Add
TXI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| TXI > SEC Filings for TXI > Form 10-Q on 13-Jan-2004 | All Recent SEC Filings |
13-Jan-2004
Quarterly Report
CAC Operations
CAC operating profit for the current quarter at $23.7 million increased $2.1 million from the prior year period on higher shipments. Operating profit for the current six-month period at $43.9 million decreased $6.1 million from the prior year period due to the higher maintenance and energy costs experienced at the Company's Texas cement plants during the August 2003 quarter. Overall demand for the Company's CAC products have remained relatively unchanged over the past six months.
Net Sales. CAC sales for the current quarter at $192.4 million were up 10% from the prior year period. Total cement sales increased $6.6 million on 11% higher shipments at 2% lower average trade prices. Ready-mix sales increased $3.0 million on 5% higher volumes at comparable average trade prices. Aggregate sales increased $5.0 million on 24% higher shipments at 8% lower average trade prices. More favorable weather patterns in the Company's Texas markets increased shipping days from the prior year quarter. Sales for the current six-month period at $388.8 million were up 4% from the prior year period. Total cement sales increased $3.7 million on 5% higher shipments and 2% lower average trade prices. Ready-mix sales decreased $3.6 million on 3% lower shipments. Aggregate sales increased $9.1 million on 21% higher shipments and 7% lower trade prices.
Table of Contents
Operating Costs. CAC costs for the current quarter at $157.2 million, including depreciation, depletion and amortization, increased $12.9 million from the prior year period on higher shipments. Costs for the current six-month period at $323.7 million increased $21.7 million on higher shipments and the higher maintenance and energy costs at the Company's Texas cement plants in the August 2003 quarter.
Selling, general and administrative expense for the current quarter at $11.7 million, including depreciation, depletion and amortization, increased $1.8 million from the prior year period. Selling, general and administrative expense for the current six-month period at $23.2 million increased $1.0 million from the prior year period. The increases were primarily due to higher incentive and bad debt expense.
Other income for the current six-month period increased $900,000 as a result of increased gains from the disposal of surplus operating assets.
Steel Operations
Steel operating loss for the current quarter at $5.8 million improved $8.1 million from the prior year period on higher realized prices and lower manufacturing costs at the Virginia facility. Operating loss for the current six-month period at $15.9 million improved $1.2 million from the prior year period. Although foreign exchange rates and higher ocean freight costs have impeded imports, the level of non-residential construction continues to result in a very competitive structural steel market. During the past six months rapidly escalating raw material costs have affected results. Sales price increases have not yet kept pace with these cost increases. Increased selling prices and the implementation of a raw material surcharge is expected to help restore margins in the second half of the fiscal year.
Net Sales. Steel sales for the current quarter at $176.2 million were up 8% from the prior year period. Structural steel sales increased $2.9 million on 7% higher selling prices and 4% lower shipments. Bar mill sales increased $10.2 million on 6% higher average selling prices and 31% higher shipments. Steel sales for the current six-month period at $355.8 million were up 8% from the prior year period. Structural steel sales increased $11.4 million on 3% higher average selling prices and 2% higher shipments. Bar mill sales increased $12.3 million on 7% higher average selling prices and 14% higher shipments.
Operating Costs. Steel costs for the current quarter at $176.6 million, including depreciation and amortization, increased $5.5 million from the prior year period due to higher bar mill shipments and the effect of higher raw material costs on unit costs offset in part by improved operating efficiencies at the Virginia facility. Costs for the current six-month period at $362.8 million increased $25.6 million from the prior year period due to higher structural and bar mill shipments and the effect of higher raw materials costs on unit costs.
Selling, general and administration expense for the current quarter at $5.6 million, including depreciation and amortization, increased $1.0 million from the prior year period primarily due to higher bad debt and incentive expense. Selling, general and administrative expense for the current six-month period at $13.0 million increased $2.5 million from the prior year period primarily due to higher bad debt expense.
Other income for the current six-month period included $4.2 million obtained from the Company's litigation against certain graphite electrode suppliers in the August 2003 quarter.
Corporate Resources
Selling, general and administrative expenses for the current quarter at $7.4 million, including depreciation and amortization, increased $500,000 from the prior year period as increased franchise taxes offset the effect of the termination of the Company's agreement to sell receivables. Selling, general and administrative expenses for the current six-month period at $14.1 million decreased $1.0 million due to lower general expenses, the effect of the termination of the Company's agreement to sell receivables offset in part by higher franchise taxes.
Other income decreased $1.5 million in the current quarter and $1.1 million in the current six-month period due to lower interest and investment income.
Table of Contents
Interest Expense
Interest expense increased $6.8 million in the current quarter and $15.0 million in the current six-month period from the prior year periods. The June 2003 refinancing added approximately 4% to the Company's overall average effective interest rate and together with the increased outstanding debt is expected to result in higher annual interest costs of approximately $30 million. Interest expense in the current quarter was reduced $1.7 million as a result of interest rate swaps entered into on $200 million of the Company's new senior notes.
Loss on Early Retirement of Debt
As a result of the June 2003 refinancing, the Company recognized an ordinary loss on early retirement of debt of $11.2 million. The loss represented $8.5 million in premium or consent payments to holders of the existing senior notes and a write-off of $2.7 million of debt issuance costs associated with the debt repaid.
Income Taxes
Federal income taxes for the interim periods ended November 30, 2003 and 2002 have been included in the accompanying financial statements on the basis of an estimated annual rate. The primary reason that the tax rate differs from the 35% statutory corporate rate is due to percentage depletion that is tax deductible and state income tax expense. Applying these differences to the estimated current year pre-tax income resulted in an estimated annualized effective tax rate for 2003 of 39.6% compared to 115.4% for 2002. The tax benefit attributed to dividends on preferred securities and cumulative effect of accounting change is based on the incremental tax rate of 35%.
Dividends on Preferred Securities – Net of Tax
Dividends on preferred securities of subsidiary net of tax benefit amounted to $3.6 million in each of the six-month periods ended November 30, 2003 and 2002.
Cumulative Effect of Accounting Change – Net of Tax
Effective June 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations," which applies to legal obligations associated with the retirement of long-lived assets. The Company incurs legal obligations for asset retirement as part of its normal CAC and Steel operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. Application of the new rules resulted in a cumulative charge of $1.1 million, net of tax of $600,000.
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
To improve liquidity and provide more financial and operating flexibility, the Company on June 6, 2003 issued $600 million of 10.25% senior notes maturing June 15, 2011. The net proceeds were used to repay $473.5 million of the outstanding debt at May 31, 2003. The remaining proceeds were applied toward the cost of the Company's agreement whereby the entire outstanding interest in the defined pool of trade receivables previously sold was repurchased and the agreement to sell receivables was terminated.
The new senior notes represent general unsecured senior obligations of the Company. The new senior notes were issued by Texas Industries, Inc. (the parent company), which has no independent assets or operations, excluding amounts related to its investments in its consolidated subsidiaries and financing activities. All 100% owned subsidiaries of the Company, excluding TXI Capital Trust I and minor subsidiaries without operations or material assets, have provided a joint and several, full and unconditional guarantee of the securities. The terms of the notes contain covenants that among other things provide for restrictions on the payment of dividends or repurchasing common stock, making certain investments, incurring additional debt or selling preferred stock, creating liens, and transferring assets. At any time prior to June 15, 2006, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 110.25% of the principal amount thereof, plus accrued interest, with the net cash proceeds from certain equity offerings. In addition, at any time on or prior to June 15, 2007, the Company may redeem all or part of the notes at a redemption price equal to the sum of the principal amount thereof, plus accrued interest and a make-whole premium. After June 15, 2007, the Company may redeem all or a part of the notes at a redemption price of 105.125% in 2007, 102.563% in 2008 and 100% in 2009 and thereafter.
In addition, the Company entered into a new senior secured credit facility, which provides up to $200 million of available borrowings, subject to a borrowing base. The facility matures in June 2007, with borrowings limited based on the net amounts of eligible accounts receivable and inventory. Initial borrowings bear annual interest at either the LIBOR based rate plus 2.5% or the prime rate plus .5%. These interest rate margins are subject to performance price adjustments. Commitment fees at an annual rate of .375% are to be paid on the unused portion of the facility. The Company may terminate the facility at anytime, and under certain circumstances may be required to pay a termination fee.
The senior secured credit facility is collateralized by first priority liens on substantially all of the Company's existing and future acquired accounts receivable, inventory, deposit accounts and certain of its general intangibles. The agreement contains covenants restricting, among other things, prepayment or redemption of notes, distributions, dividends and repurchases of capital stock and other equity interests, acquisitions and investments, indebtedness, liens and affiliate transactions. In addition, there is the requirement to meet certain financial tests and to maintain certain financial ratios if the excess availability under the senior secured credit facility falls below $30 million, including maintaining a fixed charge coverage ratio and meeting a minimum tangible net worth test.
No borrowings were outstanding under the senior secured credit facility at November 30, 2003, however, $20.6 million of the facility was utilized to support letters of credit.
The Company's ability to incur additional debt is currently limited to borrowings available under the senior secured credit facility. The payment of cash dividends on common stock is currently limited to an annual amount of $7.0 million.
Effective August 5, 2003, the Company entered into interest rate swap agreements that have the economic effect of modifying the interest obligations associated with $200 million of the senior notes such that the interest payable on the senior notes effectively becomes variable based on six month LIBOR, set on June 15th and December 15th of each year. The interest rate swaps have been designated as fair value hedges and have no ineffective portion. The notional amounts and the termination dates match the principal amounts and maturities of the $200 million portion of the outstanding senior notes. As a result of the interest rate swaps, the current effective interest rate on the hedged portion of the senior notes was reduced to 6.74%.
The Company historically has financed major capital expansion projects with cash from operations and long-term borrowings. Working capital requirements and capital expenditures for normal replacement and technological upgrades of existing equipment and expansions of its operations are funded with cash from operations. The fiscal year 2004 capital expenditure budget for these activities is estimated currently at approximately $50 million. In addition, the Company leases certain mobile and other equipment used in its operations under operating leases that in the normal course of business are renewed or replaced by subsequent leases.
We expect cash from operations and borrowings under the new senior secured credit facility to be sufficient to provide funds for capital expenditure commitments, scheduled debt repayments and working capital needs for at least the next year.
Table of Contents
Cash Flows
Net cash used by operating activities was $54.4 million, compared to $64.6 million provided in the prior year period. The decrease in operating cash flow of $119.0 million was primarily the result of the Company's repurchase of trade receivables in the amount of $115.5 million. The repurchase was funded out of the proceeds of the June 2003 refinancing. Excluding the repurchase cash provided by operating activities declined $9.2 million from the prior year period as the effects of lower net income including the resulting change in deferred taxes were partially offset by changes in working capital items.
Net cash used by investing activities was $15.1 million, compared to $23.4 million in the prior year period. Capital expenditures for normal replacement and technological upgrades of existing equipment and expansions of the Company's operations excluding major plant expansions was $16.0 million, down $17.5 million from the prior year period. Proceeds from disposal of assets in the prior year included collection of notes receivable related to disposals in 2001.
Net cash provided by financing activities was $98.4 million, compared to $44.2 million used in the prior year period. The proceeds from the June 2003 refinancing net of issuance and retirement costs funded the repurchase of trade receivables. The Company's quarterly cash dividend of $.075 per common share remained unchanged from the prior year period.
OTHER ITEMS
Litigation
In November 1998, Chaparral Steel Company, a 100% owned subsidiary, filed an action in the District Court of Ellis County, Texas against certain graphite electrode suppliers seeking damages for illegal restraints of trade in the sale of graphite electrodes. During the current six-month period the Company obtained a settlement from a producer of graphite electrodes in the net amount of $4.2 million. The Company has now obtained settlements from all the major producers named in the action and does not anticipate any material future settlements.
Environmental Matters
The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, furnace dust disposal and wastewater discharge. The Company believes it is in substantial compliance with applicable environmental laws and regulations. However, from time to time the Company receives claims from federal and state environmental regulatory agencies and entities asserting that the Company is or may be in violation of certain environmental laws and regulations. Chaparral Steel's Virginia facility is in discussions with the Virginia Air Pollution Control Board regarding changes to its permitted emissions of carbon monoxide (CO) and nitrogen oxides (NOx). Its permit limits were expressed as a proportion comparing pounds of emissions per ton of steel manufactured and were initially derived using the assumption that the facility would operate at 100% capacity, which has not occurred. The Virginia Air Pollution Control Board has proposed the voluntary payment of a $137,500 civil charge in resolution of alleged past violations and will require amendments to the permit going forward. Based on its experience and the information currently available to it, the Company believes that this and other such claims will not have a material impact on its financial condition or results of operations. Despite the Company's compliance and experience, it is possible that the Company could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by the Company.
Table of Contents
Market Risk
The Company has not historically entered into derivatives or other financial instruments for trading or speculative purposes. Because of the short duration of the Company's investments, changes in market interest rates would not have a significant impact on their fair value.
The June 2003 refinancing increased the amount of fixed rate debt outstanding and the Company's overall average effective interest rate. The fair value of the debt will vary as interest rates change.
Effective August 5, 2003, the Company entered into interest rate swaps that change the characteristics of the interest payments on $200 million of the underlying fixed rate debt from fixed-rate payments to short-term LIBOR-based variable rate payments in order to achieve a mix of interest rates on the Company's long-term debt which, over time, is expected to moderate financing costs. The swaps are sensitive to interest rate changes. For example, if short-term interest rates increase (decrease) by one percentage point from the date of the refinancing, annual pretax interest expense would increase (decrease) by $2 million.
Critical Accounting Policies
The preparation of financial statements and accompanying notes in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported. Changes in the facts and circumstances could have a significant impact on the resulting financial statements. The critical accounting policies that affect its more complex judgments and estimates are described in the Company's Annual Report on Form 10-K for the year ended May 31, 2003.
Effective June 1, 2003, the Company adopted Statement of Accounting Standards No. 143, "Accounting for Asset Retirement Obligations," which applies to legal obligations associated with the retirement of long-lived assets. The Company is required to recognize the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company incurs legal obligations for asset retirement as part of its normal CAC and Steel operations related to land reclamation, plant removal and Resource Conservation and Recovery Act closures. The Company considers asset retirement obligations to be a critical accounting policy. 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.
New Accounting Pronouncements
Effective June 1, 2003, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." For most companies, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. SFAS No. 145 also amends SFAS No. 13 to require certain modifications to capital leases be treated as a sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). Its adoption required that the loss on early retirement of debt incurred in the six-month period ended November 30, 2003 be recognized as an ordinary loss.
Effective June 1, 2003, the Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Company has no financial instruments for which a change in classification was required.
Table of Contents
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," clarifying the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Currently, the Company will be required to adopt the provisions of FIN 46, as revised, no later than May 31, 2004. Its adoption is expected to result in the reclassification of the preferred securities of subsidiary to long-term convertible debt on the Company's consolidated balance sheet and the reclassification of the dividends on preferred securities to interest expense on the Company's statement of operations. The resulting reclassifications will have no overall effect on the Company's results of operations or financial position.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Certain statements contained in this quarterly report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, the impact of competitive pressures and changing economic and financial conditions on the Company's business, construction activity in the Company's markets, abnormal periods of inclement weather, changes in the cost of raw materials, fuel and energy, and the impact of environmental laws and other regulations. For further information refer to the Company's Annual Report on Form 10-K for the year ended May 31, 2003.
Table of Contents
|
|