| TEXAS INDUSTRIES INC ITEM 1A RISK FACTORS In addition to the risks discussed elsewhere in this annual report, you should carefully consider the risks described below before making an investment decision |
| Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations |
| Any of the events discussed in the risk factors below may occur |
| If they do, our business, results of operations or financial condition could be materially adversely affected |
| In such an instance, the trading price of our securities could decline, and you might lose all or part of your investment |
| Our project to expand and modernize our Oro Grande, California cement plant or future expansionary capital expenditures may not strengthen our competitive position |
| In order to strengthen our competitive position, in recent years we have made significant capital expenditures to expand our facilities |
| In November 2005 we commenced a project to expand and modernize our cement plant in Oro Grande, California |
| We expect the project will take at least two years to construct, and will cost approximately dlra358 million excluding capitalized interest related to the project |
| We could experience construction delays or cost overruns for many reasons, including inclement weather, unavailability of materials and unanticipated site conditions |
| Although we have all material environmental permits necessary for the construction of the plant, we cannot obtain operating permits until the construction is complete |
| In addition, as we finalize the construction plans during the course of construction, we expect that amendments to our existing construction permits will be required to accommodate any changes we make to the original construction plans |
| Failure to timely receive any such permits, or permit amendments, could delay construction |
| Our construction costs would also increase if we incur unanticipated costs to comply with any permit requirements that may be imposed as conditions to obtaining such permits |
| We cannot assure you that the new plant, when completed, will operate in accordance with its design specifications |
| If it does not, we could incur additional costs or production delays while problems are corrected and operating permits are obtained |
| As we do not have control over the cost or the outcome of these factors, we cannot assure you that the planned expansion will occur on schedule, within budget or at all |
| In February 2006 we filed an application for the environmental permit necessary to expand our Hunter, Texas cement plant |
| If cement market conditions in Texas remain favorable, we expect to begin engineering design work on the expansion project soon after the permit is issued and, ultimately, to construct an additional cement kiln at the Hunter plant |
| We cannot assure you, however, that all necessary permits will be issued, that market conditions will remain favorable, or that any financing, if required, will be available on acceptable terms |
| The Oro Grande project, the Hunter project or any other future expansionary capital expenditures may not improve our competitive position and business prospects as anticipated |
| If certain of the events described above occur, it could materially and adversely affect our results of operations and financial condition |
| 9 ______________________________________________________________________ [33]Table of Contents Our business is sensitive to economic cycles within the public, residential and non-residential construction segments as well as seasonality and inclement weather conditions |
| Some of our competitors may cope better with adverse economic and market conditions than we would |
| A significant percentage of sales of our products is attributable to the level of construction activity in our specific local markets |
| Historically, construction spending and cement consumption have been cyclical |
| Demand for cement is derived primarily from public (infrastructure), residential and non-residential construction |
| Construction activity in each of these segments is cyclical and is influenced by prevailing economic conditions, including availability of public funds, interest rate levels, inflation, consumer spending habits and employment |
| Additionally, fluctuations in the value of the dollar can be expected to affect our business because a strong US dollar makes imported cement less expensive, resulting in more imports into the United States by foreign competitors |
| Moreover, our industry is characterized by low backlogs, which means that our results of operations may be promptly affected by short-term economic fluctuations |
| In particular, our customers are engaged in a substantial amount of construction in which government funding is a component and, as a result, can be subject to government budget constraints and political shifts resulting in fund reallocation |
| For example, funds distributed under multi-year federal highway legislation historically comprised a majority of California and Texas’ public works spending |
| A significant decline in the level of construction activity in our markets would negatively affect our operating results |
| The cement, aggregate and concrete markets are also generally regional because transportation costs are high relative to the value of the product |
| Regional markets in particular are highly cyclical |
| Sales in regional markets are dependent on regional demand, which is tied to local economic factors that may fluctuate more widely than those of the United States as a whole |
| As a result, even though we sell in more than one area of the country, our operating results are subject to significant fluctuation |
| The regional nature of our business also makes us vulnerable to changes in regional weather and its impact on the regional construction industry |
| Our operating profit is generally lower in our fiscal quarter ending on the last day of February than it is in our other three fiscal quarters because of the impact of winter weather on construction activity |
| Although southern California and Texas are regions characterized by longer periods of favorable weather, extended periods of inclement weather can reduce construction activity at any time of the year |
| Because we sell almost all of our cement in Texas and Southern California, and because cement sales contribute more to our profitability than any other product line, a significant decline in cement demand in Texas or southern California would negatively impact our profitability |
| Our product prices are subject to material changes in response to relatively minor fluctuations in supply and demand, which can be affected by economic and other market conditions beyond our control |
| We may face price or volume declines in the future |
| Due to the high fixed cost nature of our business, our operating results may be significantly affected by relatively small changes in production volumes |
| Some of our competitors are larger and have greater financial resources or have less financial leverage than we do |
| As a result, these competitors may cope better with any downward pricing pressure and adverse economic or market conditions than we would |
| The availability and pricing of energy could lower our results of operations and harm our financial condition |
| We are dependent upon energy sources, including electricity and fossil fuels |
| During our last fiscal year, our operating results were negatively impacted by increasing energy costs |
| We have generally not entered into any long-term contracts to satisfy our fuel and electricity needs, with the exception of coal which we purchase from specific mines pursuant to long-term contracts |
| Despite long-term coal contracts, our coal supplies could be interrupted in the event of rail service disruptions or mine failures |
| If we are unable to meet our requirements for fuel and electricity, we may experience interruptions in our production |
| Price increases or disruption of the uninterrupted supply of these products could adversely affect our results of operations and financial condition |
| 10 ______________________________________________________________________ [34]Table of Contents We may incur substantial expenditures to comply with environmental laws which may adversely affect our results of operations and harm our financial condition |
| We are subject to federal, state and local environmental laws and regulations concerning, among other matters, air emissions, kiln dust disposal and wastewater discharge |
| We believe we are in substantial compliance with applicable environmental laws and regulations |
| However, from time to time we receive claims from federal and state environmental regulatory agencies and entities asserting that we are or may be in violation of certain environmental laws and regulations |
| Based on our experience and information currently available to us, we believe that such claims will not have a material impact on our financial condition or results of operations |
| Despite our compliance and experience, it is possible that we could be held liable for future charges which might be material but are not currently known or estimable |
| In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us, interrupt production or hinder our ability to build new or expand production facilities |
| For example, there currently is considerable scientific and political debate about whether the production of gases such as carbon dioxide may be causing global climate change |
| Since the manufacture of cement also produces carbon dioxide, any new regulations limiting our emissions of carbon dioxide could significantly impact our production volumes or costs of compliance |
| We believe we are in substantial compliance with all legal requirements regarding the environment and health and safety matters, but 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 effect on our operations, future net income or financial condition |
| Notwithstanding our intentions to comply with all legal requirements, if injury to persons or damage to property or contamination of the environment has been or is caused by the conduct of our business or hazardous substances or waste used in, generated or disposed of by us, we may be liable for such injuries and damages, and be required to pay the cost of investigation and remediation of such contamination |
| The amount of such liability could be material, and we may incur material liability in connection with possible claims related to our operations and properties under environmental, health and safety laws |
| Future litigation could affect our profitability |
| The nature of our business exposes us to various litigation matters including product liability claims, employment matters, environmental matters, regulatory and administrative proceedings, governmental investigations, tort claims and contract disputes |
| We contest these matters vigorously and make insurance claims where appropriate |
| However, litigation is inherently costly and unpredictable, making it difficult to accurately estimate the outcome of existing or future litigation |
| Although we make accruals as we believe warranted, the amounts that we accrue could vary significantly from any amounts we actually pay due to the inherent uncertainties and shortcomings in the estimation process |
| Future litigation costs, settlements or judgments could materially and adversely affect our results of operations and financial condition |
| Unexpected equipment failures, catastrophic events and scheduled maintenance may lead to production curtailments or shutdowns |
| Due to the high fixed cost nature of our business, interruptions in our production capabilities may cause our productivity and results of operations to decline significantly during the affected period |
| Our manufacturing processes are dependent upon critical pieces of equipment, such as our kilns and finishing mills |
| This equipment, on occasion, may be out of service as a result of unanticipated failures or damaged during accidents |
| In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions |
| In addition, our operations in California are susceptible to damage from earthquakes, for which we maintain only a limited amount of earthquake insurance and, therefore, we are not fully insured against earthquake risk |
| We also have one to two-week scheduled shut-downs every 12 to 24 months to refurbish our cement production facilities |
| Any significant interruption in production capability 11 ______________________________________________________________________ [35]Table of Contents may require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenue due to lost production time, which could have a material adverse effect on our results of operations and financial condition |
| Implementation of our growth strategy has certain risks |
| As part of our growth strategy, we may expand existing facilities, build additional plants, acquire other reserves or operations, enter into joint ventures or form strategic alliances that we believe will expand or complement our existing business |
| If any of these transactions occur, they will likely involve some or all of the following risks: • the potential disruption of our ongoing business; • the diversion of resources and management’s time and attention; • the inability of management to maintain uniform standards, controls, procedures and policies; • the difficulty of managing the operations of a larger company; • the risk of becoming involved in labor, commercial or regulatory disputes or litigation related to the new enterprise; • the risk of contractual or operational liability to joint venture participants or to third parties as a result of our participation; • the difficulty of competing for acquisitions and other growth opportunities with companies having greater financial resources than us; and • the difficulty of integrating the acquired operations and personnel into our existing business |
| Pursuing our growth strategy may be required for us to remain competitive, but we may not be able to complete any such transactions or obtain financing, if necessary, for such transactions on favorable terms or at all |
| Future transactions may not improve the competitive position and business prospects as anticipated, and could reduce sales or profit margins, and, therefore, earnings if they are not successful |
| Our business could suffer if cement imports from Mexico or other countries significantly increase or are sold in the US in violation of US fair trade laws |
| In 1989 and 1990, groups of domestic cement producers, including us, filed antidumping petitions that resulted in the imposition of significant antidumping import duties on imports of gray portland cement and clinker from Mexico and Japan |
| On March 6, 2006, the governments of the US and Mexico signed the US-Mexico Agreement on Cement, which settled the 16-year dispute over the US antidumping duty order on imports from Mexico |
| During the three-year term of the agreement, Mexican cement producers are allowed to import into the United States up to 3dtta0 million metric tons of cement and clinker annually, which will be subject to a reduced import duty of dlra3dtta00 per ton |
| Maximum import levels will be adjusted annually within certain limits to reflect changes in consumption, and will be allowed to increase to higher levels, if needed, to respond to natural disasters such as hurricanes |
| The antidumping order will be terminated in 2009 if Mexican producers have complied with the agreement |
| The agreement also provides that US Customs will deposit into an escrow account substantially all of the cash deposits of estimated antidumping duties collected from importers of Mexican cement and clinker |
| In a separate agreement, the importers and certain producers in the US, including us, agreed that 50prca of the deposits in the escrow account would be distributed to the importers and the remaining 50prca would be distributed to the US producers |
| We expect to receive about 12prca of the amounts distributed to the US producers |
| 12 ______________________________________________________________________ [36]Table of Contents Although we expect the antidumping order against cement and clinker from Japan to remain in effect until at least 2011, beginning in 2009 unlimited imports from Mexico may enter the US without the imposition of any import duties |
| In addition, as has always been the case, independently owned cement operators can construct new import facilities and begin to purchase cement from other countries, such as those in Asia, which could compete with domestic producers |
| An influx of cement or clinker products from countries not subject to antidumping orders, or sales of imported cement or clinker in violation of US fair trade laws, could materially and adversely affect our results of operations and financial condition |
| The financing agreements governing our debt contain various covenants that limit our discretion in the operation of our business and could lead to acceleration of debt |
| Our financing agreements, including our senior secured credit facility and the indenture governing our outstanding notes, impose operating and financial restrictions on our activities |
| Our senior secured credit facility requires us to comply with or maintain certain financial tests and ratios, including a leverage ratio and an interest coverage ratio |
| Restrictions contained in these financing agreements also limit or prohibit our ability and certain of our subsidiaries ability to, among other things: • pay dividends to our stockholders; • make certain investments and capital expenditures; • incur additional debt or sell preferred stock; • create liens; • restrict dividend payments or other payments from subsidiaries to us; • engage in consolidations and mergers or sell or transfer assets; • engage in transactions with our affiliates; and • sell stock in our subsidiaries |
| Various risks and events beyond our control could affect our ability to comply with these covenants and maintain financial tests and ratios |
| If we cannot comply with the financial covenants in our senior secured credit facility, we may not be able to borrow under this facility |
| In addition, failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions |
| A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing that debt |
| In addition, lenders may be able to terminate any commitments they made to supply us with further funds |
| Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations |
| In addition, the limitations imposed by our financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing |
| We cannot assure you that we will be able to obtain waivers or amendments of our financing agreements, if necessary, at acceptable terms or at all |
| The spin-off could result in significant tax liability |
| Our distribution of the common stock of Chaparral was conditioned upon our receipt of an opinion from our tax counsel to the effect that, among other things, the distribution qualified as a tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as amended, or the Code, to us and our stockholders for US federal income tax purposes |
| The opinion is based upon various factual representations and assumptions, as well as upon certain undertakings |
| We are not aware of any facts or circumstances that would cause the representations and assumptions to be untrue or incomplete in any material respect |
| If, however, any of those factual representations or assumptions were untrue or incomplete in any material respect, any undertaking was not complied with, or the facts upon which the opinion is based were materially different from the facts at the time of the distribution, the distribution may not qualify for tax-free treatment |
| 13 ______________________________________________________________________ [37]Table of Contents Under current policy of the Internal Revenue Service, or IRS, advance rulings will not be issued for certain significant aspects of spin-off transactions |
| Therefore, we did not apply for an advance ruling from the IRS with respect to the US federal income tax consequences of the distribution |
| Opinions of counsel are not binding on the courts or the IRS, and the conclusions expressed in the opinion delivered to us could be challenged by the IRS If the spin-off fails to qualify for tax-free treatment for US federal income tax purposes, then, in general, we would be subject to tax as if we had sold the Chaparral common stock in a taxable sale for its fair market value |
| Our stockholders would be treated as if they had received a taxable dividend equal to the fair market value of the Chaparral common stock that was distributed to them, taxed as a dividend (without reduction for any portion of a stockholder’s basis in its shares of our common stock) for US federal income tax purposes and possibly for purposes of state and local tax law, to the extent of a stockholder’s pro rata share of our current and accumulated earnings and profits (including any taxable gain of ours with respect to the spin-off) |
| It is expected that the amount of any such taxes to our stockholders and us would be substantial |
| Our ability to engage in acquisitions and other strategic transactions is subject to limitations because we agreed to certain restrictions in order to comply with US federal income tax requirements for a tax-free spin-off |
| Current US tax law that applies to spin-offs generally creates a presumption that the spin-off would be taxable to us but not to our stockholders if we engage in, or enter into an agreement to engage in, a transaction (or series of transactions) that would result in a 50prca or greater change by vote or by value in our stock ownership during the four-year period beginning on the date two years before the distribution date, unless it is established that the transaction (or a series of transactions) is not pursuant to a plan related to the spin-off |
| US Treasury regulations generally provide that whether an acquisition transaction and a spin-off transaction are part of a plan is determined based on all of the facts and circumstances, including specific factors listed in the regulations |
| In addition, the regulations provide certain “safe harbors” for acquisition transactions that are not considered to be part of a plan |
| There are other restrictions imposed on us under current US federal income tax laws for spin-offs with which we will need to comply in order to preserve the favorable tax treatment of the distribution of Chaparral common stock to our stockholders, such as continuing to own and manage our remaining business and limitations on sales or redemptions of our common stock for cash or other property following the distribution |
| In our tax sharing and indemnification agreement with Chaparral, we agreed that, among other things, we will not take any actions that would result in any tax being imposed on the spin-off |
| Further, during the two-year period following the spin-off, we may not repurchase any of our stock except in certain circumstances permitted by the IRS nor may we during the six-month period following the spin-off, except in certain specified transactions, liquidate, merge or consolidate with another person or sell or dispose of our assets (or those of certain of our subsidiaries) except in the ordinary course of business |
| We may, however, take certain actions prohibited by the tax sharing and indemnification agreement if we receive an unqualified opinion of tax counsel or an IRS ruling acceptable to us, to the effect that these actions will not affect the tax-free nature of the spin-off |
| These restrictions could substantially limit our strategic and operational flexibility, including our ability to finance our operations by issuing equity securities, make acquisitions using equity securities, repurchase our equity securities, raise money by selling assets or enter into business combination transactions |
| We may be required to satisfy certain indemnification obligations to Chaparral or may not be able to collect on indemnification rights from Chaparral |
| In the tax sharing and indemnification agreement between us and Chaparral, Chaparral agreed to indemnify us and our subsidiaries for any loss, including any adjustment to our taxes, resulting from (1) any action or failure to act by Chaparral or any of its subsidiaries following the completion of the spin-off that would be inconsistent with or prohibit the spin-off from qualifying as a tax-free transaction to us and our stockholders 14 ______________________________________________________________________ [38]Table of Contents under Section 355 of the Code, (2) certain acquisitions of its equity securities or assets or those of certain of its subsidiaries, and (3) any breach of any representation or covenant given by Chaparral or its subsidiaries in the separation documents or in connection with the tax opinion delivered by our tax counsel in connection with the spin-off |
| Chaparral’s indemnification obligations to us and our subsidiaries, officers and directors, are not limited in amount or subject to any cap |
| Under the terms of the separation and distribution agreement between us and Chaparral, we and Chaparral have agreed to indemnify each other with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies |
| These indemnification obligations could be significant |
| The ability to satisfy these indemnities if called upon to do so will depend upon the future financial strength of each of our companies |
| We cannot determine whether we will have to indemnify Chaparral for any substantial obligations after the distribution |
| We also cannot assure you that, if Chaparral has to indemnify us for any substantial obligations, Chaparral will have the ability to satisfy those obligations to us |
| If Chaparral is unable to satisfy its obligations under its indemnity to us under the circumstances set forth above, we may be subject to substantial liabilities |