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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 MARCH 31, 1997
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 April 30, 1997 there were 21.3 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
March 31, 1997 and December 31, 1996 1
Statement of Consolidated Earnings
Three months ended March 31, 1997 and 1996 2
Statement of Consolidated Cash Flows
Three months ended March 31, 1997 and 1996 3
Statement of Consolidated Revenues and Operating Earnings
by Business Segment
Three months ended March 31, 1997 and 1996 4
Statement of Shareholders' Equity
Three months ended March 31, 1997 4
Notes to Consolidated Financial Statements 5
Independent Accountants' Review Report 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN MILLIONS)
---------------------------------------
MARCH 31, DECEMBER 31,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22.4 $ 45.4
Short-term investments 8.9 11.8
Accounts and notes receivable, less allowance for doubtful
accounts of $5.4 and $7.4 81.5 77.3
Inventories (Note 2) 73.9 62.4
Prepaid expenses and other 10.1 13.1
--------------- ---------------
Total current assets 196.8 210.0
Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $362.9 and $354.2 587.1 588.8
Goodwill 74.7 75.4
Other long-term assets 57.7 57.8
--------------- ---------------
$ 916.3 $ 932.0
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 15.9 $ 1.2
Accounts payable and accrued liabilities 79.5 89.0
--------------- ---------------
Total current liabilities 95.4 90.2
Long-term debt 148.8 164.4
Deferred income taxes 121.1 120.3
Minority interest in consolidated joint venture 27.9 28.0
Long-term portion of postretirement benefit obligation 70.5 71.7
Other long-term liabilities and deferred credits 17.4 18.1
--------------- ---------------
481.1 492.7
--------------- ---------------
Shareholders' equity:
Preferred stock (Note 3) 86.2 86.3
Common stock, $1.25 par value 27.5 27.4
Capital in excess of par value 213.3 213.3
Reinvested earnings 127.5 117.9
Treasury stock, at cost (19.3) (5.6)
--------------- ---------------
435.2 439.3
--------------- ---------------
$ 916.3 $ 932.0
=============== ===============
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
---------------------------------------
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues $ 151.4 $ 127.4
--------------- ---------------
Costs and expenses:
Operating 104.0 91.9
Depreciation, depletion and amortization 11.6 10.1
Selling and marketing 4.1 3.9
General and administrative 8.7 8.5
Other income, net (1.6) (0.2)
--------------- ---------------
126.8 114.2
Minority interest in earnings of consolidated joint venture 0.5 0.3
--------------- ---------------
127.3 114.5
--------------- ---------------
Earnings before interest, income taxes and extraordinary charge 24.1 12.9
Interest, net of amounts capitalized (3.2) (6.0)
--------------- ---------------
Earnings before income taxes and extraordinary charge 20.9 6.9
Income tax expense (7.3) (2.1)
--------------- ---------------
Earnings before extraordinary charge 13.6 4.8
Extraordinary charge, net of income taxes - (11.4)
--------------- ---------------
Net earnings (loss) $ 13.6 $ (6.6)
=============== ===============
Dividends on preferred stock (Note 3) $ (1.2) $ (2.4)
=============== ===============
Earnings (loss) per common share:
Primary
Earnings before extraordinary charge $ 0.56 $ 0.14
Extraordinary charge, net of income taxes - (0.66)
--------------- ---------------
$ 0.56 $ (0.52)
=============== ===============
Fully diluted
Earnings before extraordinary charge $ 0.55 $ 0.14
Extraordinary charge, net of income taxes - (0.66)
--------------- ---------------
$ 0.55 $ (0.52)
=============== ===============
Average shares outstanding:
Primary 21.9 17.3
=============== ===============
Fully diluted 24.5 17.3
=============== ===============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Operating activities:
Earnings before extraordinary charge $ 13.6 $ 4.8
Adjustments to reconcile earnings before extraordinary charge
to cash provided by (used in) operating activities:
Depreciation, depletion and amortization 11.6 10.1
Deferred income tax expense 1.7 0.4
Amortization of debt issuance costs 0.2 0.7
Changes in operating assets and liabilities (21.1) (14.3)
Net cash used in discontinued operations (0.2) (0.5)
--------------- ---------------
Net cash provided by operating activities 5.8 1.2
--------------- ---------------
Investing activities:
Additions to property, plant and equipment (13.5) (9.6)
Sale of short-term investments 2.9 -
Proceeds from asset sales 0.8 0.5
Other (0.5) (0.2)
--------------- ---------------
Net cash used in investing activities (10.3) (9.3)
--------------- ---------------
Financing activities:
Additions to long-term debt - 150.7
Reductions in long-term debt (0.9) (120.3)
Purchase of treasury stock (13.7) -
Dividends (3.4) (5.0)
Distributions to minority interest (0.5) (1.5)
Premium on early extinguishment of debt - (11.6)
Securities issuance costs - (3.8)
--------------- ---------------
Net cash provided by (used in) financing activities (18.5) 8.5
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (23.0) 0.4
Cash and cash equivalents at beginning of period 45.4 7.7
--------------- ---------------
Cash and cash equivalents at end of period $ 22.4 $ 8.1
=============== ===============
</TABLE>
Cash payments for income taxes totaled $200,000 and $100,000 in the first
quarters of 1997 and 1996, respectively. Interest paid, net of amounts
capitalized, was $6.2 million and $8.1 million in 1997 and 1996, respectively.
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<PAGE>
<TABLE>
<CAPTION>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF SELECTED CONSOLIDATED SEGMENT DATA
(UNAUDITED)
(IN MILLIONS)
-----------------------------------------
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Contributions to revenues:
Cement $ 103.9 $ 82.6
Concrete products 60.1 55.8
Intersegment sales (12.6) (11.0)
--------------- ---------------
$ 151.4 $ 127.4
=============== ===============
Contributions to earnings before interest, income taxes
and extraordinary charge:
Operating profit
Cement $ 27.0 $ 17.1
Concrete products 2.5 1.9
--------------- ---------------
29.5 19.0
Corporate overhead (5.4) (6.1)
--------------- ---------------
$ 24.1 $ 12.9
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN MILLIONS)
-------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK CAPITAL
------------------- ------------------- IN EXCESS OF REINVESTED TREASURY
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS STOCK
-------- --------- ------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 1.7 $ 86.3 21.9 $ 27.4 $ 213.3 $ 117.9 $ (5.6)
NET EARNINGS - - - - - 13.6 -
DIVIDENDS ON PREFERRED STOCK
(NOTE 3) - - - - - (1.2) -
DIVIDENDS PAID ON COMMON
STOCK - - - - - (2.2)) -
PURCHASE OF TREASURY STOCK - - - - - - (13.7)
OTHER - (0.1) 0.1 0.1 - (0.6) -
-------- --------- ------- --------- ---------- ---------- ----------
BALANCE AT MARCH 31, 1997 1.7 $ 86.2 22.0 $ 27.5 $ 213.3 $ 127.5 $ (19.3)
======== ========= ======= ========= ========== ========== ==========
</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 March 31, 1997 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, 1996 is derived from the December 31, 1996 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 1996 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 March 31, 1997 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 - INVENTORIES:
(UNAUDITED IN MILLIONS)
--------------------------------------
MARCH 31, DECEMBER 31,
1997 1996
--------------- ---------------
Finished goods $ 21.2 $ 16.9
Work in progress 15.9 9.6
Raw materials 6.0 6.8
Supplies 30.8 29.1
--------------- ---------------
$ 73.9 $ 62.4
=============== ===============
Inventories stated on the LIFO method were $35.9 million of total
inventories at March 31, 1997 and $26.1 million of total inventories at December
31, 1996 compared with current costs of $44.5 million and $34.7 million,
respectively.
NOTE 3 - CAPITAL STOCK:
COMMON STOCK
At March 31, 1997, a total of approximately 21,990,000 shares of common
stock were issued and 21,390,000 shares of common stock were outstanding,
respectively. On November 22, 1996, the Board of Directors approved a common
stock repurchase program under which the Company is authorized to
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<PAGE>
repurchase up to 1.5 million shares of the Company's outstanding common stock.
As of March 31, 1997, approximately 600,000 shares of common stock had been
purchased in open market transactions at a cost of $19.3 million.
PREFERRED STOCK REDEEMABLE AT ISSUER'S OPTION
Series D Preferred Stock - The Company had approximately 1,725,000
shares of Preferred Stock, $2.875 Cumulative Convertible Series D (Series D
Preferred Stock) outstanding at March 31, 1997, December 31, 1996, and March 31,
1996. 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, (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, the closing price of the common stock equals or
exceeds $43.02 per share and (e) is redeemable at the option of the Company at
$50 per share plus accrued and unpaid dividends on and after January 27, 2001.
Dividends paid on the Series D Preferred Stock were approximately $1.2 million
during the three month periods ended March 31, 1997 and 1996.
NOTE 4 - CONTINGENCIES:
The Company has certain commitments and contingent liabilities incurred
in the ordinary course of business including, among other things, being a named
defendant in lawsuits related to various matters including personal injury,
contractual indemnifications, environmental remediation, product liability and
employment matters. These various commitments and contingent liabilities, in the
judgment of management, will not result in losses which would materially affect
the Company's consolidated financial position. However, because the Company's
results of operations vary considerably with construction activity and other
factors, it is at least reasonably possible that future charges for
contingencies could, depending on their timing and magnitude, have a material
adverse impact on the Company's results of operations in a particular period.
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 5 - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share," (SFAS No. 128) in February 1997. SFAS No. 128, which is
effective for periods ending after December 15, 1997, establishes standards for
computing and presenting earnings per share (EPS). SFAS No. 128 replaces the
presentation of primary EPS previously prescribed by Accounting Principles Board
Opinion No. 15 (APB No. 15) with a presentation of basic EPS which is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period.
-6-
<PAGE>
SFAS No. 128 also requires dual presentation of basic and diluted EPS. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB No. 15. Proforma
basic and diluted EPS for the three months ended March 31, 1997 and 1996,
assuming that SFAS No. 128 was effective as of the beginning of the year, are
presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1997 1996
-------------- -----------
<S> <C> <C>
Earnings (loss) per common share:
Basic
Earnings before extraordinary charge $ 0.58 $ 0.14
Extraordinary charge, net of income taxes - (0.66)
-------------- ----------
$ 0.58 $ (0.52)
============== ==========
Diluted
Earnings before extraordinary charge $ 0.55 $ 0.13
Extraordinary charge, net of income taxes - (0.63)
-------------- ----------
$ 0.55 $ (0.50)
============== ==========
</TABLE>
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 March 31, 1997
and for the three month periods ended March 31, 1997 and 1996 follows.
-7-
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW 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 March 31, 1997, and the related
consolidated statements of earnings and cash flows for the three months ended
March 31, 1997 and 1996 and the consolidated statement of shareholders' equity
for the three months ended March 31, 1997. 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, 1996 and the related consolidated
statements of earnings, shareholders' equity and cash flows for the year then
ended (not presented herein); and in our report dated January 22, 1997, 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, 1996 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
April 24, 1997
-8-
<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 18 through 29 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 should be read in conjunction
with the discussion contained herein.
RESULTS OF OPERATIONS
CONSOLIDATED FIRST QUARTER EARNINGS
Earnings before interest, income taxes and extraordinary charge for the
first quarter of 1997 were up 87% compared with the prior year quarter. Net
earnings for the first quarter of 1997 were $13.6 million, $0.55 per share on
fully diluted basis. The net loss for the prior year quarter was $6.6 million,
$0.52 per share, including an extraordinary charge of $11.4 million, $0.66 per
share, reflecting prepayment premium and other costs incurred in the early
retirement of $120.2 million of 14% senior subordinated notes.
Consolidated revenues in the first quarter of 1997 increased 19% over
the same period of the prior year primarily because of improved sales volumes
and sales prices in both the Cement and Concrete Products segments. First
quarter 1997 earnings before interest, income taxes and extraordinary charge
improved $11.2 million over the same quarter of the prior year reflecting a $9.9
million improvement in the Cement segment as well as a smaller improvement in
Concrete Products operating results and lower Corporate overhead expenses.
First quarter interest expense for 1997 declined compared with the
prior year quarter, reflecting the refinancing of 14% senior subordinated notes
with 10% senior subordinated notes in March 1996 and no borrowings under the
Company's revolving credit facility in the 1997 period. The effective income tax
rate in 1997 increased over the prior year quarter primarily because of the
lessened impact of permanent differences on a higher level of earnings.
SEGMENT OPERATING EARNINGS
CEMENT
Operating earnings of the Cement segment for the three month period
ended March 31, 1997 were up 58% compared with the prior year quarter. The
improvement was attributable to sales volumes that were 19% higher and a
weighted average $3.77 per ton improvement in cement sales prices over the
comparable period in the prior year. Higher first quarter sales volumes were
reflected at all eight cement plants in 1997. Cement sales volumes were
favorably impacted by strong demand, including an improvement in California, and
mild winter weather in most of the Company's market areas. Management believes
the Cement segment will achieve a 3-5% increase in cement sales volumes for the
full year 1997 compared with 1996. The improvement in sales prices reflected
price increases implemented during the previous months at several locations.
These strong market conditions and favorable weather, combined with the improved
manufacturing performance in 1997 compared with the prior year period, resulted
in record first quarter results for the Cement segment.
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<PAGE>
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
MARCH 31,
--------------------------
1997 1996
---------- -----------
<S> <C> <C>
Tons of cement sold (thousands) 1,450 1,219
========== ==========
Weighted average per ton data:
Sales price (net of freight) $ 64.19 $ 60.42
Cost of sales (1) 45.86 46.20
---------- ----------
Margin $ 18.33 $ 14.22
========== ==========
--------------
(1) Includes fixed and variable manufacturing costs, cost of
purchased cement, selling expenses, plant general and
administrative costs, other plant overhead and miscellaneous
costs.
</TABLE>
CONCRETE PRODUCTS
Operating earnings for the Concrete Products segment increased 32% over
the prior year quarter, primarily because of higher earnings from the California
aggregate operations. In Florida, operating earnings were flat primarily because
lower earnings from the block and fly ash operations offset improved results
from ready-mixed concrete. A 2% improvement in ready-mixed concrete sales prices
resulted in improved Florida ready-mixed concrete earnings. Operating results
from the California Concrete Products operations improved over the prior year
quarter because of higher aggregate earnings. Despite an 18% increase in
ready-mixed concrete sales volumes and a 2% improvement in ready-mixed concrete
sales prices, operating results from the ready-mixed concrete operation in
California were flat primarily because of higher raw material costs incurred on
certain large projects.
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
MARCH 31,
--------------------------
1997 1996
-------- ---------
<S> <C> <C>
Yards of ready-mixed concrete
sold (thousands) 904 858
======== ========
Weighted average per cubic yard data:
Sales price $ 53.91 $ 52.72
Operating costs (1) 52.87 51.83
-------- --------
Margins (2) $ 1.04 $ 0.89
======== ========
--------------
(1) Includes variable and fixed plant costs, delivery, selling,
general and administrative and miscellaneous operating costs.
(2) Does not include profits from sale of aggregates, concrete block
and other related products.
</TABLE>
The segment's operating results also include block, resale and fly ash
operations in Florida and aggregate operations in southern California which
combined totaled $1.6 million of operating earnings in the 1997 period compared
with $1.4 million in the 1996 period.
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<PAGE>
CORPORATE
Corporate overhead expenses for the first quarter of 1997 decreased
primarily because income from the short-term investment of excess cash balances
benefitted first quarter 1997 results compared with the prior year period.
Included in corporate overhead for the first quarter of 1997 is interest income
of $662,000 compared with interest income of $229,000 in the first quarter of
1996.
LIQUIDITY AND CAPITAL RESOURCES
Beginning cash balances as well as internally generated cash flow
during the first three months of 1997 were sufficient to (i) fund the investment
of approximately $13.5 million in property, plant and equipment, (ii) repurchase
$13.7 million in common stock of the Company, (iii) fund working capital
requirements and (iv) pay $3.4 million of dividends on capital stock. In March
1996, the Company realized approximately $122 million in net proceeds from the
issuance of $125 million of 10% senior subordinated notes. The net proceeds
combined with borrowings under the Company's revolving credit facility were
utilized to repurchase $120.2 million of 14% senior subordinated notes and to
pay the related prepayment premium and other costs. Other borrowings under the
Company's revolving credit facility during the first quarter of 1996 were
utilized to invest approximately $9.6 million in property, plant and equipment
and pay dividends on capital 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 March 31, 1997, 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 capacity.
CHANGES IN FINANCIAL CONDITION
The change in the financial condition of the Company between December
31, 1996 and March 31, 1997 reflected the utilization of cash, short-term
investments and internally generated cash flow during the quarter to fund
capital expenditures, repurchases of common stock, working capital requirements
and capital stock dividends. Accounts and notes receivables increased primarily
because of the strong sales activity occurring in March 1997 relative to lower
December 1996 sales. The increase in inventories as a result of improved
manufacturing performance relative to sales volume reflected the typical
build-up in cement inventories during the first quarter of the year. Current
maturities of long-term debt increased because of the reclassification of
certain industrial development and pollution control bonds that become due in
the first quarter of 1998. Accounts payable and accrued liabilities decreased
because of the timing of payments on normal trade and other obligations.
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
Environmental Matters - The Company is subject to a wide range of
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 create joint and several liability for the
cost of cleaning up or correcting releases to the environment of designated
hazardous substances which may, as a result, require the Company to
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<PAGE>
remove or mitigate the environmental effects of the disposal or release of
certain substances at the Company's various operating facilities or elsewhere.
Amendments to the Clean Air Act in 1990 provided comprehensive federal
regulation of various sources of air pollution, and established a new federal
operating permit and fee program for virtually all manufacturing operations. The
Clean Air Act Amendments may result in increased capital and operational
expenses for the Company in the future, the amounts of which are not presently
determinable. As mandated by the Clean Air Act, beginning in late 1995, the
Company commenced submitting permit applications and paying annual permit fees
for its cement manufacturing plants. In addition, the U.S. Environmental
Protection Agency (U.S. EPA) is developing air toxics regulations for a broad
spectrum of industrial sectors, including portland cement manufacturing. U.S.
EPA has indicated that the new maximum available control technology standards
could require significant reduction of air pollutants below existing levels
prevalent in the industry. Management has no reason to believe, however, that
these new standards would place the Company at a disadvantage with respect to
its competitors.
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. 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 their
respective plant sites since the inception of cement manufacturing operations.
CKD that is infused with water 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 regulatory status of CKD is governed by the
so-called Bevill amendment, enacted as part of the Solid Waste Disposal Act
Amendments of 1980. Under the Bevill amendment, CKD, along with several other
low hazard, high volume wastes identified by Congress, was excluded from
regulation as hazardous waste under the Resource Conservation and Recovery Act
(RCRA), Subtitle C, pending completion of a study and recommendations to
Congress by the U.S. EPA. Although the U.S. EPA in a 1995 decision determined
further regulation of CKD was necessary, the agency stated that it (i) found no
evidence of risks associated with the use of cement products and (ii) believes
most secondary uses of CKD do not present significant risks to people or the
environment. The U.S. EPA has initiated a rulemaking process in order to develop
specially tailored CKD management standards. This rulemaking is not expected to
identify CKD as a RCRA hazardous waste and the Bevill amendment exemption will
remain in effect for CKD until issuance of the new CKD management standards. It
is estimated that the proposed new standards for CKD will be published in late
1997. A change in the status of CKD may require the cement industry to develop
new methods for handling this high volume, low toxicity waste.
Several of the Company's previously and currently owned facilities have
become the subject of various local, state or federal environmental proceedings
and inquiries. Included among these environmental matters are being named a
potentially responsible party with regard to Superfund sites, primarily at
locations to which the Company is alleged to have shipped materials for
disposal. The Company has also voluntarily undertaken the remediation of an
inactive CKD site in Ohio and investigation of several other inactive CKD
disposal sites in Ohio and elsewhere around the country. While some of these
matters have been settled, others are in their preliminary stages and final
results may not be determined for years. Based on the information developed to
date, the Company has no reason to believe it will be required to spend
significant sums in excess of the amounts reflected in the Company's reserves.
However, until all environmental studies, investigations, remediation work and
negotiations with or
-12-
<PAGE>
litigation against potential sources of recovery have been completed, it is
impossible to determine the ultimate cost that might be incurred by the Company
to resolve these environmental matters.
Status of Antidumping Orders - In response to the surge of unfairly
priced imports, groups of U.S. 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 and the
Department of Commerce (DOC), an antidumping order was imposed against Mexican
cement and clinker in 1990 and against Japanese cement and clinker in 1991. In
addition, in February 1992, the DOC suspended antidumping and countervailing
duty investigations of cement and clinker from Venezuela, based upon (i) the
Venezuelan cement producers' agreement to revise their prices to eliminate the
dumping of gray portland cement and clinker from Venezuela into the U.S., and
(ii) the Venezuelan government's agreement not to subsidize the Venezuelan
cement producers.
As a result of these orders, importers must tender antidumping duty
cash deposits to the U.S. Customs Service with each entry of cement or clinker
from Mexico or Japan equal to the customs value of the cement times the cash
deposit rate applicable to the exporter. In the case of Japan, imports of cement
and clinker have declined precipitously since the imposition of antidumping duty
cash deposits. Imports from Mexico have continued. The dumping margins and
resulting rates of antidumping duty cash deposits are subject to annual review
by the DOC. In addition, legislation passed by the U.S. Congress in December
1994 requires the initiation of "sunset" reviews of the antidumping orders prior
to January 2000 to determine whether these antidumping orders and the Venezuelan
suspension agreement should terminate or remain in effect.
A substantial reduction or elimination of the existing antidumping
duties as a result of the World Trade Organization, North American Free Trade
Agreement, currency devaluation or any other reason, or an influx of low-priced
cement from countries not subject to antidumping orders, could materially
adversely affect the Company's results of operations. The Company, however, is
of the opinion an influx of low-priced cement imports from countries not subject
to antidumping orders is unlikely given the present circumstances in the U.S.
market and the ownership profile of import terminals. U.S. imports of foreign
cement once again increased in the mid-1990's as U.S. cement consumption began
its recovery. The Portland Cement Association, the industry's primary trade
organization, has estimated that imports represented approximately 14% of U.S.
consumption in 1996 as compared with approximately 16% in 1995 and 13% in 1994.
During this recent period of strong demand, however, the prices of cement
imports have risen. Unlike the imports during the 1980's, many of the current
imports are playing a supplementary rather than a disruptive role.
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 it
had determined that a lump sum payment made by Tennessee Gas to Pelto was, for
several alleged reasons, royalty bearing and, accordingly, it had made a
preliminary determination of underpayment of royalties in the amount of $1.35
million attributable to these proceeds. 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
-13-
<PAGE>
the Tennessee Gas matter and 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 to Pelto.
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, plus late payment charges. Such expenditures
would result in a charge to discontinued operations.
In a case in which the Company is not involved, a three judge panel of
the U.S. Circuit Court of Appeals ruled 2-1 on August 27, 1996 that the DOI
impermissibly departed from established agency practices in attempting to
collect royalties on a settlement payment and that gas producers cannot be
required to pay royalties on payments in settlement of take-or-pay contracts and
related contract claims. Rehearing of the Circuit Court of Appeals' decision has
been denied and no appeal was taken to the U.S. Supreme Court. The Circuit Court
of Appeals' decision, therefore, has become final.
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 a
few 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.
Other - The Company has certain other commitments and contingent
liabilities incurred in the ordinary course of business including, among other
things, being a named defendant in lawsuits related to various matters including
personal injury, contractual indemnifications, environmental remediation,
product liability and employment matters. These various commitments and
contingent liabilities, in the judgment of management, will not result in losses
which would materially affect its consolidated financial position. However,
because the Company's results of operations vary considerably with construction
activity and other factors, it is at least reasonably possible that future
charges for contingencies could, depending on their timing and magnitude, have a
material adverse impact on the Company's results of operations in a particular
period.
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. These statements are
based on current expectations, estimates and projections about the general
economy and the Company's line of business. Although the Company believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Future performance involves certain assumptions, risks and
uncertainties and is not guaranteed. Important factors that could cause actual
results to differ materially from the Company's expectations, including, among
others, foreign and domestic price competition, cost effectiveness, changes in
environmental regulation and general economic and market conditions such as
interest rates, the availability of capital and the cyclical nature of the
construction industry, 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.
-14-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company may from time-to-time
be a named defendant in lawsuits related to various matters including, among
others, personal injury, contractual indemnifications, environmental
remediation, product liability and employment matters. Based on the information
developed to date and advice of outside counsel, the Company is of the opinion
the liability related to these lawsuits individually or in the aggregate, if
any, will not materially exceed the amounts accrued on the Company's books as of
March 31, 1997 and will have no material adverse effect on the consolidated
financial statements of the Company.
(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 was stayed
pending the completion of a Phase II investigation in the USX Case, as
discussed below.
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 completed a
Phase II investigation of remedial options. As a result, on March 3, 1997,
the Court issued a stay of the USX Case until, at least May 12, 1997 at
which time a status conference with the Court has been scheduled to discuss
the status of settlement and setting a trial date, if necessary.
-15-
<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 March
31, 1997.
-16-
<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: May 6, 1997 By: JAMES L. PERSKY
------------------------------
James L. Persky
Executive Vice President-
Finance & Administration
(Principal Financial Officer)
Date: May 6, 1997 By: ALLAN KORSAKOV
----------------------------
Allan Korsakov
Corporate Controller
(Principal Accounting Officer)
-17-
Exhibit 11
-------------
<TABLE>
SOUTHDOWN, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In millions, except per share amounts - Unaudited)
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Earnings (loss) for primary earnings per share:
Earnings before extraordinary charge and
preferred stock dividends $ 13.6 $ 4.8
Preferred stock dividends (1.2) (2.4)
------------- -------------
Earnings before extraordinary charge 12.4 2.4
Extraordinary charge, net of income taxes - (11.4)
------------- -------------
Net earnings (loss) for primary earnings per share $ 12.4 $ (9.0)
============= =============
Earnings (loss) for fully diluted earnings per share:
Earnings before extraordinary charge and
preferred stock dividends $ 13.6 $ 4.8
Antidilutive preferred stock dividends - (2.4)
------------- -------------
Earnings before extraordinary charge 13.6 2.4
Extraordinary charge, net of income taxes - (11.4)
------------- -------------
Net earnings (loss) for fully diluted earnings per share $ 13.6 $ (9.0)
============= =============
Average shares outstanding:
Common stock 21.5 17.3
Common stock equivalents from assumed exercise of
stock options and warrants 0.4 -
------------- -------------
Total for primary earnings per share 21.9 17.3
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
- assumed conversion of Series B convertible
preferred stock at 2.5 shares of common stock - 2.3
- assumed conversion of the Series D convertible
preferred stock at 1.51 shares of common stock 2.6 2.6
------------- -------------
Total for fully diluted earnings per share 24.5 23.3
Less: Antidilutive securities
Stock options and warrants - (0.1)
Series A preferred stock - (1.0)
Series B preferred stock - (2.3)
Series D preferred stock - (2.6)
------------- -------------
24.5 17.3
============= =============
Earnings (loss) per share:
Primary
Earnings before extraordinary charge $ 0.56 $ 0.14
Extraordinary charge, net of income taxes - (0.66)
------------- -------------
$ 0.56 $ (0.52)
============= =============
Fully diluted
Earnings before extraordinary charge $ 0.55 $ 0.14
Extraordinary charge, net of income taxes - (0.66)
------------- -------------
$ 0.55 $ (0.52)
============= =============
</TABLE>
EXHIBIT 15
May 6, 1997
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
March 31, 1997 and 1996, as indicated in our report dated April 24, 1997.
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 March 31, 1997 is
incorporated by reference in Registration Statement No. 33-23328, Registration
Statement No. 33-35011, Registration Statement No. 33-45144, Registration
Statement No. 33-26529 and Registration Statement No. 33-26523 all on Form S-8
and Registration Statement No. 33-16517 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
<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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 22
<SECURITIES> 9
<RECEIVABLES> 87
<ALLOWANCES> 5
<INVENTORY> 74
<CURRENT-ASSETS> 197
<PP&E> 950
<DEPRECIATION> 363
<TOTAL-ASSETS> 916
<CURRENT-LIABILITIES> 95
<BONDS> 149
<COMMON> 28
0
86
<OTHER-SE> 321
<TOTAL-LIABILITY-AND-EQUITY> 916
<SALES> 151
<TOTAL-REVENUES> 151
<CGS> 115
<TOTAL-COSTS> 127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 21
<INCOME-TAX> 7
<INCOME-CONTINUING> 14
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.55
</TABLE>
