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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO ____________________
COMMISSION FILE NUMBER 1-6117
SOUTHDOWN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LOUISIANA 72-0296500
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET
SUITE 2400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 650-6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
At September 30, 1996 there were 17.7 million common shares outstanding.
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<PAGE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
INDEX
PAGE
NO.
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
September 30, 1996 and December 31, 1995 1
Statement of Consolidated Earnings
Three and nine months ended September 30, 1996 and 1995 2
Statement of Consolidated Cash Flows
Nine months ended September 30, 1996 and 1995 3
Statement of Consolidated Revenues and Operating Earnings
by Business Segment
Three and nine months ended September 30, 1996 and 1995 4
Statement of Shareholders' Equity
Nine months ended September 30, 1996 4
Notes to Consolidated Financial Statements 5
Independent Accountants' Report 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
(IN MILLIONS)
---------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37.6 $ 7.7
Accounts and notes receivable, less allowance for doubtful
accounts of $10.2 and $8.8 83.8 68.9
Inventories (Note 3) 63.1 69.6
Deferred income taxes 8.0 11.7
Prepaid expenses and other 3.9 3.3
------------------ -----------------
Total current assets 196.4 161.2
Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $345.0 and $330.0 568.2 565.4
Goodwill 79.3 79.3
Other long-term assets:
Long-term receivables 13.8 21.0
Other 51.6 48.6
------------------ -----------------
$ 909.3 $ 875.5
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1.2 $ 0.7
Accounts payable and accrued liabilities 88.6 78.7
------------------ -----------------
Total current liabilities 89.8 79.4
Long-term debt (Note 2) 169.5 174.5
Deferred income taxes 120.0 116.9
Minority interest in consolidated joint venture 29.6 30.9
Long-term portion of postretirement benefit obligation 73.3 76.8
Other long-term liabilities and deferred credits 18.4 22.0
------------------ -----------------
500.6 500.5
------------------ -----------------
Shareholders' equity:
Preferred stock redeemable at issuer's option (Note 4) 151.9 151.9
Common stock, $1.25 par value 22.1 21.6
Capital in excess of par value 133.1 127.0
Reinvested earnings 101.6 74.5
------------------ -----------------
408.7 375.0
------------------ -----------------
$ 909.3 $ 875.5
================== =================
</TABLE>
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<PAGE>
<TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED EARNINGS
(UNAUDITED)
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA)
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 189.3 $ 170.4 $ 494.9 $ 444.5
------------ ------------ ------------ ------------
Costs and expenses:
Operating 122.0 115.0 332.5 309.4
Depreciation, depletion and amortization 10.6 10.2 30.8 29.9
Selling and marketing 4.1 3.8 12.0 11.3
General and administrative 7.7 9.3 26.1 27.8
Other income, net (3.8) (1.7) (4.2) (4.4)
------------ ------------ ------------ ------------
140.6 136.6 397.2 374.0
Minority interest in earnings of consolidated joint venture 2.7 2.6 4.7 4.3
------------ ------------ ------------ ------------
143.3 139.2 401.9 378.3
------------ ------------ ------------ ------------
Operating earnings 46.0 31.2 93.0 66.2
Interest, net of amounts capitalized (4.6) (6.6) (15.8) (20.0)
------------ ------------ ------------ ------------
Earnings before income taxes and extraordinary charge 41.4 24.6 77.2 46.2
Federal and state income tax expense (14.0) (8.1) (26.1) (15.2)
------------ ------------ ------------ ------------
Earnings before extraordinary charge 27.4 16.5 51.1 31.0
Extraordinary charge, net of income taxes (Note 2) - - (11.4) -
------------ ------------ ------------ ------------
Net earnings $ 27.4 $ 16.5 $ 39.7 $ 31.0
============ ============ ============ ============
Dividends on preferred stock (Note 4 and Exhibit 11) $ (2.4) $ (2.4) $ (7.3) $ (7.3)
============ ============ ============ ============
Earnings (loss) per common share (Note 4 and Exhibit 11):
Primary
Earnings before extraordinary charge $ 1.39 $ 0.80 $ $ 1.35
Extraordinary charge, net of income taxes - - (0.63) -
------------ ------------ ------------ ------------
$ 1.39 $ 0.80 $ 1.81 $ 1.35
============ ============ ============ ============
Fully diluted
Earnings before extraordinary charge $ 1.15 $ 0.70 $ 2.14 $ 1.31
Extraordinary charge, net of income taxes - - (0.48) -
------------ ------------ ------------ ------------
$ 1.15 $ 0.70 $ 1.66 $ 1.31
============ ============ ============ ============
Average shares outstanding (Exhibit 11)
Primary 17.9 17.6 17.9 17.5
============ ============ ============ ============
Fully diluted 23.9 23.5 23.8 20.8
============ ============ ============ ============
</TABLE>
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<TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<CAPTION>
(IN MILLIONS)
-------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Operating activities:
Earnings before extraordinary charge $ 51.1 $ 31.0
Adjustments to reconcile earnings before extraordinary charge
to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 30.8 29.9
Deferred income tax expense 6.8 8.5
Amortization of debt issuance costs 2.2 2.0
Changes in operating assets and liabilities 8.1 (46.9)
Other adjustments 2.4 2.7
Net cash used in discontinued operations (0.9) (2.5)
------------- --------------
Net cash provided by operating activities 100.5 24.7
------------- --------------
Investing activities:
Additions to property, plant and equipment (32.0) (19.3)
Acquisitions, net of cash acquired (6.2) (12.6)
Proceeds from asset sales 4.6 8.8
Other (0.5) (0.5)
Net cash used in discontinued operations - (1.5)
------------- --------------
Net cash used in investing activities (34.1) (25.1)
------------- --------------
Financing activities:
Additions to long-term debt 125.0 13.4
Reductions in long-term debt (132.3) (0.4)
Premium on early extinguishment of debt (11.6) -
Dividends (13.4) (8.2)
Exercise of warrants to purchase common stock 6.4 -
Securities issuance costs (4.6) -
Distributions to minority interest (6.0) (1.3)
------------- --------------
Net cash provided by (used in) financing activities (36.5) 3.5
------------- --------------
Net increase in cash and cash equivalents 29.9 3.1
Cash and cash equivalents at beginning of period 7.7 7.4
------------- --------------
Cash and cash equivalents at end of period $ 37.6 $ 10.5
============= ==============
</TABLE>
Cash payments for income taxes totaled $3.4 million and $9.9 million in the
first nine months of 1996 and 1995, respectively. Further, in order not to incur
additional interest charges, in early January 1995 the Company also paid a $7.6
million tax assessment, including interest, proposed by the Internal Revenue
Service in a preliminary audit report issued in late 1994. Interest paid, net of
amounts capitalized, was $16.3 million and $13.8 million in the first nine
months of 1996 and 1995, respectively.
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<TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED REVENUES AND OPERATING EARNINGS
BY BUSINESS SEGMENT
(UNAUDITED)
<CAPTION>
(IN MILLIONS)
--------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contributions to revenues:
Cement $ 140.4 $ 124.3 $ 350.9 $ 313.2
Concrete products 62.0 56.7 180.9 162.9
Intersegment sales (13.1) (10.6) (36.9) (31.6)
------------ ------------ ------------ ------------
$ 189.3 $ 170.4 $ 494.9 $ 444.5
============ ============ ============ ============
Contributions to operating earnings (loss) before interest
expense and income taxes:
Cement $ 44.3 $ 35.7 $ 97.8 $ 79.8
Concrete products 4.7 0.7 11.0 4.6
Corporate
General and administrative (4.1) (5.8) (15.2) (18.1)
Depreciation, depletion and amortization (0.8) (1.0) (2.6) (3.1)
Miscellaneous income 1.9 1.6 2.0 3.0
------------ ------------ ------------ ------------
$ 46.0 $ 31.2 $ 93.0 $ 66.2
============ ============ ============ ============
</TABLE>
<TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
(IN MILLIONS)
---------------------------------------------------------------------------------
CAPITAL
PREFERRED STOCK COMMON STOCK IN EXCESS OF REINVESTED
------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 4.6 $ 151.9 17.3 $ 21.6 $ 127.0 $ 74.5
NET EARNINGS - - - - - 39.7
DIVIDENDS ON PREFERRED STOCK
(NOTE 4) - - - - - (7.3)
DIVIDENDS PAID ON COMMON STOCK - - - - - (5.2)
EXERCISE OF WARRANTS TO PURCHASE
COMMON STOCK - - 0.4 0.5 5.9 -
OTHER - - - - 0.2 (0.1)
----------- ----------- ---------- ---------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1996 4.6 $ 151.9 17.7 $ 22.1 $ 133.1 $ 101.6
=========== =========== ========== ========== =========== ===========
</TABLE>
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<PAGE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
The Consolidated Balance Sheet of Southdown, Inc. and subsidiary
companies (the Company) at September 30, 1996 and the Statements of Consolidated
Earnings, Consolidated Cash Flows, Consolidated Revenues and Operating Earnings
by Business Segment and Shareholders' Equity for the periods indicated herein
have been prepared by the Company without audit. The Consolidated Balance Sheet
at December 31, 1995 is derived from the December 31, 1995 audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. It is assumed that these financial statements will be
read in conjunction with the audited financial statements and notes thereto
included in the Company's 1995 Annual Report on Form 10-K.
In the opinion of management, the statements reflect all adjustments
necessary for a fair presentation of the financial position, results of
operations and cash flows of the Company on a consolidated basis and all such
adjustments are of a normal recurring nature. The interim statements for the
period ended September 30, 1996 are not necessarily indicative of results to be
expected for the full year. Certain data from the prior year have been
reclassified for purposes of comparison.
NOTE 2 - CHANGES IN LONG-TERM DEBT:
On March 19, 1996, the Company issued $125 million of 10% Senior
Subordinated Notes due 2006 (the 10% Notes) in a private placement. Interest on
the 10% Notes is payable semi-annually, commencing September 1, 1996. The 10%
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after March 1, 2001 at 105% of the principal amount, declining
ratably in annual increments to par on or after March 1, 2004, plus accrued
interest. The 10% Notes are subordinate in right of payment to the Company's
existing and future senior debt, as defined in the indenture under which the 10%
Notes were issued, rank on a parity with the Company's existing and future
senior subordinated debt, as defined in the indenture, and rank senior to other
existing and future subordinated debt of the Company. The indenture includes
affirmative and negative covenants which in certain instances restrict, among
other things, incurrence of additional indebtedness, certain sales of assets,
certain mergers and consolidations, dividends and distributions and redemptions
and repurchases of equity securities. In accordance with a Registration Rights
Agreement entered into at the time of the private placement, the Company
exchanged all of the 10% Notes in a registered exchange offer for 10% Senior
Subordinated Notes due 2006, Series B, which are substantially similar to the
10% Notes and were issued under the same indenture.
The net proceeds of the 10% Notes and other funds were used to retire
$120.2 million in principal amount of the Company's 14% Senior Subordinated
Notes due 2001, Series B (the 14% Notes) that the Company had offered to
repurchase for $131.8 million plus accrued interest of $7.2 million and to pay
related costs and expenses. The Company recorded a $11.4 million net of tax
extraordinary charge in the first quarter of 1996 to reflect the prepayment
premium and other costs incurred in the repurchase. The remaining $4.8 million
in principal amount of the 14% Notes was called for redemption on October 31,
1996 at 105.25% of the principal amount plus accrued interest.
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NOTE 3 - INVENTORIES:
<TABLE>
<CAPTION>
(UNAUDITED IN MILLIONS)
----------------------------------------
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Finished goods $ 15.2 $ 18.6
Work in progress 11.4 14.6
Raw materials 6.4 6.5
Supplies 30.1 29.9
---------------- ----------------
$ 63.1 $ 69.6
================ ================
</TABLE>
Inventories stated on the LIFO method were $26.7 million of total
inventories at September 30, 1996 and $30.4 million of total inventories at
December 31, 1995 compared with current costs of $35.4 million and $39.1
million, respectively.
NOTE 4 - CAPITAL STOCK:
COMMON STOCK
At September 30, 1996, a total of approximately 17,715,000 shares of
Common Stock were issued and outstanding. A quarterly dividend of $0.10 per
share of Common Stock has been paid quarterly beginning in March 1996, and the
Company has declared a quarterly dividend of $0.10 per share payable on December
2, 1996, to holders of record on November 15, 1996.
PREFERRED STOCK REDEEMABLE AT ISSUER'S OPTION
Series A Preferred Stock - The Company had 1,994,000 shares of Preferred
Stock, $0.70 Cumulative Convertible Series A (Series A Preferred Stock)
outstanding at September 30, 1996, December 31, 1995 and September 30, 1995. The
Series A Preferred Stock (a) has a stated value and liquidation preference of
$10 per share, plus accrued and unpaid dividends, (b) carries a cumulative
dividend of $.70 per year, payable quarterly, and entitles the holders of a
majority thereof to elect two directors if dividends are in arrears for at least
540 days, (c) is convertible into one-half of a share of Common Stock for each
share of Series A Preferred Stock and (d) is redeemable with at least 10 days
notice at the option of the Company at 105% of the $10 stated value thereof
through April 30, 1997 (declining to 100% of the stated value thereafter) plus
an amount equal to accrued and unpaid dividends. Dividends paid on the Series A
Preferred Stock were approximately $350,000 and $1 million, respectively, during
the three and nine-month periods ended September 30, 1996 and 1995. The Company
has called all of the shares of its Series A Preferred Stock for redemption on
November 8, 1996. The Series A Preferred Stock will remain convertible into
Common Stock until 5:00 p.m., Houston, Texas time, on the November 8, 1996
redemption date.
Series B Preferred Stock - The Company had 914,360 shares of Preferred
Stock, $3.75 Convertible Exchangeable Series B (Series B Preferred Stock)
outstanding at September 30, 1996, December 31, 1995, and September 30, 1995.
The Series B Preferred Stock (a) has a stated value and liquidation preference
of $50 per share, plus accrued and unpaid dividends, (b) carries a cumulative
dividend of $3.75 per year, payable semi-annually, and entitles the holders of a
majority thereof to elect two directors if dividends are in arrears for at least
180 days, (c) is convertible into two and one-half shares of Common Stock for
each share of Series B Preferred Stock and (d) is redeemable with at least 30
days notice at the option of the Company at 100% of the $50 stated value thereof
plus an amount equal to accrued and unpaid dividends. Dividends accrued on the
Series B Preferred
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<PAGE>
Stock were approximately $860,000 and $2.6 million, respectively, during the
three and nine-month periods ended September 30, 1996 and 1995.
On August 29, 1996, the Company announced that it would call for
redemption fifty percent of the shares of its Series B Preferred Stock
outstanding. The redemption price was $50.00 per share of Series B Preferred
Stock plus accrued dividends of $1.13. On October 18, 1996, which was the date
set for redemption, only 150 shares of Series B Preferred Stock were redeemed.
The remaining 457,030 shares of Series B Preferred Stock which had been called
for redemption (plus an additional 14,775 shares of Series B Preferred Stock
which had not been called for redemption) had been converted into Common Stock
prior to the redemption date, leaving 442,405 shares of Series B Preferred Stock
outstanding on the close of business on October 18, 1996. On a proforma basis,
assuming that 471,805 shares of Series B Preferred Stock were converted into
Common Stock at the beginning of the year, primary earnings per share would have
been reduced by $0.06 per share and $0.04 per share, respectively, for the three
and nine months ended September 30, 1996.
On October 22, 1996, the Company issued a notice of redemption for all
of the remaining outstanding shares of Series B Preferred Stock. The redemption
date has been set for November 21, 1996. The Series B Preferred Stock will
remain convertible into Common Stock until 5:00 p.m., Houston, Texas time on the
November 21, 1996 redemption date.
Series D Preferred Stock - The Company had 1,725,000 shares of Preferred
Stock, $2.875 Cumulative Convertible Series D (Series D Preferred Stock)
outstanding at September 30, 1996, December 31, 1995, and September 30, 1995.
The Series D Preferred Stock (a) has a stated value and liquidation preference
of $50 per share, plus accrued and unpaid dividends, (b) carries a cumulative
annual dividend of $2.875 per share, payable quarterly, (c) is convertible into
1.511 shares of Common Stock for each share of Series D Preferred Stock, subject
to adjustment and (d) may be converted at the option of the Company, in whole
but not in part, at any time on and after January 27, 1997 and until January 27,
2001, if for at least 20 trading days within a period of 30 consecutive trading
days, including the last trading day of such 30 trading day period, the closing
price of the Common Stock equals or exceeds 130% of the conversion price of
$33.092 and (e) is redeemable at the option of the Company at 100% of the stated
value thereof plus accrued and unpaid dividends on and after January 27, 2001.
Dividends paid on the Series D Preferred Stock were approximately $1.2 million
and $3.7 million, respectively, during the three and nine-month periods ended
September 30, 1996 and 1995.
Warrants to Purchase Common Stock - In October 1991, the Company issued
and sold an aggregate of 1,250,000 Warrants pursuant to the terms of a Warrant
Agreement dated as of October 31, 1991. ChaseMellon Shareholder Services, L.L.C.
is the Warrant Agent. Each Warrant entitles the holder to purchase one share of
Common Stock at a price of $16 per share until 5:00 p.m. New York City on
October 31, 1996. The closing price of the Company's Common Stock on the New
York Stock Exchange on October 29, 1996 was $28.75 as reported in The Wall
Street Journal. As of October 29, 1996, 616,500 Warrants remained unexercised.
NOTE 5 - CONTINGENCIES:
On a voluntary basis, the Company is investigating two inactive Ohio
cement kiln dust (CKD) disposal sites. When CKD is infused with water, it may
produce leachate with an alkalinity high enough to be classified as hazardous
and may also leach certain hazardous trace metals present therein. The two sites
in question were part of a cement manufacturing facility that was owned and
operated by a now dissolved cement company from 1924 to 1945 and by a division
of USX Corporation (USX) from 1945 to 1975. The Company believes that USX is a
responsible party because it owned and operated the larger of the two sites (USX
Site) at the time of disposal of the CKD, and also arranged for the disposal and
transported the CKD to the USX Site. Under Federal and applicable Ohio law, a
court generally applies equitable principles in determining the amount of
contribution which a potentially responsible party must provide with respect to
a cleanup of hazardous substances and such
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<PAGE>
determination is within the sole discretion of the court. Therefore, based on
the advice of counsel, the Company believes there is a reasonable basis for the
apportionment of cleanup costs relating to the USX Site between the Company and
USX with USX shouldering substantially all of the cleanup costs because, based
on the facts known at this time, the Company itself disposed of no CKD at the
USX Site and is potentially liable only because of its current ownership of the
USX Site.
In September 1993, the Company filed a complaint against USX, alleging
that USX is a potentially responsible party under both Federal and applicable
Ohio law, and therefore, jointly and severally liable for costs associated with
cleanup of the USX Site. The Company and USX have held settlement discussions
with respect to this matter and are currently jointly funding a phased approach
to investigating the problems at the USX Site. Based on the information obtained
from this investigation project, current estimates of the potential magnitude of
the remediation costs for the USX Site are between $300,000 and $8 million,
depending on the assumptions used. No regulatory agency has directly asserted a
claim against the Company as the owner of the USX Site requiring it to remediate
the property, and no cleanup of the USX Site has yet been initiated.
See also Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources - Known
Events, Trends and Uncertainties" for discussion of certain contingencies.
NOTE 6 - REVIEW BY INDEPENDENT ACCOUNTANTS:
The unaudited financial information presented in this report has been
reviewed by the Company's independent public accountants. The review was limited
in scope and did not constitute an audit of the financial information in
accordance with generally accepted auditing standards such as is performed in
the year-end audit of financial statements. The report of Deloitte & Touche LLP
relating to its limited review of the financial information as of September 30,
1996 and for the three and nine-month periods ended September 30, 1996 and 1995
follows.
-8-
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF
SOUTHDOWN, INC.
HOUSTON, TEXAS
We have reviewed the accompanying consolidated balance sheet of
Southdown, Inc. and subsidiary companies as of September 30, 1996, and the
related statements of consolidated earnings for the three and nine-month periods
ended September 30, 1996 and 1995, consolidated cash flows for the nine months
ended September 30, 1996 and 1995 and the statement of shareholders' equity for
the nine months ended September 30, 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of the interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such financial statements for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Southdown, Inc. and
subsidiary companies as of December 31, 1995 and the related statements of
consolidated earnings, shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated February 14, 1996, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 1995 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Houston, Texas
October 22, 1996
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations included on pages 21 through 35 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 should be read in conjunction
with the discussion contained herein.
RESULTS OF OPERATIONS
CONSOLIDATED THIRD QUARTER EARNINGS
Operating earnings for the third quarter of 1996 were $46.0 million
compared with $31.2 million in the prior year quarter. Net earnings for the
third quarter of 1996 were $27.4 million, $1.15 per share, fully diluted,
compared with $16.5 million, $0.70 per share, fully diluted, for the prior year
quarter.
Consolidated revenues in the third quarter of 1996 increased 11% over
the same period of the prior year primarily because of improved sales volumes
and sales prices in both cement and ready-mixed concrete. Third quarter 1996
operating earnings improved $14.8 million over the same quarter of the prior
year reflecting improvements in both operating segments.
Third quarter interest expense in 1996 declined compared with the prior
year quarter, reflecting the refinancing of the 14% Notes with the 10% Notes in
March 1996 and lower borrowings under the Company's Revolving Credit Facility.
CONSOLIDATED YEAR-TO-DATE EARNINGS
Earnings before extraordinary charge for the nine months ended September
30, 1996 were $51.1 million, $2.14 per share, fully diluted, compared with $31
million, $1.31 per share, fully diluted, in the prior year period. The
extraordinary charge of $11.4 million, $0.48 per share, fully diluted, reflects
the prepayment premium and other costs incurred in the first quarter of 1996 in
conjunction with the repurchase of $120.2 million principle amount of the 14%
Notes. Consolidated year-to-date revenues were 11% higher than the prior year
period for the same reasons as discussed above. The year-over-year improvement
in operating results includes a 23% increase in Cement segment earnings, a $6.4
million improvement in the results reported by the Concrete Products segment and
a 16% reduction in Corporate expenses. The Cement segment benefited from an 11%
increase in sales volumes and a 3% improvement in average sales prices.
Operating earnings from the Concrete Products segment were also significantly
improved primarily because of higher ready-mixed concrete sales volumes and
sales prices. Interest expense in the 1996 period was 21% below that of the
comparable prior year period because of lower debt levels and borrowing costs.
SEGMENT OPERATING EARNINGS
CEMENT
THIRD QUARTER - The record quarterly operating earnings of the Cement
segment for the three-month period ended September 30, 1996 were $44.3 million
compared with $35.7 million in the prior year quarter. The improvement reflects
a 12% increase in sales volumes and a weighted average $1.44 per ton improvement
in cement sales prices. Higher sales volumes were reflected at all but two of
the Company's cement plants. Sales volumes were favorably impacted by strong
market conditions and favorable weather. The improvement in sales
-10-
<PAGE>
prices reflected price increases implemented during the previous twelve months.
Per unit Cement segment operating costs declined slightly.
YEAR-TO-DATE - Operating earnings for the nine months ended September
30, 1996 were $97.8 million compared with $79.8 million in the prior year
period. The Cement segment benefited from a 476,000 ton increase in cement sales
volumes and a 3% improvement in the weighted average sales price. The higher
sales volumes and sales prices reflected strong demand. Per unit operating costs
were essentially unchanged for the comparable year-to-date periods.
Sales volumes, average unit price and cost data and unit operating
profit margins relating to the Company's cement plant operations appear in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tons of cement sold (thousands) 1,971 1,759 5,003 4,527
========= ========= ========= =========
Weighted average per ton data:
Sales price (net of freight) $ 62.99 $ 61.55 $ 62.28 $ 60.70
Cost of sales (1) 40.75 41.31 42.78 42.85 (2)
--------- --------- --------- ---------
Margin $ 22.24 $ 20.24 $ 19.50 $ 17.85
========= ========= ========= =========
--------------
(1) Includes fixed and variable manufacturing costs, cost of purchased
cement, selling expenses, plant general and administrative costs,
other plant overhead and miscellaneous costs.
(2) Excludes a $1 million charge for the nine months ended September 30,
1995 related to a litigation settlement.
</TABLE>
CONCRETE PRODUCTS
THIRD QUARTER - Excluding a $1.5 million gain from the sale of surplus
California real estate, operating earnings for the Concrete Products segment
increased $2.5 million over the prior year quarter because of a $1.30 per yard
improvement in ready-mixed concrete sales prices combined with a 8% increase in
ready-mixed sales volumes. The increase in sales volumes was based entirely on
an improved Florida market. Favorable weather and an improved construction
market contributed to higher Florida concrete operations sales volumes and sales
prices and resulted in a twofold increase in earnings from the Florida division.
Excluding the previously mentioned $1.5 million gain, operating results in
California were higher than the prior year quarter. The improvement resulted
primarily from lower operating costs from the California aggregate operations in
contrast with the prior year quarter which was adversely impacted by a labor
strike. Operating results from California ready-mixed concrete were improved,
reflecting a 4% increase in ready-mixed concrete sales prices.
YEAR-TO-DATE - Concrete Products operating earnings increased $6.4
million for the nine months ended September 30, 1996. The Concrete Products
segment achieved a significant improvement primarily because of higher earnings
from the Florida concrete operation. Fair weather and a strong construction
market resulted in higher Florida ready-mixed concrete sales volumes and sales
prices. Excluding the previously mentioned $1.5 million gain, operating results
from the California operation improved slightly. The California Concrete
Products operating results were favorably impacted by a $3.33 per yard increase
in ready-mixed concrete sales prices offset
-11-
<PAGE>
by a 39% decline in earnings from the California aggregate operations. The
California aggregate operations were adversely impacted by a further slide in
construction activity in the Company's market area.
The segment's operating results also include the block, resale and fly
ash operations in Florida and aggregate operations in southern California which
combined totalled $1.6 million and $5 million of operating earnings in the 1996
quarter and year-to-date periods, respectively, compared with $700,000 and $4.7
million in the 1995 periods, respectively.
Sales volumes, unit price and cost data and unit operating margins
relating to the Company's sales of ready-mixed concrete appear in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Yards of ready-mixed concrete
sold (thousands) 947 875 2,779 2,555
========= ======== ========= ========
Weighted average per cubic yard data:
Sales price $ 53.21 $ 51.91 $ 53.10 $ 51.05
Operating costs (1) 51.62 (2) 51.96 51.48 (2) 51.08
--------- --------- --------- --------
Margin(3) $ 1.59 $ (0.05) $ 1.62 $ (0.03)
========= ========= ========= =========
--------------
(1) Includes variable and fixed plant costs, delivery, selling,
general and administrative and miscellaneous operating costs.
(2) Excludes a third quarter 1996, $1.5 million gain from the sale of
surplus real estate.
(3) Does not include aggregate, concrete block and other related
products.
</TABLE>
CORPORATE
Corporate general and administrative expenses declined in both the
current year third quarter and nine months year-to-date periods compared with
the prior year periods primarily because of estimated credits for postretirement
benefits and pension expense.
LIQUIDITY AND CAPITAL RESOURCES
The net proceeds from the Company's March 1996 issuance of $125 million
of 10% Notes, combined with borrowings under the Company's Revolving Credit
Facility, were utilized to repurchase $120.2 million of 14% Notes and to pay the
related prepayment premium and other costs. On October 1, 1996, the final $4.8
million in principal amount of the 14% Notes were called for redemption on
October 31, 1996 at 105.25% of the principal amount plus accrued interest. The
Company will utilize internally generated funds for the redemption.
Internally generated cash flow during the first nine months of 1996 was
utilized to (i) invest approximately $32 million in property, plant and
equipment, (ii) acquire a terminal in Phoenix, Arizona, (iii) reduce borrowings
outstanding under the Revolving Credit Facility and (iv) pay dividends on
capital stock. In the first nine months of 1995, internally generated funds from
operations and borrowings under the Company's Revolving Credit Facility were
utilized to (i) fund working capital requirements including the build-up of
inventories, (ii) invest
-12-
<PAGE>
approximately $19.3 million in property, plant and equipment, (iii) acquire
additional ready-mix concrete operations in Florida and in southern California
for a total of $12.6 million and (iv) pay dividends on preferred stock.
The Company's Revolving Credit Facility totals $200 million and matures
in October 2000. The terms of the facility also permit the issuance of standby
letters of credit up to a maximum of $95 million in lieu of borrowings. The
Company's ownership interest in five cement manufacturing facilities and the
Company's joint venture interest in Kosmos Cement Company are pledged to secure
this facility. At September 30, 1996, there were no borrowings and $51.4 million
of letters of credit were outstanding under the Revolving Credit Facility,
leaving $148.6 million of unused and unrestricted capacity.
On August 29, 1996, the Company announced that it would call for
redemption fifty percent of the shares of its Series B Preferred Stock
outstanding. The redemption price was $50 per share of Series B Preferred Stock
plus accrued dividends of $1.13. On October 18, 1996, which was the date set for
redemption, only 150 shares of Series B Preferred Stock were redeemed. The
remaining 457,030 shares of Series B Preferred Stock which had been called for
redemption (plus an additional 14,775 shares of Series B Preferred Stock which
had not been called for redemption) had been converted into Common Stock prior
to the redemption date, leaving 442,405 shares of Series B Preferred Stock
outstanding on the close of business on October 18, 1996.
On October 22, 1996, the Company issued a notice of redemption for all
of the remaining outstanding shares of the Series B Preferred Stock on November
21, 1996 and 100% of the Company's Series A Preferred Stock on November 8, 1996.
The Series B Preferred Stock and the Series A Preferred Stock will remain
convertible into Common Stock until 5:00 p.m. Houston, Texas time on their
respective November 1996 redemption dates.
In October 1991, the Company issued and sold an aggregate of 1,250,000
Warrants pursuant to the terms of a Warrant Agreement dated as of October 31,
1991. Each Warrant entitles the holder to purchase one share of Common Stock at
a price of $16 per share until 5:00 p.m. New York City on October 31, 1996. The
closing price of the Company's Common Stock on the New York Stock Exchange on
October 29, 1996 was $28.75 as reported in The Wall Street Journal. As of
October 29, 1996, 616,500 Warrants remained unexercised.
CHANGES IN FINANCIAL CONDITION
The change in the financial condition of the Company between December
31, 1995 and September 30, 1996 reflects the March 1996 issuance of $125 million
of 10% Notes, and the increase in internally generated cash flow to complete the
repurchase of $120.2 million of the 14% Notes, pay down borrowings under the
Company's Revolving Credit Facility and fund capital expenditures and capital
stock dividends. Accounts and notes receivables increased because of the
additional sales activity occurring in the summer construction season relative
to the winter months. The decrease in inventories reflects the higher than
anticipated cement sales volumes during the peak selling months in the second
and third quarters. The decrease in long-term receivables reflects collections
on restructured trade accounts receivable. The decrease in deferred income taxes
reflects the reduction of net operating loss carryforwards. Accounts payable and
accrued liabilities increased because of the timing of payments on normal trade
and other obligations. Other liabilities and deferred credits decreased because
of payments made in conjunction with the shipping operations formerly owned by a
predecessor company and other obligations.
-13-
<PAGE>
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
Environmental Matters
The Company is subject to Federal, state and local laws, regulations and
ordinances pertaining to the protection of the environment. These laws regulate
water discharges and air emissions, as well as the handling, use and disposal of
hazardous and non-hazardous waste materials and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
certain substances at the Company's various operating facilities or elsewhere.
Industrial operations have been conducted at the Company's cement
manufacturing facilities for many years. In the past, the Company disposed of
various materials used in its cement manufacturing and concrete products
operations in onsite and offsite facilities. Some of these materials, if
discarded today, might be classified as hazardous substances. Several of the
Company's previously and currently owned facilities at several locations have
become the subject of various local, state and Federal environmental proceedings
and inquiries, including being named a potentially responsible party with regard
to Superfund sites, primarily at several locations to which they are alleged to
have shipped materials for disposal. While some of these matters have been
settled for de minimis amounts, others are in their preliminary stages and final
results may not be determined for years. Based on the information the Company
has developed to date, the Company has no reason to believe it will be required
to spend significant sums with regard to these locations either individually or
in the aggregate. However, until it is determined what, if any, contribution the
Company or its predecessors made to these locations and until all environmental
studies, investigations, remediation work and negotiations with or litigation
against potential sources of recovery have been completed, it is impossible to
determine the ultimate cost of resolving these environmental matters.
Cement kiln dust (CKD) is a by-product of the cement manufacturing
process. Most manufacturing plants in the industry have typically disposed of
CKD in and around the plant site since the inception of cement manufacturing
operations. When CKD is infused with water, it may produce a leachate with an
alkalinity high enough to be classified as hazardous and may also leach certain
hazardous trace metals present therein. The Company has recorded charges
totaling approximately $13.3 million as the estimated remediation cost for one
inactive CKD disposal site in Ohio. Approximately $12 million of the reserved
amount had been expended through September 30, 1996.
On a voluntary basis, the Company is also investigating two other
inactive Ohio CKD disposal sites. The two additional sites in question were part
of a cement manufacturing facility that was owned and operated by a now
dissolved cement company from 1924 to 1945 and by a division of USX Corporation
(USX) from 1945 to 1975. The Company believes that USX is a responsible party
because it owned and operated the larger of the two sites (USX Site) at the time
of disposal of the CKD, and also arranged for the disposal and transported the
CKD to the USX Site. Under Federal and applicable Ohio law, a court generally
applies equitable principles in determining the amount of contribution which a
potentially responsible party must provide with respect to a cleanup of
hazardous substances and such determination is within the sole discretion of the
court. Therefore, based on the advice of counsel, the Company believes there is
a reasonable basis for the apportionment of cleanup costs relating to the USX
Site between the Company and USX with USX shouldering substantially all of the
cleanup costs because, based on the facts known at this time, the Company itself
disposed of no CKD at the USX Site and is potentially liable only because of its
current ownership of the USX Site.
-14-
<PAGE>
In September 1993, the Company filed a complaint against USX, alleging
that USX is a potentially responsible party under both Federal and applicable
Ohio law, and therefore, jointly and severally liable for costs associated with
cleanup of the USX Site. The Company and USX have held settlement discussions
with respect to this matter and are currently jointly funding a phased approach
to investigating the problems at the USX Site. Based on the information obtained
from this investigation project, current estimates of the potential magnitude of
the remediation costs for the USX Site are between $300,000 and $8 million,
depending on the assumptions used. No regulatory agency has directly asserted a
claim against the Company as the owner of the USX Site requiring it to remediate
the property, and no cleanup of the USX Site has yet been initiated.
No substantial investigative work has been undertaken at the Company's
other CKD sites in Ohio. Several of the Company's other inactive CKD disposal
sites around the country are under study to determine if remedial action is
required.
Claims for Indemnification
Prior to the sale of the Company's then oil and gas subsidiary, Pelto
Oil Company (Pelto) in 1989 to Energy Development Corporation (EDC), Pelto
entered into certain gas settlement agreements, including one with Tennessee Gas
Pipeline Company (Tennessee Gas). The Minerals Management Service (MMS) of the
Department of the Interior (DOI) has reviewed the 1988 agreement Pelto entered
into with Tennessee Gas to determine whether a payment to Pelto thereunder is
associated with Federal or Indian leases and whether, in its view, any
additional royalties may be due as a result of that payment. In October 1995,
the MMS's Houston Compliance Division advised EDC that it had determined that a
lump sum payment made by Tennessee Gas to Pelto was, for several alleged
reasons, royalty bearing. The MMS advised EDC of a preliminary determination of
underpayment of royalties in the amount of $1.35 million attributable to these
proceeds. In 1994, the Company timely filed its notice of appeal and its
statement of reasons supporting its appeal regarding an earlier similar MMS
determination of royalty underpayment, in an amount unspecified, with respect to
a separate $5.9 million gas settlement payment from Transcontinental Gas Pipe
Line Corporation (Transco) to Pelto. The Company has been notified by EDC that
EDC was exercising its indemnification rights under the 1989 stock purchase for
Pelto with respect to both of these matters. The Company disagrees with MMS'
preliminary determinations; however, if the determinations as to the payments to
Pelto are ultimately upheld, the Company could have liability for royalties on
those sums, plus late payment charges. Such expenditures would result in a
charge to discontinued operations.
On June 14, 1995, in a case in which the Company is not involved,
Independent Petroleum Association of America v. Babbitt, a United States
District Court Judge upheld the DOI's claim for royalty, based on MMS' Dear
Payor letter, on the lump sum payment received by an unrelated gas producer for
settling its contract claims with a gas purchaser. The U.S. Circuit Court of
Appeals, however, reversed the lower court decision and ruled that gas producers
cannot be required to pay royalties on the payments in settlement of take-or-pay
contracts and related contract claims. In its August 27, 1996 opinion, the three
judge panel held 2-1 that the DOI impermissibly departed from established agency
practices in attempting to collect royalties on the settlement payment.
Rehearing of the Circuit Court of Appeals' decision, however, has been sought.
Status of Antidumping Orders Against Mexican Cement and Clinker
Historically, cement imports have increased during peak demand periods to
supplement U.S. production. During the 1980s, however, competition from imported
cement in most coastal and border areas grew significantly. According to the
Portland Cement Association, U.S. consumption of foreign cement increased from
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<PAGE>
approximately 4% of total U.S. consumption in 1982 to a peak of approximately
20% in 1987. The large volume of low priced imported cement depressed cement
prices during a period of strong growth in cement consumption.
In response to the surge of unfairly priced imports, groups of industry
participants, including the Company, filed antidumping petitions in 1989 against
imports from Mexico and, in subsequent years, against imports from certain other
countries. Based upon affirmative final determinations of the International
Trade Commission (ITC) and the Department of Commerce (DOC), an antidumping
order was imposed against Mexican cement and clinker in 1990. As a result of
this order, importers must tender antidumping duty cash deposits to the U.S.
Customs Service with each entry of cement or clinker from Mexico equal to the
customs value of the cement times the cash deposit rate applicable to the
exporter.
The dumping margins and resulting rates of antidumping duty cash
deposits are subject to annual review by the DOC. In the case of Mexico, the
dumping margins are subject to appeal either to the U.S. Court of International
Trade (CIT) and the U.S. Court of Appeals for the Federal Circuit (CAFC) or to
bi-national dispute panels under the North American Free Trade Agreement
(NAFTA). NAFTA has thus far had no material adverse effect on the antidumping
duty cash deposit rates imposed on gray portland cement and clinker imported
from Mexico. On September 13, 1996, a NAFTA bi-national dispute resolution panel
unanimously rejected Cemex's appeal of the DOC's final results of the third
administrative review. The bi-national panel found that DOC's initiation of the
original investigation was consistent with U.S. and International law and
rejected Cemex's claim that an unadopted 1992 GATT panel recommendation required
DOC to terminate the antidumping order. In the third administrative review, DOC
determined a dumping margin for Cemex of 62% based on using the margin from the
original investigation as best information available (BIA). The panel found that
DOC had properly used BIA because of Cemex's refusal to provide DOC with
requested information on Cemex's home market pricing of cement.
On September 30, 1996, DOC found significant dumping margins in two
administrative reviews of the antidumping order on Mexican cement. In the fifth
administrative review, covering imports by Cemex during August 1994 - July 1995,
DOC determined a preliminary dumping margin of 108%. DOC is scheduled to issue
final results of the fifth administrative review in April 1997, which may then
be appealed to a NAFTA bi-national panel. On September 30, 1996, DOC also
released its redetermination on remand from the CIT in the second administrative
review period of August 1991 through July 1992. The final dumping margin in this
review was 109%. If both of these rulings are upheld, Cemex's estimated
liability for antidumping duties exceeds $55 million for its entries during the
second and fifth review periods.
Discontinued Environmental Services Segment
The Company has both given environmental and other indemnifications to
and received environmental and other indemnifications from others for properties
previously owned although some courts have held that indemnification for such
environmental liabilities is unenforceable. No estimate of the extent of
contamination, remediation cost or recoverability of cost from prior owners, if
any, is presently available regarding these discontinued operations.
Disclosure Regarding Forward Looking Statements
Part I, Item 2 and Part II, Item 1 of this document include forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Although the Company believes that the expectations reflected in such
forward looking
-16-
<PAGE>
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors that could cause actual
results to differ materially from the Company's expectations are disclosed in
conjunction with the forward looking statements included herein (Cautionary
Disclosures). Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Disclosures.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) The information appearing under "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources - Known Events, Trends and Uncertainties Environmental Matters" is
incorporated hereunder by reference, pursuant to Rule 12b-23.
(b) The Company owns two inactive CKD disposal sites in Ohio that were
formerly owned by a division of USX Corporation (USX). In late July 1993, a
citizens environmental group brought suit in U.S. District Court for the
Southern District of Ohio, Western Division (Greene Environmental Coalition,
Inc. (GEC) v. Southdown, Inc., Case No. C-3-93-270) alleging the Company is in
violation of the Clean Water Act by virtue of the discharge of pollutants in
connection with the runoff of stormwater and groundwater from the larger of
these two sites (USX Site) and is seeking injunctive relief, unspecified civil
penalties and attorney's fees, including expert witness fees (GEC Case). In
December 1994, GEC agreed to a separate out-of-court settlement which included a
cash payment by the Company to GEC and a covenant by the Company not to store,
burn or dispose of hazardous wastes at the Ohio cement plant. As a result of the
settlement, the GEC Case has been stayed until January 3, 1997 pending possible
resolution.
In September 1993, the Company filed a complaint against USX alleging that
with respect to the USX Site, USX is a potentially responsible party under
CERCLA and, therefore, jointly and severally liable for costs associated with
cleanup of the USX Site. (Southdown, Inc. vs. USX Corporation, Case No. C-3-
93-354, U.S. District Court, Southern District of Ohio Western Division) (USX
Case). In late September 1995, the Company and USX entered into a partial
settlement agreement wherein the Company dismissed its claim for response costs
incurred prior to September 29, 1995 and USX agreed to pay the Company a
specified amount representing half of certain costs already incurred by the
Company at the USX Site. The Company and USX jointly funded the initial project
of a phased approach to investigating and remediating the problems at the USX
Site and have since agreed to undertake a Phase II investigation of remedial
options. The Phase II investigation is estimated to take approximately six
months to complete. As a result, on August 13, 1996, the Court issued a stay of
the USX Case until, at least, January 1, 1997 in order to allow the Phase II
investigation to be completed.
(c) In the matter of Jack Blair, et al. vs. Ideal Basic Industries, Inc.,
United Cement, Lime, Gypsum and Allied Workers International Union, and Dixie
Cement Company (Chancery Court of Knox County, Tennessee, No. 03A1-CH-00029),
which is described in the Company's 1995 Annual Report on Form 10- K and
Quarterly Report on Form 10-Q for the period ended March 31, 1996, the
plaintiffs are fifteen former employees of Ideal Basic Industries, Inc. (Ideal),
and the defendants are Ideal, Dixie Cement Company (Dixie) (a subsidiary of
Moore McCormack Resources Inc. which was acquired by the Company in 1988), and
the United Cement, Lime, Gypsum and Allied Workers International Union (Union).
The Union and Plaintiffs reached a separate settlement agreement in early 1996
and Plaintiff's claim against the Union has been dismissed. The Company has
subpoenaed information concerning this agreement.
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<PAGE>
Discovery has recommenced and depositions of the Plaintiffs were taken
in June 1996. The case has now been set for trial during February 1997.
(d) In late August 1993, the Company was notified by Energy Development
Corporation (EDC), the 1989 purchaser of the common stock of the Company's then
oil and gas subsidiary, Pelto Oil Company (Pelto), that EDC was exercising its
indemnification rights under the 1989 stock purchase agreement with respect to a
Department of Energy (DOE) Remedial Order regarding the audit of crude oil
produced and sold during the period September 1973 through January 1981 from an
offshore, federal waters field in which the Company's oil and gas subsidiary
owned an interest. The DOE alleged certain price overcharges and sought to
recover a total of $68 million in principal and interest from Murphy Oil
Corporation (Murphy), as operator of the property. In mid-1994, Murphy notified
the Company that it had settled with the DOE by agreeing to pay $10.7 million
and that it would contact the Company later concerning the Company's alleged
share of this amount. The Company advised Murphy that it did not accept
liability for any portion of the settlement amount paid to the DOE other than
its pro rata share of attorney's fees, which the Company paid. On April 10,
1995, Murphy filed a complaint against the Company in the U.S. District court
for the Southern District of Texas, Houston Division (Murphy Exploration &
Production Company v. Southdown, Inc. - Case No. H-95-1049) alleging that the
Company is liable for $634,487 plus interest from October 15, 1994 and
attorney's fees as the Company's pro rata share of the payment made to the DOE
by Murphy in its capacity as operator of the property. In September 1996, the
Company and Murphy reached an agreement in principle whereby Murphy, for and in
consideration of a payment to be made by the Company, agreed to dismiss the
lawsuit with prejudice and release and discharge the Company from all
liabilities and claims in connection with this matter.
-18-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11 Statement of Computation of Per Share Earnings
15 Independent Accountants' Letter re. Unaudited Interim
Financial Information
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHDOWN, INC.
-------------------------------
(Registrant)
Date: October 31, 1996 By: JAMES L. PERSKY
-------------------------------
James L. Persky
Executive Vice President-Finance & Administration
(Principal Financial Officer)
Date: October 31, 1996 By: ALLAN KORSAKOV
-------------------------------
Allan Korsakov
Corporate Controller
(Principal Accounting Officer)
-20-
<TABLE>
Exhibit 11
------------
SOUTHDOWN, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In millions, except per share amounts - Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings (loss) for primary earnings per share:
Earnings before extraordinary charge and
preferred stock dividends $ 27.4 $ 16.5 $ 51.1 $ 31.0
Preferred stock dividends (2.4) (2.4) (7.3) (7.3)
------------ ----------- ----------- -----------
Earnings before extraordinary charge 25.0 14.1 43.8 23.7
Extraordinary charge, net of income taxes - - (11.4) -
------------ ----------- ----------- -----------
Net earnings for primary earnings per share $ 25.0 $ 14.1 $ 32.4 $ 23.7
============ =========== =========== ===========
Earnings (loss) for fully diluted earnings per share:
Earnings before extraordinary charge and
preferred stock dividends $ 27.4 $ 16.5 $ 51.1 $ 31.0
Antidilutive preferred stock dividends - - - (3.7)
------------ ----------- ----------- -----------
Earnings before extraordinary charge 27.4 16.5 51.1 27.3
Extraordinary charge, net of income taxes - - (11.4) -
------------ ----------- ----------- -----------
Net earnings for fully diluted earnings per share $ 27.4 $ 16.5 $ 39.7 $ 27.3
============ =========== =========== ===========
Average shares outstanding:
Common stock 17.4 17.3 17.3 17.3
Common stock equivalents from assumed exercise of
stock options and warrants (treasury stock method) 0.5 0.3 0.6 0.2
------------ ----------- ----------- -----------
Total for primary earnings per share 17.9 17.6 17.9 17.5
Other potentially dilutive securities:
- additional common stock equivalent from assumed
conversion of stock options and warrants at ending
market price 0.1 - - -
- assumed conversion of Series A convertible
preferred stock at one-half share of common stock 1.0 1.0 1.0 1.0
- assumed conversion of Series B convertible
preferred stock at 2.5 shares of common stock 2.3 2.3 2.3 2.3
- assumed conversion of the Series D convertible
preferred stock at 1.51 shares of common stock 2.6 2.6 2.6 2.6
------------ ----------- ----------- -----------
Total for fully diluted earnings per share 23.9 23.5 23.8 23.4
Less: Antidilutive securities
Series D preferred stock - - - (2.6)
------------ ----------- ----------- -----------
23.9 23.5 23.8 20.8
============ =========== =========== ===========
Earnings (loss) per share:
Primary
Earnings before extraordinary charge $ 1.39 $ 0.80 $ 2.44 $ 1.35
Extraordinary charge, net of income taxes - - (0.63) -
------------ ----------- ----------- -----------
$ 1.39 $ 0.80 $ 1.81 $ 1.35
============ =========== =========== ===========
Fully diluted
Earnings before extraordinary charge $ 1.15 $ 0.70 $ 2.14 $ 1.31
Extraordinary charge, net of income taxes - - (0.48) -
------------ ----------- ----------- -----------
$ 1.15 $ 0.70 $ 1.66 $ 1.31
============ =========== =========== ===========
</TABLE>
Southdown, Inc.
1200 Smith Street, Suite 2400
Houston, Texas 77002
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Southdown, Inc. and subsidiary companies for the periods ended
September 30, 1996 and 1995, as indicated in our report dated October 22, 1996.
Because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 is
incorporated by reference in Registration Statement No. 33-23328 on Form S-8,
Registration Statement No. 33-35011 on Form S-8, Registration Statement No.
33-45144 on Form S-8, Registration Statement No. 33- 16517 on Form S-3 and
Registration Statement No. 33-45371 on Form S-3.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statements prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Section 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Houston, Texas
October 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet as of September 30, 1996 and the related
statement of consolidated earnings and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 38
<SECURITIES> 0
<RECEIVABLES> 94
<ALLOWANCES> 10
<INVENTORY> 63
<CURRENT-ASSETS> 196
<PP&E> 913
<DEPRECIATION> 345
<TOTAL-ASSETS> 909
<CURRENT-LIABILITIES> 90
<BONDS> 170
<COMMON> 22
0
152
<OTHER-SE> 235
<TOTAL-LIABILITY-AND-EQUITY> 909
<SALES> 495
<TOTAL-REVENUES> 495
<CGS> 361
<TOTAL-COSTS> 402
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 77
<INCOME-TAX> 26
<INCOME-CONTINUING> 51
<DISCONTINUED> 0
<EXTRAORDINARY> (11)
<CHANGES> 0
<NET-INCOME> 40
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.66
</TABLE>
