cement operations. During the nine-month period ended February 28, 2006 goodwill was adjusted to recognize a deferred tax asset in the amount of $2.9 million related to the acquisition. The fair value of the reporting unit exceeds its carrying value.

Real Estate and Investments.Surplus real estate and real estate acquired for development of high quality industrial, office or multi-use parks totaled $8.1 million at February 28, 2006 and $9.2 million at May 31, 2005.

Investments are composed primarily of life insurance contracts purchased in connection with certain Company benefit plans. The contracts, recorded at their net cash surrender value, totaled $95.9 million (net of distributions of $1.3 million) at February 28, 2006 and $89.4 million (net of distributions of $1.3 million) at May 31, 2005. During the nine-month period ended February 28, 2005 distributed amounts totaling $51.2 million were repaid.

Deferred Charges and Intangibles.Deferred charges are composed primarily of debt issuance costs that totaled $11.6 million at February 28, 2006 and $17.3 million at May 31, 2005. The costs are associated with various debt issues and amortized over the term of the related debt.

Intangibles are composed of non-compete agreements and other intangibles with finite lives being amortized on a straight-line basis over periods of 7 to 15 years. Their carrying value, adjusted for write-offs, totaled $1.5 million (net of accumulated amortization of $2.9 million) at February 28, 2006 and $1.8 million (net of accumulated amortization of $2.6 million) at May 31, 2005. Amortization expense incurred was $300,000 in both nine-month periods ended February 28, 2006 and 2005. Estimated amortization expense for each of the five succeeding years is $300,000 per year.

Other Credits.Other credits composed primarily of liabilities related to the Company’s retirement plans, deferred compensation agreements and asset retirement obligations totaled $60.4 million at February 28, 2006 and $57.8 million at May 31, 2005.

Asset Retirement Obligations.Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which applies to legal obligations associated with the retirement of long-lived assets, requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through a charge to operating expense. A gain or loss on settlement is recognized if the obligation is settled for other than the carrying amount of the liability.

The Company incurs legal obligations for asset retirement as part of its normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. Determining the amount of an asset retirement liability requires estimating the future cost of contracting with third parties to perform the obligation. The estimate is significantly impacted by, among other considerations, management’s assumptions regarding the scope of the work required, labor costs, inflation rates, market-risk premiums and closure dates.

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Changes in the Company’s asset retirement obligations are as follows:

	Nine months ended February 28,
In thousands	2006			2005
Balance at beginning of period	$	4,655		$	4,455
Additions		5			—
Accretion expense		246			236
Settlements		(585	)		(222	)
Balance at end of period	$	4,321		$	4,469

Pension Liability Adjustment.The pension liability adjustment to shareholders’ equity of $7.7 million (net of tax of $4.2 million) at both February 28, 2006 and May 31, 2005 relates to a defined benefit retirement plan covering approximately 600 employees and retirees of the Company’s California cement subsidiary. Comprehensive income or loss consists of net income or loss and the pension liability adjustment to shareholders’ equity. Comprehensive income (loss) was the same as net income (loss) for the three-month and nine-month periods ended February 28, 2006 and 2005.

Net Sales. The Company recognizes sales when title has transferred and products are delivered. All of the Company’s sales were made in the United States during the periods presented. The Company includes delivery fees in the amount it bills customers to the extent needed to recover the Company’s cost of freight and delivery. Net sales are presented as revenues including these delivery fees. The following is a summary of net sales by product.

	Three months ended February 28,				Nine months ended February 28,
In thousands	2006		2005		2006		2005
Cement	$	86,880	$	71,312	$	267,512	$	240,179
Stone, sand and gravel		25,132		22,638		82,577		68,542
Ready-mix		59,676		47,680		195,806		157,310
Other products		27,116		22,095		75,790		67,794
Delivery fees		17,959		17,314		57,726		50,885
	$	216,763	$	181,039	$	679,411	$	584,710

Other Income.Routine sales of surplus operating assets and real estate resulted in gains of $3.0 million and $3.8 million in the three-month periods ended February 28, 2006 and 2005, respectively, and $7.6 million and $8.5 million in the nine-month periods ended February 28, 2006 and 2005, respectively. In addition, other income in the nine-month period ended February 28, 2006 includes a gain of $3.8 million resulting from the sale of certain investment assets. Other income in the nine-month period ended February 28, 2005 includes a gain of $6.2 million resulting from the sale of emissions credits associated with the Company’s expanded shale and clay operations in south Texas.

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.

Contingently issuable shares relate to deferred compensation agreements in which directors elected to defer annual and meeting fees and vested shares under the Company’s former stock awards program. The deferred compensation is denominated in shares of the Company’s common stock and issued in accordance with the terms of the agreement subsequent to retirement or separation from the Company or with the approval of the Compensation Committee of the Board of Directors. The shares are considered contingently issuable because the director has an unconditional right to the shares to be issued. Vested stock award shares are issued in the year in which the employee reaches age 60.

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Diluted EPS adjusts income from continuing operations and the outstanding shares for the dilutive effect of convertible subordinated debentures, stock options and awards.

Basic and Diluted EPS are calculated as follows:

	Three months ended February 28,				Nine months ended February 28,
In thousands except per share	2006		2005		2006			2005
Basic earnings (loss)
Income (loss) from continuing operations	$	11,311	$	1,482	$	(42,519	)	$	18,751
Income from discontinued operations		—		14,508		8,691			64,079
Net income (loss)	$	11,311	$	15,990	$	(33,828	)	$	82,830
Diluted earnings (loss)
Income (loss) from continuing operations	$	11,311	$	1,482	$	(42,519	)	$	18,751
Interest on convertible subordinated debentures—net of tax		1,787		—		—			—
Diluted income (loss) from continuing operations		13,098		1,482		(42,519	)		18,751
Income from discontinued operations		—		14,508		8,691			64,079
Diluted income (loss)	$	13,098	$	15,990	$	(33,828	)	$	82,830
Shares
Weighted-average shares outstanding		23,089		22,378		22,957			21,807
Contingently issuable shares		28		35		29			51
Basic weighted-average shares		23,117		22,413		22,986			21,858
Convertible subordinated debentures		3,897		—		—			—
Dilutive effect of stock options and awards		614		818		—			816
Diluted weighted-average shares*		27,628		23,231		22,986			22,674
Basic earnings (loss) per share
Income (loss) from continuing operations	$	.49	$	.06	$	(1.85	)	$	.86
Income from discontinued operations		—		.65		.38			2.93
Net income (loss)	$	.49	$	.71	$	(1.47	)	$	3.79
Diluted earnings (loss) per share
Income (loss) from continuing operations	$	.47	$	.06	$	(1.85	)	$	.83
Income from discontinued operations		—		.63		.38			2.82
Net income (loss)	$	.47	$	.69	$	(1.47	)	$	3.65
*       Shares excluded due to antidilutive effect
Convertible subordinated debentures		—		2,888		3,897			2,888
Stock options and awards		—		—		731			173

Stock-based Compensation.The Company accounts for employee stock options using the intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” as allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” Generally, no expense is recognized related to the Company’s stock options because the exercise price of each option is set at the fair market value of the underlying common stock on the date the option is granted.

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In accordance with SFAS No. 123, the Company discloses the compensation cost, recognized ratably over the shorter of the vesting period or required service period, based on the estimated fair value at the date of grant. The fair value of each option grant was estimated on the date of grant for purposes of the pro forma disclosures using the Black-Scholes option-pricing model. In the nine-month period ended February 28, 2006, the weighted-average fair value of options granted was $20.46 based on weighted average assumptions for dividend yield of .58%, volatility factor of .338, risk-free interest rate of 4.31% and expected life in years of 6.4.

In addition to grants under its stock option plans, the Company has provided stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program. Stock compensation expense related to these grants is included in the determination of net income as reported in the financial statements over the vesting periods of the related grants.

If the Company had applied the fair value recognition provision of SFAS No. 123, the Company’s net income (loss) and earnings (loss) per share would have been adjusted to the following pro forma amounts:

	Three months ended February 28,						Nine months ended February 28,
In thousands except per share	2006			2005			2006			2005
Net income (loss)
As reported	$	11,311		$	15,990		$	(33,828	)	$	82,830
Plus: stock-based compensation included in the determination of net income (loss) as reported, net of tax		1,748			933			4,215			2,677
Less: fair value of stock-based compensation, net of tax		(2,424	)		(748	)		(4,454	)		(2,645	)
Pro forma	$	10,635		$	16,175		$	(34,067	)	$	82,862
Basic earnings (loss) per share
As reported	$	.49		$	.71		$	(1.47	)	$	3.79
Pro forma		.46			.72			(1.48	)		3.79
Diluted earnings (loss) per share
As reported	$	.47		$	.69		$	(1.47	)	$	3.65
Pro forma		.45			.70			(1.48	)		3.65

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB Opinion No. 25. Among other items, SFAS No. 123R eliminates the use of APB Opinion No. 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The current effective date of SFAS No. 123R is the first fiscal year beginning after June 15, 2005, which will be the first quarter of the Company’s fiscal year ending May 31, 2007. We currently expect to adopt SFAS No. 123R effective June 1, 2006 using the “modified prospective” method. Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Financial information for periods prior to the date of adoption of SFAS No. 123R would not be restated. The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. The Company has not yet determined which model it will use to measure the fair value of awards of equity instruments to employees upon the adoption of SFAS No. 123R.

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The adoption of SFAS No. 123R will not have an impact on the Company’s consolidated financial position. Although the impact of SFAS No. 123R on the Company’s results of operations can not be predicted at this time, because it will depend on the number of equity awards granted in the future, as well as the model used to value the awards, it is expected to have a significant effect on the Company’s future results of operations. However, had the Company adopted the requirements of SFAS No. 123R in prior periods, the impact would have approximated the amounts disclosed in the table above.

SFAS No. 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options.

Accounting for Changes in Accounting Principles.In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, “Accounting Changes and Error Corrections,” which is effective for the Company for reporting changes in accounting principles beginning June 1, 2006. SFAS No. 154 modifies the reporting of a change in accounting principle to require retrospective application to prior periods’ financial statements, unless explicit transition provisions are provided for in new accounting pronouncements or existing pronouncements that are in the transition phase when SFAS No. 154 becomes effective.

Accounting for Mining Stripping Costs.In March 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6, “Accounting for Stripping Costs Incurred during Production in the Mining Industry,” which will become effective for the Company beginning June 1, 2006. EITF 04-06 requires that stripping costs incurred during the production phase of the mine be included in the costs of the inventory produced during the period that the stripping costs are incurred. Although dependent in part on the future level of post-production stripping activity which varies from period to period, the Company does not expect that the adoption of EITF 04-6 will have a material impact on its financial position or results of operations.

WORKING CAPITAL

Working capital totaled $260.1 million at February 28, 2006, compared to $372.8 million at May 31, 2005.

Accounts receivable are presented net of allowances for doubtful receivables of $2.4 million at February 28, 2006 and $2.2 million at May 31, 2005. Provisions for bad debts charged to expense were $500,000 in both nine-month periods ended February 28, 2006 and 2005, respectively. Uncollectible accounts written off amounted to $400,000 and $2.3 million in the nine-month periods ended February 28, 2006 and 2005, respectively.

Inventories consist of:

In thousands	February 28, 2006		May 31, 2005
Finished products	$	8,849	$	6,353
Work in process		44,542		34,273
Raw materials and supplies		50,162		42,665
	$	103,553	$	83,291

Inventories are stated at cost (not in excess of market) with approximately 68% of inventories using the last-in, first-out (“LIFO”) method. If the average cost method (which approximates current replacement cost) had been used, inventory values would have been higher by $17.9 million at February 28, 2006 and $16.8 million at May 31, 2005.

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In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will become effective for the Company beginning June 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations.

Accrued interest, wages and other items consist of:

In thousands	February 28, 2006		May 31, 2005
Interest	$	4,366	$	8,908
Employee compensation		18,650		27,919
Income taxes		—		2,036
Property taxes and other		10,396		10,586
	$	33,412	$	49,449

LONG-TERM DEBT

Long-term debt is comprised of the following:

In thousands	February 28, 2006		May 31, 2005
Senior secured revolving credit facility expiring in 2010	$	—	$	—
Senior notes due 2013, interest rate 7.25%		250,000		—
Pollution control bonds due through 2007, interest rate 5.625% (75% of prime)		2,155		2,495
Refinanced debt		—		600,932
Other		376		387
		252,531		603,814
Less current maturities		683		688
	$	251,848	$	603,126

Refinancing in Connection with the Spin-off of Chaparral.In connection with the spin-off of Chaparral in July 2005 (see “Discontinued Operations” footnote on pages 18 and 19), the Company entered into new financing agreements and purchased the outstanding $600 million aggregate principal amount of its 10.25% senior notes due 2011 (“10.25% Senior Notes”). On July 6, 2005, the Company issued $250 million aggregate principal amount of its new 7.25% senior notes due July 15, 2013 (“7.25% Senior Notes”) and entered into a new senior secured revolving credit facility. In addition, Chaparral issued $300 million aggregate principal amount of its new senior notes due 2013 (“Chaparral Senior Notes”) and entered into a separate new senior secured revolving credit facility. Chaparral used the net proceeds from its note offering and borrowings under its credit facility to pay the Company a dividend of $341.1 million. The Company used the net proceeds from its offering of notes, the dividend paid by Chaparral and existing cash to purchase for cash all of its outstanding $600 million aggregate principal amount of 10.25% Senior Notes. The Company paid a total of $699.5 million to the holders of the 10.25% Senior Notes, which was comprised of $600 million of principal, $3.6 million of accrued interest and $95.9 million of make-whole premiums and consent fees. In the current nine-month period, the Company recorded a charge of $107.0 million related to the early retirement of the 10.25% Senior Notes and old credit facility, consisting of $96.0 million in premiums or consent payments and transaction costs and a write-off of $11.0 million of debt issuance costs and interest rate swap gains and losses associated with the debt repaid. On July 29, 2005, Chaparral became an independent, public company and the Company has no obligations with respect to Chaparral’s long-term debt. Chaparral is not a guarantor of any of the Company’s indebtedness nor is the Company a guarantor of any Chaparral indebtedness.

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7.25% Senior Notes.At any time on or prior to July 15, 2009, the Company may redeem the notes at a redemption price equal to the sum of the principal amount thereof, plus accrued interest and a make-whole premium. On and after July 15, 2009, the Company may redeem the notes at a premium of 103.625% in 2009, 101.813% in 2010 and 100% in 2011 and thereafter. In addition, prior to July 15, 2008, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 107.25% of the principal amount thereof, plus accrued interest with the net cash proceeds from certain equity offerings.

If the Company experiences a change of control, it may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued interest.

All of the Company’s consolidated subsidiaries have unconditionally guaranteed the 7.25% Senior Notes. The indenture governing the notes contains covenants that will limit the Company’s ability and the ability of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions or repurchase or redeem its stock, make investments, sell assets, incur liens, enter into agreements restricting its subsidiaries’ ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of its assets.

Senior Secured Revolving Credit Facility.The senior secured revolving credit facility expires in July 2010 and provides up to $200 million of available borrowings. It includes a $50 million sub-limit for letters of credit. Any outstanding letters of credit are deducted from the borrowing availability under the facility. At February 28, 2006, $27.3 million of the facility was utilized to support letters of credit. Amounts drawn under the facility bear interest either at the LIBOR rate plus a margin of 1% to 2%, or at a base rate (which is the higher of the federal funds rate plus 0.5% and the prime rate) plus a margin of up to 1%. The interest rate margins are subject to adjustments based on the Company’s leverage ratio. Commitment fees are payable currently at an annual rate of 0.375% on the unused portion of the facility. The Company may terminate the facility at any time.

All of the Company’s consolidated subsidiaries have guaranteed the Company’s obligations under the credit facility. The credit facility is secured by first priority security interests in all or most of the Company’s existing and future accounts, inventory, equipment, intellectual property and other personal property, and in all of the Company’s equity interest in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries.

The credit facility contains covenants restricting, among other things, prepayment or redemption of the Company’s new senior notes, distributions, dividends and repurchases of capital stock and other equity interests, acquisitions and investments, indebtedness, liens and affiliate transactions. The Company is required to comply with certain financial tests and to maintain certain financial ratios, such as leverage and interest coverage ratios. At February 28, 2006, the Company was in compliance with all of its loan covenants.

Other.Maturities of long-term debt for each of the five succeeding years are $700,000 for 2007, $1.5 million for 2008 and none for 2009 through 2011. Interest paid was $52.7 million and $66.6 million in the nine-month periods ended February 28, 2006 and 2005, respectively. Interest capitalized was $500,000 in the three-month and nine-month periods ended February 28, 2006. No interest was capitalized in the prior year periods.

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CONVERTIBLE SUBORDINATED DEBENTURES

On June 5, 1998, the Company issued $206.2 million aggregate principal amount of 5.5% convertible subordinated debentures due June 30, 2028 (the “Debentures”). TXI Capital Trust I (the “Trust”), a Delaware business trust 100% 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 the Debentures which are the sole assets of the Trust. At February 28, 2006, 3,998,744 Preferred Securities, representing an undivided beneficial interest in $199.9 million of the $206.1 million aggregate principal amount of Debentures, were outstanding.

The Debentures are redeemable for cash, at par, plus accrued and unpaid interest, under certain circumstances relating to federal income tax matters or in whole or in part at the option of the Company. Upon any redemption of the Debentures, a like aggregate liquidation amount of Preferred Securities will be redeemed. Debentures are convertible at any time prior to the close of business on June 30, 2028, at the option of the holder of the Preferred Securities into shares of the Company’s common stock. On July 29, 2005, due to the spin-off of Chaparral the conversion rate was adjusted from 0.72218 shares to 0.97468 shares of the Company’s common stock for each Preferred Security.

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 not paid by the Trust (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 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.

SHAREHOLDERS’ EQUITY

Common stock consists of:

In thousands	February 28, 2006	May 31, 2005
Shares authorized	40,000	40,000
Shares outstanding	23,129	22,728
Shares held in treasury	1,938	2,339
Shares reserved for stock options and other	3,675	4,036

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. No shares of Cumulative Preferred Stock or Series B Junior Participating Preferred Stock were outstanding as of February 28, 2006. 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.

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STOCK-BASED COMPENSATION

Stock Option Plans.The Texas Industries, Inc. 2004 Omnibus Equity Compensation Plan (the “2004 Plan”) provides that, in addition to other types of awards, non-qualified and incentive stock options to purchase Common Stock may be granted to employees and non-employee directors at market prices at date of grant. Options become exercisable in installments beginning one year after date of grant and expire ten years later. In addition, non-qualified and incentive stock options remain outstanding under the Company’s 1993 Stock Option Plan.

A summary of option transactions for the nine-month period ended February 28, 2006, follows:

	Shares Under Option		Weighted-Average Option Price
Outstanding at May 31, 2005	1,736,050		$	33.48
Spin-off share adjustment	443,462			—
Granted	223,500			51.71
Exercised	(432,276	)		24.66
Canceled	(358,569	)		32.17
Outstanding at February 28, 2006	1,612,167		$	29.45
Exercisable at February 28, 2006	812,618		$	26.10

Non-vested options held by Chaparral’s employees and new directors were cancelled on July 29, 2005 in connection with the spin-off of Chaparral. Options held by the Company’s continuing employees and directors and vested options held by Chaparral’s employees and new directors were adjusted based on the closing share prices of the Company and Chaparral on July 29, 2005. Outstanding options expire on various dates to January 18, 2016. The Company has reserved 2,048,995 shares for future awards under the 2004 Plan.

Other Stock-based Compensation.The Company has provided stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program. At February 28, 2006, outstanding Stock Appreciation Rights totaled 161,311 shares, deferred compensation agreements payable in cash totaled 97,826 shares, deferred compensation agreements payable in common stock totaled 4,231 shares and stock awards totaled 10,020 shares. Total charges under these grants and restricted stock payments included in selling, general and administrative expense were $2.7 million and $1.4 million in the three-month periods ended February 28, 2006 and 2005, respectively, and $6.5 million and $4.1 million in the nine-month periods ended February 28, 2006 and 2005, respectively.

INCOME TAXES

Federal income taxes for the interim periods ended February 28, 2006 and 2005, have been included in the accompanying financial statements on the basis of an estimated annual rate for continuing operations. The estimated annualized rate for continuing operations does not include the tax impact of the loss on debt retirements and Chaparral spin-off charges. The estimated annualized rate for continuing operations, excluding these charges, is 27.1% for 2006 compared to 21.9% for 2005. The effective rate for discontinued operations is 35% for 2006 and 2005, and reflects Chaparral’s allocable share of such tax as prescribed in the tax sharing agreement between the Company and Chaparral. The Company made income tax payments of $4.3 million and $8.9 million in the nine-month periods ended February 28, 2006 and 2005, respectively.

The American Jobs Creation Act of 2004, among other things, allows a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The Company is currently evaluating the impact of the new law on its future taxable income for the applicable years, but does not anticipate a benefit for the current year because of an expected taxable loss for the year.

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LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES

The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions 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 its subsidiaries are defendants in lawsuits which arose in the normal course of business. In management’s judgment 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.

In connection with the Company’s spin-off of Chaparral, the Company entered into a separation and distribution agreement and a tax sharing and indemnification agreement with Chaparral. In these agreements, the Company has indemnified Chaparral against, among other things, any liabilities arising out of the businesses, assets or liabilities retained by the Company and any taxes imposed on Chaparral in connection with the spin-off that result from the Company’s breach of its covenants in the tax sharing and indemnification agreement. Chaparral has indemnified the Company against, among other things, any liabilities arising out of the businesses, assets or liabilities transferred to Chaparral and any taxes imposed on the Company in connection with the spin-off that result from Chaparral’s breach of its covenants in the tax sharing and indemnification agreement.

The Company and Chaparral have made certain covenants to each other in connection with the spin-off that prohibit the Company and Chaparral from taking certain actions. Pursuant to these covenants: (1) neither the Company nor Chaparral will liquidate, merge, or consolidate with any other person, sell, exchange, distribute or otherwise dispose of its assets (or those of certain of its subsidiaries) except in the ordinary course of business, or enter into any substantial negotiations, agreements, or arrangements, or arrangements with respect to any such transaction, during the six months following the distribution date of July 29, 2005; (2) the Company and Chaparral will, for a minimum of two years after the distribution date, continue the active conduct of the cement or steel business, respectively; (3) neither the Company nor Chaparral will repurchase its stock for two years following the distribution except in certain circumstances permitted by the IRS; (4) the Company and Chaparral will not take any actions inconsistent with the representations made in the separation and distribution agreement or in connection with the issuance by the Company’s tax counsel of its tax opinion with respect to the spin-off; and (5) the Company and Chaparral will not take or fail to take any other action that would result in any tax being imposed on the spin-off. The Company or Chaparral may take actions inconsistent with these covenants if it obtains an unqualified opinion of counsel or a private letter ruling from the IRS that such actions will not cause the spin-off to become taxable, except that Chaparral may not, under any circumstances, take any action described in (1) above.

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RETIREMENT PLANS

Approximately 600 employees and retirees of Riverside Cement Company are covered by a defined benefit pension plan and a postretirement health benefit plan. The amount of the defined benefit pension plan and postretirement health benefit plan expense charged to costs and expenses in the three-month and nine-month periods ended February 28, 2006 and 2005, are as follows:

	Pension Benefit						Health Benefit
In thousands	2006			2005			2006			2005
Three months ended February 28
Service cost	$	143		$	109		$	27		$	23
Interest cost		624			644			87			123
Expected return on plan assets		(691	)		(611	)		—			—
Amortization of prior service cost		—			—			(212	)		(211	)
Amortization of net actuarial loss		264			125			185			226
	$	340		$	267		$	87		$	161
Nine months ended February 28
Service cost	$	429		$	327		$	80		$	69
Interest cost		1,872			1,932			260			369
Expected return on plan assets		(2,073	)		(1,832	)		—			—
Amortization of prior service cost		—			—			(634	)		(633	)
Amortization of net actuarial loss		791			375			554			678
	$	1,019		$	802		$	260		$	483

The Company has a series of financial security plans (“FSP”) that are non-qualified defined benefit plans providing retirement and death benefits to substantially all of the Company’s executive and key managerial employees. The plans are contributory but not funded.

The amount of FSP benefit expense charged to costs and expenses in the three-month and nine-month periods ended February 28, 2006 and 2005, are as follows:

	FSP Benefit
In thousands	2006			2005
Three months ended February 28
Service cost	$	487		$	415
Interest cost		418			347
Amortization of transition amount		—			41
Participant contributions		(79	)		(70	)
	$	826		$	733
Nine months ended February 28
Service cost	$	1,462		$	1,245
Interest cost		1,254			1,041
Amortization of transition amount		—			124
Participant contributions		(231	)		(219	)
	$	2,485		$	2,191

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DISCONTINUED OPERATIONS

On December 15, 2004, the Company’s board of directors adopted a plan to spin-off the Company’s steel operations, which was completed on July 29, 2005. In anticipation of the spin-off, the Company entered into the following transactions:

The Company formed Chaparral Steel Company as a wholly-owned subsidiary. On June 25, 2005, the Company contributed to Chaparral all of its subsidiaries engaged in the steel business. On July 6, 2005, the Company contributed or transferred to Chaparral real estate and transportation assets used in the steel business. Chaparral assumed all liabilities arising out of the steel business and the transferred assets.

At various times the Company settled intercompany indebtedness between and among the Company and its subsidiaries, including its subsidiaries engaged in the steel business. The Company settled these accounts through offsets, contributions of such indebtedness to the capital of the debtor subsidiaries and other non-cash transfers. By the effective date of the spin-off, the Company had contributed to the capital of Chaparral and its subsidiaries the net intercompany indebtedness owed to it by Chaparral and its subsidiaries.

On July 6, 2005, the Company issued $250 million principal amount of its 7.25% Senior Notes, entered into a new $200 million senior secured revolving credit facility with a syndicate of lenders, and terminated its then existing credit facility. The Company received net proceeds from the note offering of $245.0 million. The terms of the new 7.25% Senior Notes and credit facility are more fully described in the “Long-term Debt” footnote on pages 12 and 13.

On July 6, 2005, Chaparral issued $300 million principal amount of senior notes and entered into a new $150 million credit facility. Chaparral used the net proceeds from its note offering and borrowings under its credit facility to pay the Company a dividend of $341.1 million.

On July 6, 2005, the Company used the net proceeds from its offering of notes, the dividend paid by Chaparral and existing cash to purchase for cash all of its outstanding $600 million principal amount of 10.25% Senior Notes. The Company paid a total of $699.5 million to the holders of the 10.25% Senior Notes, which was comprised of $600 million of principal, $3.6 million of accrued interest and $95.9 million of make-whole premiums and consent fees.

As a consequence of the spin-off:

On July 29, 2005, Chaparral became an independent, public company. The Company has no further ownership interest in Chaparral or in any steel business, and Chaparral has no ownership interest in the Company. In addition, Chaparral is not a guarantor of any of the Company’s indebtedness nor is the Company a guarantor of any Chaparral indebtedness. The Company’s relationship with Chaparral is now governed by a separation and distribution agreement and the ancillary agreements described in that agreement. The terms of the agreements are more fully described in the “Legal Proceedings and Contingent Liabilities” note on page 16.

In the current nine-month period the Company recorded a loss of $107.0 million related to the early retirement of the 10.25% Senior Notes and old credit facility and incurred $5.4 million in spin-off related charges.

Summarized financial information for discontinued operations is presented below:

	Three months ended February 28,				Nine months ended February 28,
In thousands	2006		2005		2006 (a)		2005
Net sales	$	—	$	259,119	$	198,893	$	799,019
Cost and expenses		—		236,789		185,509		700,415
Income before income/taxes		—		22,330		13,384		98,604
Income taxes		—		7,822		4,693		34,525
Income from discontinued operations	$	—	$	14,508	$	8,691	$	64,079

(a) Includes operations through July 29, 2005.

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The following is a summary of the assets and liabilities of discontinued operations as of the July 29, 2005 spin-off and prior year-end.

In thousands	July 29, 2005			May 31, 2005
Assets
Current assets	$	361,863		$	393,417
Property, plant and equipment – net		623,165			628,457
Goodwill		85,167			85,167
Other assets		16,742			7,586
		1,086,937			1,114,627
Liabilities
Current liabilities		72,089			130,757
Long-term debt		350,000			—
Deferred income taxes and other credits		146,949			147,770
		569,038			278,527
		517,899			836,100
Total distribution charged to retained earnings		(517,899	)		—
Net Assets of Discontinued Operations	$	—		$	836,100

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CONDENSED CONSOLIDATING FINANCIAL INFORMATION

On July 6, 2005, Texas Industries, Inc. (the parent company) issued $250 million principal amount of its 7.25% Senior Notes. All existing consolidated subsidiaries of the parent company are 100% owned and, excluding its Chaparral subsidiaries, provide a joint and several, full and unconditional guarantee of the securities. There are no significant restrictions on the parent company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the parent company or its direct or indirect subsidiaries.

The following condensed consolidating balance sheets, statements of operations and statements of cash flows are provided for the parent company, all guarantor subsidiaries and all non-guarantor subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor and non-guarantor subsidiaries using the equity method of accounting.

In thousands	Texas Industries, Inc.		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated
Condensed consolidating balance sheet at February 28, 2006
Cash and cash equivalents	$	79,360	$	834	$	—	$	—		$	80,194
Short-term investments		48,584		—		—		—			48,584
Accounts receivable - net		—		110,019		—		—			110,019
Intercompany receivables		3,203		114,479		—		(117,682	)		—
Inventories		—		103,553		—		—			103,553
Deferred income taxes and prepaid expenses		1,019		25,927		—		—			26,946
Total current assets		132,166		354,812		—		(117,682	)		369,296
Goodwill		—		58,395		—		—			58,395
Real estate and investments		95,926		8,582		—		—			104,508
Deferred income taxes, intangibles and other charges		63,866		6,884		—		(31,960	)		38,790
Net assets of discontinued operations		—		—		—		—			—
Investment in subsidiaries		650,271		—		—		(650,271	)		—
Long-term intercompany receivables		50,000		—		—		(50,000	)		—
Property, plant and equipment—net		—		439,021		—		—			439,021
Total assets	$	992,229	$	867,694	$	—	$	(849,913	)	$	1,010,010
Accounts payable	$	84	$	75,027	$	—	$	—		$	75,111
Intercompany payables		114,479		3,203		—		(117,682	)		—
Accrued interest, wages and other items		8,286		25,126		—		—			33,412
Current portion of long-term debt		683		—		—		—			683
Total current liabilities		123,532		103,356		—		(117,682	)		109,206
Long-term debt		251,848		—		—		—			251,848
Convertible subordinated debentures		199,937		—		—		—			199,937
Long-term intercompany payables		—		50,000		—		(50,000	)		—
Deferred income taxes and other credits		28,972		64,067		—		(31,960	)		61,079
Shareholders’ equity		387,940		650,271		—		(650,271	)		387,940
Total liabilities and shareholders’ equity	$	992,229	$	867,694	$	—	$	(849,913	)	$	1,010,010

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In thousands	Texas Industries, Inc.			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated
Condensed consolidating balance sheet at May 31, 2005
Cash and cash equivalents	$	241,287		$	10,313	$	—	$	—		$	251,600
Short-term investments		—			—		—		—			—
Accounts receivable - net		—			117,363		—		—			117,363
Intercompany receivables		240,978			15,360		—		(256,338	)		—
Inventories		—			83,291		—		—			83,291
Deferred income taxes and prepaid expenses		698			28,056		—		—			28,754
Total current assets		482,963			254,383		—		(256,338	)		481,008
Goodwill		—			61,307		—		—			61,307
Real estate and investments		—			100,200		—		—			100,200
Deferred income taxes, intangibles and other charges		18,077			10,287		—		(793	)		27,571
Net assets of discontinued operations		(12,891	)		489,720		359,764		(493	)		836,100
Investment in subsidiaries		1,221,131			—		—		(1,221,131	)		—
Long-term intercompany receivables		50,000			—		—		(50,000	)		—
Property, plant and equipment - net		—			412,653		—		—			412,653
Total assets	$	1,759,280		$	1,328,550	$	359,764	$	(1,528,755	)	$	1,918,839
Accounts payable	$	297		$	57,725	$	—	$	—		$	58,022
Intercompany payables		15,360			240,978		—		(256,338	)		—
Accrued interest, wages and other items		11,084			38,365		—		—			49,449
Current portion of long-term debt		680			8		—		—			688
Total current liabilities		27,421			337,076		—		(256,338	)		108,159
Long-term debt		602,747			379		—		—			603,126
Convertible subordinated debentures		199,937			—		—		—			199,937
Long-term intercompany payables		—			50,000		—		(50,000	)		—
Deferred income taxes and other credits		1,608			79,235		—		(793	)		80,050
Shareholders’ equity		927,567			861,860		359,764		(1,221,624	)		927,567
Total liabilities and shareholders’ equity	$	1,759,280		$	1,328,550	$	359,764	$	(1,528,755	)	$	1,918,839

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In thousands	Texas Industries, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated
Condensed consolidating statement of operations for three months ended February 28, 2006
Net sales	$	—		$	216,763		$	—	$	—		$	216,763
Costs and expenses (income)
Cost of products sold		—			179,397			—		—			179,397
Selling, general and administrative		2,222			18,265			—		—			20,487
Interest		7,837			366			—		(863	)		7,340
Loss on debt retirements and spin-off charges		—			—			—		—			—
Other income		(1,557	)		(3,717	)		—		—			(5,274	)
Intercompany other income		(863	)		—			—		863			—
		7,639			194,311			—		—			201,950
Income (loss) before the following items		(7,639	)		22,452			—		—			14,813
Income taxes (benefit)		(2,812	)		6,314			—		—			3,502
		(4,827	)		16,138			—		—			11,311
Income from discontinued operations - net of income taxes		—			—			—		—			—
Equity in earnings (loss) of subsidiaries		16,138			—			—		(16,138	)		—
Net income (loss)	$	11,311		$	16,138		$	—	$	(16,138	)	$	11,311
Condensed consolidating statement of operations for three months ended February 28, 2005
Net sales	$	—		$	181,039		$	—	$	—		$	181,039
Costs and expenses (income)
Cost of products sold		—			164,242			—		(4	)		164,238
Selling, general and administrative		1,000			16,515			—		—			17,515
Interest		5,601			910			—		(863	)		5,648
Loss on debt retirements and spin-off charges		314			—			—		—			314
Other income		(946	)		(6,062	)		—		—			(7,008	)
Intercompany other income		(863	)		—			—		863			—
		5,106			175,605			—		(4	)		180,707
Income (loss) before the following items		(5,106	)		5,434			—		4			332
Income taxes (benefit)		(1,805	)		654			—		1			(1,150	)
		(3,301	)		4,780			—		3			1,482
Income from discontinued operations - net of income taxes		—			(173	)		14,681		—			14,508
Equity in earnings (loss) of subsidiaries		19,291			—			—		(19,291	)		—
Net income (loss)	$	15,990		$	4,607		$	14,681	$	(19,288	)	$	15,990

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In thousands	Texas Industries, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminating Entries			Consolidated
Condensed consolidating statement of operations for nine months ended February 28, 2006
Net sales	$	—		$	679,411		$	—	$	—		$	679,411
Costs and expenses (income)
Cost of products sold		—			571,553			—		—			571,553
Selling, general and administrative		5,272			53,275			—		—			58,547
Interest		24,944			2,129			—		(2,618	)		24,455
Loss on debt retirements and spin-off charges		112,391			—			—		—			112,391
Other income		(4,424	)		(13,152	)		—		—			(17,576	)
Intercompany other income		(2,618	)		—			—		2,618			—
		135,565			613,805			—		—			749,370
Income (loss) before the following items		(135,565	)		65,606			—		—			(69,959	)
Income taxes (benefit)		(47,704	)		20,264			—		—			(27,440	)
		(87,861	)		45,342			—		—			(42,519	)
Income from discontinued operations - net of income taxes		—			(176	)		8,867		—			8,691
Equity in earnings (loss) of subsidiaries		54,033			—			—		(54,033	)		—
Net income (loss)	$	(33,828	)	$	45,166		$	8,867	$	(54,033	)	$	(33,828	)
Condensed consolidating statement of operations for nine months ended February 28, 2005
Net sales	$	—		$	584,710		$	—	$	—		$	584,710
Costs and expenses (income)
Cost of products sold		—			508,017			—		(12	)		508,005
Selling, general and administrative		2,151			54,877			—		—			57,028
Interest		15,638			2,802			—		(2,618	)		15,822
Loss on debt retirements and spin-off charges		314			—			—		—			314
Other income		(1,930	)		(18,540	)		—		—			(20,470	)
Intercompany other income		(2,618	)		—			—		2,618			—
		13,555			547,156			—		(12	)		560,699
Income (loss) before the following items		(13,555	)		37,554			—		12			24,011
Income taxes (benefit)		(4,744	)		10,000			—		4			5,260
		(8,811	)		27,554			—		8			18,751
Income from discontinued operations—net of income taxes		—			(699	)		64,778		—			64,079
Equity in earnings (loss) of subsidiaries		91,641			—			—		(91,641	)		—
Net income (loss)	$	82,830		$	26,855		$	64,778	$	(91,633	)	$	82,830

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In thousands	Texas Industries, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated
Condensed consolidating statement of cash flows for nine months ended February 28, 2006
Continuing Operations
Cash provided by continuing operating activities	$	3,754		$	39,233		$	—		$	11,013		$	54,000
Investing activities
Capital expenditures - expansions		—			(36,061	)		—			—			(36,061	)
Capital expenditures - other		—			(27,512	)		—			—			(27,512	)
Proceeds from asset disposals		—			14,509			—			—			14,509
Purchases of short-term investments		(48,500	)		—			—			—			(48,500	)
Investments in life insurance contracts		(4,071	)		—			—			—			(4,071	)
Intercompany investing activities		341,139			—			—			(341,139	)		—
Other - net		(2,367	)		352			—			—			(2,015	)
Cash used by continuing investing activities		286,201			(48,712	)		—			(341,139	)		(103,650	)
Financing activities
Long-term borrowings		250,000			—			—			—			250,000
Debt retirements		(600,353	)		—			—			—			(600,353	)
Debt issuance costs		(7,356	)		—			—			—			(7,356	)
Debt retirement costs		(96,029	)		—			—			—			(96,029	)
Interest rate swap terminations		—			—			—			—			—
Stock option exercises		7,028			—			—			—			7,028
Common dividends paid		(5,172	)		—			—			—			(5,172	)
Other - net		—			—			—			—			—
Cash provided (used ) by continuing financing activities		(451,882	)		—			—			—			(451,882	)
Net Cash Provided (Used) by Continuing Operations		(161,927	)		(9,479	)		—			(330,126	)		(501,532	)
Discontinued Operations
Cash provided (used) by discontinued operating activities		—			—			3,309			(11,013	)		(7,704	)
Cash used by discontinued investing activities		—			—			(343,896	)		341,139			(2,757	)
Cash provided by discontinued financing activities		—			—			340,587			—			340,587
Net Cash Provided (Used) by Discontinued Operations		—			—			—			330,126			330,126
Increase (Decrease) in Cash and Cash Equivalents		(161,927	)		(9,479	)		—			—			(171,406	)
Cash and Cash Equivalents at Beginning of Period		241,287			10,313			—			—			251,600
Cash and Cash Equivalents at End of Period	$	79,360		$	834		$	—		$	—		$	80,194

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In thousands	Texas Industries, Inc.			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminating Entries			Consolidated
Condensed consolidating statement of cash flows for nine months ended February 28, 2005
Continuing Operations
Cash provided by continuing operating activities	$	(3,244	)	$	88,853		$	—		$	8,619		$	94,228
Investing activities
Capital expenditures - expansions		—			(1,518	)		—			—			(1,518	)
Capital expenditures - other		—			(31,583	)		—			—			(31,583	)
Proceeds from asset disposals		—			6,444			—			—			6,444
Purchases of short-term investments		(500	)		—			—			—			(500	)
Investments in life insurance contracts		—			(58,676	)		—			—			(58,676	)
Intercompany investing activities		—			—			—			—			—
Other - net		—			(659	)		—			—			(659	)
Cash used by continuing investing activities		(500	)		(85,992	)		—			—			(86,492	)
Financing activities
Long-term borrowings		—			—			—			—			—
Debt retirements		(340	)		(17	)		—			—			(357	)
Debt issuance costs		—			—			—			—			—
Debt retirement costs		—			—			—			—			—
Interest rate swap terminations		(6,315	)		—			—			—			(6,315	)
Stock option exercises		39,565			—			—			—			39,565
Common dividends paid		(4,939	)		—			—			—			(4,939	)
Other - net		—			—			—			—			—
Cash provided (used ) by continuing financing activities		27,971			(17	)		—			—			27,954
Net Cash Provided (Used) by Continuing Operations		24,227			2,844			—			8,619			35,690
Discontinued Operations
Cash provided (used) by discontinued operating activities		—			1,622			14,310			(8,619	)		7,313
Cash used by discontinued investing activities		—			(1,622	)		(14,310	)		—			(15,932	)
Cash provided by discontinued financing activities		—			—			—			—			—
Net Cash Provided (Used) by Discontinued Operations		—			—			—			(8,619	)		(8,619	)
Increase (Decrease) in Cash and Cash Equivalents		24,227			2,844			—			—			27,071
Cash and Cash Equivalents at Beginning of Period		134,813			(1,760	)		—			—			133,053
Cash and Cash Equivalents at End of Period	$	159,040		$	1,084		$	—		$	—		$	160,124

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EXHIBIT A

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Texas Industries, Inc.

We have reviewed the accompanying consolidated balance sheet of Texas Industries, Inc. and subsidiaries as of February 28, 2006, and the related consolidated statements of operations for the three and nine-month periods ended February 28, 2006 and 2005 and the related consolidated statements of cash flows for the nine-month periods ended February 28, 2006 and 2005. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Texas Industries, Inc. and subsidiaries as of May 31, 2005, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended [not presented herein], and in our report dated August 10, 2005, except for the matters discussed in the last paragraph of the “Discontinued Operations” footnote, as to which the date is November 11, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of May 31, 2005, 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

March 29, 2006

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a leading supplier of construction materials. On July 29, 2005, we completed the spin-off of our steel segment in the form of a pro-rata, tax-free dividend to our shareholders of one share of Chaparral Steel Company (“Chaparral”) common stock for each share of our common stock that was owned on July 20, 2005. As a result of the spin-off, the operating results of the steel segment prior to the spin-off are presented as discontinued operations. See Notes to Consolidated Financial Statements footnote entitled “Discontinued Operations” on pages 18 and 19. Our continuing operations constitute a single business segment which produces and sells cement, stone, sand and gravel, ready-mix concrete, expanded shale and clay aggregate, and other products from facilities concentrated in Texas, Louisiana and California.

RESULTS OF OPERATIONS

Net Sales. The following table presents certain sales information regarding our major products.

	Three months ended February 28,						Nine months ended February 28,
In thousands except per unit	2006			2005			2006			2005
Sales
Cement	$	104,290		$	84,935		$	319,807		$	285,171
Stone, sand and gravel		34,645			30,223			111,368			93,343
Ready-mix		59,732			47,750			196,021			157,494
Other products		29,305			23,900			82,085			72,802
Interplant		(29,168	)		(23,083	)		(87,596	)		(74,985	)
Delivery fees		17,959			17,314			57,726			50,885
Net Sales	$	216,763		$	181,039		$	679,411		$	584,710
Shipments
Cement (tons)		1,164			1,133			3,747			3,881
Stone, sand and gravel (tons)		5,417			5,392			18,684			16,687
Ready-mix (cubic yards)		847			782			2,859			2,650
Prices
Cement ($/ton)	$	89.62		$	74.99		$	85.35		$	73.47
Stone, sand and gravel ($/ton)		6.40			5.60			5.96			5.59
Ready-mix ($/cubic yard)		70.49			60.99			68.54			59.43

Net sales were $216.8 million in the current three-month period, an increase of $35.7 million or 20% from the prior year period. Total cement sales increased $19.4 million on 20% higher average prices and 3% higher shipments. Total aggregate sales increased $4.4 million on 14% higher average prices and comparable shipments. Total ready-mix sales increased $12.0 million on 16% higher average prices and 8% higher volume.

Net sales were $679.4 million in the current nine-month period, an increase of $94.7 million or 16% from the prior year period. Total cement sales increased $34.6 million on 16% higher average prices and 3% lower shipments. Total aggregate sales increased $18.0 million on 7% higher average prices and 12% higher shipments. Total ready-mix sales increased $38.5 million on 15% higher average prices and 8% higher volume.

- 27 -

Construction activity in the Texas and California markets we serve remained solid in the current February 2006 quarter. Average prices for our major products continued to improve. Our previously announced cement price increases have begun to be realized as average cement prices increased $5 per ton in the current quarter from the November 2005 quarter. Throughout the current quarter favorable weather positively impacted shipments. During the prior year quarter abnormally wet weather in both our Texas and California markets negatively impacted shipments.

We believe market conditions should continue to support the price improvement we have experienced.

Cost of Products Sold. Cost of products sold was $179.4 million in the current three-month period and $571.6 million in the current nine-month period, an increase from the prior year periods of $15.2 million and $63.5 million, respectively. Energy costs, particularly the cost of electricity we use in cement production, moderated in the current February 2006 quarter from the November 2005 quarter but remain well above prior year levels. We experienced no unscheduled major plant downtime in the current quarter reducing maintenance costs from the prior year quarter and offsetting in part the higher energy costs. Unit costs in the prior year quarter were impacted by cement plant downtime and wet weather.

Selling, General and Administrative.Selling, general and administrative expense was $20.5 million in the current three-month period, an increase of $3.0 million from the prior year period primarily as a result of a $1.3 million increase in stock-based compensation and $1.9 million increase in incentive compensation expense. Selling, general and administrative expense was $58.5 million in the current nine-month period, an increase of $1.5 million from the prior year period primarily as a result of a $2.4 million increase in stock-based compensation.

Interest.Interest expense was $7.3 million in the current three-month period, an increase of $1.7 million from the prior year period. Interest expense was $24.5 million in the current nine-month period, an increase of $8.6 million from the prior year period. Interest expense capitalized on costs incurred for our Oro Grande, California cement plant expansion and modernization project reduced the amount of interest expense recognized by $500,000 in the current three-month and nine-month periods. Total interest expense to be capitalized related to this project during the upcoming two year construction period is currently estimated at $25 million.

In connection with the spin-off of Chaparral, we entered into new financing agreements and purchased the outstanding $600 million aggregate principal amount of 10.25% senior notes due 2011. On July 6, 2005, we issued $250 million aggregate principal amount of new 7.25% senior notes due 2013 and entered into a separate new senior secured revolving credit facility.

Prior to the spin-off of Chaparral interest was allocated between continuing and discontinued operations based on the historic use of funds derived from long-term borrowings. Total accrued interest for the three-month period ended February 28, 2005 was $17.8 million, of which $12.2 million was allocated to discontinued operations. Total accrued interest for the nine-month period ended February 28, 2006 was $29.9 million, of which $5.4 million was allocated to discontinued operations. Total accrued interest for the nine-month period ended February 28, 2005 was $51.9 million, of which $36.1 million was allocated to discontinued operations.

Loss on Debt Retirements and Spin-off Charges.The nine-month period ended February 28, 2006 includes a loss of $107.0 million related to the early retirement of our 10.25% senior notes and old credit facility consisting of $96.0 million in make-whole premiums and consent payments plus transaction costs and a write-off of $11.0 million of debt issuance costs and interest rate swap gains and losses associated with the debt repaid. In addition, we incurred $5.4 million in charges related to the spin-off of Chaparral.

- 28 -

Other Income.Other income was $5.3 million in the current three-month period, a decrease of $1.7 million from the prior year period. Other income was $17.6 million in the current nine-month period, a decrease of $2.9 million from the prior year period. Routine sales of surplus operating assets and real estate resulted in gains of $3.0 million and $3.8 million in the three-month periods ended February 28, 2006 and 2005, respectively, and $7.6 million and $8.5 million in the nine-month periods ended February 28, 2006 and 2005, respectively. Other income in the nine-month period ended February 28, 2006 includes a gain of $3.8 million resulting from the sale of certain investments. Other income in the nine-month period ended February 28, 2005 includes a gain of $6.2 million resulting from the sale of emissions credits associated with our expanded shale and clay operations in south Texas. Interest income was $1.6 million and $1.0 million in the three-month periods ended February 28, 2006 and 2005, respectively, and $4.5 million and $2.0 million in the nine-month periods ended February 28, 2006 and 2005, respectively.

Income Taxes.Federal income taxes for the interim periods ended February 28, 2006 and 2005 have been included in the accompanying financial statements on the basis of an estimated annual rate. The estimated annualized rate does not include the tax impact of the loss on debt retirements and Chaparral spin-off charges. The estimated annualized rate for continuing operations, excluding these charges, is 27.1% for 2006 compared to 21.9% for 2005. The effective rate for discontinued operations is 35% for 2006 and 2005, and reflects Chaparral’s allocable share of such tax as prescribed in our tax sharing agreement with Chaparral.

The American Jobs Creation Act of 2004, among other things, allows a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The Company is currently evaluating the impact of the new law on its future taxable income for the applicable years, but does not anticipate a benefit for the current year because of an expected taxable loss for the year.

Income from Discontinued Operations – Net of Income Taxes.As a result of the spin-off of Chaparral, the operating results of our steel segment, including the allocation of certain corporate expenses, have been reclassified and presented as discontinued operations. The nine-month period ended February 28, 2006 includes steel operations through the July 29, 2005 spin-off date.

LIQUIDITY AND CAPITAL RESOURCES

In addition to cash and cash equivalents of $80.2 million at February 28, 2006, our sources of liquidity include cash from operations, proceeds from sales of our short-term investments, borrowings available under our $200 million senior secured revolving credit facility and distributions available from our investments in life insurance contracts.

Short-term Investments.Our short-term investments, totaling $48.6 million at February 28, 2006, consist of investment grade auction rate securities with an active resale market to ensure liquidity and the ability to be readily converted into cash. These securities are expected to be sold within one year to fund current operations, or satisfy other cash requirements as needed.

Senior Secured Revolving Credit Facility.We have available a $200 million senior secured revolving credit facility expiring in July 2010. It includes a $50 million sub-limit for letters of credit. Any outstanding letters of credit are deducted from the borrowing availability under the facility. At February 28, 2006, $27.3 million of the facility was utilized to support letters of credit. Amounts drawn under the facility bear interest either at the LIBOR rate plus a margin of 1% to 2%, or at a base rate (which is the higher of the federal funds rate plus 0.5% and the prime rate) plus a margin of up to 1%. The interest rate margins are subject to adjustments based on our leverage ratio.

All of our consolidated subsidiaries, following the spin-off of Chaparral, have guaranteed our obligations under the credit facility. The credit facility is secured by first priority security interests in all or most of our existing and future accounts, inventory, equipment, intellectual property and other personal property, and in all of our equity interest in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries.

The credit facility contains covenants restricting, among other things, prepayment or redemption of our new 7.25% senior notes, distributions, dividends and repurchases of capital stock and other equity interests, acquisitions and investments, indebtedness, liens and affiliate transactions. We are required to comply with certain financial tests and to maintain certain financial ratios, such as leverage and interest coverage ratios. We are in compliance with all of our loan covenants.

- 29 -

Investments of Life Insurance Contracts.During the nine-month period ended February 28, 2005 previous distributions received from our investments in life insurance contracts in the amount of $51.2 million were repaid. Approximately $50 million of these funds are available for redistribution at our election.

Contractual Obligations.The following is a summary of our estimated future payments under our material contractual obligations as of February 28, 2006.

	Periods ending February 28,
In thousands	Total		2007		2008		2009		2010-2011		After 2011
Long-term debt (1)	$	252,531	$	683	$	1,475	$	—	$	—	$	250,373
Convertible subordinated debentures (2)		199,937		—		—		—		—		199,937
Leases (3)		56,759		15,128		8,529		8,094		15,921		9,087
Coal supply contracts (4)		85,051		26,771		31,347		26,933		—		—
Other unconditional purchase obligations (5)		313,800		234,400		79,400		—		—		—
Asset retirement obligations (6)		19,278		896		491		510		379		17,002
Defined benefit plans (7) (8)		92,420		2,609		2,534		2,855		6,567		77,855
	$	1,019,776	$	280,487	$	123,776	$	38,392	$	22,867	$	554,254

(1) Our long-term debt is described in Notes to Consolidated Financial Statements footnote entitled “Long-term Debt” on pages 12 and 13. Our outstanding letters of credit issued under the senior secured revolving credit facility only collateralize payment of recorded liabilities.

(2) Our convertible subordinated debentures are described in Notes to Consolidated Financial Statements footnote entitled “Convertible Subordinated Debentures” on page 14.

(3) We lease certain mobile and other equipment used in our operations under operating leases that may in the normal course of business be renewed or replaced by subsequent leases. Future payments under leases exclude mineral rights which are insignificant and are generally required only for products produced.

(4) In December 2005 we renegotiated three long-term contracts for the purchase of coal for use in our cement and expanded shale and clay plants in Texas that now require minimum amounts of coal be purchased. These future minimum payment amounts exclude transportation surcharges that may be imposed under certain circumstances.

(5) We have entered into construction and equipment purchase contracts in connection with the expansion and modernization of our Oro Grande, California cement plant. We expect the project will take at least two years to construct with actual capital expenditures occurring as the work progresses.

(6) We incur legal obligations for asset retirement as part of our normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures.

(7) We pay benefits under a series of non-qualified defined benefit plans.

(8) We pay benefits under a health benefit plan covering approximately 600 employees and retirees of our California cement subsidiary. These employees are also covered by a qualified defined benefit pension plan. We contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus additional amounts considered appropriate. We contributed $3.0 million in the nine-month period ended February 28, 2006.

During the February 2006 quarter, we commenced construction on a project to expand and modernize our Oro Grande, California cement plant. We plan to expand the Oro Grande plant to approximately 2.3 million tons of advanced dry process cement production capacity annually, and retire the 1.3 million tons of existing, but less efficient, production after the new plant is commissioned. We expect the Oro Grande project will take at least two years to construct and will cost approximately $358 million excluding capitalized interest related to the project. We expect our capital expenditures in fiscal year 2006, including those related to the expansion and modernization of our Oro Grande cement plant, to be approximately $120 million.

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We expect cash and cash equivalents, cash from operations, proceeds from sales of our short-term investments, available borrowings under our senior secured revolving credit facility and available distributions from our investments in life insurance contracts to be sufficient to provide funds for capital expenditure commitments (including the expansion and modernization of our Oro Grande, California cement plant), scheduled debt payments, working capital needs and other general corporate purposes for at least the next year.

Spin-off of Chaparral.We entered into a separation and distribution agreement with Chaparral in which we each released the other from all liabilities existing or arising from all acts and events occurring before the spin-off with respect to our respective businesses. The liabilities released or discharged do not include liabilities arising under or assigned by the separation and distribution agreement or any ancillary agreement, such as tax liabilities and liabilities to third parties. In the separation and distribution agreement Chaparral assumed all the liabilities related to the steel business and the transferred assets, and we and Chaparral agreed on the allocation of responsibility for certain employee benefits matters. The separation and distribution agreement also requires that each party indemnify the other against certain liabilities. See Notes to Consolidated Financial Statements footnote entitled “Legal Proceedings and Contingent Liabilities” on page 16.

Cash Flows

Net cash provided by continuing operating activities was $54.0 million in the current nine-month period, compared to $94.2 million in the prior year period. The decrease resulted primarily from the utilization of tax benefits in the prior year and changes in working capital items. Accounts receivable decreased $7.2 million and inventories increased $20.3 million primarily due to normal seasonal factors. Scheduled interest and tax payments reduced accrued expenses offsetting increased accounts payable due to higher manufacturing cost accruals.

Net cash used for continuing investing activities was $103.7 million in the current nine-month period, compared to $86.5 million in the prior year period. Capital expenditures incurred in connection with the expansion and modernization of our Oro Grande, California cement plant were $36.1 million up $34.5 million from the prior year period. Capital expenditures for normal replacement and technological upgrades of existing equipment and acquisitions to sustain our existing operations were $27.5 million, down $4.1 million from the prior year period. In the current year period we invested $48.5 million in auction rate securities. In the prior year period we repaid distributions received from our investments in life insurance contracts in the amount of $51.2 million.

Net cash used for continuing financing activities was $451.9 million in the current nine-month period, compared to $28.0 million provided in the prior year period. We purchased $600 million aggregate principal amount of our 10.25% senior notes, paying $96.0 million in make-whole premiums and consent payments plus transaction costs. To fund the purchase we issued $250 million aggregate principal amount of our new 7.25% senior notes and incurred $7.4 million in debt issuance costs, received a cash dividend of $341.1 million from Chaparral and used $112.3 million of cash and cash equivalents on hand.

Net cash provided by discontinued operations was $330.1 million in the current nine-month period, compared to $8.6 million used in the prior year period. In connection with our refinancing and spin-off transactions, Chaparral issued $300 million aggregate principal amount of senior notes and borrowed $50 million under its new $150 million credit facility. The net proceeds were used to pay us a dividend of $341.1 million.

OTHER ITEMS

Environmental Matters

We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions and wastewater discharge. We believe we are in substantial compliance with applicable environmental laws and regulations; however, from time to time we receive claims from federal and state environmental regulatory agencies and entities asserting that we are or may be in violation of certain environmental laws and regulations. Based on our experience and the information currently available to us, we believe that such claims will not have a material impact on our financial condition or results of operations. Despite our compliance and experience, it is possible that we could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us.

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Market Risk

Historically, we have not entered into derivatives or other financial instruments for trading or speculative purposes. Our short-term investments consist of auction rate securities that have their interest rates reset at predetermined intervals, typically less than 30 days, through an auction process. Due to the short duration between interest rate reset dates, changes in market interest rates would not have a significant impact on their fair value. We have $250 million of 7.25% fixed-rate senior notes outstanding. The fair value of the debt will vary as interest rates change.

Our operations require large amounts of energy and are dependent upon energy sources, including electricity and fossil fuels. Prices for energy are subject to market forces largely beyond our control. In December 2005 we renegotiated three contracts for the purchase of coal for use in our cement and expanded shale and clay plants in Texas. Each contract specifies a fixed price (escalated quarterly or annually) at which we must purchase a minimum amount of coal each calendar year through 2008, and we may purchase additional amounts up to a specified maximum. We have generally not entered into any long-term contracts to satisfy our natural gas and electricity needs. However, we continually monitor these markets and we may decide in the future to enter into long-term contracts. If we are unable to meet our requirements for fuel and electricity, we may experience interruptions in our production. Price increases or disruption of the uninterrupted supply of these products could adversely affect our results of operations.

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 our Annual Report on Form 10-K for the year ended May 31, 2005.

New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”. SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”, and supersedes APB 25. Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The current effective date of SFAS 123R is the first fiscal year beginning after June 15, 2005, which will be the first quarter of our fiscal year ending May 31, 2007. We currently expect to adopt the SFAS 123R effective June 1, 2006 using the “modified prospective” method. Under the modified prospective method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Financial information for periods prior to the date of adoption of SFAS 123R would not be restated. We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use such a model, the standard also permits the use of a “lattice” model. We have not yet determined which model we will use to measure the fair value of awards of equity instruments to employees upon the adoption of SFAS 123R.

The adoption of SFAS 123R will not have an impact on our consolidated financial position. Although the impact of SFAS 123R on our results of operations cannot be predicted at this time, because it will depend on the number of equity awards granted in the future, as well as the model used to value the awards, it is expected to have a significant effect on our future results of operations. However, had we adopted the requirements of SFAS 123R in prior periods, the impact would have approximated the amounts disclosed in Summary of Significant Accounting Policies – Stock-based Compensation in the Notes to Consolidated Financial Statements.

SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated, because they depend on, among other things, when employees exercise stock options.

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In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which will become effective for our fiscal year beginning June 1, 2006. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead cost to inventory be based on the normal capacity of the production facilities. We are currently evaluating the potential impact of this standard on its financial position and results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which is effective for reporting changes in accounting principles for our fiscal year beginning June 1, 2006. SFAS No. 154 modifies the reporting of a change in accounting principle to require retrospective application to prior periods’ financial statements, unless explicit transition provisions are provided for in new accounting pronouncements or existing pronouncements that are in the transition phase when SFAS No. 154 becomes effective.

In March 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6, “Accounting for Stripping Costs Incurred during the Production in the Mining Industry,” which will become effective for our fiscal year beginning June 1, 2006. EITF 04-06 requires that stripping costs incurred during the production phase of the mine be included in the cost of the inventory produced during the period that the stripping costs are incurred. Although dependent in part on the future level of post-production stripping activity which varies from period to period, we do not expect that the adoption of EITF 04-6 will have a material impact on the financial position or results of operations.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

Certain statements contained in this 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 our business, the level of construction activity in our markets, abnormal periods of inclement weather, unexpected periods of equipment downtime, changes in the cost of raw materials, fuel and energy, and the impact of environmental laws and other regulations. For further information refer to our Annual Report on Form 10-K for the year ended May 31, 2005.

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Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer evaluated, with the participation of the Company’s management, the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is included in the section of the Notes to Consolidated Financial Statements entitled “Legal Proceedings and Contingent Liabilities” presented in Part I on page 16 and incorporated herein by reference.

Item 1A. Risk Factors

Our business could suffer if cement imports from Mexico or other countries significantly increase or are sold in the U.S. in violation of U.S. fair trade laws.

In 1989 and 1990, groups of domestic cement producers, including us, filed antidumping petitions that resulted in the imposition of significant antidumping import duties on imports of gray portland cement and clinker from Mexico and Japan. On March 6, 2006, the governments of the U.S. and Mexico signed the U.S.-Mexico Agreement on Cement, which settles the 16-year dispute over the U.S. antidumping duty order on imports from Mexico.

During the three-year term of the agreement, Mexican cement producers are allowed to import into the United States up to 3.0 million metric tons of cement and clinker annually, which will be subject to a reduced import duty of $3.00 per ton. Maximum import levels will be adjusted annually within certain limits to reflect changes in consumption, and will be allowed to increase to higher levels, if needed, to respond to natural disasters such as hurricanes. The antidumping order will be terminated in 2009 if Mexican producers have complied with the agreement.

The agreement also provides that U.S. Customs will deposit into an escrow account substantially all of the cash deposits of estimated antidumping duties collected from importers of Mexican cement and clinker. In a separate agreement, the importers and certain producers in the U.S., including us, agreed that 50% of the deposits in the escrow account would be distributed to the importers and the remaining 50% would be distributed to the U.S. producers. We expect to receive about 12% of the amounts distributed to the U.S. producers.

Although we expect the antidumping order against cement and clinker from Japan to remain in effect until at least 2011, beginning in 2009 unlimited imports from Mexico may enter the U.S. without the imposition of any import duties. In addition, independently owned cement operators can construct new import facilities and begin to purchase cement from other countries, such as those in Asia, which could compete with domestic producers. An influx of cement or clinker products from countries not subject to antidumping orders, or sales of imported cement or clinker in violation of U.S. fair trade laws, could materially and adversely affect our results of operations.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities.Robert Alpert, a Director of the Company, elected in prior years to defer a portion of his annual and meeting fees under deferred compensation agreements. The compensation so deferred was denominated in shares of the Company’s Common Stock determined by reference to the average market price during the thirty (30) trading days prior to the date of each agreement. Dividends were credited to the account in the form of Common Stock equivalents at a value equal to the fair market value of the Common Stock on the date of the payment of such dividend. On December 28, 2005, the Company delivered 25,303 unregistered shares of Common Stock in final settlement of the $308,809 of annual and meeting fees deferred and dividends credited.

The unregistered shares were issued in reliance upon Section 4 (2) of the Securities Act of 1933, as amended.

Item 6. Exhibits

The following exhibits are included herein:

(12.1) Computation of Ratios of Earnings to Fixed Charges

(15.1) Letter re: Unaudited Interim Financial Information

(31.1) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

(31.2) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

(32.1) Section 1350 Certification of Chief Executive Officer

(32.2) Section 1350 Certification of Chief Financial Officer

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.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange 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.
March 31, 2006	/s/ Richard M. Fowler
	Richard M. Fowler
	Executive Vice President - Finance and Chief Financial Officer (Principal Financial Officer)
March 31, 2006	/s/ James R. McCraw
	James R. McCraw
	Vice President – Accounting and Risk Management (Principal Accounting Officer)

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INDEX TO EXHIBITS

Exhibits
12.1	Computation of Ratios of Earnings to Fixed Charges
15.1	Letter re: Unaudited Interim Financial Information
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer

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