UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No.1
| x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended May 31, 2012
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-4887
TEXAS INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 75-0832210 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1341 West Mockingbird Lane, Suite 700W, Dallas, Texas 75247-6913
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (972) 647-6700
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, $1.00 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yesx No¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ Nox
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. Yesx No¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filerx Accelerated Filer¨ Non-accelerated Filer¨ Smaller Reporting Company¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes¨ Nox
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant was approximately $693,660,606, computed by reference to the price at which the common stock was last sold on the New York Stock Exchange as of November 30, 2011, the last business day of the Registrant’s most recently completed second fiscal quarter.
There were 28,003,219 shares of the Registrant’s common stock outstanding as of June 30, 2012.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy statement for the 2012 annual meeting of shareholders are incorporated by reference into Part III.
EXPLANATORY NOTE
This Amendment No. 1 amends Registrant’s Annual Report on Form 10-K for the year ended May 31, 2012, which was filed on July 17, 2012. This Amendment No. 1 is being filed solely for the purpose of correcting (i) typographical printer’s errors in the number of tons of cement backlog that we do not expect to fill in fiscal year 2013 in the “Products – Cement Segment” section on page 3 and in the “Total segment operating profit” line for 2012 and 2011 in footnote 10 on page 63, and (ii) a typographical error in the date in the last paragraph of the “Report of Independent Registered Public Accounting Firm” on page 70. Except for these corrections, there have been no changes in any of the financial or other information contained in the report. This Amendment No. 1 speaks as of the original filing date of the Form 10-K and does not reflect events that may have occurred subsequent to the original filing date.
Items 1 and 8, as amended, are included in their entirety below.
| ITEM 1. | BUSINESS |
When used in the Report, the terms “Company,” “we,” “us,” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise.
General
We are a leading supplier of heavy construction materials in the southwestern United States through our three business segments: cement, aggregates and consumer products. Our cement segment produces gray portland cement and specialty cements. Our cement production and distribution facilities are concentrated primarily in Texas and California, the two largest cement markets in the United States. Based on production capacity, we are the largest producer of cement in Texas with a 24% share in that state. Our aggregates segment produces natural aggregates, including sand, gravel and crushed limestone, and specialty lightweight aggregates. Our consumer products segment produces ready-mix concrete. We are a major supplier of natural aggregates and ready-mix concrete in Texas and northern Louisiana and, to a lesser extent, in Oklahoma and Arkansas. For financial information about our business segments, see Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Report.
As of May 31, 2012, we had 82 manufacturing facilities in six states. In fiscal year 2012, our net sales were $647.0 million, of which 42% was generated by our cement segment, 23% by our aggregates segment, and 35% by our consumer products segment. During the year, we shipped 3.6 million tons of finished cement, 11.8 million tons of natural aggregates, 1.1 million cubic yards of lightweight aggregates and 2.4 million cubic yards of ready-mix concrete.
Even though the national economy experienced some growth during fiscal year 2012, construction activity remained at low levels. As a consequence, throughout fiscal year 2012 we continued with many of the steps that we began taking in fiscal year 2009 in response to the recession. We also continued to assess other actions that may help us reduce costs, conserve cash or improve our sales or operations. These steps and others are indicative of our intense focus on cost reduction, management of our cash position and management of production levels, which we believe had a significant positive impact on our operating results in the last three fiscal years.
During October 2007, we commenced construction on a project to expand our Hunter, Texas cement plant. In May 2009 we temporarily halted construction on the project because we believed that economic and market conditions made it unlikely that cement demand levels in Texas at that time would permit the new kiln to operate profitably if the project was completed as originally scheduled. We resumed construction in October 2010 and expect to begin commissioning in the fall of 2012. The total capital cost of the project is expected to be between $365 million and $375 million, excluding capitalized interest. As of May 31, 2012, we have incurred approximately $353.1 million, excluding capitalized interest of approximately $68.7 million related to the project, of which $344.4 million has been paid.
On July 29, 2011, we acquired from CEMEX, USA three ready mix concrete plants and one sand and gravel plant, located in the Austin metropolitan market, adding to our existing ready mix and aggregate presence in the region. As a part of the transaction, we transferred to CEMEX USA seven ready mix concrete plants in the Houston market.
On November 18, 2011, we entered into a joint venture agreement with Ratliff Ready-Mix , L.P., a ready mix operator based in Waco, Texas. We contributed seven of our central Texas ready-mix plants and certain related assets to the joint venture in return for a 40% equity interest. We also guaranteed approximately $13 million of joint venture debt.
On April 16, 2012, we sold our Texas based packaged products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities in the Dallas-Fort Worth Metroplex, the Houston metro area, and the Austin/Central Texas region. We entered into a long-term cement supply agreement with Bonsal as a part of the transaction.
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On April 20, 2012, we sold our aggregate rail distribution terminal including 154 acres of land and associated assets located in Stafford, Texas, south of Houston, to Lex Missouri City, LP. We continue to supply aggregates to the Houston market through our aggregate distribution terminal located in Katy, Texas, west of Houston.
We expect our capital expenditures in fiscal year 2013 to be approximately $25 million to $35 million, excluding those related to the construction of the Hunter cement plant expansion.
Our Competitive Strengths and Strategies
We believe the following competitive strengths and strategies are key to our ability to grow and compete successfully:
Leading Market Positions. We strive to be a major supplier in markets that have attractive characteristics, such as large market size, above average long-term projected population growth, strong economic activity and a year-round building season. Based on production capacity, we are the largest producer of cement in Texas (with a 24% share of total production capacity), and the second largest producer of cement in southern California. We believe we are also the largest supplier of expanded shale and clay specialty aggregate products west of the Mississippi River, the second largest supplier of stone, sand and gravel natural aggregate products in North Texas, one of the largest suppliers of ready-mix concrete in North Texas and the Central Texas/Austin region, and one of the largest suppliers of sand and gravel aggregate products and ready-mix concrete in northern Louisiana. We believe our leadership in these markets enhances our competitive position.
Integrated Operations. Historically, a significant part of our operating approach has focused on the synergies available from operating in the cement, aggregate and ready-mix businesses. We plan to continue to assess opportunities to enhance our operations in similar ways.
Low Cost Supplier. We strive to be a low cost supplier in our markets. We believe we have some of the most efficient cement capacity in the industry. We focus on optimizing the use of our equipment, enhancing our productivity and exploring new technologies to further improve our unit cost of production at each of our facilities. Efficient plant designs, high productivity rates and innovative manufacturing processes are all results of our focus on being a low cost supplier.
Strategic Locations and Markets. The strategic locations of our facilities near our customer base and sources of raw materials allow us to access the largest cement consuming markets in the United States. Our cement manufacturing facilities are located in Texas and California, the two largest U.S. cement markets. During calendar year 2011, Texas and California accounted for approximately 11.0 million and 8.0 million tons, respectively, of cement consumption or approximately 15% and 10%, respectively, of total U.S. cement consumption. California and Texas have also been the largest beneficiaries of federal transportation funding during the last several years. Funds distributed under federal highway legislation historically have comprised a majority of California and Texas’ public works spending. Additionally, Texas utilizes private sources of funds for highway construction through public-private partnerships.
Diversified Product Mix and Broad Range of End-User Markets. Our revenue streams are derived from multiple end-user markets, including the public works, residential, commercial, industrial and institutional construction sectors, as well as the oil and gas industry. Accordingly, we have a broad and diverse customer base. Our diversified mix of products provides access to this broad range of end-user markets and helps mitigate the exposure to cyclical downturns in any one product or end-user market. No one customer accounted for more than 10% of our net sales in fiscal year 2012.
Long-Standing Customer Relationships. We have established a solid base of long-standing customer relationships. For example, our ten largest customers during fiscal year 2012 have done business with us for an average of over 20 years. We strive to achieve customer loyalty by delivering superior customer service and maintaining an experienced sales force with in-depth market knowledge. We believe our long-standing relationships and our leading market positions help to provide additional stability to our operating performance and make us a preferred supplier.
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Experienced Management Team. Mel Brekhus, our chief executive officer, Ken Allen, our chief financial officer, Jamie Rogers, our chief operating officer, and the vice presidents for the cement, aggregates and consumer products segments have an average of almost 24 years of industry experience. Our management team has led our company through several industry cycles and has demonstrated the ability to successfully complete and operate major expansion projects.
Products
Cement Segment
Our cement segment produces gray portland cement as its principal product. We also produce specialty cements such as masonry and oil well cements.
Our cement production facilities are located at three sites in Texas and California: Midlothian, Texas, south of Dallas/Fort Worth, the largest cement plant in Texas; Hunter, Texas, between Austin and San Antonio; and Oro Grande, California, near Los Angeles. The limestone reserves used as the primary raw material are located on property we own adjacent to each of the plants. Additional information about our cement production facilities and associated limestone reserves is provided in Item 2, Properties, of this Report.
Due to the recent recession, we modified our operating processes in order to reduce costs and more closely match cement production to demand in our markets. We temporarily idle each of our dry process gray cement kilns from time to time in order to control inventories. We shut down the four wet process kilns at our Midlothian, Texas plant which were less efficient than the large dry kiln at that plant. Finally, the white cement production facility at our Crestmore plant near Riverside, California remains idled. We continue to operate a cement terminal and packaging facility at the Crestmore plant, and we operate its gray portland cement grinding facility on an as needed basis.
In July 2010 we decided to surrender the operating permits for the four wet kilns at our Midlothian plant, which had a rated annual production capacity of 600,000 tons of clinker. We plan to replace the production capacity of the wet kilns by increasing the much more efficient capacity of the large modern dry process kiln at the plant. Closing the four wet kilns allowed us to obtain the permits needed to enhance and optimize the dry kiln. We do not know when market conditions will support the enhancements. As a consequence, we cannot yet estimate the cost or schedule for the enhancements.
The primary fuel source for all of our facilities is coal, which can be supplemented with natural gas, petroleum coke, tires and other fuels at some of our locations. Our facilities also consume large amounts of electricity. We believe that adequate supplies of both fuel and electricity are available.
We produced approximately 3.6 million tons of finished cement during fiscal year 2012. We shipped approximately 3.6 million tons during the year, of which 3.0 million tons were shipped to outside trade customers. At May 31, 2012, our backlog was approximately 926,000 tons, approximately 425,000 tons of which we do not expect to fill in fiscal year 2013. At May 31, 2011, our backlog was approximately 551,000 tons.
We market our cement products in the southwestern United States. Our principal marketing area includes the states of Texas, Louisiana, Oklahoma, California, Nevada and Arizona. Sales offices are maintained in the marketing area and sales are made primarily to numerous customers in the construction industry, no one of which would be considered material to our business.
Cement is distributed by rail or truck to 8 distribution terminals located throughout the marketing area. Transportation costs vary depending on the mode of transportation utilized.
Aggregates Segment
Natural Aggregates. Our natural aggregate operations produce sand, gravel and crushed limestone. These operations are conducted from facilities primarily serving the Dallas/Fort Worth and Austin areas in Texas; the southern Oklahoma area; and the Alexandria and Monroe areas in Louisiana. Additional information about our national aggregates production facilities and associated reserves is provided in Item 2, Properties, of this Report.
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We produced approximately 11.7 million tons of natural aggregates during fiscal year 2012. We shipped approximately 11.8 million tons of natural aggregates during fiscal year 2012, of which 9.1 million tons were shipped to outside trade customers. At May 31, 2012, our backlog was approximately 1.4 million tons, approximately 0.7 million tons of which we expect to ship in fiscal year 2013. At May 31, 2011, our backlog was approximately 1.6 million tons.
The cost of transportation limits the marketing of aggregate products to the areas within approximately 100 miles of the plant or terminal sites. Sales are therefore related to the level of construction activity near the plants and terminals. The products are marketed by our sales organization located in the areas served by the plants and terminals and are sold to numerous customers, no one of which would be considered material to our business.
Products are distributed to trade customers principally by contract or customer-owned haulers or through rail distribution facilities. To enhance our efficiency and competitiveness, particularly in sales of crushed stone, we strive to establish direct rail links between production facilities and our key markets, reducing the cost of transportation. We have installed rail capacity at our crushed stone plants and 5 rail terminals close to major markets, which allow rapid loading and unloading of product. In local areas surrounding our rail terminals, we believe we have a transportation cost advantage over some competing suppliers who rely to a greater extent on truck transportation.
Lightweight Aggregates. Expanded shale and clay, a specialty lightweight aggregate product, is manufactured from facilities serving the Dallas/Fort Worth, Austin and Houston areas in Texas; the Oakland/San Francisco and Los Angeles areas in California; and the Denver area in Colorado. Additional information about our lightweight aggregates production facilities and associated reserves is provided in Item 2, Properties, of this Report.
We produced approximately 1.1 million cubic yards of lightweight aggregates during fiscal year 2012. We shipped approximately 1.1 million cubic yards of lightweight aggregates during fiscal year 2012, of which approximately 0.9 million cubic yards were shipped to outside trade customers. At May 31, 2012, our backlog was approximately 165,000 cubic yards, the majority of which will be shipped in fiscal year 2013. At May 31, 2011, our backlog was approximately 110,000 cubic yards.
The cost of transportation limits the marketing of most lightweight aggregate products to the areas within approximately 200 miles of the plant or terminal sites. Sales are therefore related to the level of construction activity near the plants and terminals. The products are marketed by our sales organization located in the areas served by the plants and terminals and are sold to numerous customers, no one of which would be considered material to our business.
Products are distributed to trade customers principally by contract or customer-owned haulers and, to a lesser extent, by rail. Certain specialty products we have developed from our expanded shale and clay, such as DiamondPro® baseball infield conditioner, have developed a geographically dispersed customer base and are shipped to a significant portion of the continental United States.
Consumer Products Segment
Ready-mix Concrete. Our ready-mix concrete operations are situated in three areas in Texas (Dallas/Fort Worth/Denton, central Texas and east Texas), in north and central Louisiana, and at one location in southern Arkansas. We are also a 40% partner in a joint venture that has ready mix concrete operations in the northern part of central Texas. Additional information about our ready mix concrete production facilities is provided in Item 2, Properties, of this Report.
We shipped approximately 2.4 million cubic yards of ready-mix concrete during fiscal year 2012. At May 31, 2012, our backlog was approximately 1.8 million cubic yards, approximately 0.9 million cubic yards of which we expect to ship in fiscal year 2013. At May 31, 2011, our backlog was approximately 2.5 million cubic yards.
We manufacture and supply a substantial amount of the cement and aggregates raw materials used by the ready-mix plants. The remainder is purchased from outside suppliers. Ready-mix concrete is sold to various
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contractors in the construction industry, no one of which would be considered material to our business. We believe that we are a significant participant in the Texas and Louisiana concrete products markets in which we operate. Because we are a producer of cement and aggregates, the primary components of concrete, we believe that our customers view us as a reliable supplier of quality concrete, particularly during times that the supply of raw materials is tight.
Other Products. Until April 2012, we manufactured and marketed packaged concrete mix, mortar, sand and related packaged products from bagging plants and distribution sites we owned in the Dallas/Fort Worth, Austin and Houston areas in Texas. We also marketed our Maximizer packaged concrete mixes in southern California. On April 16, 2012 we sold our Texas based packaged products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities in the Dallas-Fort Worth Metroplex, the Houston metro area, and the Austin/Central Texas region, and included rights to the Maximizer name and technology. We entered into a long-term cement supply agreement with Bonsal as a part of the transaction.
Competition
All of the product segments and markets in which we participate are highly competitive. These markets are also generally regional because transportation costs are high relative to the value of the product. Ready-mix concrete also competes in relatively small geographic areas due to delivery time constraints associated with pre-mixed concrete after the addition of water. As a result, in our aggregates and consumer products markets, there is little competition from imported products. However, our cement segment does compete with imported cement because of the higher value of the product and the existence of major ports in some of our markets.
The nature of our competition varies among our product lines due to the widely differing amounts of capital necessary to build production facilities. Construction of cement production facilities is highly capital intensive and requires long lead times to complete engineering design, obtain regulatory permits, acquire equipment and construct a plant. Most domestic producers of cement are owned by large foreign companies operating in multiple international markets. Many of these producers maintain the capability to import cement from foreign production facilities.
Sand and gravel production by dredging, or crushed stone production from stone quarries, is moderately capital intensive. Our major competitors in the aggregates markets are typically large vertically integrated companies.
Ready-mix concrete production requires relatively small amounts of capital to build a concrete batching plant and acquire delivery trucks. As a result, in each local market we face competition from numerous small producers as well as large vertically integrated companies with facilities in many markets.
Due to the lack of product differentiation, competition for all of our products is based largely on price and, to a lesser extent, quality of product and service. As a result, the prices that we charge our customers are not likely to be materially different from the prices charged by other producers in the same markets. Accordingly, our profitability is generally dependent on the level of demand for cement, aggregates and concrete products in the local markets we serve, and on our ability to control operating costs.
Employees
At May 31, 2012, we had approximately 1,630 employees. Approximately 95 employees at our Oro Grande, California cement plant are covered by a collective bargaining agreement with an original expiration date in June 2012, but the parties have agreed to a short term extension while they conduct good faith bargaining on a new collective bargaining agreement. We expect to reach agreement on a new collective bargaining agreement, but we cannot guarantee this result, nor can we predict what action the union may take if we cannot reach agreement. Approximately 10 employees at our Crestmore plant near Riverside, California are covered by a collective bargaining agreement that expires in August 2013.
We believe our relationship with our employees is good.
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Legal Proceedings
In March 2008, the South Coast Air Quality Management District, or SCAQMD, informed one of our subsidiaries, Riverside Cement Company (Riverside), that it believed that operations at the Crestmore cement plant in Riverside, California caused the level of hexavalent chromium, or chrome 6, in the air in the vicinity of the plant to be elevated above ambient air levels. Chrome 6 has been identified by the State of California as a carcinogen. Riverside immediately began taking steps, in addition to its normal dust control procedures, to reduce dust from plant operations and eliminate the use of open clinker stockpiles. In February 2008, the SCAQMD placed an air monitoring station at the downwind property line closest to the open clinker stockpiles. In the SCAQMD’s first public report of the results of its monitoring, over the period of February 12 to April 9, 2008, the average level of chrome 6 was 2.43 nanograms per cubic meter, or ng/m³. Since that time, the average level has decreased. The average levels of chrome 6 reported by the SCAQMD at all of the air monitoring stations in areas around the plant, including the station at the property line, are below 1.0 ng/m³ over the entire period of time it has operated the stations. The SCAQMD compared the level of exposure at the air monitor on our property line with the following employee exposure standards established by regulatory agencies:
Occupational Safety and Health Administration | 5,000 ng/m³ | |||
National Institute for Occupational Safety and Health | 1,000 ng/m³ | |||
California Environmental Protection Agency | 200 ng/m³ |
In public meetings conducted by the SCAQMD, it stated that the risk of long term exposure immediately adjacent to the plant is similar to living close to a busy freeway or rail yard, and it estimated an increased risk of 250 to 500 cancers per one million people, assuming continuous exposure for 70 years. Riverside has not determined how this particular risk number was calculated by SCAQMD. However, the Riverside Press Enterprise reported in a May 30, 2008 story that “John Morgan, a public health and epidemiology professor at Loma Linda University, said he looked at cancer cases reported from 1996 to 2005 in the … census [tract] nearest the [plant] and found no excess cases. That includes lung cancer, which is associated with exposure to hexavalent chromium.”
In late April 2008, a lawsuit was filed in Riverside County Superior Court of the State of California styled Virginia Shellman, et al. v. Riverside Cement Holdings Company, et al. The lawsuit against three of our subsidiaries purports to be a class action complaint for medical monitoring for a putative class defined as individuals who were allegedly exposed to chrome 6 emissions from our Crestmore cement plant. The complaint alleges an increased risk of future illness due to the exposure to chrome 6 and other toxic chemicals. The suit requests, among other things, establishment and funding of a medical testing and monitoring program for the class until their exposure to chrome 6 is no longer a threat to their health, as well as punitive and exemplary damages.
Since the Shellman lawsuit was filed, five additional putative class action lawsuits have been filed in the same court. The putative class in each of these cases is the same as or a subset of the putative class in the Shellman case, and the allegations and requests for relief are similar to those in the Shellman case. As a consequence, the court has stayed four of these lawsuits until the Shellman lawsuit is finally determined.
Since August 2008, additional lawsuits have been filed in the same court against Texas Industries, Inc. or one or more of our subsidiaries containing allegations of personal injury and wrongful death by approximately 3,000 individual plaintiffs who were allegedly exposed to chrome 6 and other toxic or harmful substances in the air, water and soil caused by emissions from the Crestmore plant. The court has dismissed Texas Industries, Inc. from the suits, and our subsidiaries operating in Texas have been dismissed by agreement with the plaintiffs. Most of our subsidiaries operating in California remain as defendants. The court has dismissed from these suits plaintiffs that failed to provide required information, leaving approximately 2,000 plaintiffs.
Since January 2009, additional lawsuits have been filed against Texas Industries, Inc. or one or more of our subsidiaries in the same court involving similar allegations, causes of action and requests for relief, but with respect to our Oro Grande, California cement plant instead of the Crestmore plant. The suits involve approximately 300 individual plaintiffs. Texas Industries, Inc. and our subsidiaries operating in Texas have been
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similarly dismissed from these suits. The court has dismissed from these suits plaintiffs that failed to provide required information, leaving approximately 250 plaintiffs. Prior to the filing of the lawsuits, the air quality management district in whose jurisdiction the plant lies conducted air sampling from locations around the plant. None of the samples contained chrome 6 levels above 1.0 ng/m³.
The plaintiffs allege causes of action that are similar from suit to suit. Following dismissal of certain causes of action by the court and amendments by the plaintiffs, the remaining causes of action typically include, among other things, negligence, intentional and negligent infliction of emotional distress, trespass, public and private nuisance, strict liability, willful misconduct, fraudulent concealment, unfair business practices, wrongful death and loss of consortium. The plaintiffs generally request, among other things, general and punitive damages, medical expenses, loss of earnings, property damages and medical monitoring costs. At the date of this report, none of the plaintiffs in these cases has alleged in their pleadings any specific amount or range of damages. Some of the suits include additional defendants, such as the owner of another cement plant located approximately four miles from the Crestmore plant or former owners of the Crestmore and Oro Grande plants. We will vigorously defend all of these suits but we cannot predict what liability, if any, could arise from them. We also cannot predict whether any other suits may be filed against us alleging damages due to injuries to persons or property caused by claimed exposure to chrome 6.
We are defendants in other lawsuits that arose in the ordinary course of business. In our judgment the ultimate liability, if any, from such legal proceedings will not have a material effect on our consolidated financial position or results of operations.
Environmental
We are subject to various federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern, among other things:
| • | air emissions, |
| • | wastewater discharges, |
| • | generation, use, handling, storage, transportation and disposal of hazardous substances and wastes, |
| • | investigation and remediation of contamination existing at current and former properties, and at third-party waste disposal sites, |
| • | exposure limits of our employees and others to dust, silica and other substances, and |
| • | safety standards for operating our quarries and plant equipment. |
Sources of air emissions and wastewater discharges at our facilities are regulated by a combination of permit limitations and emission standards of national and statewide application. The laws and regulations requiring permits and establishing emission standards have tended to become increasingly stringent over time. In addition, permits are subject to modification, renewal and revocation requirements, which allow issuing agencies to tighten the permit limitations.
Many of the raw materials, products and by-products associated with the operation of any industrial facility, including those for the production of cement or concrete products, contain chemical elements or compounds that can be designated as hazardous. An example is the metals present in cement kiln dust, or CKD. Currently, CKD is exempt from hazardous waste management standards under the Resource Conservation and Recovery Act, or RCRA, if certain tests are satisfied. We have demonstrated that the CKD we generate satisfies these tests, but there can be no guarantee that the tests will not be changed in the future.
Like others in our business, we expend substantial amounts to comply with these environmental, health and safety laws, regulations and permit limitations, including amounts for pollution control equipment required to monitor and regulate air emissions and wastewater discharges. Since many of these requirements are subjective and therefore not quantifiable, or are presently not determinable, or are likely to be affected by future legislation or rule making by government agencies, it is not possible to accurately predict the aggregate future costs of compliance and their affect on our future results of operations or financial condition.
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For additional information about the environmental, health and safety risks inherent in our operations, see “Legal Proceedings” above and Item 1A, Risk Factors, in this Report.
Intellectual Property
We own trademarks such as TXI® and certain process patents. We believe that none of our active trademarks or patents are essential to our business as a whole.
Real Estate
We own significant amounts of land that was acquired for our business purposes such as mining limestone, sand, gravel and clay. When mining is completed or land becomes surplus for other reasons, we sell it for development or, in some instances, develop it ourselves. We are involved in the sale of land in a high quality industrial and multi-use park that we developed in the metropolitan area of Dallas/Fort Worth, Texas, and we are developing plans for a multi-use development in the Austin, Texas area.
Research and Development
We incurred no research and development cost for any of the past three fiscal years. All of our innovations are developed through the production process.
Executive Officers of the Registrant
Following is information as of June 30, 2012 about our executive officers:
Mel G. Brekhus, age 63, has been President and Chief Executive Officer since June 1, 2004. From 1998 through May 2004, he was Executive Vice President, Cement, Aggregate and Concrete. He joined us in 1989 as Vice President, Cement Production and within a short period became Vice President, Cement. His career in the cement industry began in 1972 when he joined Lehigh Portland Cement Company (1972-1983). While at Lehigh, he held various positions throughout the United States as Chemist, Production Manager and Plant Manager. He was Technical Manager and Plant Manager for Missouri Portland Cement Company (1984-1989) in their Midwest operations. His professional affiliations include the Portland Cement Association, where he is Past Chairman and presently a Director.
Kenneth R. Allen, age 54, has been Vice President, Finance and Chief Financial Officer since August 1, 2008. Mr. Allen joined us in 1985 and became Treasurer in 1991 and Vice President and Treasurer in 1999. He continued to serve as Treasurer until July 2008, and from September 2009 until April 2011. Mr. Allen is a director of The Empire District Electric Company.
Frederick G. Anderson, age 61, has been Vice President, General Counsel and Secretary since November 2004. He has been a practicing attorney for over 30 years. From March 2003 until November 2004 he engaged in the private practice of law, including as of counsel to Davis Munck P.C., a Dallas, Texas based law firm. From August 1997 through March 2003, he was Senior Vice President, General Counsel and Secretary of WebLink Wireless, Inc., a wireless telecommunications company. Mr. Anderson maintains membership in the State Bar of Texas and Dallas Bar Association. He is a former Chairman of the Legal Counsels Committee of the Portland Cement Association.
Barry M. Bone, age 54, has been Vice President-Real Estate since 1995 and President of Brookhollow Corporation, our real estate subsidiary, since 1991. He joined us in 1982 and has served in various real estate positions since then.
Michael P. Collar, age 59, has been Vice President-Human Resources of the Company since June 1, 2010. From June 2002 until June 2010, he was Director, Human Resources of the Company. Prior to joining the Company in 2002, Mr. Collar had over 20 years of human resources experience with companies such as Ford Motor Company and Atlantic Richfield Company. Mr. Collar is a member of the Executive Committee of the Cement Employers Association.
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James B. Rogers,age 45, has been Vice President and Chief Operating Officer since June 1, 2011. From August 2002 through May 2011, he was Vice President-Consumer Products. He joined us in 1996 and has held various positions in our cement, aggregates and concrete operations since then. He is a director of the National Ready-Mix Concrete Association and the Texas Aggregates and Concrete Association. Mr. Rogers is the son of Robert D. Rogers, our Chairman of the Board.
T. Lesley Vines, age 49, has been Vice President-Corporate Controller since 2004 and Treasurer since April 2011. He was Assistant Treasurer from September 2009 to April 2011. He joined us in November 1995 as the Corporate Tax Manager and later became our Director of Accounting and Tax prior to becoming the Vice President-Corporate Controller. Prior to 1995, he was a Senior Manager with Ernst & Young. Mr. Vines is a Certified Public Accountant.
Executive officers are elected annually by the board of directors and serve at the pleasure of the board.
Available Information
Our company was incorporated in Delaware in 1951. Our internet address iswww.txi.com. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any reports, statements and other information filed by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains an internet web site that contains our reports, proxy and information statements and other information about us that is filed electronically with the SEC, which may be accessed athttp://www.sec.gov.
We make available, free of charge, through our investor relations website athttp://investorrelations.txi.com our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with the SEC. Our annual report to shareholders and Code of Ethics for the CEO and Senior Financial Officers are also available at this website. We intend to disclose amendments and waivers of such Code of Ethics on this website.
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PART II
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
| May 31, | ||||||||
In thousands | 2012 | 2011 | ||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 88,027 | $ | 116,432 | ||||
Receivables—net | 98,836 | 85,817 | ||||||
Inventories | 129,514 | 140,646 | ||||||
Deferred income taxes and prepaid expenses | 19,007 | 22,040 | ||||||
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TOTAL CURRENT ASSETS | 335,384 | 364,935 | ||||||
PROPERTY, PLANT AND EQUIPMENT | ||||||||
Land and land improvements | 172,247 | 158,232 | ||||||
Buildings | 51,982 | 59,320 | ||||||
Machinery and equipment | 1,184,651 | 1,222,560 | ||||||
Construction in progress | 437,166 | 357,638 | ||||||
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| 1,846,046 | 1,797,750 | |||||||
Less depreciation and depletion | 650,450 | 642,329 | ||||||
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| 1,195,596 | 1,155,421 | |||||||
OTHER ASSETS | ||||||||
Goodwill | 1,715 | 1,715 | ||||||
Real estate and investments | 20,865 | 6,749 | ||||||
Deferred income taxes and other charges | 23,368 | 22,191 | ||||||
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| 45,948 | 30,655 | |||||||
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| $ | 1,576,928 | $ | 1,551,011 | |||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 64,825 | $ | 56,787 | ||||
Accrued interest, compensation and other | 61,317 | 58,848 | ||||||
Current portion of long-term debt | 1,214 | 73 | ||||||
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TOTAL CURRENT LIABILITIES | 127,356 | 115,708 | ||||||
LONG-TERM DEBT | 656,949 | 652,403 | ||||||
OTHER CREDITS | 96,352 | 87,318 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $1 par value; authorized 100,000 shares; issued and outstanding 27,996 and 27,887 shares, respectively | 27,996 | 27,887 | ||||||
Additional paid-in capital | 488,637 | 481,706 | ||||||
Retained earnings | 204,136 | 198,751 | ||||||
Accumulated other comprehensive loss | (24,498 | ) | (12,762 | ) | ||||
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| 696,271 | 695,582 | |||||||
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| $ | 1,576,928 | $ | 1,551,011 | |||||
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See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
| Year Ended May 31, | ||||||||||||
In thousands except per share | 2012 | 2011 | 2010 | |||||||||
NET SALES | $ | 647,003 | $ | 621,813 | $ | 621,064 | ||||||
Cost of products sold | 601,256 | 596,510 | 562,066 | |||||||||
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GROSS PROFIT | 45,747 | 25,303 | 58,998 | |||||||||
Selling, general and administrative | 73,057 | 76,420 | 79,415 | |||||||||
Restructuring charges | 3,216 | — | — | |||||||||
Interest | 34,835 | 47,583 | 52,240 | |||||||||
Loss on debt retirements | — | 29,619 | — | |||||||||
Other income | (73,833 | ) | (21,512 | ) | (10,666 | ) | ||||||
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| 37,275 | 132,110 | 120,989 | ||||||||||
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INCOME (LOSS) BEFORE INCOME TAXES | 8,472 | (106,807 | ) | (61,991 | ) | |||||||
Income taxes (benefit) | 996 | (41,894 | ) | (23,138 | ) | |||||||
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NET INCOME (LOSS) | $ | 7,476 | $ | (64,913 | ) | $ | (38,853 | ) | ||||
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Net income (loss) per share | ||||||||||||
Basic | $ | .27 | $ | (2.33 | ) | $ | (1.40 | ) | ||||
Diluted | $ | .27 | $ | (2.33 | ) | $ | (1.40 | ) | ||||
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Average shares outstanding | ||||||||||||
Basic | 27,914 | 27,825 | 27,744 | |||||||||
Diluted | 28,016 | 27,825 | 27,744 | |||||||||
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See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
| Year Ended May 31, | ||||||||||||
In thousands | 2012 | 2011 | 2010 | |||||||||
OPERATING ACTIVITIES | ||||||||||||
Net income (loss) | $ | 7,476 | $ | (64,913 | ) | $ | (38,853 | ) | ||||
Adjustments to reconcile net income (loss) to cash provided by operating activities | ||||||||||||
Depreciation, depletion and amortization | 60,952 | 64,297 | 63,925 | |||||||||
Gains on asset disposals | (67,610 | ) | (13,638 | ) | (1,350 | ) | ||||||
Deferred income tax benefit | (88 | ) | (42,875 | ) | (9,132 | ) | ||||||
Stock-based compensation expense | 2,387 | 5,581 | 5,097 | |||||||||
Excess tax benefits from stock-based compensation | — | — | (250 | ) | ||||||||
Loss on debt retirements | — | 29,619 | — | |||||||||
Other—net | 1,223 | 3,158 | 13,998 | |||||||||
Changes in operating assets and liabilities | ||||||||||||
Receivables—net | (13,303 | ) | 13,379 | (5,421 | ) | |||||||
Inventories | 10,829 | 2,164 | 13,706 | |||||||||
Prepaid expenses | 1,385 | 1,301 | 387 | |||||||||
Accounts payable and accrued liabilities | 6,923 | 11,172 | 6,046 | |||||||||
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Net cash provided by operating activities | 10,174 | 9,245 | 48,153 | |||||||||
INVESTING ACTIVITIES | ||||||||||||
Capital expenditures—expansions | (72,906 | ) | (25,430 | ) | (5,337 | ) | ||||||
Capital expenditures—other | (33,430 | ) | (20,253 | ) | (8,322 | ) | ||||||
Proceeds from asset disposals | 66,845 | 3,596 | 21,592 | |||||||||
Investments in life insurance contracts | 3,354 | 4,073 | 6,967 | |||||||||
Other—net | (245 | ) | 1,266 | 2,079 | ||||||||
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Net cash provided (used) by investing activities | (36,382 | ) | (36,748 | ) | 16,979 | |||||||
FINANCING ACTIVITIES | ||||||||||||
Long-term borrowings | — | 650,000 | — | |||||||||
Debt retirements | (300 | ) | (561,627 | ) | (245 | ) | ||||||
Debt issuance costs | (1,829 | ) | (12,492 | ) | (2,552 | ) | ||||||
Stock option exercises | 2,023 | 1,462 | 893 | |||||||||
Excess tax benefits from stock-based compensation | — | — | 250 | |||||||||
Common dividends paid | (2,091 | ) | (8,354 | ) | (8,328 | ) | ||||||
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Net cash provided (used) by financing activities | (2,197 | ) | 68,989 | (9,982 | ) | |||||||
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Increase (decrease) in cash and cash equivalents | (28,405 | ) | 41,486 | 55,150 | ||||||||
Cash and cash equivalents at beginning of year | 116,432 | 74,946 | 19,796 | |||||||||
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Cash and cash equivalents at end of year | $ | 88,027 | $ | 116,432 | $ | 74,946 | ||||||
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See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
| Year Ended May 31, | ||||||||||||
In thousands except per share | 2012 | 2011 | 2010 | |||||||||
COMMON STOCK ($1 par value) | ||||||||||||
Balance at the beginning of the year | $ | 27,887 | $ | 27,796 | $ | 27,718 | ||||||
Stock issued to employees and non-employee directors related to stock compensation plans | 109 | 91 | 78 | |||||||||
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Balance at the end of the year | 27,996 | 27,887 | 27,796 | |||||||||
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ADDITIONAL PAID-IN CAPITAL | ||||||||||||
Balance at the beginning of the year | 481,706 | 475,584 | 469,908 | |||||||||
Stock-based compensation | 5,003 | 4,729 | 4,584 | |||||||||
Tax benefit from stock-based compensation | — | — | 220 | |||||||||
Stock issued to employees and non-employee directors related to stock compensation plans | 1,928 | 1,393 | 872 | |||||||||
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Balance at the end of the year | 488,637 | 481,706 | 475,584 | |||||||||
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RETAINED EARNINGS | ||||||||||||
Balance at the beginning of the year | 198,751 | 272,018 | 319,199 | |||||||||
Net income (loss) | 7,476 | (64,913 | ) | (38,853 | ) | |||||||
Common dividends paid—$.075 per share in 2012 and $.30 per share in 2011 and 2010 | (2,091 | ) | (8,354 | ) | (8,328 | ) | ||||||
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Balance at the end of the year | 204,136 | 198,751 | 272,018 | |||||||||
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ACCUMULATED OTHER COMPREHENSIVE LOSS | ||||||||||||
Balance at the beginning of the year | (12,762 | ) | (14,150 | ) | (13,680 | ) | ||||||
Postretirement benefit obligation adjustments—net of tax expense (benefit) of $1,367 in 2012, $799 in 2011 and $(270) in 2010 | (11,736 | ) | 1,388 | (470 | ) | |||||||
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Balance at the end of the year | (24,498 | ) | (12,762 | ) | (14,150 | ) | ||||||
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TOTAL SHAREHOLDERS’ EQUITY | $ | 696,271 | $ | 695,582 | $ | 761,248 | ||||||
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COMPREHENSIVE INCOME (LOSS) | ||||||||||||
Net income (loss) | $ | 7,476 | $ | (64,913 | ) | $ | (38,853 | ) | ||||
Net other comprehensive income (loss) | (11,736 | ) | 1,388 | (470 | ) | |||||||
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Net comprehensive loss | $ | (4,260 | ) | $ | (63,525 | ) | $ | (39,323 | ) | |||
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See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Texas Industries, Inc. and subsidiaries is a leading supplier of heavy construction materials in the southwestern United States through our three business segments: cement, aggregates and consumer products. Our principal products are gray portland cement, produced and sold through our cement segment; stone, sand and gravel, produced and sold through our aggregates segment; and ready-mix concrete, produced and sold through our consumer products segment. Other products include expanded shale and clay lightweight aggregates, produced and sold through our aggregates segment. Our facilities are concentrated primarily in Texas, Louisiana and California. When used in these notes the terms “Company,” “we,” “us,” or “our” mean Texas Industries, Inc. and subsidiaries unless the context indicates otherwise.
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of Texas Industries, Inc. and all subsidiaries except for a joint venture in which the Company has a 40% equity interest. The joint venture is accounted for using the equity method. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.
Estimates. The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates.
Fair Value of Financial Instruments. The estimated fair value of each class of financial instrument as of May 31, 2012 and May 31, 2011 approximates its carrying value except for long-term debt having fixed interest rates. The fair value of our long-term debt is estimated based on broker/dealer quoted market prices. As of May 31, 2012, the fair value of our long-term debt, including the current portion, was approximately $646.8 million compared to the carrying amount of $658.2 million. As of May 31, 2011, the fair value of long-term debt, including the current portion, was approximately $691.5 million compared to the carrying amount of $652.5 million.
Cash and Cash Equivalents. Investments with maturities of less than 90 days when purchased are classified as cash equivalents and consist primarily of money market funds and investment grade commercial paper issued by major corporations and financial institutions.
Receivables. Management evaluates the ability to collect accounts receivable based on a combination of factors. A reserve for doubtful accounts is maintained based on the length of time receivables are past due or the status of a customer’s financial condition. If we are aware of a specific customer’s inability to make required payments, specific amounts are added to the reserve.
Environmental Liabilities. We are subject to environmental laws and regulations established by federal, state and local authorities, and make provision for the estimated costs related to compliance when it is probable that an estimable liability has been incurred.
Legal Contingencies. We are a defendant in lawsuits which arose in the normal course of business, and make provision for the estimated loss from any claim or legal proceeding when it is probable that an estimable liability has been incurred.
Inventories. Inventories are stated at the lower of cost or market. We use the last-in, first out (“LIFO”) method to value finished products, work in process and raw material inventories excluding natural aggregate inventories. Natural aggregate inventories and parts and supplies inventories are valued using the average cost method. Our natural aggregate inventory excludes volumes in excess of an average twelve-month period of actual sales.
Long-lived Assets. Management reviews long-lived assets on a facility by facility basis for impairment whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable and would record an impairment charge if necessary. Such evaluations compare the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset and are significantly impacted by
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estimates of future prices for our products, capital needs, economic trends and other factors. Estimates of future cash flows reflect Management’s belief that it operates in a cyclical industry and that we are at a low point in the cycle.
In the fourth quarter of our 2012 fiscal year, management evaluated the Hunter, Texas cement plant, including the capitalized construction and interest costs associated with the expansion. We expect the Texas market to recover to pre-recession levels and to complete the expansion project. Based on historical margins, we believe the undiscounted cash flows over the remaining life of the Hunter plant after completion of the expansion will significantly exceed the current investment in the plant as well as the remaining costs of the expansion and future capital expenditures necessary to achieve these cash flows.
Property, plant and equipment is recorded at cost. Costs incurred to construct certain long-lived assets include capitalized interest which is amortized over the estimated useful life of the related asset. Interest is capitalized during the construction period of qualified assets based on the average amount of accumulated expenditures and the weighted average interest rate applicable to borrowings outstanding during the period. If accumulated expenditures exceed applicable borrowings outstanding during the period, capitalized interest is allocated to projects under construction on a pro rata basis. Provisions for depreciation are computed generally using the straight-line method. Useful lives for our primary operating facilities range from 10 to 25 years with certain cement facility structures having useful lives of 40 years. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials. The costs of removing overburden and waste materials to access mineral deposits are referred to as stripping costs. All production phase stripping costs are recognized as costs of the inventory produced during the period the stripping costs are incurred. Maintenance and repairs are charged to expense as incurred.
Goodwill and Goodwill Impairment. Management tests goodwill for impairment annually by reporting unit in the fourth quarter of our fiscal year using a two-step process. The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value including goodwill. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
Goodwill resulting from the acquisition of ready-mix operations in Texas and Louisiana and identified with our consumer products operations has a carrying value of $1.7 million at both May 31, 2012 and 2011. Based on an impairment test performed as of March 31, 2012, the fair value of the reporting unit exceeds its carrying value, and therefore, no potential impairment was identified.
Income Taxes. Texas Industries, Inc. (the parent company) joins in filing a consolidated return with its subsidiaries based on federal and certain state tax filing requirements. Certain subsidiaries also file separate state income tax returns. Current and deferred tax expense is allocated among the members of the group based on a stand-alone calculation of the tax of the individual member. We recognize and classify deferred income taxes using an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by current enacted tax rates.
We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the year the tax returns are filed.
The amount of income tax we pay is subject to ongoing audits by federal and state authorities which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly
- 16 -
judgmental. We account for these uncertain tax issues using a two-step approach to recognizing and measuring uncertain tax positions taken or expected to be taken in a tax return. The first step determines if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step measures the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates, or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of these matters differs from the amounts recorded, such differences generally will impact our provision for income taxes in the period in which such a determination is made. Our provisions for income taxes include the impact of reserve provisions and changes to reserves that are considered appropriate including related interest and penalties.
Management reviews our deferred tax position and in particular our deferred tax assets whenever circumstances indicate that the assets may not be realized in the future and would record a valuation allowance unless such deferred tax assets were deemed more likely than not to be recoverable. The ultimate realization of these deferred tax assets is dependent upon various factors including the generation of taxable income during future periods. In determining the need for a valuation allowance, we consider such factors as historical earnings, the reversal of existing temporary differences, prior taxable income (if carryback is permitted under the tax law), and prudent and feasible tax planning strategies. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets valuation allowance would be charged to earnings in the period in which we make such a determination. If we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance as an adjustment to earnings at such time. See further discussion in note 8.
Real Estate and Investments. Surplus real estate and real estate acquired for development of high quality industrial or multi-use parks totaled $7.6 million at May 31, 2012 and $6.0 million at May 31, 2011.
Investments include life insurance contracts purchased in connection with certain of our benefit plans. The contracts, recorded at their net cash surrender value, totaled $0.7 million (net of distributions of $94.4 million plus accrued interest and fees) at May 31, 2012 and $0.7 million (net of distributions of $87.7 million plus accrued interest and fees) at May 31, 2011. We can elect to receive distributions chargeable against the cash surrender value of the policies in the form of borrowings or withdrawals or we can elect to surrender the policies and receive their net cash surrender value. Proceeds received from the policies were $7.3 million in 2012, $7.8 million in 2011 and $10.6 million in 2010.
Investment in Joint Venture. In November 2011 we entered into a joint venture agreement with Ratliff Ready-Mix, L.P., a ready-mix operator based in Waco, Texas. We contributed seven of our central Texas ready-mix plants and certain related assets to the joint venture and guaranteed 50%, or $13.0 million, of the debt of the joint venture which matures November 18, 2013. In addition to our 50% guarantee of the debt of the joint venture, 100% of the debt is guaranteed by the other partner and secured by the underlying assets of the joint venture. The joint venture was in compliance with all the terms of the debt as of May 31, 2012. The fair value of our 40% equity interest in the joint venture was $13.0 million which resulted in the recognition of a gain of $8.9 million as required by accounting rule ASC 810 when assets constituting a business are no longer under the Company’s control. The day to day business operations are managed by the 60% partner in the venture. The joint venture operates a total of nineteen ready-mix and two sand and gravel plants serving the central Texas market. We continue to supply cement to the joint venture. Our equity in losses of the joint venture was $0.5 million in 2012.
Deferred Other Charges. Deferred other charges totaled $20.4 million at May 31, 2012 and $19.5 million at May 31, 2011 and are composed primarily of debt issuance costs that totaled $13.0 million at May 31, 2012 and $13.2 million at May 31, 2011. The costs are amortized over the term of the related debt.
Other Credits. Other credits totaled $96.4 million at May 31, 2012 and $87.3 million at May 31, 2011 and are composed primarily of liabilities related to our retirement plans, deferred compensation agreements and asset retirement obligations.
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Asset Retirement Obligations. We record a liability for legal obligations associated with the retirement of our long-lived assets in the period in which it is incurred if an estimate of fair value of the obligation can be made. The discounted fair value of the obligations incurred in each period are added to the carrying amount of the associated assets and depreciated over the lives of the assets. The liability is accreted at the end of each period through a charge to operating expense. A gain or loss on settlement is recognized if the obligation is settled for other than the carrying amount of the liability.
We incur legal obligations for asset retirement as part of our normal operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. Determining the amount of an asset retirement liability requires estimating the future cost of contracting with third parties to perform the obligation. The estimate is significantly impacted by, among other considerations, management’s assumptions regarding the scope of the work required, labor costs, inflation rates, market-risk premiums and closure dates.
Changes in asset retirement obligations are as follows:
In thousands | 2012 | 2011 | ||||||
Balance at beginning of year | $ | 4,455 | $ | 4,474 | ||||
Additions | 287 | 441 | ||||||
Accretion expense | 175 | 194 | ||||||
Settlements | (1,038 | ) | (654 | ) | ||||
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Balance at end of year | $ | 3,879 | $ | 4,455 | ||||
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Net Sales. Sales are recognized when title has transferred and products are delivered. We include delivery fees in the amount we bill customers to the extent needed to recover our cost of freight and delivery. Net sales are presented as revenues including these delivery fees.
Other Income. Other income includes gains from the sale or exchange of operating assets and emission credits of $70.1 million in 2012, $15.4 million in 2011 and $4.8 million in 2010.
In April 2011 we entered into an asset exchange transaction in which we acquired the ready-mix operations of Transit Mix Concrete and Materials Company, a subsidiary of Trinity Industries, Inc., that serve the central Texas market from north of San Antonio to Hillsboro, Texas. In exchange for the ready-mix facilities, we transferred to Trinity Materials, Inc., also a subsidiary of Trinity Industries, Inc., the aggregate operations at the Anacoco sand and gravel plant, which serves the southwest Louisiana and southeast Texas markets, and the Paradise and Beckett sand and gravel plants, which both serve the north Texas market. The exchange resulted in the acquisition of ready-mix property, plant and equipment of $17.4 million and the recognition of a gain of $12.0 million in 2011. The gain from the transaction is reported in our aggregates segment and the operating results of the acquired ready-mix operations are reported in our consumer products segment.
In July 2011 we entered into an asset exchange transaction with CEMEX USA in which we acquired three ready-mix concrete plants and a sand and gravel plant that serve the Austin, Texas metropolitan market. In exchange, we transferred to CEMEX USA seven ready-mix concrete plants in the Houston, Texas market, and we designated four non-operating ready-mix plant sites in the Houston area as surplus real estate. The exchange resulted in the acquisition of ready-mix and aggregate property, plant and equipment of $6.1 million and the recognition of a gain of $1.6 million in 2012. The gain from the transaction and the operating results of the acquired ready-mix operations are reported in our consumer products segment, and the operating results of the acquired sand and gravel operations are reported in our aggregates segment.
In November 2011 we entered into a joint venture agreement with Ratliff Ready-Mix, L.P., a ready-mix operator based in Waco, Texas. We contributed seven of our central Texas ready-mix plants and certain related assets to the joint venture. The fair value of our 40% equity interest in the joint venture was $13.0 million which resulted in the recognition of a gain of $8.9 million in 2012. The gain from the transaction and our proportional share of the joint venture operating results are reported in our consumer products segment.
In April 2012 we sold our Texas-based package products operations to Bonsal American, a unit of Oldcastle, Inc. The transaction included five production facilities that serve the Texas market from the Dallas-Fort Worth
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area of north Texas to the Houston area of south Texas and extending through Austin and central Texas. The sale resulted in the recognition of a gain of $30.9 million in 2012. As a part of the agreement, we have entered into a long-term cement supply agreement with Bonsal American and will continue to produce and sell packaged cement and masonry cements in the Texas region. The gain from the transaction is reported in our consumer products segment.
In April 2012 we sold our aggregate rail distribution terminal and associated assets located in Stafford, Texas to Lex Missouri City, LP which resulted in the recognition of a gain of $20.8 million in 2012 that is reported in our aggregates segment.
Routine sales of surplus operating assets and real estate resulted in gains of $5.4 million in 2012, $1.7 million in 2011 and $1.4 million in 2010. We have sold emissions credits associated with our Crestmore cement plant in Riverside, California resulting in gains of $2.5 million in 2012, $1.7 million in 2011 and $3.4 million in 2010.
In addition, we have entered into various oil and gas lease agreements on property we own in north Texas. The terms of the agreements include the payment of a lease bonus and royalties on any oil and gas produced. Lease bonus payments and royalties on oil and gas produced resulted in income of $1.3 million in 2012, $3.1 million in 2011 and $1.1 million in 2010. We cannot predict what the level of future royalties, if any, will be.
Restructuring Charges. We recorded restructuring charges of $3.2 million in 2012, of which $2.6 million has been paid. These charges consist primarily of severance and benefit costs associated with various workforce reduction initiatives.
Stock-based Compensation. We have provided stock-based compensation to employees and non-employee directors in the form of non-qualified and incentive stock options, restricted stock, stock appreciation rights, deferred compensation agreements and stock awards. We use the Black-Scholes option-pricing model to determine the fair value of stock options granted as of the date of grant. Options with graded vesting are valued as single awards and the related compensation cost is recognized using a straight-line attribution method over the shorter of the vesting period or required service period adjusted for estimated forfeitures. We use the average stock price on the date of grant to determine the fair value of restricted stock awards paid. A liability, which is included in other credits, is recorded for stock appreciation rights, deferred compensation agreements and stock awards expected to be settled in cash, based on their fair value at the end of each period until such awards are paid. See further discussion in note 6.
Financial-based Incentive Plans. All personnel employed as of May 31 and not participating in a production-based incentive awards plan share in our pretax income for the year then ended based on predetermined formulas. The duration of most of the plans is one year. Certain executives are additionally covered under a three-year plan. All plans are subject to annual review by the Compensation Committee of the Board of Directors. The amount of financial-based incentive compensation included in selling, general and administrative expense was $5.0 million in 2012 and none in 2011 and 2010.
Earnings Per Share(“EPS”). Income or loss allocated to common shareholders adjusts net income or loss for the participation in earnings of unvested restricted shares outstanding.
Basic weighted-average number of common shares outstanding during the period includes contingently issuable shares and excludes outstanding unvested restricted shares. Contingently issuable shares outstanding at May 31, 2012 relate to deferred compensation agreements in which directors elected to defer their fees. The deferred compensation is denominated in shares of our common stock and issued in accordance with the terms of the agreement subsequent to retirement or separation from us. The shares are considered contingently issuable because the director has an unconditional right to the shares to be issued.
Diluted weighted-average number of common shares outstanding during the period adjusts basic weighted-average shares for the dilutive effect of stock options, restricted shares and awards.
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Basic and Diluted EPS are calculated as follows:
In thousands except per share | 2012 | 2011 | 2010 | |||||||||
Earnings | ||||||||||||
Net income (loss) | $ | 7,476 | $ | (64,913 | ) | $ | (38,853 | ) | ||||
Unvested restricted share participation | (14 | ) | 31 | 16 | ||||||||
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Income (loss) allocated to common shareholders | $ | 7,462 | $ | (64,882 | ) | $ | (38,837 | ) | ||||
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Shares | ||||||||||||
Weighted-average shares outstanding | 27,927 | 27,836 | 27,752 | |||||||||
Contingently issuable shares | 2 | 2 | 6 | |||||||||
Unvested restricted shares | (15 | ) | (13 | ) | (14 | ) | ||||||
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Basic weighted-average shares | 27,914 | 27,825 | 27,744 | |||||||||
Stock option, restricted share and award dilution | 102 | — | — | |||||||||
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Diluted weighted-average shares(1) | 28,016 | 27,825 | 27,744 | |||||||||
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Net income (loss) per share | ||||||||||||
Basic | $ | .27 | $ | (2.33 | ) | $ | (1.40 | ) | ||||
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Diluted | $ | .27 | $ | (2.33 | ) | $ | (1.40 | ) | ||||
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(1) Shares excluded due to antidilutive effect | ||||||||||||
Stock options, restricted shares and awards | 1,280 | 1,032 | 978 | |||||||||
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Recently Issued Accounting Guidance. In June 2011, the Financial Accounting Standards Board issued new accounting guidance that requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. In December 2011, the Financial Accounting Standards Board issued an amendment to an existing accounting standard which defers the requirement to present reclassification adjustments for each component of other comprehensive income on the face of the income statement. The new guidance is effective for us on June 1, 2012 and is not expected to have a material impact on our consolidated financial statements.
2. Working Capital
Working capital totaled $208.0 million at May 31, 2012, compared to $249.2 million at May 31, 2011. Selected components of working capital are summarized below.
Receivables consist of:
In thousands | 2012 | 2011 | ||||||
Trade notes and accounts receivable | $ | 97,621 | $ | 84,406 | ||||
Other | 1,215 | 1,411 | ||||||
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| $ | 98,836 | $ | 85,817 | |||||
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Trade notes and accounts receivable are presented net of allowances for doubtful receivables of $2.5 million at May 31, 2012 and $3.9 million at May 31, 2011. Provisions for bad debts charged to expense were $0.5 million in 2012, $3.3 million in 2011 and $2.0 million in 2010. Uncollectible accounts written off totaled $1.9 million in 2012, $2.9 million in 2011 and $0.6 million in 2010.
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Inventories consist of:
In thousands | 2012 | 2011 | ||||||
Finished products | $ | 7,749 | $ | 9,627 | ||||
Work in process | 37,301 | 44,391 | ||||||
Raw materials | 12,745 | 15,215 | ||||||
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Total inventories at LIFO cost | 57,795 | 69,233 | ||||||
Finished products | 23,451 | 23,427 | ||||||
Raw materials | 229 | 272 | ||||||
Parts and supplies | 48,039 | 47,714 | ||||||
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Total inventories at average cost | 71,719 | 71,413 | ||||||
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Total inventories | $ | 129,514 | $ | 140,646 | ||||
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All inventories are stated at the lower of cost or market. Finished products, work in process and raw material inventories, excluding natural aggregate inventories, are valued using the last-in, first-out (“LIFO”) method. Natural aggregate finished products and raw material inventories and parts and supplies inventories are valued using the average cost method. If the average cost method (which approximates current replacement cost) had been used for all of these inventories, inventory values would have been higher by $37.5 million in 2012 and $44.6 million in 2011. During each of the three years ended May 31, 2012 certain inventory quantities were reduced, which resulted in liquidations of LIFO inventory layers carried at lower costs prevailing in prior years. The effect of the liquidations was to decrease cost of products sold by approximately $4.1 million in 2012, $1.2 million in 2011 and $1.8 million in 2010.
Accrued interest, compensation and other consist of:
In thousands | 2012 | 2011 | ||||||
Interest | $ | 17,810 | $ | 17,827 | ||||
Compensation and employee benefits | 18,103 | 13,536 | ||||||
Casualty insurance claims | 14,004 | 15,740 | ||||||
Income taxes | 4,500 | 3,723 | ||||||
Property taxes and other | 6,900 | 8,022 | ||||||
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| $ | 61,317 | $ | 58,848 | |||||
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3. Long-Term Debt
Long-term debt consists of:
In thousands | 2012 | 2011 | ||||||
Senior secured revolving credit facility expiring in 2016 | $ | — | $ | — | ||||
9.25% Senior notes due 2020 issued August 10, 2010 at par value | 650,000 | 650,000 | ||||||
Other | 5,778 | — | ||||||
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| 655,778 | 650,000 | |||||||
Capital lease obligations | 2,136 | 2,208 | ||||||
Other contract obligations | 249 | 268 | ||||||
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| 658,163 | 652,476 | |||||||
Less current portion | 1,214 | 73 | ||||||
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| $ | 656,949 | $ | 652,403 | |||||
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Senior Secured Revolving Credit Facility. On August 25, 2011, we amended and restated our credit agreement and the associated security agreement. The credit agreement continues to provide for a $200 million senior secured revolving credit facility with a $50 million sub-limit for letters of credit and a $15 million sub-limit for swing line loans. The credit facility matures on August 25, 2016. Amounts drawn under the credit
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facility bear annual interest either at the LIBOR rate plus a margin of 2.0% to 2.75% or at a base rate plus a margin of 1.0% to 1.75%. The base rate is the higher of the federal funds rate plus 0.5%, the prime rate established by Bank of America, N.A. or the one-month LIBOR rate plus 1.0%. The interest rate margins are determined based on the Company’s fixed charge coverage ratio. The commitment fee calculated on the unused portion of the credit facility ranges from 0.375% to 0.50% per year based on the Company’s average daily loan balance. We may terminate the credit facility at any time.
The amount that can be borrowed under the credit facility is limited to an amount called the borrowing base. The borrowing base may be less than the $200 million stated principal amount of the credit facility. The borrowing base is calculated based on the value of our accounts receivable, inventory and mobile equipment in which the lenders have a security interest. In addition, by mortgaging tracts of its real property to the lenders, the Company may increase the borrowing base by an amount beginning at $20 million and declining to $10.7 million at the maturity of the credit facility.
The borrowing base under the agreement was $147.8 million as of May 31, 2012. We are not required to maintain any financial ratios or covenants unless an event of default occurs or the unused portion of the borrowing base is less than $25 million, in which case we must maintain a fixed charge coverage ratio of at least 1.0 to 1.0. At May 31, 2012, our fixed charge coverage ratio was (.39) to 1.0. Given this ratio, we may use only $122.8 million of the borrowing base as of such date. No borrowings were outstanding at May 31, 2012; however, $26.9 million of the borrowing base was used to support letters of credit. As a result, the maximum amount we could borrow as of May 31, 2012 was $95.9 million.
All of our consolidated subsidiaries have guaranteed our obligations under the credit facility. The credit facility is secured by first priority security interests in all or most of our existing and future consolidated accounts, inventory, equipment, intellectual property and other personal property, and in all of our equity interests in present and future domestic subsidiaries and 66% of the equity interest in any future foreign subsidiaries, if any.
The credit agreement contains a number of covenants restricting, among other things, prepayment or redemption of our senior notes, distributions and dividends on and repurchases of our capital stock, acquisitions and investments, indebtedness, liens and affiliate transactions. We are permitted to pay cash dividends on our common stock as long as the credit facility is not in default, the fixed charge coverage ratio is greater than 1.0 to 1.0 and borrowing availability under the borrowing base is more than $40 million. When our fixed charge coverage ratio is less than 1.0 to 1.0, we are permitted to pay cash dividends on our common stock not to exceed $2.5 million in any single instance (which shall not occur more than four times in any calendar year) or $10 million in the aggregate during any calendar year as long as the credit facility is not in default and borrowing availability is more than the greater of $60 million or 30% of the aggregate commitments of all lenders. For this purpose, borrowing availability is equal to the borrowing base less the amount of outstanding borrowings less the amount used to support letters of credit. We were in compliance with all of our loan covenants as of May 31, 2012.
9.25% Senior Notes. On August 10, 2010, we sold $650 million aggregate principal amount of our 9.25% senior notes due 2020 at an offering price of 100%. The notes were issued under an indenture dated as of August 10, 2010. The net proceeds were used to purchase or redeem all of our outstanding 7.25% senior notes due 2013, with additional proceeds available for general corporate purposes.
At May 31, 2012, we had $650 million aggregate principal amount of 9.25% senior notes outstanding. Under the indenture, at any time on or prior to August 15, 2015, we may redeem the notes at a redemption price equal to the sum of the principal amount thereof, plus accrued interest and a make-whole premium. On and after August 15, 2015, we may redeem all or a part of the notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest if redeemed during the twelve-month period beginning on August 15 of the years indicated below:
Year | Percentage | |||
2015 | 104.625 | % | ||
2016 | 103.083 | % | ||
2017 | 101.542 | % | ||
2018 and thereafter | 100.000 | % | ||
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In addition, prior to August 15, 2013, we may redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 109.250% of the principal amount thereof, plus accrued interest with the net cash proceeds from certain equity offerings. If we experience a change of control, we may be required to offer to purchase the notes at a purchase price equal to 101% of the principal amount, plus accrued interest.
All of our consolidated subsidiaries have unconditionally guaranteed the 9.25% senior notes. The indenture governing the notes contains affirmative and negative covenants that, among other things, limit our and our subsidiaries’ ability to pay dividends on or redeem or repurchase stock, make certain investments, incur additional debt or sell preferred stock, create liens, restrict dividend payments or other payments from subsidiaries to the Company, engage in consolidations and mergers or sell or transfer assets, engage in sale and leaseback transactions, engage in transactions with affiliates, and sell stock in our subsidiaries. We are not required to maintain any affirmative financial ratios or covenants. We were in compliance with all of our covenants as of May 31, 2012.
Refinancing. On July 27, 2010, we commenced a cash tender offer for all of the outstanding $550 million aggregate principal amount of our 7.25% senior notes due 2013 and a solicitation of consents to amend the indenture governing the 7.25% notes. Pursuant to the tender offer and consent solicitation, we purchased $536.6 million aggregate principal amount of the 7.25% notes, and paid an aggregate of $547.7 million in purchase price and consent fees. On September 9, 2010, we redeemed the remaining $13.4 million aggregate principal amount of the 7.25% notes at a price of 101.813% of the principal amount thereof, plus accrued and unpaid interest on the 7.25% notes to the redemption date. We recognized a loss on debt retirement of $29.6 million representing $11.4 million in consent fees, redemption price premium and transaction costs and a write-off of $18.2 million of unamortized debt discount and original issuance costs associated with the 7.25% notes.
Guarantee of Joint Venture Debt. We have guaranteed 50%, or $13.0 million, of the debt of an unconsolidated joint venture which matures November 18, 2013. The joint venture was in compliance with all the terms of the debt as of May 31, 2012. See further discussion of the joint venture underInvestment in Joint Venture in note 1.
Other. Principal payments due on long-term debt, excluding capital lease and other contract obligations, during each of the five years subsequent to May 31, 2012 are $1.1 million, $1.2 million, $1.2 million, $1.3 million and $1.0 million. The total amount of interest incurred was $68.5 million in 2012, $66.3 million in 2011 and $52.2 million in 2010, of which $33.7 million in 2012 and $18.7 million in 2011 was capitalized. The total amount of interest paid was $66.3 million in 2012, $60.5 million in 2011 and $46.4 million in 2010.
4. Commitments
Operating Leases. We lease certain mobile and other equipment, office space and other items which in the normal course of business may be renewed or replaced by subsequent leases. Total expense for such operating leases (other than for mineral rights) was $14.5 million in 2012, $15.5 million in 2011 and $18.2 million in 2010. Total future payments under non-cancelable operating leases with an initial or remaining term of more than one year were $37.5 million at May 31, 2012. Estimated lease payments for each of the five succeeding years are $15.4 million, $6.8 million, $4.4 million, $3.6 million and $3.4 million.
Purchase Obligations. We purchase coal for use in our operations under long-term supply contracts that, in certain cases, require minimum amounts of materials be purchased or are subject to minimum transportation charges. In addition, we purchase mining services at our north Texas cement plant under a long-term contract that contains provisions for minimum payments. We expect to utilize these required amounts of material and services in the normal course of business operations. Total cost incurred under contracts requiring minimum purchases or payments was $16.1 million in 2012, $27.0 million in 2011 and $24.8 million in 2010. Total future minimum payments under the contracts were $6.1 million at May 31, 2012. Estimated minimum payments for each of the five succeeding years are $3.0 million, $0.8 million, $0.8 million, $0.8 million and $0.7 million.
We entered into a long-term contract with a power supplier in connection with our Oro Grande, California cement plant which included the construction of certain power facilities at the plant. We recognized a
- 23 -
capital lease obligation of $2.4 million related to payment obligations under the power supply contract related to these facilities. The total future commitment under the contract, including maintenance services to be provided by the power supplier, related to these facilities was $6.0 million at May 31, 2012. Payments for each of the five succeeding years are $0.4 million per year.
During October 2007, we commenced construction on a project to expand our Hunter, Texas cement plant. In May 2009 we temporarily halted construction on the project because we believed that economic and market conditions made it unlikely that cement demand levels in Texas at that time would permit the new kiln to operate profitably if the project was completed as originally scheduled. We resumed construction in October 2010 and expect to begin commissioning in the fall of 2012. The total capital cost of the project is expected to be between $365 million and $375 million, excluding capitalized interest. As of May 31, 2012, we have incurred $353.1 million, excluding capitalized interest of $68.7 million related to the project, of which $344.4 million has been paid.
5. Shareholders’ Equity
There are authorized 100,000 shares of Cumulative Preferred Stock, no par value, of which 20,000 shares are designated $5 Cumulative Preferred Stock (Voting), redeemable at $105 per share and entitled to $100 per share upon dissolution. An additional 40,000 shares are designated Series B Junior Participating Preferred Stock. The Series B Preferred Stock is not redeemable and ranks, with respect to the payment of dividends and the distribution of assets, junior to (i) all other series of the Preferred Stock unless the terms of any other series shall provide otherwise and (ii) the $5 Cumulative Preferred Stock. No shares of $5 Cumulative Preferred Stock or Series B Junior Participating Preferred Stock were outstanding as of May 31, 2012.
6. Stock-Based Compensation Plans
The Texas Industries, Inc. 2004 Omnibus Equity Compensation Plan (the “2004 Plan”) provides that, in addition to other types of awards, non-qualified and incentive stock options to purchase Common Stock may be granted to employees and non-employee directors at market prices at date of grant. In addition, non-qualified and incentive stock options remain outstanding under our 1993 Stock Option Plan.
Options become exercisable in installments beginning one year after the date of grant and expire ten years after the date of grant. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. Options with graded vesting are valued as single awards and the compensation cost recognized using a straight-line attribution method over the shorter of the vesting period or required service period adjusted for estimated forfeitures. The following table sets forth the information about the weighted-average grant date fair value of options granted during the three years ended May 31, 2012 and the weighted-average assumptions used for such grants.
| 2012 | 2011 | 2010 | ||||||||||
Weighted average grant date fair value | $ | 13.80 | $ | 18.52 | $ | 16.83 | ||||||
Weighted average assumptions used: | ||||||||||||
Expected volatility | .450 | .462 | .469 | |||||||||
Expected option term in years | 6.7 | 6.7 | 6.5 | |||||||||
Risk-free interest rate | 1.31 | % | 2.68 | % | 3.20 | % | ||||||
Expected dividend yield | .02 | % | .74 | % | .83 | % | ||||||
Expected volatility is based on an analysis of historical volatility of our common stock. Expected option term is the period of time that options granted are expected to be outstanding and is derived by analyzing the historical option exercise experience of our optionees. Risk-free interest rate is determined using the implied yield currently available for zero coupon U.S. treasury issues with a remaining term equal to the expected term of the option. Expected dividend yield is based on the approved annual dividend rate in effect and the market price of our common stock at the time of grant.
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A summary of option transactions for the three years ended May 31, 2012, follows:
| Shares Under Option | Weighted-Average Option Price | |||||||
Outstanding at May 31, 2009 | 1,594,757 | $ | 38.03 | |||||
Granted | 320,450 | 36.15 | ||||||
Exercised | (122,884 | ) | 25.50 | |||||
Canceled | (27,807 | ) | 39.20 | |||||
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Outstanding at May 31, 2010 | 1,764,516 | 38.54 | ||||||
Granted | 358,450 | 40.22 | ||||||
Exercised | (103,280 | ) | 22.51 | |||||
Canceled | (47,245 | ) | 43.13 | |||||
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Outstanding at May 31, 2011 | 1,972,441 | 39.58 | ||||||
Granted | 389,850 | 29.75 | ||||||
Exercised | (105,269 | ) | 21.44 | |||||
Canceled | (111,452 | ) | 42.31 | |||||
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Outstanding at May 31, 2012 | 2,145,570 | $ | 38.54 | |||||
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Options exercisable at May 31 were 1,160,420 shares for 2012, 1,040,521 shares for 2011 and 905,066 shares for 2010 at a weighted-average option price of $42.59, $41.34 and $39.09 respectively. The following table summarizes information about stock options outstanding as of May 31, 2012.
| Range of Exercise Prices | ||||||||||||
| $16.04—$29.38 | $33.57—$48.60 | $50.63—$70.18 | ||||||||||
Options outstanding | ||||||||||||
Shares outstanding | 818,763 | 800,257 | 526,550 | |||||||||
Weighted-average remaining life in years | 6.72 | 6.67 | 4.06 | |||||||||
Weighted-average exercise price | $ | 25.32 | $ | 39.68 | $ | 57.37 | ||||||
Options exercisable | ||||||||||||
Shares exercisable | 323,633 | 346,447 | 490,340 | |||||||||
Weighted-average remaining life in years | 3.71 | 5.12 | 3.99 | |||||||||
Weighted-average exercise price | $ | 21.09 | $ | 41.06 | $ | 57.86 | ||||||
Outstanding options expire on various dates to January 11, 2022. Shares reserved for future awards under the 2004 Plan totaled 335,199 at May 31, 2012.
As of May 31, 2012, the aggregate intrinsic value (the difference in the closing market price of our common stock of $32.00 and the exercise price to be paid by the optionee) of stock options outstanding was $5.5 million. The aggregate intrinsic value of exercisable stock options at that date was $3.5 million. The total intrinsic value for options exercised (the difference in the market price of our common stock on the exercise date and the price paid by the optionee to exercise the option) was $1.0 million in 2012, $1.7 million in 2011 and $1.5 million in 2010.
We have provided additional stock-based compensation to employees and directors under stock appreciation rights contracts, deferred compensation agreements, restricted stock payments and a former stock awards program which was settled during 2012. At May 31, 2012, outstanding stock appreciation rights totaled 133,315 shares, deferred compensation agreements to be settled in cash totaled 101,790 shares, deferred compensation agreements to be settled in common stock totaled 2,995 shares and unvested restricted stock payments totaled 18,334 shares. Other credits included $4.1 million at May 31, 2012 and $6.8 million at May 31, 2011 representing accrued compensation which is expected to be settled in cash. Common stock reserved for the settlement of stock-based compensation totaled 2.5 million shares at May 31, 2012 and 2.6 million shares at May 31, 2011.
Total stock-based compensation included in selling, general and administrative expense was $2.4 million in 2012, $5.6 million in 2011 and $5.1 million in 2010. The impact of changes in our company’s stock price on
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stock-based awards accounted for as liabilities reduced stock-based compensation $2.6 million in 2012 and increased stock-based compensation $0.8 million in 2011 and $0.5 million in 2010.
The total tax expense or benefit recognized in our statements of operations for stock-based compensation was a benefit of less than $0.1 million in 2012, $1.1 million in 2011 and $1.0 million in 2010. No cash tax benefit was realized for stock-based compensation in 2012 and 2011. The total cash tax benefit realized for stock-based compensation was $0.7 million in 2010.
As of May 31, 2012, the total unrecognized stock-based compensation expense was $11.9 million. We currently expect to recognize approximately $4.2 million of this expense in 2013, $3.4 million in 2014, $2.3 million in 2015, $1.5 million in 2016 and $0.5 million in 2017.
7. Retirement Plans
Defined Benefit Plans. Approximately 600 employees and retirees of our subsidiary, Riverside Cement Company, are covered by a defined benefit pension plan and a postretirement health benefit plan. In addition, substantially all of our executive and certain managerial employees are covered by a series of financial security plans that are non-qualified defined benefit plans. The financial security plans require deferral of a portion of a participant’s salary and provide retirement, death and disability benefits to participants. We use a measurement date of May 31 for each of our pension and postretirement benefit plans.
The pension and other benefit obligations recognized on our consolidated balance sheets totaled $88.5 million at May 31, 2012 and $74.0 million at May 31, 2011, of which $3.7 million at May 31, 2012 and $3.1 million at May 31, 2011 were classified as current liabilities.
The cumulative postretirement benefit plan adjustment recognized as other comprehensive loss on our consolidated balance sheets totaled $24.5 million (net of tax of $6.0 million) at May 31, 2012 and $12.8 million (net of tax of $7.4 million) at May 31, 2011.
The pretax changes in accumulated other comprehensive loss consist of the following:
| Pension Benefits | Other Benefits | |||||||||||||||
In thousands | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net actuarial loss at beginning of year | $ | 18,828 | $ | 21,021 | $ | 5,613 | $ | 6,382 | ||||||||
Amortization of actuarial loss | (1,722 | ) | (2,068 | ) | (566 | ) | (614 | ) | ||||||||
Current period net actuarial loss (gain) | 11,862 | (125 | ) | 19 | (155 | ) | ||||||||||
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Net actuarial loss at the end of year | $ | 28,968 | $ | 18,828 | $ | 5,066 | $ | 5,613 | ||||||||
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Net prior service credit at beginning of year | $ | — | $ | — | $ | (4,320 | ) | $ | (5,095 | ) | ||||||
Amortization of prior service credit | — | — | 775 | 775 | ||||||||||||
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Net prior service credit at the end of year | $ | — | $ | — | $ | (3,545 | ) | $ | (4,320 | ) | ||||||
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The pretax amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic postretirement benefit cost (credit) in 2013 are as follows:
In thousands | Pension Benefits | Other Benefits | ||||||
Net actuarial loss | $ | 2,927 | $ | 515 | ||||
Prior service credit | — | (775 | ) | |||||
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| $ | 2,927 | $ | (260 | ) | ||||
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Riverside Defined Benefit Plans. The amount of the defined benefit pension plan and postretirement health benefit plan expense charged to costs and expenses was as follows:
| Defined Pension Benefit | Health Benefit | |||||||||||||||||||||||
In thousands | 2012 | 2011 | 2010 | 2012 | 2011 | 2010 | ||||||||||||||||||
Service cost | $ | 537 | $ | 502 | $ | 457 | $ | 98 | $ | 114 | $ | 106 | ||||||||||||
Interest cost | 3,040 | 2,951 | 3,166 | 415 | 425 | 466 | ||||||||||||||||||
Expected return on plan assets | (3,108 | ) | (2,740 | ) | (2,342 | ) | — | — | — | |||||||||||||||
Amortization of prior service credit | — | — | — | (775 | ) | (775 | ) | (774 | ) | |||||||||||||||
Amortization of net actuarial loss | 1,722 | 2,068 | 2,000 | 566 | 614 | 603 | ||||||||||||||||||
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| $ | 2,191 | $ | 2,781 | $ | 3,281 | $ | 304 | $ | 378 | $ | 401 | |||||||||||||
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|
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| |||||||||||||
Weighted average assumptions used to determine net cost | ||||||||||||||||||||||||
Assumed discount rate | 5.35 | % | 5.60 | % | 6.80 | % | 5.35 | % | 5.60 | % | 6.80 | % | ||||||||||||
Assumed long-term rate of return on pension plan assets | 7.60 | % | 8.25 | % | 8.25 | % | — | — | — | |||||||||||||||
Average long-term pay progression | 3.00 | % | 3.00 | % | 3.00 | % | — | — | — | |||||||||||||||
Unrecognized prior service costs and credits and actuarial gains or losses for these plans are recognized in a systematic manner over the remaining service periods of active employees expected to receive benefits under these plans.
We contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts as are considered appropriate. We expect to make contributions of $4.6 million in 2013.
Obligation and asset data for the defined benefit pension plan and postretirement health benefit plan at May 31 were as follows:
| Defined Pension Benefit | Health Benefit | |||||||||||||||
In thousands | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Change in projected benefit obligation | ||||||||||||||||
Benefit obligation at beginning of year | $ | 57,756 | $ | 53,567 | $ | 7,857 | $ | 7,654 | ||||||||
Service cost | 537 | 502 | 98 | 114 | ||||||||||||
Interest cost | 3,040 | 2,951 | 415 | 425 | ||||||||||||
Participant contributions | — | — | 184 | 196 | ||||||||||||
Benefits paid | (3,102 | ) | (2,924 | ) | (405 | ) | (377 | ) | ||||||||
Actuarial loss (gain) | 7,890 | 3,660 | 19 | (155 | ) | |||||||||||
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| |||||||||
Benefit obligation at end of year | $ | 66,121 | $ | 57,756 | $ | 8,168 | $ | 7,857 | ||||||||
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| |||||||||
Change in plan assets | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 39,752 | $ | 33,080 | $ | — | $ | — | ||||||||
Actual return on plan assets | (864 | ) | 6,526 | — | — | |||||||||||
Employer contributions | 4,242 | 3,070 | 221 | 181 | ||||||||||||
Benefits paid | (3,102 | ) | (2,924 | ) | (221 | ) | (181 | ) | ||||||||
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| |||||||||
Fair value of plan assets at end of year | $ | 40,028 | $ | 39,752 | $ | — | $ | — | ||||||||
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Funded status at end of year | $ | (26,093 | ) | $ | (18,004 | ) | $ | (8,168 | ) | $ | (7,857 | ) | ||||
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| |||||||||
Weighted average assumptions used to determine benefit obligations | ||||||||||||||||
Assumed discount rate | 4.35 | % | 5.35 | % | 4.35 | % | 5.35 | % | ||||||||
Average long-term pay progression | 3.00 | % | 3.00 | % | — | — | ||||||||||
Accumulated benefit obligation for the defined benefit pension plan was $64.0 million at May 31, 2012 and $56.1 million at May 31, 2011.
- 27 -
The estimated future benefit payments under the defined benefit pension plan for each of the five succeeding years are $3.2 million, $3.4 million, $3.5 million, $3.6 million and $3.7 million and for the five-year period thereafter an aggregate of $20.2 million.
Authoritative accounting guidance for fair value measures provides a framework for measuring fair value. The framework establishes a three-level value hierarchy based on the nature of the information used to measure fair value. The fair value of all the defined benefit pension plan assets is based on quoted prices in active markets for identical assets which are considered Level 1 inputs within the hierarchy. The total estimated fair value of the plan assets at May 31 were as follows:
In thousands | 2012 | 2011 | ||||||
Cash and cash equivalents | $ | 882 | $ | 715 | ||||
Mutual funds | ||||||||
Equity | 23,782 | 24,343 | ||||||
Fixed income | 15,364 | 14,694 | ||||||
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| |||||
Fair value of plan assets at end of year | $ | 40,028 | $ | 39,752 | ||||
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The plan fiduciaries set the long-term strategic investment objectives for the defined benefit pension plan assets. The objectives include preserving the funded status of the trust and balancing risk and return. Investment performance and plan asset mix are periodically reviewed with external consultants. Plan assets are currently allocated to the fixed income and equity categories of investments in a manner that varies in the short term, but has a long term objective of averaging approximately 60% in equity securities and 40% in fixed income securities. Within these categories, investments are allocated to multiple asset classes. The expected long-term rate of return on plan assets of 7.60% for 2012 was determined by considering historical and expected returns for each asset class and the effect of periodic asset rebalancing and, for underperforming assets, reallocations. The current allocation of plan assets has a long-term historical rate of return that exceeds the plan objectives. While historical returns are not guarantees of future performance, these allocations are expected to meet the objectives of the plan.
The actual defined benefit pension plan asset allocation at May 31, 2012 and 2011, and the target asset allocation for 2013, by asset category were as follows
% of Plan Assets | 2012 | 2011 | Target 2013 | |||||||||
Equity securities | 59 | % | 61 | % | 60 | % | ||||||
Fixed income securities | 41 | % | 39 | % | 40 | % | ||||||
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| |||||||
| 100 | % | 100 | % | 100 | % | |||||||
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| |||||||
The assumed health care cost trend rate for the next year attributed to all participant age groups is 9% declining to an ultimate trend rate of 5% in 2017. The effect of increasing or decreasing the health care cost trend rates by one percentage point would increase the health benefit obligation by approximately $377,000 or decrease the health benefit obligation by approximately $388,000 and increase or decrease the plan expense by approximately $26,000.
The estimated future benefit payments under the postretirement health benefit plan for each of the five succeeding years are $0.4 million, $0.4 million, $0.4 million, $0.4 million and $0.5 million and for the five-year period thereafter an aggregate of $2.7 million.
Financial Security Defined Benefit Plans. The amount of financial security plan benefit expense and the projected financial security plan benefit obligation are determined using assumptions as of the end of the year. The weighted-average discount rate used was 4.30% in 2012 and 5.15% in 2011. Actuarial gains or losses are recognized when incurred, and therefore, the end of year benefit obligation is the same as the accrued benefit costs recognized in the consolidated balance sheet.
In 2010, it was discovered that our actuarial assumptions for certain participants failed to consider that these participants will receive their defined benefit for a minimum of 15 years or life. Previously, our calculations had
- 28 -
incorrectly assumed that the payments to these participants ceased after 15 years. We recomputed the defined benefit liability for these participants and recognized a charge of $4.4 million in 2010 to record the additional liability. Management estimated that $3.4 million of this additional liability related to years prior to 2010. This $3.4 million would have accumulated over time since the year 2000. The $1.0 million increase related to 2010 was primarily a function of the decreased discount rate in 2010 compared to the discount rate in 2009. Management determined that the amount related to prior years was not material to the financial statements and the entire charge was recognized in selling, general and administrative expense in 2010.
The amount of financial security plan benefit expense charged to costs and expenses was as follows:
In thousands | 2012 | 2011 | 2010 | |||||||||
Service cost | $ | 2,147 | $ | 2,213 | $ | 1,673 | ||||||
Interest cost | 2,517 | 2,311 | 2,289 | |||||||||
Recognized actuarial loss | 4,366 | 2,347 | 3,854 | |||||||||
Recognized actuarial loss adjustment | — | — | 4,441 | |||||||||
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| |||||||
| $ | 9,030 | $ | 6,871 | $ | 12,257 | |||||||
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| |||||||
The following provides a reconciliation of the financial security plan benefit obligation.
In thousands | 2012 | 2011 | ||||||
Change in projected benefit obligation | ||||||||
Benefit obligation at beginning of year | $ | 48,091 | $ | 43,959 | ||||
Service cost | 2,147 | 2,213 | ||||||
Interest cost | 2,517 | 2,311 | ||||||
Recognized actuarial loss (gain) | 4,366 | 2,347 | ||||||
Benefits paid | (2,891 | ) | (2,739 | ) | ||||
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| |||||
Benefit obligation at end of year | $ | 54,230 | $ | 48,091 | ||||
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| |||||
Funded status at end of year | $ | (54,230 | ) | $ | (48,091 | ) | ||
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The financial security plans are unfunded and benefits are paid as they become due. The estimated future benefit payments under the plans for each of the five succeeding years are $3.3 million, $3.5 million, $3.9 million, $4.4 million and $4.5 million and for the five-year period thereafter an aggregate of $21.6 million.
Defined Contribution Plans. Substantially all of our employees are covered by a series of defined contribution retirement plans. The amount of pension expense charged to costs and expenses for these plans was $1.2 million in 2012, $2.8 million in 2011 and $2.8 million in 2010. It is our policy to fund the plans to the extent of charges to income.
8. Income Taxes
The provisions (benefit) for income taxes are composed of:
In thousands | 2012 | 2011 | 2010 | |||||||||
Current | $ | 1,084 | $ | 981 | $ | (14,006 | ) | |||||
Deferred | (88 | ) | (42,875 | ) | (9,132 | ) | ||||||
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| |||||||
| $ | 996 | $ | (41,894 | ) | $ | (23,138 | ) | |||||
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- 29 -
A reconciliation of income taxes at the federal statutory rate to the preceding provisions (benefit) follows:
In thousands | 2012 | 2011 | 2010 | |||||||||
Taxes at statutory rate | $ | 2,965 | $ | (37,382 | ) | $ | (21,697 | ) | ||||
Additional statutory depletion | (2,793 | ) | (2,512 | ) | (3,128 | ) | ||||||
State income taxes | 597 | (1,226 | ) | (862 | ) | |||||||
Nontaxable insurance benefits | (1,219 | ) | (1,275 | ) | (1,012 | ) | ||||||
Qualified domestic production activities | — | — | 2,085 | |||||||||
Stock-based compensation | 823 | 909 | 863 | |||||||||
Other—net | 623 | (408 | ) | 613 | ||||||||
|
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|
| |||||||
| $ | 996 | $ | (41,894 | ) | $ | (23,138 | ) | |||||
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| |||||||
The components of the net deferred tax asset at May 31 are summarized below.
In thousands | 2012 | 2011 | ||||||
Deferred tax assets | ||||||||
Deferred compensation | $ | 22,626 | $ | 22,341 | ||||
Inventory costs | 4,897 | 6,833 | ||||||
Accrued expenses not currently tax deductible | 9,192 | 10,205 | ||||||
Goodwill | 988 | 2,191 | ||||||
Other comprehensive income | 11,042 | 7,250 | ||||||
Alternative minimum tax credit carryforward | 28,808 | 28,808 | ||||||
Net operating loss carryforward | 61,530 | 49,896 | ||||||
Other | 5,998 | 4,803 | ||||||
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|
| |||||
Total deferred tax assets | 145,081 | 132,327 | ||||||
Valuation allowance | (5,159 | ) | — | |||||
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|
|
| |||||
Net deferred tax assets | 139,922 | 132,327 | ||||||
Deferred tax liabilities | ||||||||
Property, plant and equipment | 103,583 | 99,750 | ||||||
Deferred real estate gains | 19,049 | 14,505 | ||||||
Other | 3,575 | 3,039 | ||||||
|
|
|
| |||||
Total deferred tax liabilities | 126,207 | 117,294 | ||||||
|
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|
| |||||
Net deferred tax asset | 13,715 | 15,033 | ||||||
Less current deferred tax asset | 10,713 | 12,346 | ||||||
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|
| |||||
Long-term deferred tax asset | $ | 3,002 | $ | 2,687 | ||||
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| |||||
We made income tax payments of $0.4 million in 2012, $0.4 million in 2011 and $0.4 million in 2010, and received income tax refunds of $0.1 million in 2012, $13.1 million in 2011 and $16.8 million in 2010.
As of May 31, 2012, we had an alternative minimum tax credit carryforward of $28.8 million. The credit, which does not expire, is available for offset against future regular federal income tax. We had $57.6 million in federal net operating loss carryforwards. The federal net operating losses, which begin to expire in 2030, may be carried forward twenty years and offset against future federal taxable income. We had $4.0 million in state net operating loss carryforwards. The state net operating losses, which begin to expire in 2014, may be carried forward from five to twenty years depending on the state jurisdiction.
Under special tax rules (the Section 382 Limitation), cumulative stock ownership changes among material shareholders exceeding fifty percent during a three-year period can potentially limit a company’s future use of net operating losses, tax credits and certain “built-in losses” or deductions (tax attributes). The Section 382 Limitation may be increased by certain “built-in gains” as provided by current IRS guidance. We had an ownership change in 2009. However, management does not believe the Section 382 Limitation impacts the recorded value of deferred taxes or realization of our tax attributes.
- 30 -
Management reviews our deferred tax position and in particular our deferred tax assets whenever circumstances indicate that the assets may not be realized in the future and records a valuation allowance unless such deferred tax assets are deemed more likely than not to be recoverable. The ultimate realization of these deferred tax assets depends upon various factors including the generation of taxable income during future periods. The Company’s deferred tax assets exceeded deferred tax liabilities as of May 31, 2012 and May 31, 2011. Management has concluded that the sources of taxable income we are permitted to consider do not assure the realization of the entire amount of our net deferred tax assets. Accordingly, a valuation allowance was required due to the uncertainty of realizing the deferred tax assets. We recorded a valuation allowance of $5.2 million in 2012 through a charge to other comprehensive loss given the increase in actuarial losses in our retirement plans in 2012 when the Company was otherwise profitable.
The amount of income tax we pay is subject to ongoing audits by federal and state authorities which may result in proposed assessments. We adjust reserves for our uncertain tax positions due to changing facts and circumstances, such as the closing of a tax audit, judicial rulings, refinement of estimates, or realization of earnings or deductions that differ from our estimates. To the extent that the final outcome of a matter differs from the amount recorded, such difference generally will impact our provision for income taxes in the period that includes its final resolution. We have no significant reserves for uncertain tax positions including related interest and penalties.
In addition to our federal income tax return, we file income tax returns in various state jurisdictions. We are no longer subject to income tax examinations by federal tax authorities for years prior to 2007 and state tax authorities for years prior to 2007. Our federal income tax returns for 2007 through 2010 are currently under examination. We do not anticipate that any adjustments that may result from this examination would have a material effect on our financial position or results of operations.
9. Legal Proceedings and Contingent Liabilities
We are subject to federal, state and local environmental laws, regulations and permits concerning, among other matters, air emissions and wastewater discharge. We intend to comply with these laws, regulations and permits. However, from time to time we receive claims from federal and state environmental regulatory agencies and entities asserting that we are or may be in violation of certain of these laws, regulations and permits, or from private parties alleging that our operations have injured them or their property. It is possible that we could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us.
In March 2008, the South Coast Air Quality Management District, or SCAQMD, informed one of our subsidiaries, Riverside Cement Company (Riverside), that it believed that operations at the Crestmore cement plant in Riverside, California caused the level of hexavalent chromium, or chrome 6, in the air in the vicinity of the plant to be elevated above ambient air levels. Chrome 6 has been identified by the State of California as a carcinogen. Riverside immediately began taking steps, in addition to its normal dust control procedures, to reduce dust from plant operations and eliminate the use of open clinker stockpiles. In February 2008, the SCAQMD placed an air monitoring station at the downwind property line closest to the open clinker stockpiles. In the SCAQMD’s first public report of the results of its monitoring, over the period of February 12 to April 9, 2008, the average level of chrome 6 was 2.43 nanograms per cubic meter, or ng/m³. Since that time, the average level has decreased. The average levels of chrome 6 reported by the SCAQMD at all of the air monitoring stations in areas around the plant, including the station at the property line, are below 1.0 ng/m³ over the entire period of time it has operated the stations. The SCAQMD compared the level of exposure at the air monitor on our property line with the following employee exposure standards established by regulatory agencies:
Occupational Safety and Health Administration | 5,000 ng/m³ | |||
National Institute for Occupational Safety and Health | 1,000 ng/m³ | |||
California Environmental Protection Agency | 200 ng/m³ |
- 31 -
In public meetings conducted by the SCAQMD, it stated that the risk of long term exposure immediately adjacent to the plant is similar to living close to a busy freeway or rail yard, and it estimated an increased risk of 250 to 500 cancers per one million people, assuming continuous exposure for 70 years. Riverside has not determined how this particular risk number was calculated by SCAQMD. However, theRiverside Press Enterprise reported in a May 30, 2008 story that “John Morgan, a public health and epidemiology professor at Loma Linda University, said he looked at cancer cases reported from 1996 to 2005 in the … census [tract] nearest the [plant] and found no excess cases. That includes lung cancer, which is associated with exposure to hexavalent chromium.”
In late April 2008, a lawsuit was filed in Riverside County Superior Court of the State of California styledVirginia Shellman, et al. v. Riverside Cement Holdings Company, et al . The lawsuit against three of our subsidiaries purports to be a class action complaint for medical monitoring for a putative class defined as individuals who were allegedly exposed to chrome 6 emissions from our Crestmore cement plant. The complaint alleges an increased risk of future illness due to the exposure to chrome 6 and other toxic chemicals. The suit requests, among other things, establishment and funding of a medical testing and monitoring program for the class until their exposure to chrome 6 is no longer a threat to their health, as well as punitive and exemplary damages.
Since theShellman lawsuit was filed, five additional putative class action lawsuits have been filed in the same court. The putative class in each of these cases is the same as or a subset of the putative class in theShellman case, and the allegations and requests for relief are similar to those in theShellman case. As a consequence, the court has stayed four of these lawsuits until theShellman lawsuit is finally determined.
Since August 2008, additional lawsuits have been filed in the same court against Texas Industries, Inc. or one or more of our subsidiaries containing allegations of personal injury and wrongful death by approximately 3,000 individual plaintiffs who were allegedly exposed to chrome 6 and other toxic or harmful substances in the air, water and soil caused by emissions from the Crestmore plant. The court has dismissed Texas Industries, Inc. from the suits, and our subsidiaries operating in Texas have been dismissed by agreement with the plaintiffs. Most of our subsidiaries operating in California remain as defendants. The court has dismissed from these suits plaintiffs that failed to provide required information, leaving approximately 2,000 plaintiffs.
Since January 2009, additional lawsuits have been filed against Texas Industries, Inc. or one or more of our subsidiaries in the same court involving similar allegations, causes of action and requests for relief, but with respect to our Oro Grande, California cement plant instead of the Crestmore plant. The suits involve approximately 300 individual plaintiffs. Texas Industries, Inc. and our subsidiaries operating in Texas have been similarly dismissed from these suits. The court has dismissed from these suits plaintiffs that failed to provide required information, leaving approximately 250 plaintiffs. Prior to the filing of the lawsuits, the air quality management district in whose jurisdiction the plant lies conducted air sampling from locations around the plant. None of the samples contained chrome 6 levels above 1.0 ng/m³.
The plaintiffs allege causes of action that are similar from suit to suit. Following dismissal of certain causes of action by the court and amendments by the plaintiffs, the remaining causes of action typically include, among other things, negligence, intentional and negligent infliction of emotional distress, trespass, public and private nuisance, strict liability, willful misconduct, fraudulent concealment, unfair business practices, wrongful death and loss of consortium. The plaintiffs generally request, among other things, general and punitive damages, medical expenses, loss of earnings, property damages and medical monitoring costs. At the date of this report, none of the plaintiffs in these cases has alleged in their pleadings any specific amount or range of damages. Some of the suits include additional defendants, such as the owner of another cement plant located approximately four miles from the Crestmore plant or former owners of the Crestmore and Oro Grande plants. We will vigorously defend all of these suits but we cannot predict what liability, if any, could arise from them. We also cannot predict whether any other suits may be filed against us alleging damages due to injuries to persons or property caused by claimed exposure to chrome 6.
We are defendants in other lawsuits that arose in the ordinary course of business. In our judgment the ultimate liability, if any, from such legal proceedings will not have a material effect on our consolidated financial position or results of operations.
- 32 -
10. Business Segments
We have three business segments: cement, aggregates and consumer products. Our business segments are managed separately along product lines. Through the cement segment we produce and sell gray portland cement as our principal product, as well as specialty cements. Through the aggregates segment we produce and sell stone, sand and gravel as our principal products, as well as expanded shale and clay lightweight aggregates. Through the consumer products segment we produce and sell ready-mix concrete as our principal product, as well as packaged concrete mix, mortar, sand and related products prior to our sale of our Texas-based package products operations in April 2012. We account for intersegment sales at market prices. Segment operating profit consists of net sales less operating costs and expenses. Corporate includes those administrative, financial, legal, human resources, environmental and real estate activities which are not allocated to operations and are excluded from segment operating profit. Identifiable assets by segment are those assets that are used in each segment’s operation. Corporate assets consist primarily of cash and cash equivalents, real estate and other financial assets not identified with a business segment.
The following is a summary of operating results and certain other financial data for our business segments.
In thousands | 2012 | 2011 | 2010 | |||||||||
Net sales | ||||||||||||
Cement | ||||||||||||
Sales to external customers | $ | 268,886 | $ | 240,449 | $ | 249,366 | ||||||
Intersegment sales | 46,407 | 46,845 | 45,147 | |||||||||
Aggregates | ||||||||||||
Sales to external customers | 149,110 | 147,862 | 143,045 | |||||||||
Intersegment sales | 25,450 | 24,563 | 21,902 | |||||||||
Consumer products | ||||||||||||
Sales to external customers | 229,007 | 233,502 | 228,653 | |||||||||
Intersegment sales | 2,721 | 2,646 | 2,730 | |||||||||
Eliminations | (74,578 | ) | (74,054 | ) | (69,779 | ) | ||||||
|
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|
|
|
| |||||||
Total net sales | $ | 647,003 | $ | 621,813 | $ | 621,064 | ||||||
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|
| |||||||
Segment operating profit (loss) | ||||||||||||
Cement | $ | 20,488 | $ | (10,249 | ) | $ | 13,996 | |||||
Aggregates | 33,555 | 22,638 | 13,801 | |||||||||
Consumer products | 25,035 | (11,151 | ) | 3,657 | ||||||||
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|
|
|
| |||||||
Total segment operating profit | 79,078 | 1,238 | 31,454 | |||||||||
Corporate | (35,771 | ) | (30,843 | ) | (41,205 | ) | ||||||
Interest | (34,835 | ) | (47,583 | ) | (52,240 | ) | ||||||
Loss on debt retirements | — | (29,619 | ) | — | ||||||||
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|
|
|
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| |||||||
Income (loss) from continuing operations before income taxes | $ | 8,472 | $ | (106,807 | ) | $ | (61,991 | ) | ||||
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- 33 -
In thousands | 2012 | 2011 | 2010 | |||||||||
Identifiable assets | ||||||||||||
Cement | $ | 1,135,336 | $ | 1,082,524 | $ | 1,093,301 | ||||||
Aggregates | 219,074 | 201,917 | 229,084 | |||||||||
Consumer products | 90,717 | 106,643 | 85,641 | |||||||||
Corporate | 131,801 | 159,927 | 123,721 | |||||||||
|
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|
|
|
| |||||||
Total assets | $ | 1,576,928 | $ | 1,551,011 | $ | 1,531,747 | ||||||
|
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|
|
| |||||||
Depreciation, depletion and amortization | ||||||||||||
Cement | $ | 35,078 | $ | 36,576 | $ | 35,828 | ||||||
Aggregates | 15,745 | 18,963 | 19,873 | |||||||||
Consumer products | 8,981 | 7,625 | 7,065 | |||||||||
Corporate | 1,148 | 1,133 | 1,159 | |||||||||
|
|
|
|
|
| |||||||
Total depreciation, depletion and amortization | $ | 60,952 | $ | 64,297 | $ | 63,925 | ||||||
|
|
|
|
|
| |||||||
Capital expenditures | ||||||||||||
Cement | $ | 78,618 | $ | 30,413 | $ | 7,672 | ||||||
Aggregates | 21,332 | 6,124 | 5,293 | |||||||||
Consumer products | 4,569 | 8,229 | 564 | |||||||||
Corporate | 1,817 | 917 | 130 | |||||||||
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| |||||||
Total capital expenditures | $ | 106,336 | $ | 45,683 | $ | 13,659 | ||||||
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| |||||||
Net sales by product | ||||||||||||
Cement | $ | 232,007 | $ | 209,586 | $ | 221,068 | ||||||
Stone, sand and gravel | 64,393 | 68,645 | 69,081 | |||||||||
Ready-mix concrete | 182,418 | 180,733 | 175,581 | |||||||||
Other products | 89,529 | 94,892 | 95,928 | |||||||||
Delivery fees | 78,656 | 67,957 | 59,406 | |||||||||
|
|
|
|
|
| |||||||
Total net sales | $ | 647,003 | $ | 621,813 | $ | 621,064 | ||||||
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| |||||||
All sales were made in the United States during the periods presented with no single customer representing more than 10 percent of sales. All of our identifiable assets are located in the United States.
Cement segment operating profit includes $2.5 million in 2012, $1.7 million in 2011 and $3.4 million in 2010 from sales of emission credits associated with our Crestmore cement plant in Riverside, California.
Aggregate segment operating profit in 2012 includes a gain of $20.8 million from the sale of our aggregate rail distribution terminal and associated assets located in Stafford, Texas. Segment operating profit in 2011 includes a gain of $12.0 million from the exchange of aggregate operating assets for ready-mix operating assets.
Consumer products segment operating profit in 2012 includes a gain of $30.9 million from the sale of our Texas-based package products operations. We also entered into ready-mix and aggregate asset exchange transactions and a joint venture agreement that resulted in the recognition of gains of $10.5 million in 2012.
Cement segment capital expenditures incurred in connection with the expansion of our Hunter, Texas cement plant were $72.9 million in 2012, $25.4 million in 2011 and $5.3 million in 2010, of which $32.3 million in 2012 and $11.0 million in 2011 was capitalized interest paid.
Capital expenditures for normal replacement and upgrades of existing equipment and acquisitions to sustain existing operations were $33.4 million in in 2012, $20.3 million in 2011 and $8.3 million in 2010, of which $18.0 million was incurred to acquire aggregate reserves in 2012.
- 34 -
11. Condensed Consolidating Financial Information
On August 10, 2010, Texas Industries, Inc. (the parent company) issued $650 million aggregate principal amount of its 9.25% senior notes due 2020. All existing consolidated subsidiaries of the parent company are 100% owned and provide a joint and several, full and unconditional guarantee of the securities. There are no significant restrictions on the parent company’s ability to obtain funds from any of the guarantor subsidiaries in the form of a dividend or loan. Additionally, there are no significant restrictions on a guarantor subsidiary’s ability to obtain funds from the parent company or its direct or indirect subsidiaries.
The following condensed consolidating balance sheets, statements of operations and statements of cash flows are provided for the parent company and all guarantor subsidiaries. The information has been presented as if the parent company accounted for its ownership of the guarantor subsidiaries using the equity method of accounting. Prior period information has been reclassified to conform to the current period presentation.
In thousands | Texas Industries, Inc. | Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||
Condensed consolidating balance sheet at May 31, 2012 |
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Cash and cash equivalents | $ | 84,713 | $ | 3,314 | $ | — | $ | 88,027 | ||||||||
Receivables—net | — | 98,836 | — | 98,836 | ||||||||||||
Inventories | — | 129,514 | — | 129,514 | ||||||||||||
Deferred income taxes and prepaid expenses | 99 | 18,908 | — | 19,007 | ||||||||||||
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Total current assets | 84,812 | 250,572 | — | 335,384 | ||||||||||||
Property, plant and equipment—net | — | 1,195,596 | — | 1,195,596 | ||||||||||||
Goodwill | — | 1,715 | — | 1,715 | ||||||||||||
Real estate and investments | 664 | 20,201 | — | 20,865 | ||||||||||||
Deferred income taxes and other charges | 123,734 | 7,356 | (107,722 | ) | 23,368 | |||||||||||
Investment in subsidiaries | 987,519 | — | (987,519 | ) | — | |||||||||||
Long-term intercompany receivables | 246,298 | 18,747 | (265,045 | ) | — | |||||||||||
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Total assets | $ | 1,443,027 | $ | 1,494,187 | $ | (1,360,286 | ) | $ | 1,576,928 | |||||||
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Accounts payable | $ | 108 | $ | 64,717 | $ | — | $ | 64,825 | ||||||||
Accrued interest, compensation and other | 25,829 | 35,488 | — | 61,317 | ||||||||||||
Current portion of long-term debt | 4 | 1,210 | — | 1,214 | ||||||||||||
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Total current liabilities | 25,941 | 101,415 | — | 127,356 | ||||||||||||
Long-term debt | 650,245 | 6,704 | — | 656,949 | ||||||||||||
Long-term intercompany payables | 18,747 | 246,298 | (265,045 | ) | — | |||||||||||
Deferred income taxes | — | 107,722 | (107,722 | ) | — | |||||||||||
Other credits | 51,823 | 44,529 | — | 96,352 | ||||||||||||
Shareholders’ equity | 696,271 | 987,519 | (987,519 | ) | 696,271 | |||||||||||
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Total liabilities and shareholders’ equity | $ | 1,443,027 | $ | 1,494,187 | $ | (1,360,286 | ) | $ | 1,576,928 | |||||||
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- 35 -
In thousands | Texas Industries, Inc. | Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||
Condensed consolidating balance sheet at May 31, 2011 |
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Cash and cash equivalents | $ | 113,898 | $ | 2,534 | $ | — | $ | 116,432 | ||||||||
Receivables—net | — | 85,817 | — | 85,817 | ||||||||||||
Inventories | — | 140,646 | — | 140,646 | ||||||||||||
Deferred income taxes and prepaid expenses | 77 | 21,963 | — | 22,040 | ||||||||||||
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Total current assets | 113,975 | 250,960 | — | 364,935 | ||||||||||||
Property, plant and equipment—net | — | 1,155,421 | — | 1,155,421 | ||||||||||||
Goodwill | — | 1,715 | — | 1,715 | ||||||||||||
Real estate and investments | 677 | 6,072 | — | 6,749 | ||||||||||||
Deferred income taxes and other charges | 110,305 | 6,242 | (94,356 | ) | 22,191 | |||||||||||
Investment in subsidiaries | 945,039 | — | (945,039 | ) | — | |||||||||||
Long-term intercompany receivables | 264,779 | 18,751 | (283,530 | ) | — | |||||||||||
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Total assets | $ | 1,434,775 | $ | 1,439,161 | $ | (1,322,925 | ) | $ | 1,551,011 | |||||||
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Accounts payable | $ | 34 | $ | 56,753 | $ | — | $ | 56,787 | ||||||||
Accrued interest, compensation and other | 22,146 | 36,702 | — | 58,848 | ||||||||||||
Current portion of long-term debt | — | 73 | — | 73 | ||||||||||||
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| |||||||||
Total current liabilities | 22,180 | 93,528 | — | 115,708 | ||||||||||||
Long-term debt | 650,268 | 2,135 | — | 652,403 | ||||||||||||
Long-term intercompany payables | 18,751 | 264,779 | (283,530 | ) | — | |||||||||||
Deferred income taxes | — | 94,356 | (94,356 | ) | — | |||||||||||
Other credits | 47,994 | 39,324 | — | 87,318 | ||||||||||||
Shareholders’ equity | 695,582 | 945,039 | (945,039 | ) | 695,582 | |||||||||||
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Total liabilities and shareholders’ equity | $ | 1,434,775 | $ | 1,439,161 | $ | (1,322,925 | ) | $ | 1,551,011 | |||||||
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Condensed consolidating statement of operations for the year ended May 31, 2012 |
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Net sales | $ | — | $ | 647,003 | $ | — | $ | 647,003 | ||||||||
Cost of products sold | — | 601,256 | — | 601,256 | ||||||||||||
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| |||||||||
Gross profit | — | 45,747 | — | 45,747 | ||||||||||||
Selling, general and administrative | 9,349 | 63,708 | — | 73,057 | ||||||||||||
Restructuring charges | — | 3,216 | — | 3,216 | ||||||||||||
Interest | 68,291 | — | (33,456 | ) | 34,835 | |||||||||||
Loss on debt retirements | — | — | — | — | ||||||||||||
Other income | (56 | ) | (73,777 | ) | — | (73,833 | ) | |||||||||
Intercompany other income | (3,500 | ) | (29,956 | ) | 33,456 | — | ||||||||||
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| 74,084 | (36,809 | ) | — | 37,275 | ||||||||||||
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Income (loss) before the following items | (74,084 | ) | 82,556 | — | 8,472 | |||||||||||
Income taxes (benefit) | (27,345 | ) | 28,341 | — | 996 | |||||||||||
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| |||||||||
| (46,739 | ) | 54,215 | — | 7,476 | ||||||||||||
Equity in earnings (loss) of subsidiaries | 54,215 | — | (54,215 | ) | — | |||||||||||
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Net income (loss) | $ | 7,476 | $ | 54,215 | $ | (54,215 | ) | $ | 7,476 | |||||||
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- 36 -
In thousands | Texas Industries, Inc. | Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||
Condensed consolidating statement of operations for the year ended May 31, 2011 |
| |||||||||||||||
Net sales | $ | — | $ | 621,813 | $ | — | $ | 621,813 | ||||||||
Cost of products sold | — | 596,510 | — | 596,510 | ||||||||||||
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| |||||||||
Gross profit | — | 25,303 | — | 25,303 | ||||||||||||
Selling, general and administrative | 8,810 | 67,610 | — | 76,420 | ||||||||||||
Restructuring charges | — | — | — | — | ||||||||||||
Interest | 66,101 | — | (18,518 | ) | 47,583 | |||||||||||
Loss on debt retirements | 29,619 | — | — | 29,619 | ||||||||||||
Other income | (200 | ) | (21,312 | ) | — | (21,512 | ) | |||||||||
Intercompany other income | (3,500 | ) | (15,018 | ) | 18,518 | — | ||||||||||
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| 100,830 | 31,280 | — | 132,110 | |||||||||||||
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Income (loss) before the following items | (100,830 | ) | (5,977 | ) | — | (106,807 | ) | |||||||||
Income taxes (benefit) | (37,475 | ) | (4,419 | ) | — | (41,894 | ) | |||||||||
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| (63,355 | ) | (1,558 | ) | — | (64,913 | ) | ||||||||||
Equity in earnings (loss) of subsidiaries | (1,558 | ) | — | 1,558 | — | |||||||||||
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Net income (loss) | $ | (64,913 | ) | $ | (1,558 | ) | $ | 1,558 | $ | (64,913 | ) | |||||
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Condensed consolidating statement of operations for the year ended May 31, 2010 |
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Net sales | $ | — | $ | 621,064 | $ | — | $ | 621,064 | ||||||||
Cost of products sold | — | 562,066 | — | 562,066 | ||||||||||||
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Gross profit | — | 58,998 | — | 58,998 | ||||||||||||
Selling, general and administrative | 14,973 | 64,442 | — | 79,415 | ||||||||||||
Restructuring charges | — | — | — | — | ||||||||||||
Interest | 53,114 | 2,626 | (3,500 | ) | 52,240 | |||||||||||
Loss on debt retirements | — | — | — | — | ||||||||||||
Other income | (39 | ) | (10,627 | ) | — | (10,666 | ) | |||||||||
Intercompany other income | (3,500 | ) | — | 3,500 | — | |||||||||||
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| 64,548 | 56,441 | — | 120,989 | |||||||||||||
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Income (loss) before the following items | (64,548 | ) | 2,557 | — | (61,991 | ) | ||||||||||
Income taxes (benefit) | (21,247 | ) | (1,891 | ) | — | (23,138 | ) | |||||||||
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| (43,301 | ) | 4,448 | — | (38,853 | ) | |||||||||||
Equity in earnings (loss) of subsidiaries | 4,448 | — | (4,448 | ) | — | |||||||||||
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Net income (loss) | $ | (38,853 | ) | $ | 4,448 | $ | (4,448 | ) | $ | (38,853 | ) | |||||
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- 37 -
In thousands | Texas Industries, Inc. | Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||
Condensed consolidating statement of cash flows for the year ended May 31, 2012 |
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Net cash provided (used) by operating activities | $ | (49,100 | ) | $ | 59,274 | $ | — | $ | 10,174 | |||||||
Investing activities | ||||||||||||||||
Capital expenditures—expansions | — | (72,906 | ) | — | (72,906 | ) | ||||||||||
Capital expenditures—other | — | (33,430 | ) | — | (33,430 | ) | ||||||||||
Proceeds from asset disposals | — | 66,845 | — | 66,845 | ||||||||||||
Investments in life insurance contracts | 3,354 | — | — | 3,354 | ||||||||||||
Other—net | — | (245 | ) | — | (245 | ) | ||||||||||
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Net cash provided (used) by investing activities | 3,354 | (39,736 | ) | — | (36,382 | ) | ||||||||||
Financing activities | ||||||||||||||||
Long-term borrowings | — | — | — | — | ||||||||||||
Debt retirements | (19 | ) | (281 | ) | — | (300 | ) | |||||||||
Debt issuance costs | (1,829 | ) | — | — | (1,829 | ) | ||||||||||
Stock option exercises | 2,023 | — | — | 2,023 | ||||||||||||
Excess tax benefits from stock-based compensation | — | — | — | — | ||||||||||||
Common dividends paid | (2,091 | ) | — | — | (2,091 | ) | ||||||||||
Net intercompany financing activities | 18,477 | (18,477 | ) | — | — | |||||||||||
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Net cash provided (used) by financing activities | 16,561 | (18,758 | ) | — | (2,197 | ) | ||||||||||
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Increase (decrease) in cash and cash equivalents | (29,185 | ) | 780 | — | (28,405 | ) | ||||||||||
Cash and cash equivalents at beginning of year | 113,898 | 2,534 | — | 116,432 | ||||||||||||
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Cash and cash equivalents at end of year | $ | 84,713 | $ | 3,314 | $ | — | $ | 88,027 | ||||||||
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Condensed consolidating statement of cash flows for the year ended May 31, 2011 |
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Net cash provided (used) by operating activities | $ | (55,280 | ) | $ | 64,525 | $ | — | $ | 9,245 | |||||||
Investing activities | ||||||||||||||||
Capital expenditures—expansions | — | (25,430 | ) | — | (25,430 | ) | ||||||||||
Capital expenditures—other | — | (20,253 | ) | — | (20,253 | ) | ||||||||||
Proceeds from asset disposals | — | 3,596 | — | 3,596 | ||||||||||||
Investments in life insurance contracts | 4,073 | — | — | 4,073 | ||||||||||||
Other—net | — | 1,266 | — | 1,266 | ||||||||||||
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Net cash provided (used) by investing activities | 4,073 | (40,821 | ) | — | (36,748 | ) | ||||||||||
Financing activities | ||||||||||||||||
Long-term borrowings | 650,000 | — | — | 650,000 | ||||||||||||
Debt retirements | (561,394 | ) | (233 | ) | — | (561,627 | ) | |||||||||
Debt issuance costs | (12,492 | ) | — | — | (12,492 | ) | ||||||||||
Stock option exercises | 1,462 | — | — | 1,462 | ||||||||||||
Excess tax benefits from stock-based compensation | — | — | — | — | ||||||||||||
Common dividends paid | (8,354 | ) | — | — | (8,354 | ) | ||||||||||
Net intercompany financing activities | 23,391 | (23,391 | ) | — | — | |||||||||||
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Net cash provided (used) by financing activities | 92,613 | (23,624 | ) | — | 68,989 | |||||||||||
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| |||||||||
Increase (decrease) in cash and cash equivalents | 41,406 | 80 | — | 41,486 | ||||||||||||
Cash and cash equivalents at beginning of year | 72,492 | 2,454 | — | 74,946 | ||||||||||||
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Cash and cash equivalents at end of year | $ | 113,898 | $ | 2,534 | $ | — | $ | 116,432 | ||||||||
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- 38 -
In thousands | Texas Industries, Inc. | Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||
Condensed consolidating statement of cash flows for the year ended May 31, 2010 |
| |||||||||||||||
Net cash provided (used) by operating activities | $ | (37,662 | ) | $ | 85,815 | $ | — | $ | 48,153 | |||||||
Investing activities | ||||||||||||||||
Capital expenditures—expansions | — | (5,337 | ) | — | (5,337 | ) | ||||||||||
Capital expenditures—other | — | (8,322 | ) | — | (8,322 | ) | ||||||||||
Proceeds from asset disposals | — | 21,592 | — | 21,592 | ||||||||||||
Investments in life insurance contracts | 6,967 | — | — | 6,967 | ||||||||||||
Other—net | — | 2,079 | — | 2,079 | ||||||||||||
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| |||||||||
Net cash provided (used) by investing activities | 6,967 | 10,012 | — | 16,979 | ||||||||||||
Financing activities | ||||||||||||||||
Long-term borrowings | — | — | — | — | ||||||||||||
Debt retirements | (10 | ) | (235 | ) | — | (245 | ) | |||||||||
Debt issuance costs | (2,552 | ) | — | — | (2,552 | ) | ||||||||||
Stock option exercises | 893 | — | — | 893 | ||||||||||||
Excess tax benefits from stock-based compensation | 250 | — | — | 250 | ||||||||||||
Common dividends paid | (8,328 | ) | — | — | (8,328 | ) | ||||||||||
Net intercompany financing activities | 95,708 | (95,708 | ) | — | — | |||||||||||
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| |||||||||
Net cash provided (used) by financing activities | 85,961 | (95,943 | ) | — | (9,982 | ) | ||||||||||
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| |||||||||
Increase (decrease) in cash and cash equivalents | 55,266 | (116 | ) | — | 55,150 | |||||||||||
Cash and cash equivalents at beginning of year | 17,226 | 2,570 | — | 19,796 | ||||||||||||
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Cash and cash equivalents at end of year | $ | 72,492 | $ | 2,454 | $ | — | $ | 74,946 | ||||||||
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- 39 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Texas Industries, Inc.
We have audited the accompanying consolidated balance sheets of Texas Industries, Inc. and subsidiaries (the Company) as of May 31, 2012 and 2011, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended May 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Industries, Inc. and subsidiaries at May 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Texas Industries, Inc. and subsidiaries’ internal control over financial reporting as of May 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 17, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Ft. Worth, Texas
July 17, 2012
- 40 -
QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following is a summary of quarterly financial information (in thousands except per share).
2012 | Aug. | Nov. | Feb. | May | ||||||||||||
Net sales | $ | 181,740 | $ | 156,071 | $ | 134,636 | $ | 174,556 | ||||||||
Gross profit | 13,825 | 2,746 | 745 | 28,431 | ||||||||||||
Net income (loss)(1)(2) | (7,420 | ) | (21,037 | ) | (24,280 | ) | 60,213 | |||||||||
Basic earnings (loss) per share | (.27 | ) | (.75 | ) | (.87 | ) | 2.15 | |||||||||
Diluted earnings (loss) per share | (.27 | ) | (.75 | ) | (.87 | ) | 2.15 | |||||||||
2011 | Aug. | Nov. | Feb. | May | ||||||||||||
Net sales | $ | 172,122 | $ | 148,111 | $ | 125,818 | $ | 175,762 | ||||||||
Gross profit (loss) | 16,108 | 12,067 | (9,361 | ) | 6,489 | |||||||||||
Net income (loss)(3)(4) | (23,692 | ) | (11,201 | ) | (20,934 | ) | (9,086 | ) | ||||||||
Basic earnings (loss) per share | (.85 | ) | (.40 | ) | (.75 | ) | (.33 | ) | ||||||||
Diluted earnings (loss) per share | (.85 | ) | (.40 | ) | (.75 | ) | (.33 | ) | ||||||||
| (1) | During the August 2011 quarter, we sold emission credits associated with our Crestmore cement plant in Riverside, California that resulted in a gain of $2.5 million reported in our cement segment. |
| We entered into an asset exchange transaction that resulted in the recognition of a gain of $1.6 million reported in our consumer products segment. |
| (2) | During the May 2012 quarter, we completed the valuation of the fair value of our 40% interest in a joint venture to which we contributed seven ready-mix plants and related assets in November 2011 that resulted in the recognition of a gain of $8.9 million reported in our consumer products segment. |
| We sold our Texas-based package products operations that resulted in the recognition of a gain of $30.9 million reported in our consumer products segment. |
| We sold our aggregate rail distribution terminal and associated assets located in Stafford, Texas that resulted in the recognition of a gain of $20.8 million reported in our aggregates segment. |
| (3) | During the August 2010 quarter, we sold emission credits associated with our Crestmore cement plant in Riverside, California that resulted in a gain of $1.7 million reported in our cement segment. |
| (4) | During the May 2011 quarter, we entered into an asset exchange transaction that resulted in the recognition of a gain of $12.0 million reported in our aggregates segment. |
- 41 -
EXHIBITS TO THIS REPORT
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 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 | |
| 101 | The following financial information from Texas Industries, Inc.’s Annual Report on Form 10-K/A, Amendment No.1, for the year ended May 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of May 31, 2012 and May 31, 2011, (ii) Consolidated Statements of Operations for the years ended May 31, 2012, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the years ended May 31, 2012, 2011 and 2010, and (iv) the Notes to Consolidated Financial Statements. | |
- 42 -
Pursuant to the requirements of Section 13 or 15(d) 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 on the 9th day of August, 2012.
| TEXAS INDUSTRIES, INC. | ||
| By | /S/ KENNETH R. ALLEN | |
Kenneth R. Allen Vice President - Finance and Chief Financial Officer | ||
- 43 -
INDEX TO EXHIBITS
Exhibit | ||
| 23.1 | Consent of Independent Registered Public Accounting Firm | |
| 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 | |
| 101 | The following financial information from Texas Industries, Inc.’s Annual Report on Form 10-K/A, Amendment No.1, for the year ended May 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of May 31, 2012 and May 31, 2011, (ii) Consolidated Statements of Operations for the years ended May 31, 2012, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the years ended May 31, 2012, 2011 and 2010, and (iv) the Notes to Consolidated Financial Statements. | |
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