<PAGE> 1
================================================================================
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, 1998
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 OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 October 31, 1998 there were 38.5 million common shares
outstanding.
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<PAGE> 2
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
---
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
September 30, 1998 and December 31, 1997 1
Statement of Consolidated Earnings
Three and Nine Months ended September 30, 1998 and 1997 2
Statement of Consolidated Cash Flows
Nine Months ended September 30, 1998 and 1997 3
Statement of Consolidated Revenues and Operating Earnings
by Business Segment
Three and Nine Months ended September 30, 1998 and 1997 4
Statement of Consolidated Shareholders' Equity
Nine Months ended September 30, 1998 5
Statement of Consolidated Comprehensive Income
Three and Nine Months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Independent Accountants' Review Report 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 6. Exhibits and Reports on Form 8-K 36
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 105.8 $ 98.9
Short-term investments 4.0
Accounts and notes receivable, less allowance for doubtful
accounts of $4.9 and $5.0 151.6 108.5
Inventories (Note 6) 98.7 97.2
Prepaid expenses and other 15.6 17.6
------------ ------------
Total current assets 371.7 326.2
Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $669.4 and $630.9 808.3 770.2
Goodwill 102.1 116.1
Other long-term assets 67.8 63.7
------------ ------------
$ 1,349.9 $ 1,276.2
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 0.7 $ 13.6
Accounts payable and accrued liabilities 160.3 120.5
------------ ------------
Total current liabilities 161.0 134.1
Long-term debt 167.4 187.0
Deferred income taxes 131.6 127.6
Minority interest in consolidated joint venture 28.8 27.7
Long-term portion of postretirement benefit obligation 93.6 96.1
Other long-term liabilities and deferred credits 31.8 28.8
------------ ------------
614.2 601.3
------------ ------------
Shareholders' equity:
Common stock, $1.25 par value (Note 8) 49.4 51.4
Capital in excess of par value 356.0 352.0
Reinvested earnings 378.2 386.1
Unearned restricted common shares -- (8.8)
Currency translation adjustment (1.6) (1.2)
Treasury stock, at cost (46.3) (104.6)
------------ ------------
735.7 674.9
------------ ------------
$ 1,349.9 $ 1,276.2
============ ============
</TABLE>
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<PAGE> 4
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE DATA)
------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 341.4 $ 316.3 $ 884.0 $ 814.9
--------- --------- --------- ---------
Costs and expenses:
Operating 198.2 190.9 546.7 522.7
Depreciation, depletion and amortization 16.6 16.0 53.1 46.9
Selling and marketing 5.9 6.2 20.2 18.2
General and administrative 14.8 15.0 50.8 47.5
Acquisition (credit) charge (Note 2) (4.0) -- 78.9 --
Other income, net (1.1) (5.1) (6.6) (8.8)
--------- --------- --------- ---------
230.4 223.0 743.1 626.5
--------- --------- --------- ---------
Earnings from continuing operations before interest,
income taxes and minority interest 111.0 93.3 140.9 188.4
Interest, net of amounts capitalized (4.1) (4.2) (13.3) (10.7)
--------- --------- --------- ---------
Earnings from continuing operations before income taxes
and minority interest 106.9 89.1 127.6 177.7
Income tax expense (32.0) (29.2) (58.5) (59.7)
--------- --------- --------- ---------
74.9 59.9 69.1 118.0
Earnings from continuing operations before minority interest
Minority interest, net of income taxes (1.8) (1.9) (3.4) (3.5)
--------- --------- --------- ---------
Earnings from continuing operations 73.1 58.0 65.7 114.5
Loss from discontinued operations, net of
income taxes (Note 4) (1.6) -- (1.6) --
--------- --------- --------- ---------
Net earnings $ 71.5 $ 58.0 $ 64.1 $ 114.5
========= ========= ========= =========
Dividends on preferred stock (Note 8) $ -- $ -- $ -- $ 2.5
========= ========= ========= =========
Earnings attributable to common stock $ 71.5 $ 58.0 $ 64.1 $ 112.0
========= ========= ========= =========
Earnings (loss) per common share:
Basic
Earnings from continuing operations $ 1.90 $ 1.56 $ 1.72 $ 3.08
Loss from discontinued operations, net of income taxes (0.04) -- (0.04) --
--------- --------- --------- ---------
$ 1.86 $ 1.56 $ 1.68 $ 3.08
========= ========= ========= =========
Diluted
Earnings from continuing operations $ 1.88 $ 1.48 $ 1.69 $ 2.92
Loss from discontinued operations, net of income taxes (0.04) -- (0.04) --
--------- --------- --------- ---------
$ 1.84 $ 1.48 $ 1.65 $ 2.92
========= ========= ========= =========
Average shares outstanding:
Basic 38.4 37.1 38.1 36.4
========= ========= ========= =========
Diluted 38.9 39.1 38.8 39.2
========= ========= ========= =========
</TABLE>
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<PAGE> 5
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Earnings from continuing operations $ 65.7 $ 114.5
Adjustments to reconcile earnings from continuing operations to cash
provided by (used in) operating activities:
Depreciation, depletion and amortization 53.1 46.9
Deferred income tax expense 4.0 10.1
Amortization of debt issuance costs 0.6 0.6
Other non-cash charges 8.9 2.5
Changes in operating assets and liabilities (9.1) (33.7)
Other adjustments 3.8 2.9
Net cash provided by (used in) discontinued operations 0.1 (0.9)
------------ ------------
Net cash provided by operating activities 127.1 142.9
------------ ------------
Investing activities:
Additions to property, plant and equipment (75.3) (73.6)
Acquisitions, net of cash acquired (6.9) (42.8)
Purchase of short-term investments (3.9) (3.0)
Maturity of short-term investments 7.9 11.8
Proceeds from asset sales 5.7 4.8
Other investing activities 1.0 2.1
------------ ------------
Net cash used in investing activities (71.5) (100.7)
------------ ------------
Financing activities:
Additions to long-term debt 30.9 31.5
Reductions in long-term debt (63.5) (6.9)
Purchase of treasury stock (0.9) (41.0)
Dividends (13.6) (18.1)
Distributions to minority interest (4.0) (4.8)
Other financing activities 2.4 (2.1)
------------ ------------
Net cash used in financing activities (48.7) (41.4)
------------ ------------
Net increase in cash and cash equivalents 6.9 0.8
Cash and cash equivalents at beginning of period 98.9 70.4
------------ ------------
Cash and cash equivalents at end of period $ 105.8 $ 71.2
============ ============
</TABLE>
Cash payments for income taxes totaled $29.1 million and $32.7 million in
the nine months of 1998 and 1997, respectively. Interest paid, net of amounts
capitalized, was $17.7 million and $13.4 million in the nine month year-to-date
1998 and 1997 periods, respectively.
-3-
<PAGE> 6
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED REVENUES AND OPERATING EARNINGS
BY BUSINESS SEGMENT
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Contributions to revenues:
Cement
Sales to customers $ 242.5 $ 224.2 $ 610.0 $ 563.3
Freight to customers and other 12.9 12.3 32.3 32.2
------- ------- ------- -------
Total cement revenues 255.4 236.5 642.3 595.5
Concrete products 61.0 62.8 178.1 181.0
Aggregates 42.5 33.9 112.5 86.8
Intersegment sales (17.5) (16.9) (48.9) (48.4)
------- ------- ------- -------
$ 341.4 $ 316.3 $ 884.0 $ 814.9
======= ======= ======= =======
Contributions to earnings before interest, income
taxes and minority interest:
Operating profit
Cement (1) $ 104.4 $ 92.0 $ 223.6 $ 197.9
Concrete products 4.8 4.3 12.2 7.8
Aggregates 9.1 7.0 18.7 15.9
------- ------- ------- -------
118.3 103.3 254.5 221.6
Corporate overhead (11.3) (10.0) (34.7) (33.2)
Acquisition credit (charge) (Note 2) 4.0 -- (78.9) --
------- ------- ------- -------
$ 111.0 $ 93.3 $ 140.9 $ 188.4
======= ======= ======= =======
</TABLE>
- -----------
(1) Minority interest in earnings of consolidated joint venture is presented as
a separate line item, net of tax, rather than being deducted as a component of
the cement segment. There have been no material changes in total assets by
segment as disclosed in the December 31, 1997 financial statements. Identifiable
segment assets as of September 30, 1998 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
SEPTEMBER 30, 1998
------------------
<S> <C>
Identifiable assets:
Cement $ 873.7
Concrete Products 131.0
Aggregates 131.4
Other 213.8
-----------
$ 1,349.9
===========
</TABLE>
-4-
<PAGE> 7
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
---------------------------------------------------------------------------------------
CUMULATIVE
COMMON STOCK CAPITAL UNEARNED FOREIGN
------------------ IN EXCESS OF REINVESTED RESTRICTED CURRENCY TREASURY
SHARES AMOUNT PAR VALUE EARNINGS COMMON STOCK TRANSLATION STOCK
------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997
as previously reported 24.7 $ 30.9 $ 300.4 $ 199.2 $ -- $ -- $ (46.3)
Adjustment for pooling of interests 16.4 20.5 51.6 186.9 (8.8) (1.2) (58.3)
------ -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 41.1 51.4 352.0 386.1 (8.8) (1.2) (104.6)
Net earnings -- -- -- 64.1 -- -- --
Foreign currency translation adjustment -- -- -- -- -- (0.4) --
Dividends paid on common stock -- -- -- (13.6) -- -- --
Purchase of treasury stock -- -- -- -- -- -- (0.9)
Retirement of Medusa treasury stock
at combination date (1.7) (2.2) -- (57.0) -- -- 59.2
Lapse of restrictions on restricted
common stock -- -- -- -- 8.8 -- --
Exercise of stock options 0.1 0.2 4.0 (1.4) -- -- --
------ -------- -------- -------- -------- -------- --------
Balance at September 30, 1998 39.5 $ 49.4 $ 356.0 $ 378.2 $ -- $ (1.6) $ (46.3)
====== ======== ======== ======== ======== ======== ========
</TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 71.5 $ 58.0 $ 64.1 $ 114.5
Foreign currency translation
adjustments, net of tax (0.3) -- (0.4) --
---------- ---------- ---------- ----------
Comprehensive income $ 71.2 $ 58.0 $ 63.7 $ 114.5
========== ========== ========== ==========
</TABLE>
-5-
<PAGE> 8
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
This quarterly report presents the following unaudited financial
statements of Southdown, Inc. and subsidiary companies (the "Company"):
- The Consolidated Balance Sheet at September 30, 1998
- The Statements of Consolidated Earnings, Consolidated Cash Flows,
Consolidated Revenues and Operating Earnings by Business Segment,
and Consolidated Comprehensive Income for the three and nine months
ended September 30, 1998 and 1997, and
- The Statement of Consolidated Shareholders' Equity for the nine
months ended September 30, 1998.
On June 30, 1998, the Company concluded its merger transaction
with Medusa Corporation ("Medusa"). Medusa became a 100% owned subsidiary of the
Company at that time. The transaction was treated as a "pooling of interests"
rather than a purchase of one company by another. A pooling of interests
accounts for a business combination as the uniting of the ownership interests of
companies by an exchange of stock. All prior period consolidated financial
statements presented provide the combined results of operations, financial
position and cash flows of the Company and Medusa. The combined financial
results presented also include adjustments to conform the historical accounting
policies of Medusa to those of the Company. The financial statements presented
in this report were not audited.
Two significant differences between Medusa's and the Company's
accounting policies were the way Medusa valued its inventory at the end of
interim quarters and the way Medusa accounted for certain expenses. Other than
at the end of a year, Medusa used standard cost estimates predetermined by
management to value its inventory. At year-end, Medusa charged or credited to
cost of goods sold any difference between the inventory valued at this standard
cost method and the actual cost of inventory. Medusa also recorded scheduled
shutdown and certain other major repair costs that
-6-
<PAGE> 9
benefited two or more interim quarters as assets called prepaid maintenance
costs. Medusa amortized these costs over the remainder of the year.
To conform these differences to the Company's accounting policies, the
consolidated balance sheet as of September 30, 1998 and consolidated statements
of earnings for the three and nine months ended September 30, 1998 and September
30, 1997 (i) report quarterly results based on actual costs, (ii) value end of
the period inventory at actual cost, and (iii) charge all maintenance costs to
operating costs as incurred. The use of the different interim cost accounting
methods has no effect on the December 31, 1997 financial statements, because
Medusa reported inventories at actual cost at the end of each year and
completely amortized all prepaid maintenance costs by the end of each year.
A large percentage of Medusa's planned annual maintenance shutdowns
typically occurred in the first half of the year. As a result, in the earlier
part of the year, Medusa's actual cost was generally significantly higher than
the amounts it had recorded under its standard cost accounting method. To
reflect this higher cost, the adjustment from standard cost to actual cost at
September 30 increased the value of the end of period inventory and increased
the charge to cost of goods sold. This adjustment was necessary to properly
reflect the end of the period inventory for both companies on the same basis.
The adjustment at September 30 also eliminated all of Medusa's deferred shutdown
and maintenance costs.
The revenues and results of operations for the separate companies and
the combined amounts included in the consolidated financial statements for the
comparative periods of the prior year are presented below:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------------- ---------------------
<S> <C> <C>
Revenues
Southdown $ 199.2 $ 537.8
Medusa 117.1 277.1
---------- ---------
Combined $ 316.3 $ 814.9
========== =========
Net earnings
Southdown $ 32.5 $ 71.3
Medusa 25.5 43.2
---------- ---------
Combined $ 58.0 $ 114.5
========== =========
</TABLE>
-7-
<PAGE> 10
This report presents extracts from the Consolidated Balance Sheet at
December 31, 1997 drawn from the December 31, 1997 audited financial statements
of the Company and Medusa. This report does not include all disclosures required
by generally accepted accounting principles. The reader should also review the
1997 consolidated financial statements and the notes to those statements
included in both the Company's and Medusa's Annual Reports on Form 10-K.
It is management's opinion that the financial 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. Management
also believes that all such adjustments are of a normal recurring nature. The
interim statements for the period ended September 30, 1998 do not necessarily
indicate what the Company's results will be for the full year. The Company
reclassified certain data from the prior year to make it easier to compare both
years.
NOTE 2 - MEDUSA MERGER:
On June 30, 1998, Medusa became a wholly-owned subsidiary of the
Company. The Medusa merger converted each outstanding Medusa common share into
the right to receive .88 shares of Company common stock. The Company issued
approximately 14.7 million shares of its common stock for all of the outstanding
common stock of Medusa. The Medusa merger also converted Medusa's outstanding
employee stock options the same way, so these Medusa options became options to
purchase approximately 522,000 shares of Company common stock. The exchange of
Medusa shares and options for Company shares and options was tax-free. The
Company accounted for the merger as a pooling of interests as allowed by
Accounting Principles Board Opinion No. 16, "Business Combinations."
-8-
<PAGE> 11
For comparative purposes, the revenues and results of operations,
excluding the second quarter of 1998 charge for direct and other merger related
transaction costs, for the separate companies and the combined amounts for the
current year period prior to the consummation of the combination are presented
below:
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------
SIX MONTHS ENDED
JUNE 30, 1998
----------------
<S> <C>
Revenues
Southdown $ 357.9
Medusa 184.7
-----------
Combined $ 542.6
===========
Net earnings
Southdown $ 47.4
Medusa 19.1
-----------
Combined $ 66.5
===========
</TABLE>
The Company recorded second quarter charges to operating expenses
totaling $82.9 million ($73.9 million after taxes, or $1.90 per common share)
for direct and other merger related transaction costs including severance
related costs, investment bankers, attorneys, accountants, financial printing,
anticipated closure of duplicate facilities and incompatible business
activities. A significant portion of the severance costs accrued was related to
certain performance based restricted stock grants that had been awarded to
Medusa executive officers. Severance cost related to these restricted stock
awards was estimated based on the market price of the Company's common stock as
of the June 30, 1998 merger date. Because the market price of the Company's
common stock, like that of many other companies' common stock, declined between
the merger date and the August 1998 date the restrictions on the stock awards
actually lapsed, the cost of Medusa executive severance was less than originally
estimated. Accordingly, the Company recorded a third quarter 1998 credit of $6.7
million to estimated severance expense. On the other hand, the Company revised
upward its initial estimate of other merger transaction and closure costs. The
net effect was a $4.0 million third quarter 1998 reduction in estimated
transaction costs. At September 30, 1998, current liabilities related to these
charges were $13.6 million. Details of the merger related costs are as follows:
-9-
<PAGE> 12
<TABLE>
<CAPTION>
(IN MILLIONS)
-----------------------------------------------------------------
ACCRUED CURRENT
MERGER AMOUNTS BALANCE
COSTS PAID ADJUSTMENTS AT 9/30/98
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Merger transaction costs and
professional fees $ 18.4 $ 18.6 $ 0.9 $ 0.7
Severance costs 54.3 46.5 (6.7) 1.1
Closure costs 10.2 0.2 1.8 11.8
--------- --------- -------- ---------
Total $ 82.9 $ 65.3 $ (4.0) $ 13.6
========= ========= ======== =========
</TABLE>
In addition, the Company recorded charges to conform the accounting
practices of Medusa to those of the Company. A reconciliation of previously
reported Medusa net earnings for the three and nine months ended September 30,
1997 to the adjusted amounts presented in this report is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
---------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
--------------------- ---------------------
<S> <C> <C>
Net earnings
Medusa under standard cost $ 23.8 $ 43.9
Conforming accounting adjustment 1.7 (0.7)
--------- ---------
Medusa as adjusted $ 25.5 $ 43.2
========= =========
</TABLE>
As described in Note 1 of Notes to Consolidated Financial Statements,
the adjustments relate primarily to Medusa's use of standard cost accounting for
inventory. Because the use of the standard cost method of valuing inventory
impacts only interim reporting periods, there are no differences in previously
reported Medusa assets and net earnings for the full year ended December 31,
1997.
NOTE 3 - NEW ACCOUNTING STANDARDS:
Effective January 1, 1998, the Company adopted two new Statement of
Financial Accounting Standards: Statement No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") and Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components. The Company elected to report the components of comprehensive income
in a separate Statement of Consolidated Comprehensive Income. SFAS No. 131
establishes standards for the way that public companies report information about
operating segments in interim and annual financial
-10-
<PAGE> 13
statements. Operating segments is the accounting term for "lines of business."
The Company's reporting of information about its operating segments already
conformed with SFAS No. 131 prior to adopting this new standard. Medusa, which
adopted SFAS No. 131 in 1997, had two reportable segments, cement and
aggregates. After the merger, the Company's aggregates operations, which were
previously included in the concrete products segment, are now included in the
aggregates segment along with the aggregates operations of Medusa. Adoption of
these two new standards had no material effect on the Company's consolidated
results of operations, financial position, cash flows or financial statement
disclosures.
In February 1998, the Financial Accounting Standard Board ("FASB")
issued Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132, which revises
employers' disclosures about pension and other postretirement benefits, but does
not change the measurement or recognition of those plans, became effective for
periods ending after December 15, 1997. This statement will have no effect on
the Company's 1998 results of operations, but management is currently
considering if the statement will require any additional disclosures in the
Company's Annual Report on Form 10-K for the year ending December 31, 1998.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). A derivative is
a financial instrument that takes or "derives" its value from the value of some
other financial instrument. SFAS No. 133 requires that a company recognize all
derivatives as either assets or liabilities on its balance sheet and measure
those instruments at fair value. Fair value is the amount for which an object
would currently change hands between a willing buyer and an independent willing
seller. SFAS No. 133 is effective for years beginning after June 15, 1999. The
Company held no derivative financial instruments during 1997 or 1998.
NOTE 4 - LOSS FROM DISCONTINUED OPERATIONS:
In late 1994 and the first quarter of 1995, the Company became aware of
some soil and groundwater contamination at or near its former Alabama hazardous
waste processing facility. Although the Company sold the Alabama facility to
Nortru, Inc. in April 1995, the Company agreed to keep some liability for soil
and groundwater contamination at the facility prior to that time and has agreed
to remediate this contamination to the extent required by law. The Company hired
a qualified
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<PAGE> 14
consultant to conduct the investigation of the contamination at the facility.
The Company's consultant has only preliminarily determined the scope of the
contamination and is assessing whether any cleanup will be required.
Accordingly, it is not yet possible to determine the amount of the Company's
loss exposure with any degree of certainty.
As a result of the consultant's preliminary report, the Company
increased the amount reserved to resolve this matter by recording an additional
$2.4 million expense ($1.6 million, after-tax) in the third quarter of 1998.
This brought the total reserve up to $4.2 million to cover the currently
estimated cost of investigating the amount of contamination present, conducting
a ten year monitored remediation program and pursuing the claim against the
prior owner and other potentially responsible parties. Because the Company
discontinued its hazardous waste disposal business in 1994, the charge is
reflected as a "loss from discontinued operations, net of income taxes" on the
Company's Statement of Consolidated Earnings. The Company has filed a lawsuit
against the former owner of the facility. The claims against that former owner
and other potentially responsible parties could significantly reduce or
eliminate the Company's loss exposure.
NOTE 5 - EARNINGS PER SHARE:
In February 1997, the FASB issued Statement No. 128, "Earnings Per
Share" ("SFAS No. 128"). SFAS No. 128, which simplifies the standards for
computing and presenting earnings per share, became effective for periods ending
after December 15, 1997. This report restates previously reported earnings per
share to conform to the new standard. Earnings used to compute basic per share
earnings for the nine months ended September 30, 1997 were net of preferred
stock dividends of approximately $2.5 million. There is no preferred stock
outstanding in 1998. The report presents basic earnings per share using the
average number of common shares outstanding in each of the nine-month periods
ending September 30, 1998 and 1997. Diluted earnings for 1998 and 1997 assume
the dilutive impact of stock options. For 1997, diluted earnings also assume all
outstanding shares of preferred stock are converted into common stock.
-12-
<PAGE> 15
NOTE 6 - INVENTORIES:
<TABLE>
<CAPTION>
(UNAUDITED, IN MILLIONS)
-----------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ---------------
<S> <C> <C>
Finished goods 31.2 33.6
Work in progress 12.3 10.8
Raw materials 8.2 8.4
Supplies 47.0 44.4
-------------- ---------------
98.7 97.2
============== ===============
</TABLE>
Inventories stated on the LIFO method were $42.2 million of total
inventories at September 30, 1998 and $44.8 million of total inventories at
December 31, 1997 compared with current costs of $61.1 million at September and
$63.7 million at December 31.
NOTE 7 - LONG-TERM DEBT:
In May 1998, the Company amended its $200 million revolving credit
facility to permit (i) the Medusa merger, (ii) assumption of the existing
indebtedness of Medusa of up to $100 million, and (iii) the guarantee of a $15
million lease obligation associated with the Medusa merger. The Company also
obtained from its bank group a release of the bank group's liens on the
collateral security, including the security interest in five of the Company's
cement plants and the Company's interest in the Kosmos joint venture.
In early June 1998, Medusa reduced the borrowing capacity under its
unsecured, five-year revolving credit facility from $180 million to the $40
million then outstanding. The Company paid off the outstanding balance on the
Medusa credit facility on June 30, 1998. There were no amounts outstanding on
Medusa's unsecured $25 million bank lines of credit at June 30, 1998. Medusa's
bank group cancelled both credit facilities as of June 30, 1998.
The Company's revolving credit facility that matures in June 2002. The
credit facility permits the issuance of up to $95 million in standby letters of
credit in lieu of borrowings. As of September 30, 1998, the Company had $67.0
million in letters of credit outstanding under this facility, but no borrowings,
leaving $133.0 million available. The revolving credit facility limits the
Company's
-13-
<PAGE> 16
additional indebtedness, but allows the Company to borrow up to $75 million, as
well as certain other amounts, from other lenders.
Under the revolving credit facility, the Company must maintain the
following financial ratios: (i) leverage ratio (funded debt compared with
consolidated earnings before interest, tax and depreciation), (ii) minimum
current ratio (current assets compared with net current liabilities), and (iii)
free cash flow ratio (free cash flow compared with the sum of interest,
dividends, current tax provision and current portion of funded debt). In
addition, the Company must maintain a minimum tangible net worth (shareholders'
equity minus intangible assets such as goodwill).
Under the terms of the Company's 10% Senior Subordinated Notes
Indenture, the Company may borrow up to $255 million under bank credit
facilities, plus $50 million of additional debt and certain other additional
amounts. That indenture also limits "Purchase Money Obligations" and/or
"Capitalized Lease Obligations" to not more than $25 million at any one time and
restricts, among other things, certain sales of assets, certain mergers and
consolidations, dividends and distributions and redemptions and repurchases of
equity securities. Under the indenture, the Company may borrow more than those
amounts if the Company's consolidated fixed charge coverage ratio is more than
2.25 to 1. The fixed charge coverage ratio is the ratio of after tax earnings,
excluding interest charges, to the amount of interest due on all indebtedness.
As of September 30, 1998, the Company's consolidated fixed charge coverage ratio
was significantly higher than 2.25 to 1.
The Company is in compliance with the revolving credit facility and
indenture ratios and covenants. Generally, the revolving credit facility is more
restrictive than the indenture and would limit the Company's additional
borrowings before covenants in the indenture would impede the Company's ability
to incur additional debt.
-14-
<PAGE> 17
NOTE 8 - CAPITAL STOCK:
COMMON STOCK
At September 30, 1998, the Company had issued a total of approximately
39.5 million shares of common stock, of which approximately 38.3 million shares
were outstanding and the rest were held as treasury shares. As part of the
Medusa merger, the Company issued approximately 14.7 million shares of common
stock (see Note 2 of Notes to Consolidated Financial Statements).
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 June 30, 1997. The Company converted all of the
Series D Preferred Stock into common stock during the third quarter of 1997.
Dividends paid on the Series D Preferred Stock before the stock was converted
were approximately $2.5 million during the nine-month period ended September 30,
1997.
NOTE 9 - CONTINGENCIES:
The Company may incur commitments and contingent liabilities in the
normal course of business. Some examples include (i) personal injury lawsuits,
(ii) indemnity and other hold harmless agreements, (iii) environmental
remediation liabilities, (iv) product liability claims, and (v) claims by
disgruntled employees. The total of various existing commitments and contingent
liabilities, in the judgment of management, is less than 10% of consolidated
current assets (which were $371.7 million as of September 30, 1998 and $326.2
million as of December 31, 1997). Management believes there is little risk that
losses from existing commitments and contingencies would materially affect the
Company's consolidated balance sheet. The Company's results of operations,
however, vary considerably with construction activity and other factors. It is
at least reasonably possible, therefore, that charges for contingencies in the
future could, if they were large relative to results of operations or cash flows
for a particular period, have a material negative impact on the Company's
results of operations or cash flows for that period.
-15-
<PAGE> 18
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 a discussion of certain contingencies.
NOTE 10 - REVIEW BY INDEPENDENT ACCOUNTANTS:
The Company's independent public accountants reviewed the unaudited
financial information presented in this report. They conducted a limited review
and not an audit of the financial information in accordance with generally
accepted auditing standards such as they perform 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, 1998 and for the
nine months then ended follows.
-16-
<PAGE> 19
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 September 30, 1998, and the
related consolidated statements of earnings and cash flows for the nine months
ended September 30, 1998 and 1997 and the consolidated statement of
shareholders' equity for the nine months ended September 30, 1998. 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, 1997 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 27, 1998, 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, 1997 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 21, 1998
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion analyzes the Company's operations for the three and
nine month periods ending September 30, 1998 and 1997 and the Company's overall
financial condition at the end of the third quarter of 1998. To obtain a
reference point and background information for the discussion that follows, the
reader should also review the Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 17 through 27 of the Company's 1997
Annual Report on Form 10-K and on pages 15 through 21 of Medusa's 1997 Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
CONSOLIDATED THIRD QUARTER RESULTS
Net earnings for the third quarter of 1998 were $71.5 million, $1.84
per share, including a $4.0 million reduction in estimated merger related
transaction costs and an after tax loss of $1.6 million, $0.04 per share, from
discontinued operations. In the third quarter of 1997, the Company reported net
earnings of $58.0 million or $1.48 per share.
The reduction in the estimated merger related transaction costs is
primarily attributable to the lower cost of certain severance payments which
were tied to the Company's stock price. In the third quarter the Company
finalized severance payments to certain former executive officers of Medusa and
further refined the estimates of certain other transaction costs related to the
combination of Medusa and the Company. The market price of the Company's common
stock, along with the market prices of the common stock of many other publicly
traded companies, declined significantly after June 30, 1998 when the Medusa
merger closed. A considerable portion of the severance amounts paid to displaced
Medusa executive officers depended on the value of the common stock at the time
of the payment. Accordingly, a decline in the price of the Company's common
stock resulted in lower severance costs.
The second unusual transaction during the third quarter relates to the
hazardous waste disposal business. The Company is no longer in that business,
having made the decision in 1994 to discontinue all such operations.
Nevertheless, as discussed in more detail in Note 4 of Notes to Consolidated
-18-
<PAGE> 21
Financial Statements, if certain substances were disposed of or released at any
of the Company's properties before the Company sold them, the Company may still
be required to remedy the effect on the environment. The Company has learned of
some soil and groundwater contamination at a hazardous waste disposal facility
formerly owned by the Company in Alabama. The Company has agreed to remediate
this contamination at the Alabama facility to the extent required by law. In the
third quarter of 1998, the Company recorded an additional charge related to this
facility of $2.4 million ($1.6 million, after-tax) to cover the estimated cost
of investigating the amount of contamination present, conducting a ten year
monitored remediation program and pursuing a claim against the prior owner of
the facility and other potentially responsible parties. This charge is reported
separately on the Company's Statement of Consolidated Earnings as "Loss from
discontinued operations, net of income taxes."
Excluding revisions to merger related costs, operating earnings for the
quarter ended September 30, 1998 increased 15% over operating earnings for the
same quarter of 1997. All three operating segments showed quarter-over-quarter
improvements. Results might have been better but for weather problems which
adversely impacted sales volumes and profits in the Southeast. In absolute
dollars, the cement segment showed the largest improvement, rising 13% to $104.4
million in operating earnings for the third quarter of 1998 compared with $92.0
million in the comparable 1997 quarter. Excluding third quarter gains on sales
of surplus real estate in both years ($0.6 million in the 1998 quarter and $2.0
million in the 1997 quarter), the concrete products segment showed the largest
percentage improvement, increasing to $4.2 million in operating earnings
compared with $2.3 million in operating earnings in the third quarter of 1997.
The aggregates segment rose 30% to $9.1 million in operating earnings for the
September 1998 quarter compared with $7.0 million in the September 1997 quarter.
Corporate overhead expenses were higher in the third quarter of 1998
than in the comparable 1997 period because of higher corporate administration
costs, consulting fees and travel expenses. The effective tax rate for the
quarter ended September 30, 1998 is lower than the federal statutory rate of 35%
because of the benefit garnered during the period as a result of an increase in
the ratio of deductible merger related transaction costs relative to total
estimated pretax income.
-19-
<PAGE> 22
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated year-to-date revenues and earnings for the comparable
nine-month periods showed a trend similar to that of the three-month periods.
Net earnings for the nine months ended September 30, 1998 were $64.1 million,
$1.65 per share, including $78.9 million ($66.9 million after taxes, $1.72 per
share) in merger related transaction costs and the $1.6 million charge for
discontinued operations. Net earnings for the prior year period were $114.5
million, $2.92 per share. For the nine months ended September 30, cement segment
operating earnings increased $25.7 million, or almost 13%, in 1998 compared with
1997. The concrete products segment earnings increased 56% to $12.2 million in
1998 from $7.8 million earned in the 1997 period. Earnings of the aggregates
segment increased $2.8 million or almost 18% from 1997 to 1998. Year-to-date
corporate overhead increased less than 5%, from $33.2 million in the 1997 period
to $34.7 million in the 1998 period. Year-to-date interest expense for 1998 was
higher than the 1997 year-to-date period, because of Medusa borrowings on its
revolving credit facility during the first half of 1998 and because of lower
1998 capitalized interest. The year-to-date effective tax rate for the nine
months ended September 30, 1998 is higher than both the federal statutory rate
and the effective rate for the comparable 1997 period because of the
non-deductibility for tax purposes of the majority of the merger related
transaction costs. The effective tax rate for the remainder of 1998 should
decline, as the relative impact of the non-deductible transaction costs becomes
smaller compared with the year's results of operations.
SEGMENT OPERATING EARNINGS
CEMENT
Third Quarter - For the third quarter of 1998 compared with the same
period of the prior year, a 4% increase in average cement prices and a 4%
improvement in cement shipments resulted in a 13% increase in cement segment
operating earnings. Per ton manufacturing and other plant operating costs for
the comparable quarterly periods were essentially unchanged.
Year-to-Date - For the first nine months of 1998, cement segment
revenues increased 8% compared with the same period of the prior year. Cement
segment operating earnings improved 13%
-20-
<PAGE> 23
over the first nine months of 1997. Cement sales volumes were 3% higher in the
first nine months of 1998 than in the comparable period in 1997. Cement sales
prices over those same two periods averaged 5% higher in 1998. The improvement
in cement earnings would have been greater if not for slightly higher cement
production costs. Year-to-date results also include a second quarter $1.6
million charge to increase the accrual for cement kiln dust remediation at the
Charlevoix, Michigan cement plant.
Sales volumes, average unit sales 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,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Tons of cement sold (thousands) 3,351 3,231 8,482 8,225
========= ========== ========= ==========
Weighted average per ton data:
Sales price (net of freight to customers) $ 72.35 $ 69.43 $ 71.92 $ 68.49
Manufacturing and other plant
operating costs(1) 41.52 41.24 45.93 44.83
--------- ---------- --------- ----------
Margin $ 30.83 $ 28.19 $ 25.99 $ 23.66
========= ========== ========= ==========
</TABLE>
- --------------
(1) Includes fixed and variable manufacturing costs, cost of purchased cement,
selling expenses, plant general and administrative costs, other plant
overhead and miscellaneous costs.
CONCRETE PRODUCTS
Third Quarter - Concrete segment operating earnings were $4.8 million
in the third quarter 1998 compared with $4.3 million for the prior year quarter.
These figures included gains from the sale of surplus real estate in both years
($0.6 million in the 1998 quarter and $2.0 million in the 1997 quarter).
Excluding the gains on real estate, concrete operating earnings increased
primarily as a result of significant improvement in ready-mixed concrete sales
prices in the 1998 quarter compared with the 1997 period. Revenues for the
concrete products segment, however, declined slightly to $61 million for the
third quarter of 1998 compared with revenues of $62.8 million for the same 1997
period. Sales volumes for the concrete products segment declined 6%
quarter-to-quarter, but average sales prices were 5%
-21-
<PAGE> 24
higher in the 1998 quarter compared with the prior year quarter. Significant
operating margin improvement and volume growth in the Company's southern
California ready-mix operations more than offset the negative impact of severe
weather conditions in Florida during September 1998.
Year-to-Date - Concrete products earnings improved to $12.2 million in
1998 from $7.8 million earned in the 1997 period. Concrete products revenues for
the 1998 nine-month period declined almost 2% compared with the prior year
period. For the comparable nine-month periods, 1998 concrete products sales
volumes were 5% lower than the prior year. The decline in sales volumes was
offset by a 5% improvement in average sales prices.
Sales volumes, average unit sales price and cost data and unit
operating profit 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,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Cubic yards of ready-mixed concrete
sold (thousands) 899 953 2,632 2,783
========= ========== ========= ==========
Weighted average per cubic yard data:
Sales price $ 58.19 $ 55.25 $ 57.63 $ 54.82
Operating costs(1)(2) 55.00 54.03 54.89 53.77
--------- ---------- --------- ----------
Margin(3) $ 3.19 $ 1.22 $ 2.74 $ 1.05
========= ========== ========= ==========
</TABLE>
- --------------
(1) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs.
(2) Excludes a $0.6 million gain and a $2.0 million gain from the sale of
surplus real estate for the three-month periods ended September 30, 1998
and 1997, respectively, and $2.0 million in gains from the sale of surplus
real estate in both the 1998 and 1997 nine-month periods.
(3) Does not include concrete block and other related products which totaled
$1.3 million and $1.1 million of operating earnings for the three-month
periods ended September 30, 1998 and 1997, respectively, and $3.0 million
and $2.8 million of operating earnings in the year-to-date 1998 and 1997
periods, respectively.
-22-
<PAGE> 25
AGGREGATES
Third Quarter and Year-to-Date - Specialty aggregates operations at
Castlewood, Virginia and Lee, Massachusetts were acquired in August and October
1997, respectively. Accordingly, aggregates sales revenues, volumes and prices
in 1998 benefited in both the quarter and year-to-date periods as a result of
the contributions of these two additional operations that were not present in
the prior year periods. The Company sold 466,000 more tons of aggregate in the
third quarter of 1998 and 750,000 more tons of aggregate in the first nine
months of 1998 than the Company sold in the comparable 1997 periods. Revenues
for the aggregates segment increased 25% for the 1998 three-month period and 30%
for the nine-month period compared with the same 1997 periods. Operating
earnings for the aggregates segment increased 30% to $9.1 million in the third
quarter and 18% to $18.7 million in the current year-to-date period primarily as
a result of the inclusion of the new facilities. Higher construction aggregates
sales volumes in southern California and Kentucky plus the inclusion of the
specialty minerals operations acquired in late 1997 were the primary factors
behind the increase in segment earnings.
Sales volumes, average unit sales price and cost data and unit
operating profit margins relating to the Company's aggregates operations appear
in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Tons of aggregates sold (thousands) 3,614 3,148 8,666 7,916
========= ========== ========= ==========
Weighted average per ton data:
Sales price $ 8.20 $ 7.07 $ 9.23 $ 7.53
Operating costs(1) 5.94 5.14 7.22 5.65
--------- ---------- --------- ----------
Margin $ 2.26 $ 1.93 $ 2.01 $ 1.88
========= ========== ========= ==========
</TABLE>
- --------------
(1) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs.
-23-
<PAGE> 26
CORPORATE
Third Quarter and Year-to-Date - Corporate overhead expenses increased
in the third quarter of 1998 by $1.3 million for the quarter and $1.5 million
for the nine-month period compared with last year primarily because of the
inclusion of various administrative functions previously recorded in the
operating segments and because of higher consulting fees and travel expenses.
Included in corporate overhead is interest income in the third quarter of 1998
of $1.0 million compared with $0.7 million in the prior year quarter and $3.3
million of interest income in the 1998 nine-month period compared with $1.8
million in the 1997 year-to-date period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's lines of business require a large amount of capital. When
these capital requirements cannot be met internally, the Company borrows under
its outstanding credit facilities or sells debt or equity securities. For the
nine months ended September 30, 1998, the Company generated $127.1 million in
cash provided by operating activities. In the first nine months of 1997, the
Company generated $142.9 million in cash from operating activities. Cash outlays
relating to the one-time Medusa acquisition charge were the primary cause of the
decrease in cash provided from operations in 1998. The Company used 1998
operating cash flows, plus existing cash and short-term investment balances, to
fund (i) $82.2 million of capital additions primarily related to several
expansion/cost reduction projects in the Cement segment as well as a small
aggregates acquisition, (ii) a $32.6 million net reduction in long-term debt,
(iii) $13.6 million of dividends on common stock, (iv) $56.5 million in
transaction and other costs related to the Medusa merger, and (v) all working
capital requirements. Internally generated cash flows during the nine months of
1997 were utilized to (i) invest approximately $116.4 million in property, plant
and equipment and in acquisitions of minerals operations, (ii) repurchase $41.0
million in common stock of the Company, (iii) fund working capital requirements,
and (iv) pay $18.1 million of dividends on capital stock.
The Company's $200 million revolving credit facility matures in June
2002. The facility permits standby letters of credit up to a maximum of $95
million in lieu of borrowings. In connection with the Medusa merger, the Company
in May 1998 changed its revolving credit agreement to permit
-24-
<PAGE> 27
(i) the Medusa merger, (ii) the assumption of the existing indebtedness of
Medusa of up to $100 million, and (iii) the guarantee of a $15 million lease
obligation associated with the Medusa merger. The Company also obtained a
release of the bank group's liens on the collateral security, including the
security interest in five of the Company's cement plants and the Company's
interest in the Kosmos joint venture. At September 30, 1998, there were no
borrowings and $67.0 million in letters of credit outstanding under the
revolving credit facility, leaving $133.0 million of unused capacity. The
Company is in compliance with the financial ratios and covenants in the
revolving credit agreement and the 10% Senior Subordinated Notes Indenture.
CHANGES IN FINANCIAL CONDITION
The change in the financial condition of the Company between December
31, 1997 and September 30, 1998 reflected the use of internally generated cash
flow to fund capital expenditures, long-term debt reduction, working capital
requirements and common stock dividends. Accounts and notes receivable increased
primarily because of the strong sales activity occurring in the peak summer
construction season relative to lower December 1997 sales. Prepaid expenses and
other decreased because of payments made by the Voluntary Employee Beneficiary
Association to fund employee health care costs. The increase in accounts payable
and accrued liabilities reflects the one-time Medusa acquisition charge and the
timing of payments on normal trade and other obligations. Long-term debt
decreased because the Company paid off notes payable to third parties.
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
Environmental Matters - The Company is subject to a wide range of
federal, state and local laws, regulations and ordinances dealing with the
protection of human health and 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. These laws also create a shared
liability by responsible parties for the cost of cleaning up or correcting
releases to the environment of designated hazardous substances. The Company,
therefore, may have to remove or mitigate the environmental effects of the
disposal or release of certain substances at the Company's various operating
facilities or elsewhere.
-25-
<PAGE> 28
Several of the Company's previously and currently owned facilities have
become the subject of various local, state or federal environmental proceedings
and inquiries. While some of these matters have been settled, others are in
their preliminary stages and may not be resolved for years. The information
developed to date on these matters is not complete. Based on what it knows
currently, however, the Company does not believe it will be required to spend
significantly more on these matters than the amounts already recorded in the
Company's financial statements. However, until all (i) environmental studies and
investigations, (ii) remediation work, (iii) negotiations with other parties
that may be responsible, or (iv) litigation against other potential sources of
recovery have been completed, it is impossible to determine the ultimate cost
that the Company might incur to resolve these environmental matters.
Industrial operations have been conducted at the Company's cement
manufacturing facilities for many years. As was common in the industry, the
Company in the past disposed of various materials used in its cement
manufacturing and concrete products operations in onsite and offsite facilities.
Today, some of these materials may be classified as hazardous substances.
Cement manufacturing plants, depending on their process design, raw
materials characteristics, product specifications and other factors, may
generate a low toxicity by-product known as cement kiln dust or CKD. Most
manufacturing plants in the industry typically disposed of CKD in and around
their plant sites since the inception of cement manufacturing operations. CKD is
currently not regulated as a hazardous waste. The U.S. Environmental Protection
Agency ("U.S. EPA") decided in 1995 that some further regulation of CKD was
necessary. At the same time, the U.S. EPA 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 began a rulemaking process in order to develop
specially tailored CKD management standards. The Company expects the U.S. EPA to
propose new CKD standards by the end of 1998. These new CKD standards may
require the cement industry to develop improved management practices for this
waste material.
If CKD becomes saturated with water, liquid that leaches out may have
an alkaline level high enough to be classified as hazardous. Saturated CKD may
also leach certain hazardous trace metals if they are present. Discharges of
pollutants have been alleged from two CKD sites in the vicinity of the
-26-
<PAGE> 29
Company's Ohio cement plant and one site in the vicinity of its recently
acquired Medusa cement plant in Michigan. For one of the Ohio sites, the Company
has previously recorded remediation charges totaling approximately $13 million.
The Company is involved in a lawsuit with a private party over the other Ohio
site, but the Company believes it has no liability in the matter since the
Company no longer owns the property and, therefore, should have no ongoing
obligation to obtain a permit for the alleged discharge from the site, the sole
allegation in the lawsuit.
The Company is investigating potential contamination from a total of
nine separate CKD piles at one site in the vicinity of its Medusa cement plant
in Michigan. The Company is also working with a consultant and the Michigan
Department of Environmental Quality ("MDEQ") to develop a new on-site CKD
landfill. During 1997, Medusa proposed building a new landfill on top of one of
the identified CKD piles. The new $2 million landfill will remedy the problems
with that existing CKD pile, because the new one will serve to cap the existing
one. Medusa also proposed cleaning up two of the other identified CKD piles and
disposing of them in the new landfill. The new landfill, as permitted, would
also be large enough for the disposal of CKD generated in the future for the
next 30 years. MDEQ gave final approval for construction of this landfill in
April 1998.
The Company's Medusa subsidiary has also submitted plans to MDEQ
concerning the remediation of the other six identified CKD piles. These plans
are currently under review by MDEQ. The Company estimates total costs associated
with these plans are in the range of $4 million to $9 million. In the fourth
quarter of 1997, Medusa accrued $3.6 million related to various non-capital
costs associated with the nine CKD piles. As a result of further investigation,
the Company accrued an additional $1.6 million in CKD remediation costs in June
1998, based on the most current information available. The Company does not know
when or if the various remediation proposals will be approved by MDEQ. At the
present time, the Company does not know the ultimate cost to resolve these
issues or over what period the Company will incur these costs.
The California EPA required the Company to investigate the status of
two CKD disposal sites at the Company's California cement plant. The initial
phase of the investigation showed no leaching at one site, but the Company is
continuing to monitor the site. There is little likelihood of groundwater
contamination at the second California site because of the great depth to
groundwater aquifers.
-27-
<PAGE> 30
The Georgia EPA has required the Company's Medusa subsidiary to
investigate potential groundwater impact from a landfill no longer in use at its
Georgia cement plant. Although groundwater monitoring at this plant is in its
initial phase, the results to date do not indicate there were releases from the
landfill. The Company has not had reason to conduct meaningful investigation at
any of the its other CKD disposal sites.
Amendments to the Clean Air Act of 1990 may result in increased capital
and operational expenses for the Company in the future. The Company does not
know how much of an increase that might be. In addition, the U.S. EPA is
developing air toxics regulations for a broad range of industrial sectors,
including portland cement manufacturing. The U.S. EPA has indicated that the new
maximum available control technology standards could require reducing air
pollutants far below existing levels common in the industry. If enacted, these
new standards would apply to everyone in the industry. However, because of the
age, condition and design of its plants, management believes the Company would
not be at a disadvantage with respect to its competitors and, in some markets,
might have an advantage.
The Company's Medusa subsidiary operates two cement plants (Wampum,
Pennsylvania and Demopolis, Alabama) that historically have used waste-derived
liquid fuels ("WDLF") as one of their fuel sources. The use of WDLF is subject
to emission limits and other requirements under the Resource Conservation and
Recovery Act ("RCRA") and regulations issued under RCRA. The regulations apply
to plants operating under "interim status" while the plants go through the
process to get a RCRA permit. The regulations are extremely complex, and certain
provisions have been interpreted differently. The Company is required to test
periodically for compliance with the rules and submit certificates of
compliance. The tests are subject to monitoring and review by the U.S. EPA. The
Company believes it is complying with the regulations. The Company can not say
for certain, however, that the U.S. EPA will always agree with the Company or
not require additional tests or levy fines for non-compliance.
The Company thoroughly evaluated the use of WDLF at these two plants
and decided the practice is incompatible with the Company's other cement
operations because it reduces productivity and increases compliance costs, and
the potential to create other liabilities. The Company has already
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<PAGE> 31
stopped burning WDLF at one of the two plants and intends to stop burning WDLF
at the second plant in early 1999. Environmental regulations require plants that
have used WDLF to go through "closure procedures" once the use of these fuels
ceases. The Company anticipates it will have completed closure requirements at
both plants by June 30, 1999. Of the $78.9 million under the caption
"Acquisition Charge," $2.2 million represents estimated costs related to exiting
this incompatible business activity. The charge includes the estimated cost of
the closure procedure and the writedown of the assets used in the WDLF handling.
The Company's Medusa subsidiary's Wampum, Pennsylvania cement plant has
received four Notices of Violation ("NOVs") from the U.S. EPA, Region III
alleging certain air emission violations. U.S. EPA has referred these NOVs to
the U.S. Department of Justice for potential civil enforcement. Two of the NOVs,
one issued in May 1997 and another issued in July 1998, allege opacity and
fugitive emissions violations of Pennsylvania law and maintain that the
provisions are enforceable by federal authorities. The two remaining NOVs, one
issued in February 1998 and a second July 1998 NOV, allege visible emissions
violations related to the provisions of the plant's state operating permit for
burning WDLF. These NOVs also maintain that the state permit provisions are
enforceable by federal authorities.
The Company is trying to resolve these matters. Company officials met
with the U.S. EPA and Department of Justice to discuss certain future compliance
initiatives, potential penalty payments and other methods to resolve these
matters. The Company has already paid penalties in excess of $200,000 to the
Pennsylvania Department of Environmental Protection for the violations alleged
in the May 1997 and July 1998 NOVs. The Company has also made equipment and
other plant upgrades and adjustments at an estimated cost of $2.5 million to
address opacity and fugitive emission issues. The Company is assessing its legal
arguments and defenses and other mitigating factors and, therefore, is unable at
this time to predict the ultimate liability that may be associated with these
matters.
In April 1998, the Company entered into a Consent Order with the U.S.
EPA that requires the Company to take samples at six of the seven areas the U.S.
EPA has identified as "solid waste management units" ("SWMUs") at the Kosmosdale
cement plant. The Consent Order itself does not (i) require remediation, (ii)
provide a mechanism for remediation, or (iii) require any payment by the
-29-
<PAGE> 32
Company to the U.S. EPA. If the Company finds no hazardous constituents of
concern at the SWMUs or if there does not appear to be a threat to human health
or the environment from such constituents, then the U.S. EPA will provide a "no
further action determination." If hazardous constituents are present at levels
of concern at any of the SWMUs, the Consent Order provides a way for the U.S.
EPA to require in-depth investigation and an analysis of whether remediation is
necessary at any contaminated SWMUs.
Aggregates Acquisitions - During 1997, the Company assumed $6.6 million
in estimated environmental liabilities related to three aggregates acquisitions.
Environmental matters related to the acquired properties include (i)
environmental cleanup, (ii) containment and compliance matters including waste
lime, coal ash and kiln brick issues, (iii) wetland considerations, and (iv)
underground and above ground storage tank removal. Although the Company believes
the $6.6 million reserve on its books is adequate to remedy these environmental
problems, it is impossible to know with certainty until all work is complete.
Import Competition - During the 1980s there was a surge of unfairly
priced cement and clinker imports into the U.S. In response, U.S. industry
participants, including the Company, filed antidumping petitions in 1989 against
imports from Mexico and, in following years, against imports from Japan and
Venezuela. After investigations into the matter, the International Trade
Commission and the Department of Commerce ("DOC") decided in favor of the
petitioners and issued an antidumping order against Mexican cement and clinker
in 1990 and against Japanese cement and clinker in 1991. In addition, in
February 1992, the DOC suspended investigations into the allegedly dumped and
subsidized imports of cement and clinker from Venezuela, based upon (i) the
Venezuelan cement producers' agreement to change their prices to stop 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 legislation passed by the U.S. Congress in 1994,
"sunset" reviews of the antidumping orders and suspension agreements will be
conducted beginning in August 1999 to determine whether they should be revoked
or remain in effect. In addition, decisions by the DOC, by NAFTA binational
panels or by the U.S. Courts on appeal on DOC decisions in future administrative
-30-
<PAGE> 33
reviews could meaningfully reduce the existing antidumping duties. Moreover,
new, independently owned cement import operations could begin to purchase large
quantities of low-priced cement from countries not subject to antidumping orders
such as those in Asia which could compete with domestic producers. If any of
these events were to happen, there could be a material negative impact on the
Company's results of operations.
U.S. imports of foreign cement began to increase in the mid-1990's as
the use of cement in the U.S. began to recover. The Portland Cement Association
has estimated that imports represented approximately 18% of cement used in the
U.S. during 1997 as compared with approximately 16% in both 1996 and 1995.
During this three-year period of strong demand, however, and as a result of the
outstanding antidumping orders and suspension agreements, the prices of cement
imports have risen. Unlike the imports during the 1980's, most of the current
imports have provided an additional source of supply rather than merely
disrupting the market with unfair prices. Cement import prices have moderated
somewhat in 1998, particularly from Southeast Asia.
Year 2000 Compliance - The Company, like most companies relying on
automated data processing and other microprocessor controlled equipment, is
faced with the task of assuring that these systems are capable of distinguishing
21st century dates from 20th century dates and will continue to function
properly after the Year 2000. The Company is actively engaged in, but has not
yet completed, reviewing, correcting and testing all of its Year 2000 compliance
issues. To determine the Company's current exposure, corporate personnel, along
with an outside consulting firm specializing in Year 2000 problems, conducted a
formal assessment to quantify the task of becoming compliant.
Based on the results of that assessment, the Company is currently at
various stages in the processes of modifying or replacing some of its internally
developed and purchased software and its manufacturing process control systems
and assessing the need to modify or replace embedded microprocessor controlled
equipment. The Company is also taking steps designed to verify the Year 2000
readiness of key third party suppliers, service providers and customers by
contacting them and attempting to assess and validate the compliance efforts of
these third party sources. As of September 30, 1998, the Company believes it has
made significant progress toward resolving its Year 2000 compliance issues. The
Company believes that the majority of its financial applications are now Year
-31-
<PAGE> 34
2000 compliant, or soon will be, and the Company has shifted its main focus to
embedded processors in cement, concrete products and aggregates facilities and
equipment and assessing potential Year 2000 compliance problems with the
Company's material external suppliers of goods, services and data. The Company
is conducting internal investigations of its manufacturing plant control
systems, its mobile equipment and its other field equipment and devices with
embedded microprocessor controls. In some, but not all instances, time sensitive
programs or microprocessors have already been upgraded or replaced. The Company
expects to have all modifications completed by mid-1999.
Costs incurred relating to making the Company Year 2000 compliant are
being expensed in the period in which they are incurred. The Company currently
estimates that the total additional cost to comply with Year 2000 requirements
will be approximately $2.0 million to $3.0 million, including the cost of
outside consultants, accelerated software replacement beyond the normal upgrade
cycle and the replacement or modification of equipment with embedded
microprocessor controls. It is not certain, however, that these estimates are
correct or that Year 2000 compliance can be achieved. The Company expects that
it will not experience a disruption of its operations, but actual results could
differ greatly from the Company's plans. Some of the specific problem areas that
might cause material differences to occur are (i) the availability and cost of
personnel trained in this area, (ii) the ability to identify and correct all
relevant computer codes, (iii) the ability to identify and correct non-complying
microprocessors embedded in other digitally controlled equipment, and (iv) the
significant degree of interdependence with third party suppliers, service
providers and customers. Conditions outside of the Company's control such as
problems in the transportation, postal, banking or telecommunication systems,
may have a material disruptive effect on the Company's ability to process
orders, effect delivery of materials or finished goods, invoice customers or
disburse or receive funds.
With respect to the Company's own internal operations, the most
reasonably likely worst case scenario would be a shut down of a production
system because of some unforeseen problem with an automated monitoring or
control device. The Company intends to formulate a Year 2000 contingency plan by
mid-1999 to address risks and possible countermeasures that are expected to
include plans for manual intervention of control systems and equipment and may
also entail replacement of certain equipment on an emergency basis. It may not
be possible, however, to adequately plan for all contingencies. The Company is
presently unable to determine the impact on its business if it and the
-32-
<PAGE> 35
other companies on which it relies do not achieve Year 2000 compliance, or that
the impact will not have a material adverse affect on the Company's financial
condition or results of operations.
Kosmos Joint Venture Severance Tax Audit - Kosmos Cement Company
("Kosmos"), is a partnership operated and 75% owned by the Company. In late
1997, the State of Kentucky proposed a deficiency assessment against Kosmos for
severance tax payments related to limestone mined at its Battletown, Kentucky
quarry. The total assessment is approximately $3.7 million, including penalty
and interest. Kosmos is contesting the assessment. Kosmos met with the Kentucky
Revenue Cabinet in January 1998 to discuss the disputed assessments. Discussions
are ongoing and the Company is unable to evaluate whether an unfavorable outcome
is either probable or remote.
In addition to limestone mined for the production of cement, Kosmos
mines limestone specifically for use by a local electric utility company. The
Company believes that, under the terms of a supply agreement, the utility
company is responsible for severance taxes on limestone provided to it. A major
portion of the Kentucky severance tax assessment relates to this specifically
mined limestone. For the amounts not paid by the local electric utility, the
Company would indirectly bear 75% of any settlement and legal costs through its
ownership interest in Kosmos.
Claims for Indemnification - The Mineral Management Service ("MMS") of
the Department of the Interior claimed that the Company's former oil and gas
subsidiary, Pelto Oil Company ("Pelto"), owed royalties on two separate gas
contract settlement payments that Pelto received. When the Company sold Pelto in
1989, the Company agreed to protect the purchaser from any future claims related
to these two payments. In a March 10, 1998 letter, the MMS advised that it was
withdrawing its royalty claim in the amount of $1.35 million on one of the
settlement payments, because of a court ruling in July 1997 which prohibited
further claims against the current owner of Pelto and that owner's affiliates.
The MMS, however, reserved its right to possibly reassert the claim at a later
date.
The Company also disagrees with MMS' claim that an unspecified amount
of royalties are owed on the second gas contract settlement payment of $5.9
million. If one or both of MMS claims against Pelto are ultimately successful,
the Company could have liability for royalties, plus late
-33-
<PAGE> 36
payment charges, in amounts which are not currently determinable. Such
expenditures would result in a charge to discontinued operations.
Discontinued Environmental Services Segment - The Company has both
given and received environmental and other indemnifications related to
properties the Company previously owned. A few courts have held that such
promises to protect other parties from loss for environmental liabilities are
unenforceable. At present, the Company is not able to estimate the extent of
contamination, remediation cost or recoverability of cost from prior owners, if
any, regarding these discontinued operations.
In late 1994 and the first quarter of 1995, the Company became aware of
some soil and groundwater contamination at its former Alabama hazardous waste
processing facility. Although the Company sold the facility in April 1995, the
Company agreed to keep some liability for soil and groundwater contamination at
the facility prior to that time. The Company's investigation has not yet
determined the extent of the contamination or what sort of cleanup, if any, will
be required. It is too early to determine the amount of the Company's exposure
to loss with any degree of certainty.
The Company has agreed to remediate the soil and groundwater
contamination at the Alabama facility to the extent required by law, but filed a
lawsuit against the former owner of the facility. Claims against the prior owner
and other potentially responsible parties could significantly reduce or
eliminate the Company's own loss exposure. Nevertheless, to cover the estimated
cost of investigating the amount of contamination present, conducting a ten year
monitored remediation program and pursuing the claim against the prior owner and
other potentially responsible parties, the Company recorded an additional $2.4
million expense ($1.6 million, after-tax) in the third quarter of 1998. The
charge is reflected as a "loss from discontinued operations" on the Company's
Statement of Consolidated Earnings.
Other - In addition to those matters separately disclosed above, the
Company has incurred in the regular course of business certain other commitments
and contingent liabilities including, among other things, (i) personal injury
lawsuits, (ii) indemnity and other hold harmless agreements, (iii) environmental
remediation liabilities, (iv) product liability claims, and (v) claims by
disgruntled
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<PAGE> 37
employees. These various commitments and contingent liabilities, in the judgment
of management, do not total more than 10% of current assets and will not result
in losses that would materially affect the Company's consolidated balance sheet.
However, because the Company's results of operations vary considerably with
construction activity and other factors, it is at least reasonably possible that
charges for contingencies in the future could, depending on when they occur and
how large they are relative to results of operations or cash flows for a
particular period, have a material negative impact on the Company's results of
operations or cash flows for that period.
Disclosure Regarding Forward Looking Statements - This document
includes 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. The Company based these statements on current
expectations, estimates and projections about the general economy and the
Company's lines of business. These statements are generally identifiable by
phrases containing words such as "expects," "believes," "anticipates,"
"estimates" or similar expressions. Statements related to future performance
involve certain assumptions, risks and uncertainties, many of which are beyond
the control of the Company, and cannot be guaranteed.
Although the Company believes that the expectations reflected in such
forward looking statements are based upon reasonable assumptions, it can not say
with certainty that what it expects will actually happen. Important factors that
could cause actual results to differ materially from the Company's expectations
include, among others, (i) significant excess cement production capacity in
other parts of the world, specifically Asia, (ii) foreign and domestic price
competition, (iii) the loss or material negative change of existing antidumping
orders, (iv) cost effectiveness, (v) changes in environmental regulation, and
(vi) general economic and market conditions such as interest rates, the
availability of capital and the cyclical nature of the construction industry.
The Company cautions the reader to consider these disclosures when reading the
forward-looking statements included in this report ("Cautionary Disclosures").
Subsequent written and oral forward looking statements made by the Company or by
persons acting on behalf of the Company are completely qualified by these
Cautionary Disclosures.
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<PAGE> 38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company has been from
time-to-time named a defendant in lawsuits related to various matters including
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 that any
liability related to these types of lawsuits that exist as of the date of this
report, individually or in the aggregate, will not materially exceed the amounts
accrued on the Company's books as of September 30, 1998 and will have no
material negative effect on the consolidated financial position of the Company.
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.
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
27.1 Financial Data Schedule - Nine months ended September 30,
1998
27.2 Financial Data Schedule - Restated Financial Data Schedule
for the quarterly periods ended September 30, 1997 and
1996, respectively
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<PAGE> 39
(b) Reports on Form 8-K
On July 15, 1998, the Company filed a Current Report on Form 8-K
reporting the conclusion of the previously reported merger transaction with
Medusa Corporation and the results of matters submitted to a vote of the
shareholders of the Company at its Annual Meeting on June 19, 1998.
On August 20, 1998, the Company filed a Current Report on Form 8-K
reporting the publication of post-acquisition combined financial results for the
one-month period ended July 31, 1998.
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<PAGE> 40
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: November 12, 1998 By: DENNIS M. THIES
------------------------------------
Dennis M. Thies
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1998 By: ALLAN KORSAKOV
------------------------------------
Allan Korsakov
Vice President and Corporate Controller
(Principal Accounting Officer)
-38-
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11 Statement of Computation of Per Share Earnings
15 Independent Accountants' Letter re Unaudited Interim Financial Information
27.1 Financial Data Schedule - Nine months ended September 30, 1998
27.2 Financial Data Schedule - Restated Financial Data Schedule for the quarterly periods ended September 30, 1997
and 1996, respectively
</TABLE>
<PAGE> 1
Exhibit 11
----------
SOUTHDOWN, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In millions, except per share amounts - Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Earnings for basic earnings per share:
Earnings from continuing operations before
preferred stock dividends $ 73.1 $ 58.0 $ 65.7 $ 114.5
Preferred stock dividends -- -- -- (2.5)
----------- ----------- ----------- -----------
Earnings from continuing operations 73.1 58.0 65.7 112.0
Loss from discontinued operations, net of taxes (1.6) -- (1.6) --
----------- ----------- ----------- -----------
Net earnings for basic earnings per share $ 71.5 $ 58.0 $ 64.1 $ 112.0
=========== =========== =========== ===========
Earnings for diluted earnings per share
Earnings from continuing operations $ 73.1 $ 58.0 $ 65.7 $ 114.5
Loss from discontinued operations, net of taxes (1.6) -- (1.6) --
----------- ----------- ----------- -----------
Net earnings for diluted earnings per share $ 71.5 $ 58.0 $ 64.1 $ 114.5
=========== =========== =========== ===========
Average outstanding common shares for basic
earnings per share 38.4 37.1 38.1 36.4
Other potentially dilutive securities:
- common stock equivalents from assumed
exercise of stock options 0.5 0.7 0.7 0.6
- assumed conversion of the Series D convertible
preferred stock at 1.51 shares of common stock -- 1.3 -- 2.2
----------- ----------- ----------- -----------
Total for diluted earnings per share $ 38.9 $ 39.1 $ 38.8 $ 39.2
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic
Earnings from continuing operations $ 1.90 $ 1.56 $ 1.72 $ 3.08
Loss from discontinued operations, net of taxes (0.04) -- (0.04) --
----------- ----------- ----------- -----------
$ 1.86 $ 1.56 $ 1.68 $ 3.08
=========== =========== =========== ===========
Diluted
Earnings from continuing operations $ 1.88 $ 1.48 $ 1.69 $ 2.92
Loss from discontinued operations, net of taxes (0.04) -- (0.04) --
----------- ----------- ----------- -----------
$ 1.84 $ 1.48 $ 1.65 $ 2.92
=========== =========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 15
[DELOITTE & TOUCHE LETTERHEAD]
November 9, 1998
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, 1998 and 1997, as indicated in our report dated October 21, 1998.
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, 1998 is
incorporated by reference in Registration Statement No. 33-23328, Registration
Statement No. 33-35011, Registration Statement No. 33-45144, Registration
Statement No. 333-26529, Registration Statement No. 333-26523 and Registration
Statement No. 333-59349, 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 Sections 7 and 11 of that Act.
/s/ DELOITTE & TOUCHE LLP
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, 1998, and the related
statement of consolidated earnings.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 157
<ALLOWANCES> 5
<INVENTORY> 98
<CURRENT-ASSETS> 372
<PP&E> 1,478
<DEPRECIATION> 669
<TOTAL-ASSETS> 1,350
<CURRENT-LIABILITIES> 161
<BONDS> 167
0
0
<COMMON> 49
<OTHER-SE> 687
<TOTAL-LIABILITY-AND-EQUITY> 1,350
<SALES> 884
<TOTAL-REVENUES> 884
<CGS> 596
<TOTAL-COSTS> 743
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 128
<INCOME-TAX> 59
<INCOME-CONTINUING> 66
<DISCONTINUED> 2
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.65
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information extracted from the
Company's consolidated balance sheets as of September 30, 1997 and 1996,
respectively, and the related statement of consolidated earnings related to
reflect second quarter 1998 merger transaction between Southdown, Inc. and
Medusa Corporation.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 71 66
<SECURITIES> 3 0
<RECEIVABLES> 153 144
<ALLOWANCES> 5 11
<INVENTORY> 93 91
<CURRENT-ASSETS> 330 307
<PP&E> 1,403 1,287
<DEPRECIATION> 635 595
<TOTAL-ASSETS> 1,259 1,155
<CURRENT-LIABILITIES> 158 126
<BONDS> 174 231
0 0
0 152
<COMMON> 51 40
<OTHER-SE> 599 333
<TOTAL-LIABILITY-AND-EQUITY> 1,259 1,155
<SALES> 815 735
<TOTAL-REVENUES> 815 735
<CGS> 566 525
<TOTAL-COSTS> 627 580
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11 19
<INCOME-PRETAX> 178 137
<INCOME-TAX> 60 45
<INCOME-CONTINUING> 115 89
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (11)
<CHANGES> 0 0
<NET-INCOME> 115 77
<EPS-PRIMARY> 3.08 2.20
<EPS-DILUTED> 2.92 1.95
</TABLE>
