ITEM 1. BUSINESS --------
(a) General Development of Business
Texas Industries, Inc. (the "Registrant", "Company" or "TXI"), incorporated April 19, 1951, directly and through subsidiaries, is a producer of steel and cement/concrete products for the construction and manufacturing industries. Chaparral Steel Company ("Chaparral"), an 84 percent-owned subsidiary produces a broad range of high quality carbon steel products from recycled steel. Brookhollow Corporation ("Brookhollow"), a wholly-owned subsidiary, owns land for investment, resale and other real estate activities.
(b) Financial Information about Industry Segments
The Registrant has two major industry segments: steel and cement/concrete. Financial information for the Registrant's industry segments, is presented in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 and 10, incorporated herein by reference.
(c) Narrative Description of Business
STEEL
Chaparral has operated a steel mill at Midlothian, Texas, since 1975. The steel operation follows a market mill concept which entails the low cost production of a wide variety of products ranging from reinforcing bar and specialty products to large-sized structural beams. Chaparral operates two electric arc furnaces with continuous casters which feed melted steel to a bar mill, a structural mill and a large beam mill which together produce a broader array of steel products than a traditional mini-mill. Finished (rolled) products produced include beams, merchant quality rounds, special bar quality rounds, rebar and channels. In fiscal year 1992, commissioning was completed on the large beam mill which produces structural steel beams up to twenty-four inches wide.
The rated annual capacity of the operating facilities are as follows:
The bar and structural mills produced approximately 1.6 million tons of finished products in 1996, and 1.4 million tons in both 1995 and 1994.
Chaparral's primary raw material is recycled steel, with shredded steel representing 41 percent of the raw material mix. A major portion of the shredded steel requirements is produced by a shredder operation at the steel mill. The shredded material is primarily composed of crushed auto bodies purchased on the open market. Another grade of recycled steel, #1 Heavy, representing 25 percent of the raw material requirements is also purchased on the open market. The purchase price of recycled steel is subject to market forces largely beyond Chaparral's control. The supply of recycled steel is expected to be adequate to meet future requirements.
Chaparral's steel mill consumes large amounts of electricity and natural gas. Electricity is currently obtained from a local electric utility under an interruptible supply contract with six-month price adjustments which reflect increases or decreases in the utility's fuel costs. Natural gas is obtained from a local gas utility under a supply contract. Chaparral believes that adequate supplies of both electricity and natural gas are readily available.
Chaparral's products are marketed throughout the United States and to a limited extent in Canada, Mexico, Western Europe, China and Japan. Sales are primarily to steel service centers and steel fabricators for use in the construction industry, as well as, to cold finishers, forgers and original-equipment manufacturers for use in the railroad, defense, automotive, mobile home and energy industries. At present, Chaparral has approximately 1,700 customers with one customer accounting for 11% of Chaparral's sales in 1996. Sales to affiliates are minimal. Orders are generally filled within 45 days and are cancelable.
Delivery of finished products is accomplished by common-carrier, customer-owned trucks, rail or barge. Currently, Chaparral does not place heavy reliance on franchises, licenses or concessions.
Chaparral competes with steel producers, including foreign producers, on the basis of price, quality and service. Certain of the foreign and domestic competitors, including both large integrated steel producers and mini-mills, have substantially greater assets and larger sales organizations than Chaparral. Intense sales competition exists for substantially all of Chaparral's products.
CEMENT/CONCRETE
The cement/concrete business segment includes the manufacture and sale of cement, aggregates, ready-mix concrete, concrete pipe, block and brick. Production and distribution facilities are concentrated primarily in Texas and Louisiana with markets extending into contiguous states. The Registrant acquired expanded shale and clay aggregate facilities in California during 1996, and in addition has certain patented and unpatented mining claims in southern California which contain deposits of limestone.
Cement production facilities are located at two sites in Texas: one at Midlothian, approximately 25 miles south of Dallas/Fort Worth, which is the largest cement plant in Texas, and the other at Hunter, approximately 40 miles south of Austin. The limestone reserves used as the primary raw material are located on fee-owned property which is adjacent to each of these plants. The rated annual capacity and estimated minimum reserves of limestone for each of these plants are as follows:
The cement plants produced approximately 2.2 million tons of finished cement in 1996, 2.1 million tons in 1995 and 2.0 million tons in 1994. Annual shipments of finished cement to outside trade customers were approximately 1.5 million tons in both 1996 and 1995, and 1.6 million tons in 1994. Additional shipments of clinker were approximately 400,000 tons in 1994.
The Registrant's principal marketing area for cement includes Texas, Louisiana, Colorado, Oklahoma, and New Mexico. Sales offices are maintained throughout the marketing area and sales are made primarily for use in the construction industry to numerous customers, no one of which would purchase ten percent or more of the trade sales volume within any one year. The major volume of unit trade sales is of standard portland cement, although the Registrant produces and markets a variety of specialty cements.
The Registrant distributes cement from its plants by rail or truck to six distribution terminals located throughout the marketing area.
The Registrant's aggregate business, which includes sand, gravel, crushed limestone and expanded shale and clay, is conducted from facilities primarily serving Dallas/Fort Worth, Austin and Houston, Texas, and Alexandria, New Orleans, Baton Rouge, and Monroe, Louisiana, areas. Additional expanded shale and clay aggregate facilities were acquired during 1996 near Oakland and Los Angeles, California. The following table summarizes certain information about the Registrant's aggregate production facilities:
Reserves identified with the facilities shown above and additional reserves available to support future plant sites are contained on 34,675 acres of land, 15,368 acres of which are owned in fee by the Registrant and the remainder of which are leased. The expanded shale and clay plants, excluding California plants purchased in January 1996, operated at 84 percent of capacity for 1996 with sales of approximately 831,000 cubic yards. Production for the remaining aggregate facilities was 74 percent of practical capacity and sales for the year totaled 12.7 million tons, of which approximately 9.1 million tons were shipped to outside trade customers.
Sales of these various aggregates are generally related to the level of construction activity within close proximity of the plant location. The cost of transportation limits the marketing of these products to the areas relatively close to the plant sites. These products are marketed by the Registrant's sales organization located in the areas served by the plants and are sold to numerous customers, no one of which would be considered significant to the Registrant's business. The distribution of these products is provided to trade customers principally by contract or customer-owned haulers, and a limited amount of these products is distributed by rail for affiliated usage.
The Registrant's ready-mix concrete operations are situated in three areas in Texas (Dallas/Fort Worth/Denton, East Texas and Houston), three areas in Louisiana (Alexandria, Shreveport and Monroe) and at one location in southern Arkansas. The following table summarizes various information concerning these facilities:
The plants listed above are located on sites owned or leased by the Registrant. The Registrant manufactures and supplies a substantial amount of the cement and aggregates used by the ready-mix plants with the remainder being purchased from outside suppliers. Ready-mix concrete is sold to various contractors in the construction industry, no one of which would be considered significant to the Registrant's business.
The remainder of the major products manufactured and marketed by the Registrant within the concrete products segment are summarized by location below:
Location Products Produced/Sold -------- ----------------------
Dallas/Fort Worth, Texas Concrete block and brick Sakrete and related products
Austin, Texas Sakrete and related products
Houston, Texas Sakrete and related products
Corpus Christi, Texas Concrete block and pipe
New Orleans, Louisiana Concrete pipe
Baton Rouge, Louisiana Concrete pipe
Alexandria, Louisiana Concrete block and brick Concrete pipe
Shreveport, Louisiana Concrete block and pipe Sakrete and related products Bridge Spans Clay Brick
Athens, Texas Clay Brick
Mineral Wells, Texas Clay Brick
The plant sites for the above products (except for three that are leased) are owned by the Registrant. The products are marketed by the Registrant's sales force in each of these locations, and are primarily delivered by trucks owned by the Registrant. Because the cost of delivery is significant to the overall cost of most of these products, the market area is generally restricted to within approximately one hundred miles of the plant locations. These products are sold to various contractors, owners and distributors, none of which would be considered significant to the Registrant's business.
Currently, the Registrant does not place heavy reliance on patents, franchises, licenses or concessions related to its cement/concrete segment. The Registrant's cement plants and expanded shale and clay plants can burn either coal, natural gas or other high BTU fossil fuels.
In most of the Registrant's principal markets for concrete products, the Registrant competes vigorously with at least three other vertically integrated concrete companies. The Registrant believes that it is a significant participant in each of the Texas and Louisiana concrete products markets. The principal methods of competition in concrete products markets are quality and service at competitive prices.
The Registrant is involved in the development of its surplus real estate and real estate acquired for development of high quality industrial, office and multi-use parks in the metropolitan areas of Dallas/Fort Worth and Houston, Texas and Richmond, Virginia.
ENVIRONMENTAL MATTERS
The operations of the Company and its subsidiaries are subject to various federal and state environmental laws and regulations. Under these laws the U.S. Environmental Protection Agency ("EPA") and agencies of state government have the authority to promulgate regulations which could result in substantial expenditures for pollution control and solid waste treatment. Three major areas regulated by these authorities are air quality, water quality and hazardous waste management. Pursuant to these laws and regulations, emission sources at the Company's facilities are regulated by a combination of permit limitations and emission standards of statewide application, and the Company believes that it is in substantial compliance with its permit limitations and applicable laws and regulations.
Chaparral's steel mill generates, in the same manner as other steel mills in the industry, electric arc furnace ("EAF") dust that contains lead, chromium and cadmium. The EPA has listed this EAF dust, which Chaparral collects in baghouses, as a hazardous waste. Chaparral has contracts with reclamation facilities in the United States and Mexico pursuant to which such facilities receive the EAF dust generated by the steel mill and recover the metals from the dust for reuse, thus rendering the dust non-hazardous. In addition, Chaparral is continually investigating alternative reclamation technologies and has implemented processes for diminishing the amount of EAF dust generated.
The Company intends to comply with all legal requirements regarding the environment but since many of these requirements are not fixed, presently 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 or benefits of compliance and their effect on the Company's operations, future net income or financial condition. Notwithstanding such compliance, if damage to persons or property or contamination of the environment has been or is caused by the conduct of the Company's business or by hazardous substances or wastes used in, generated or disposed of by the Company, the Company may be held liable for such damages and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability could be material. Changes in federal or state laws, regulations or requirements or discovery of unknown conditions could require additional expenditures by or provide additional benefits to the Company.
OTHER ITEMS
The Registrant provides products for the construction industry. It is not uncommon for the Registrant to report a loss from its cement/concrete operations in the quarter ending February due to adverse weather conditions. Steel results in the quarters ending August and February are affected by the normal, scheduled two-week summer and one-week winter shut-downs to refurbish the production facilities. The dollar amount of Registrant's backlog of orders is not considered material to an understanding of the business of the Registrant.
The Registrant's enterprise employs approximately 3,000 persons, of whom 1,200 are engaged in steel operations and the balance in cement/concrete.
ITEM 2.
ITEM 2. PROPERTIES ----------
The information required by this item is included in the answer to Item 1.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
There are no pending legal proceedings against the Registrant and subsidiaries which in management's judgment (based upon the opinion of counsel) would have a material adverse effect on the consolidated financial position of the Registrant.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
None
ITEM 4a. EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------
Information on executive officers of the Registrant is presented below:
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY -------------------------------------------------------------- HOLDER MATTERS --------------
The shares of common stock, $1 par value, of the Registrant are traded on the New York Stock Exchange (ticker symbol TXI). At May 31, 1996, the approximate number of shareholders of common stock of the Registrant was 4,017. Common stock market prices, dividends and certain other items are presented in the Notes to Consolidated Financial Statements entitled "Quarterly Financial Information" on page 24, incorporated herein by reference. The restriction on the payment of dividends described in the Notes to Consolidated Financial Statements entitled "Long-Term Debt" on page 20 is incorporated herein by reference. At the January 1995 Board of Directors' meeting, the Directors voted to increase the quarterly cash dividend from five cents per share to ten cents per share.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ---------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------
GENERAL
The Company has two major business segments: steel and cement/concrete. The steel operation produces beams, merchant and special bar quality rounds, reinforcing bars, and channels. The cement/concrete segment supplies cement and aggregates, ready-mix, pipe, block and brick.
The steel plant follows a market mill concept which entails producing a wide variety of products utilizing recycled steel as its principal raw material. Chaparral strives to be a low-cost supplier and is able to modify its product mix to recognize changing market conditions or customer requirements. Steel products are sold principally to steel service centers, fabricators, cold finishers, forgers and original equipment manufacturers. Chaparral distributes primarily to markets in North America and, under certain market conditions, Europe and Asia.
The cement/concrete facilities are concentrated primarily in Texas and Louisiana, with several products marketed throughout the U.S. As a vertically integrated concrete products supplier, TXI owns or leases some 50,000 acres of mineral-bearing land. Both steel and cement/concrete operations require large amounts of capital investment, energy, labor and maintenance.
Corporate resources, which are excluded from operating profit, include the president's office as well as certain financial, legal, environmental, personnel and public ownership expenses, none of which are allocated to operations. Brookhollow's real estate activities are also included in corporate resources.
RESULTS OF OPERATIONS
NET SALES
Consolidated 1996 net sales of $967.4 million surpassed the 1995 record by 16%.
Steel sales were $607.7 million, up $75.8 million from the previous year due to a 9% increase in average selling price and 79,000 ton increase in shipments to a record 1,590,000 tons. Demand from service centers, fabricators and the mobile home industry for structural mill products increased substantially from the prior year. Prices for structural mill products increased 13% in 1996. Bar mill shipments were 5% below the previous year on somewhat lower average selling prices. Chaparral uses its ability to adjust its product mix to maximize profit margins.
Cement/concrete sales, at $359.8 million grew 20% over the prior year as a result of continued price improvements and increased volumes. Cement average trade pricing was up 11% over 1995 on 6% higher shipments. Ready-mix net sales reflect a 28% increase in volume from expanded capacity and a 5% increase in average trade prices. Aggregate sales improved 22% on 27% higher volumes while overall average trade prices declined slightly due to product mix.
Consolidated 1995 net sales increased 17% over 1994 to a record $830.5 million.
Steel sales climbed 15% to $531.8 million, as tons shipped increased 11%, while average unit selling prices grew 4%. Based on dollar sales, product mix favored slightly the bar mill as sales of Special Bar Quality grew by $22 million on 21% higher shipments. Bar mill pricing overall averaged 8% higher than 1994, while structural mill pricing was up 2%. Pricing in 1995 trended up steadily each quarter, whereas pricing trends in 1994, by comparison, were mixed. Demand for structural products improved throughout 1995. The 408,000 steel tons shipped in the fourth quarter surpassed the May 1989 record.
Cement/concrete sales in 1995 of $298.7 million exceeded 1994 by 22%. Cement shipments, although hampered by rain in March and April, increased 5%. Cement trade pricing averaged 18% higher; ready-mix was up 5%; stone, sand and gravel averaged 7% more, although product mix distorted a generally higher trend. Ready-mix sales increased 33% due principally to capacity added in north Texas. Additional capacity was added in north Louisiana in May 1995. Cement demand in Texas continued to be in balance with supply.
BUSINESS SEGMENTS
BUSINESS SEGMENTS--Continued
See notes to consolidated financial statements.
COST OF PRODUCTS SOLD
Consolidated cost of products sold, including depreciation, depletion and amortization, was $756.7 million in 1996, an increase of $74.9 million over the prior year. Steel cost of sales, at $510.0 million, increased $40.6 million due to greater shipments and a 4% increase in average cost per ton. Higher scrap and melt shop conversion costs contributed to the increase, as well as, slightly higher combined rolling costs. Cement/concrete costs of $246.7 million represented a 17% increase over the prior year due to higher volumes. Unit manufacturing cost of cement was comparable to 1995.
The 1995 cost of products sold was $681.8 million, reflecting increased shipments and somewhat higher steel scrap and melt shop conversion costs. Steel costs were $56.7 million higher at $470.9 million. Purchased scrap costs were unchanged during 1995 and remain at record high per ton rates. Cement/concrete costs of $210.9 million surpassed 1994 by $26.5 million. Cement costs were $11.7 million greater in 1995 due to the absence of clinker sales which reduced 1994 costs. Sale of finished cement is more profitable than clinker, however. Unit manufacturing cost of cement was lower in 1995 due to improved fuel savings and higher volume efficiency.
OPERATING PROFIT
Record operating profit of $165.9 million represents a 47% increase over 1995 which had set record profits as well. Both businesses continued to improve significantly. Steel profits grew $32.1 million as unit margins improved 27% during the year. Cement/concrete profits rose $21.1 million. Increased shipments combined with higher cement prices of approximately $6 per ton and flat unit manufacturing costs contributed to improved margins.
Operating profit in 1995 of $112.6 million surpassed 1994 by 37%, or $30.5 million, as both businesses improved dramatically. Steel profits jumped $8.1 million as average price increases of $13 per ton exceeded unit cost increases of $8. Cement/concrete added an additional $22.3 million to post a record $69.0 million profit. Greater shipments with higher pricing lead to this improvement. Cement prices rose more than $7 per ton during the year while unit costs were level with 1994.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES AND OTHER INCOME
Selling, general and administrative expenses including depreciation and amortization increased $10.6 million to $68.9 million, principally due to higher provisions for employee incentive and profit sharing expense in both operations and corporate resources. Steel costs at $26.2 million increased $5.8 million; cement/concrete at $24.7 million increased $3.1; and corporate resources at $18.0 million increased $1.7 million. Total 1995 SG&A including both operations and corporate resources was $58.3 million, an increase of $11.0 million over 1994 primarily on additional incentive expense and selling costs.
Combined other income was $13.1 million in 1996, an increase of $5.5 million over the previous year. Corporate resources other income included $6.1 million generated by the Company's real estate operations during 1996. Combined other income was $7.6 million in 1995 from routine asset retirements, real estate operations and investment income.
INTEREST EXPENSE
Interest expense, at $20.0 million in 1996, remained comparable to the prior year. In 1995, interest expense declined $6.1 million as a result of debt retirements and the effect of a significant TXI debt refinancing and rate reduction in 1994.
FINANCIAL CONDITION
Net income at $80.0 million was $31.9 million higher than the previous year. Increased operating profits due to both higher selling prices and shipments, resulted in the 66% improvement in earnings. Cash provided by operations increased to a record $127.5 million funding capital expenditures of $79.3 million, long-term debt reductions of $25.1 million and repurchases of Chaparral stock of $12.5 million. Bank financing in the amount of $75 million was replaced by long-term fixed rate debt. Shareholders' equity increased $76.9 million to $420.0 million. Long-term debt to total capitalization ratio at May 31, 1996 was 27.6%, down from 35.1% at the prior year-end.
Working capital grew $31.7 million to $219.3 million. Notes and accounts receivable increased to $113.8 million from $99.4 million in 1995 on higher sales. Receivable increases in 1996 were $9.2 million lower than 1995, in which average days outstanding increased. Sales were up 33% in May 1995 over the prior May due partly to drier weather. Chaparral increased inventories in 1996 by $20.4 million reflecting higher raw material costs. Chaparral inventories had declined during 1995 by $16.2 million. These changes in inventory levels decreased cash provided by operations by $36.6 million from 1995 to 1996. Property sales from the Company's real estate operations in 1996 provided $5.3 million in operating cash, net of $6.9 million in additional short-term notes receivable.
FINANCIAL CONDITION--Continued
Capital expenditures totaled $79.3 million in 1996, $20.6 million in Chaparral and $58.7 million in TXI. The anticipated 63% increase in expenditures reflect expansion projects in the cement/concrete operations, as well as, normal replacement and technological upgrades of existing equipment. Additional items of transportation and aggregate handling equipment have been leased. Capital budget plans for 1997 are expected to reach $100 million, as the Company continues to utilize its increased operating cash to expand and upgrade its operations.
Financing activities used $44.7 million cash in 1996, a decline of $29.8 million from 1995. In April 1996, the Company concluded the placement of $75 million in fixed-rate senior notes having an average maturity of 10 years and average interest rate of 7.28%. The proceeds were used to repay borrowings under the Company's $150 million long-term bank line of credit. At May 31, 1996, $9 million was outstanding and an additional $7.7 million utilized to support letters of credit under the credit line, compared to $98.7 million utilized at the end of 1995. The credit line expires in September 2000. Chaparral did not renew its short-term credit facilities of $20 million which expired January 31, 1996. No borrowings had been made during 1996 or 1995. Chaparral purchased $12.5 million of its common stock during 1996 pursuant to a decision announced in October 1995 authorizing the repurchase of shares to satisfy obligations under its stock option program and for other corporate purposes. In 1995, TXI purchased $54.7 million in treasury shares. On March 29, 1996, the Company redeemed and retired the remaining 5,976 shares of $5 Cumulative Preferred Stock. TXI's cash dividends increased 23% in 1996 over the previous year as the quarterly amount was doubled in January 1995 to $.10 per share. Due to the 1.2 million treasury share purchase in April 1995, average outstanding shares in 1996 returned to levels comparable to those before the April 1994 conversion of $46.9 million in debentures to common stock.
The Company generally maintains a policy of financing major capital expansion projects with long-term borrowing. Working capital, investments and replacement assets are funded out of cash flow from operations. The Company expects current financial resources and cash from 1997 operations to be sufficient to provide funds for planned capital expenditures, scheduled debt payments and other known working capital needs for fiscal 1997. If additional funds are required to accomplish long-term expansion of operations, management believes that funding can be obtained through lending or equity sources to meet such requirements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors Texas Industries, Inc.
We have audited the accompanying consolidated balance sheets of Texas Industries, Inc. and subsidiaries as of May 31, 1996 and 1995, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended May 31, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas July 12, 1996
CONSOLIDATED BALANCE SHEETS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
Year Ended May 31, - ------------------------------------------------------------------------------- In thousands 1996 1995 1994 - -------------------------------------------------------------------------------
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY TEXAS INDUSTRIES, INC. AND SUBSIDIARIES
At May 31, 1996, Common Stock and Additional Paid-in Capital include $127.8 million of accumulated transfers from Retained Earnings in connection with stock dividends.
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Texas Industries, Inc. (the Company or TXI), directly or through subsidiaries, is a producer of steel and cement/concrete products for the construction and manufacturing industries. Chaparral Steel Company (Chaparral) produces beam, merchant and special bar quality rounds, reinforcing bars and channels, primarily for markets in North America and, under certain market conditions, Europe and Asia. Cement/concrete operations supply cement and aggregates, ready- mix, pipe, block and brick from facilities concentrated primarily in Texas and Louisiana, with several products marketed throughout the U.S.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates: The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and all subsidiaries. The minority interest represents the separate public ownership of Chaparral, 16.4% at May 31, 1996 and 19.1% at May 31, 1995.
Property, Plant and Equipment: Property, plant and equipment is recorded at cost. Provisions for depreciation are computed generally using the straight-line method. Provisions for depletion of mineral deposits are computed on the basis of the estimated quantity of recoverable raw materials.
Cash Equivalents: For cash flow purposes, temporary investments which have maturities of less than 90 days when purchased are considered cash equivalents.
Earnings per Share: Earnings per share are computed by deducting preferred dividends from net income and adjusting for amortization of additional goodwill in connection with the contingent payment for the acquisition of Chaparral, then dividing this amount by the weighted average number of common shares outstanding during the period, including common stock equivalents.
Goodwill: Goodwill, currently being amortized on a straight-line basis over a 40-year period, is net of accumulated amortization of $14.2 million at May 31, 1996 and $12.2 million at May 31, 1995. A $9.4 million reduction in goodwill was recognized as of May 31, 1995 due to the realization of certain tax benefits arising from the acquisition of Chaparral. Management reviews remaining goodwill with consideration toward recovery through future operating results (undiscounted) at the current rate of amortization.
Commissioning Costs: The Company's policy for new facilities is to capitalize certain costs until the facility is substantially complete and ready for its intended use. Chaparral began the commissioning of the large beam mill in February 1991. The mill was substantially complete and ready for its intended use in the third quarter of fiscal 1992 with a total of $15.1 million of costs deferred. The annual amount of amortization charged to income was $3 million in 1996, 1995 and 1994, based on a five-year period. Total accumulated amortization is $13.1 million.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Income Taxes: Accounting for income taxes uses the liability method of recognizing and classifying deferred income taxes. The Company joins in filing a consolidated return with its subsidiaries. Current and deferred tax expense is allocated among the members of the group based on a stand-alone calculation of the tax of the individual member.
Financial Instruments: The estimated fair value of each class of financial instrument as of May 31, 1996 approximates carrying value except for Chaparral's long-term debt. The fair value of long-term debt at May 31, 1996, estimated by applying discounted cash flow analysis based on interest rates currently available to the Company for such debt with similar terms and remaining maturities, is approximately $180.6 million compared to the carrying amount of $173.7 million.
New Accounting Pronouncements: Effective June 1, 1996, the Company will adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), that requires recognition of impairment losses on long-lived assets. Based on estimates as of May 31, 1996, the Company believes its adoption will not have a material effect on the financial statements of the Company.
The Company has elected to continue utilizing the accounting for stock issued to directors and employees prescribed by APB No. 25, and therefore, the required adoption of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), is expected to have no effect on the financial position or results of operations of the Company.
WORKING CAPITAL
Working capital totaled $219.3 million at May 31, 1996, compared to $187.6 million at the prior year-end.
Notes and accounts receivable of $113.8 million at May 31, 1996, compared with $99.4 million in 1995, are presented net of allowances for doubtful receivables of $3.1 million in 1996 and $3.2 million in 1995.
Inventories are stated at cost (not in excess of market) generally using the last-in, first-out method (LIFO). If the average cost method (which approximates current replacement cost) had been used, inventory values would have been higher by $14.2 million in 1996 and $11.6 million in 1995.
Inventories are summarized as follows:
LONG-TERM DEBT
Long-term debt is comprised of the following:
Annual maturities of long-term debt for each of the five succeeding years are $13.5, $13.3, $13.2, $10.9 and $17.8 million.
The Company has available a bank-financed $150 million long-term line of credit. In addition to the $9 million currently outstanding under this line, $7.7 million has been utilized to support letters of credit. Commitment fees at a current annual rate of .22% are paid on the unused portion of this line.
In April 1996, the Company concluded the placement of $75 million in fixed-rate senior notes having an average maturity of ten years and average interest rate of 7.28%. The proceeds were used to repay bank debt.
Loan agreements contain covenants which provide for minimum working capital, restrictions on purchases of treasury stock and payment of dividends on common stock, and limitations on incurring certain indebtedness and making certain investments. Under the most restrictive of these agreements, the aggregate amount of annual cash dividends on common stock is limited based on the ratio, excluding Chaparral, of earnings before interest, taxes, depreciation and amortization plus dividends from Chaparral to fixed charges. Chaparral loan agreements also restrict dividends and advances to its shareholders, including the parent company, to $41 million as of May 31, 1996. The Company and Chaparral are in compliance with all loan covenant restrictions.
Property, plant and equipment, principally Chaparral's, carried at a net amount of approximately $203.5 million at May 31, 1996 is mortgaged as collateral for $15.6 million of secured debt.
The amount of interest paid was $18.9 million in 1996, $18.4 million in 1995 and $31.6 million in 1994.
SHAREHOLDERS' EQUITY
Common stock consists of:
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. There were 5,976 shares of $5 Cumulative Preferred Stock outstanding at May 31, 1995. On March 29, 1996 the Company redeemed and retired all outstanding shares of such $5 Cumulative Preferred Stock.
An additional 50,000 shares are designated Series A Junior Participating Preferred Stock, redeemable under certain conditions at a redemption price, subject to adjustment, equal to 200 times the aggregate amount to be distributed per share to holders of Common Stock but not less than $100. There are outstanding rights, issued to common shareholders under the Company's Shareholders Protection Plan, to purchase 48,484 shares of Series A Junior Participating Preferred Shares, none of which were outstanding. Under certain conditions, each right may be exercised to purchase one two-hundredth of a share for $100. The rights, which are non-voting, expire in August 1996 and may be redeemed by the Company at a price of five cents per right at any time.
STOCK OPTION PLANS
The Company's stock option plans provide that non-qualified and incentive stock options to purchase Common Stock may be granted to directors, officers and key employees at market prices at date of grant. Generally, options become exercisable in installments beginning one or two years after date of grant and expire six or ten years later depending on the initial date of grant. A summary of option transactions for the two years ended May 31, 1996, follows:
At May 31, 1996, there were 164,959 shares exercisable and 519,720 shares available for future grants. Outstanding options expire on various dates to January 17, 2006.
INCOME TAXES
The Company made income tax payments of $38.7 million, $19.7 million and $9.7 million in 1996, 1995 and 1994, respectively. An additional income tax provision of $1,949,000 was recognized in 1994 due to federal tax legislation enacted on August 10, 1993 which increased the corporate tax rate to 35%.
The provisions for income taxes are composed of:
A reconcilement from statutory federal taxes to the above provisions follows:
The components of the net deferred tax liability at May 31 are summarized below:
LEGAL PROCEEDINGS AND CONTINGENT LIABILITIES
The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, furnace dust disposal and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations. Notwithstanding such compliance, if damage to persons or property or contamination of the environment has been or is caused by the conduct of the Company's business or by hazardous substances or wastes used in, generated or disposed of by the Company, the Company may be held liable for such damages and be required to pay the cost of investigation and remediation of such contamination. The amount of such liability could be material. Changes in federal or state laws, regulations or requirements or discovery of unknown conditions could require additional expenditures by the Company.
The Company and subsidiaries are defendants in lawsuits which arose in the normal course of business. In management's judgment (based on the opinion of counsel) the ultimate liability, if any, from such legal proceedings will not have a material effect on the consolidated financial position.
RETIREMENT PLANS
Substantially all employees of the Company are covered by a series of defined contribution retirement plans. The amount of pension expense charged to costs and expenses for the above plans was $2.9 million in 1996, $2.6 million in 1995 and $1.5 million in 1994. It is the Company's policy to fund the plans to the extent of charges to income.
INCENTIVE PLANS
All personnel employed as of May 31 share in the pretax income of the Company 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 Company's Board of Directors. The expense for these plans, included in selling, general and administrative, was $15.1 million, $8.9 million and $4.1 million for 1996, 1995 and 1994, respectively.
Certain executives of Chaparral participate in a deferred compensation plan based on a five-year average of earnings. Amounts recorded as expense (reduction) under the plan were $.7 million, $(.1) million and $(2.0) million for 1996, 1995 and 1994, respectively.
OPERATING LEASES
Total expense for operating leases for mobile equipment, office space and other items (other than for mineral rights) amounted to $16.4 million in 1996, $12.0 million in 1995 and $10.0 million in 1994. Non-cancelable operating leases with an initial or remaining term of more than one year totaled $72.4 million at May 31, 1996. Annual lease payments for the five succeeding years are $15.9 million, $11.9 million, $8.0 million, $8.5 million and $9.0 million.
BUSINESS SEGMENTS
Business segment information is presented on pages 9 and 10. Intersegment sales, which are not material, are accounted for at prices comparable to normal trade customer sales. Operating profit is net sales less operating costs and expenses, excluding general corporate expenses and interest expense. Identifiable assets by segment are those assets that are used in the Company's operation in each segment. Corporate assets consist primarily of cash, real estate subsidiaries and other financial assets not identified with a major business segment.
QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following is a summary of quarterly financial information (in thousands except per share):
* The sum of these amounts does not equal the annual amount because of changes in the average number of common equity shares outstanding during the year.
FINANCIAL INFORMATION OF REGISTRANT (Unaudited)
The following condensed balance sheets of the Registrant only (solely parent company) with subsidiaries carried on the equity method as of May 31, 1996 and 1995 and the related statements of income and cash flows for each of the three years in the period ended May 31, 1996, are furnished to satisfy disclosure requirements due to the percentage of consolidated net assets which reside in subsidiary companies and which are subject to third party restrictions.
FINANCIAL INFORMATION OF REGISTRANT-Continued
FINANCIAL INFORMATION OF REGISTRANT-Continued
Notes to Financial Information of Registrant - --------------------------------------------
Long-term Debt
Annual maturities of long-term debt for each of the five succeeding years are $1.1, $1.0, $.9, $.9, and $9.8 million. Long-term debt is comprised of the following:
The Company has available a bank-financed $150 million long-term line of credit. In addition to the $9 million currently outstanding under this line, $7.7 million has been utilized to support letters of credit. Commitment fees at a current annual rate of .22% are paid on the unused portion of this line.
In April 1996, the Company concluded the placement of $75 million in fixed-rate senior notes having an average maturity of ten years and average interest rate of 7.28%. The proceeds were used to repay bank debt.
Dividends from Subsidiaries
The Company received cash dividends from subsidiaries of $4.8 million in 1996, $4.8 million in 1995, and $6.4 million in 1994.
Restricted Transfer of Assets from Subsidiaries
Chaparral has loan covenants that restrict the transfer of assets by loans, advances or dividends to the parent. These covenants require that Chaparral maintain minimum levels of working capital, restrict loans and the percentage of net income that can be distributed as dividends. The restricted net assets were $212.3 million and the restricted retained earnings were $71.8 million at May 31, 1996. The retained earnings of subsidiaries included in the consolidated retained earnings at May 31, 1996, were $66.6 million.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES -----------------------------------------------------
None
PART III
In accordance with paragraph (3) of General Instruction G to Form 10-K, Part III of this report is omitted because the Registrant will file with the Securities Exchange Commission, not later than 120 days after May 31, 1996, a definitive proxy statement pursuant to Regulation 14A involving the election of Directors. Reference is made to the sections of such proxy statement entitled "Security Ownership of Certain Beneficial Owners", "Election of Directors", "Executive Compensation", "Report of the Compensation Committee on Executive Compensation" and "Security Ownership of Management", which sections of such proxy statement are incorporated herein by reference. Information concerning the Registrant's executive officers is set forth under Part I, Item 4a of this report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ----------------------------------------------------------------
(a) Documents filed as a part of this report.
(1) Financial Statements
Report of Independent Auditors Consolidated Balance Sheets - May 31, 1996 and 1995 Consolidated Statements of Income - Years ended May 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years ended May 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity - Years ended May 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not applicable or the information required therein is included elsewhere in the financial statements or notes thereto.
(3) Listing of Exhibits
3. (i) Articles of Incorporation (ii) By-laws (previously filed and incorporated by reference)
4. Instruments defining rights of security holders (previously filed and incorporated by reference)
The Registrant agrees to furnish to the Commission, upon request, copies of all instruments with respect to long-term debt not being registered where the total amount of securities authorized thereunder does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis.
11. Statement re: computation of per share earnings
21. Subsidiaries of the Registrant
23. Consent of Independent Auditors
24. Power of Attorney for certain members of the Board of Directors
27. Financial Data Schedule (electronically filed only)
This schedule contains summary financial information extracted from the Registrant's May 31, 1996 Consolidated Financial Statements and is qualified in its entirety by reference to such financial statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended May 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 26th day of August, 1996.
TEXAS INDUSTRIES, INC.
By /s/ Robert D. Rogers --------------------------- Robert D. Rogers, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
* Previously filed and incorporated herein by reference. ** Electronically filed only.