<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, 1999
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)
<TABLE>
<S> <C>
LOUISIANA 72-0296500
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1200 SMITH STREET
SUITE 2400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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, 1999 there were 35.9 million common shares outstanding.
================================================================================
<PAGE> 2
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
September 30, 1999 and December 31, 1998 1
Statement of Consolidated Earnings
Three and nine months ended September 30, 1999 and 1998 2
Statement of Consolidated Cash Flows
Nine months ended September 30, 1999 and 1998 3
Statement of Selected Consolidated Segment Data
Three and nine months ended September 30, 1999 and 1998 4
Statement of Consolidated Shareholders' Equity
Nine months ended September 30, 1999 5
Statement of Consolidated Comprehensive Income
Three and nine months ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Qualitative and Quantitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
<PAGE> 3
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 35.3 $ 143.8
Short-term investments -- 14.8
Accounts and notes receivable, less allowance for doubtful
accounts of $5.0 and $4.9 163.3 120.0
Inventories (Note 5) 129.1 107.7
Prepaid expenses and other 17.4 18.4
---------- ----------
Total current assets 345.1 404.7
Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $668.7 and $679.0 890.3 819.9
Goodwill 127.9 105.5
Other long-term assets 71.6 70.3
---------- ----------
$ 1,434.9 $ 1,400.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 0.4 $ 0.6
Accounts payable and accrued liabilities 152.6 139.3
---------- ----------
Total current liabilities 153.0 139.9
Long-term debt 166.9 167.3
Deferred income taxes 139.5 139.4
Minority interest in consolidated joint venture 33.6 27.7
Long-term portion of postretirement benefit obligation 88.7 91.5
Other long-term liabilities and deferred credits 30.6 30.4
---------- ----------
612.3 596.2
---------- ----------
Shareholders' equity:
Common stock, $1.25 par value (Note 6) 50.0 49.8
Capital in excess of par value 374.2 370.6
Reinvested earnings 571.8 431.6
Currency translation adjustment (1.3) (1.5)
Treasury stock, at cost (172.1) (46.3)
---------- ----------
822.6 804.2
---------- ----------
$ 1,434.9 $ 1,400.4
========== ==========
</TABLE>
-1-
<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,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 362.5 $ 341.4 $ 940.8 $ 884.0
-------- -------- -------- --------
Costs and expenses:
Operating 214.6 198.2 577.8 546.7
Depreciation, depletion and amortization 19.1 16.6 54.4 53.1
Selling and marketing 7.5 5.9 21.8 20.2
General and administrative 14.4 14.8 47.6 50.8
Acquisition (credit) charge (Note 2) -- (4.0) (1.5) 78.9
Other income, net (2.0) (0.1) (11.4) (3.3)
-------- -------- -------- --------
253.6 231.4 688.7 746.4
-------- -------- -------- --------
Earnings before interest, income taxes
and minority interest 108.9 110.0 252.1 137.6
Interest income 1.1 1.0 4.0 3.3
(3.6) (4.1) (10.4) (13.3)
Interest expense, net of amounts capitalized
-------- -------- -------- --------
Earnings before income taxes and minority interest 106.4 106.9 245.7 127.6
Income tax expense (37.2) (32.0) (83.6) (58.5)
-------- -------- -------- --------
Earnings before minority interest 69.2 74.9 162.1 69.1
Minority interest, net of income taxes (1.8) (1.8) (3.7) (3.4)
-------- -------- -------- --------
Earnings from continuing operations 67.4 73.1 158.4 65.7
Loss from discontinued operations,
net of income taxes (Note 3) -- (1.6) (1.0) (1.6)
-------- -------- -------- --------
Net earnings $ 67.4 $ 71.5 $ 157.4 $ 64.1
======== ======== ======== ========
Earnings (loss) per common share:
Basic
Earnings from continuing operations $ 1.80 $ 1.90 $ 4.16 $ 1.72
Loss from discontinued operations, net of income taxes -- (0.04) (0.03) (0.04)
-------- -------- -------- --------
$ 1.80 $ 1.86 $ 4.13 $ 1.68
======== ======== ======== ========
Diluted
Earnings from continuing operations $ 1.78 $ 1.88 $ 4.12 $ 1.69
Loss from discontinued operations, net of income taxes -- (0.04) (0.03) (0.04)
-------- -------- -------- --------
$ 1.78 $ 1.84 $ 4.09 $ 1.65
======== ======== ======== ========
Average shares outstanding:
Basic 37.4 38.4 38.1 38.1
======== ======== ======== ========
Diluted 37.8 38.9 38.5 38.8
======== ======== ======== ========
</TABLE>
-2-
<PAGE> 5
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Earnings from continuing operations $ 158.4 $ 65.7
Adjustments to reconcile earnings from continuing
operations to cash provided by (used in) operating activities:
Depreciation, depletion and amortization 54.4 53.1
Other non-cash charges 0.7 13.5
Changes in operating assets and liabilities (52.7) (9.1)
Other adjustments (2.9) 3.8
Net cash provided by (used in) discontinued operations (1.2) 0.1
-------- --------
Net cash provided by operating activities 156.7 127.1
-------- --------
Investing activities:
Additions to property, plant and equipment (94.2) (75.3)
Acquisitions, net of cash acquired (60.0) (6.9)
Purchase of short-term investments (14.8) (3.9)
Maturity of short-term investments 29.6 7.9
Proceeds from asset sales 14.7 5.7
Other investing activities (2.7) 1.0
-------- --------
Net cash used in investing activities (127.4) (71.5)
-------- --------
Financing activities:
Additions to long-term debt -- 30.9
Reductions in long-term debt (0.7) (63.5)
Purchase of treasury stock (124.0) --
Dividends (17.2) (13.6)
Contributions from minority partner 5.3 --
Distributions to minority partner (5.0) (4.0)
Other financing activities 3.8 1.5
-------- --------
Net cash used in financing activities (137.8) (48.7)
-------- --------
Net increase (decrease) in cash and cash equivalents (108.5) 6.9
Cash and cash equivalents at beginning of period 143.8 98.9
-------- --------
Cash and cash equivalents at end of period $ 35.3 $ 105.8
======== ========
</TABLE>
Cash payments for income taxes totaled $67.7 million and $29.1 million
in the nine months ended September 30, 1999 and 1998, respectively. Interest
paid, net of amounts capitalized, was $12.9 million and $17.7 million in the
nine month year-to-date 1999 and 1998 periods, respectively.
-3-
<PAGE> 6
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF SELECTED CONSOLIDATED SEGMENT DATA
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
-----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contributions to revenues:
Cement
Sales to customers $ 254.5 $ 243.2 $ 642.8 $ 610.1
Freight to customers and other 15.0 12.2 35.7 32.2
-------- -------- -------- --------
Total cement revenues 269.5 255.4 678.5 642.3
Concrete products 66.2 61.0 191.2 178.1
Aggregates 45.2 42.5 122.5 112.5
Intersegment sales (18.4) (17.5) (51.4) (48.9)
-------- -------- -------- --------
$ 362.5 $ 341.4 $ 940.8 $ 884.0
======== ======== ======== ========
Contributions to earnings from continuing operations
before interest, income taxes and minority interest:
Operating profit
Cement $ 105.4 $ 104.4 $ 241.2 $ 223.6
Concrete products 5.3 4.8 16.1 12.2
Aggregates 9.0 9.1 29.1 18.7
-------- -------- -------- --------
119.7 118.3 286.4 254.5
Corporate overhead (10.8) (12.3) (35.8) (38.0)
Acquisition credit (charge) (Note 2) -- 4.0 1.5 (78.9)
-------- -------- -------- --------
$ 108.9 $ 110.0 $ 252.1 $ 137.6
======== ======== ======== ========
</TABLE>
-4-
<PAGE> 7
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
---------------------------------------------------------------------------
COMMON STOCK CAPITAL CURRENCY
-------------------- IN EXCESS REINVESTED TRANSLATION TREASURY
SHARES AMOUNT OF PAR VALUE EARNINGS ADJUSTMENT STOCK
-------- -------- ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 39.8 $ 49.8 $ 370.6 $ 431.6 $ (1.5) $ (46.3)
Net earnings -- -- -- 157.4 -- --
Dividends paid on common stock -- -- -- (17.2) -- --
Exercise of stock options 0.2 0.2 3.4 -- -- --
Purchase of treasury stock -- -- -- -- -- (126.9)
Issuance of treasury stock -- -- 0.2 -- -- 1.1
Foreign currency translation
adjustment -- -- -- -- 0.2 --
-------- -------- -------- -------- -------- --------
Balance at September 30, 1999 40.0 $ 50.0 $ 374.2 $ 571.8 $ (1.3) $ (172.1)
======== ======== ======== ======== ======== ========
</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,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 67.4 $ 71.5 $ 157.4 $ 64.1
Foreign currency translation
adjustments, net of tax -- (0.3) 0.2 (0.4)
-------- -------- -------- --------
Comprehensive income $ 67.4 $ 71.2 $ 157.6 $ 63.7
======== ======== ======== ========
</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 financial statements of
Southdown, Inc. and subsidiary companies ("Southdown" or the "Company"):
- The Consolidated Balance Sheet at September 30, 1999, and
December 31, 1998.
- The Statements of Consolidated Earnings, Selected Consolidated
Segment Data, and Consolidated Comprehensive Income for the
three and nine month periods ended September 30, 1999 and
1998.
- The Statement of Consolidated Cash Flows for the nine months
ended September 30, 1999 and 1998.
- The Statement of Consolidated Shareholders' Equity for the
nine months ended September 30, 1999.
The financial statements presented in this report were not audited.
This report presents extracts from the Consolidated Balance Sheet at December
31, 1998 drawn from the December 31, 1998 audited financial statements of
Southdown. This report does not include all disclosures required by generally
accepted accounting principles. The reader should also review the 1998
consolidated financial statements and the notes to those statements included in
Southdown's Annual Report to Shareholders.
Management believes that the financial statements reflect all
adjustments necessary for a fair presentation of the financial position, results
of operations and cash flows of Southdown 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, 1999 do not necessarily
indicate what Southdown's results will be for the full year. Southdown
reclassified certain data from the prior year to make it easier to compare both
years.
NOTE 2 - ACQUISITIONS:
In August 1999, the Company acquired all of the common stock of SMI
Holdings, Inc. ("SMI") for $56.5 million plus working capital. The acquisition
was funded from the cash balances of the Company. SMI operated eight ready-mix
concrete plants, an aggregates quarry and four concrete block and resale
operations located in the proximity of the Company's Brooksville, Florida cement
plant. Pro forma financial information has not been provided because of
immateriality.
On June 30, 1998, Southdown concluded a merger transaction with Medusa
Corporation. Medusa became a 100% owned subsidiary of Southdown at that time.
The Medusa merger converted each outstanding Medusa common share into the right
to receive .88 shares of Southdown common stock. Southdown issued approximately
14.7 million shares of its common stock for all of the outstanding
-6-
<PAGE> 9
common stock of Medusa. This tax-free 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.
The results of operations for the separate companies and the combined
amounts included in the 1998 consolidated financial statements 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 (loss)
Southdown $ 39.2
Medusa (46.6)
--------
Combined $ (7.4)
========
</TABLE>
Southdown recorded 1998 charges to operating expenses totaling $78.9
million ($66.9 million after taxes, or $1.72 per diluted common share) for
direct and other merger related transaction costs. Remaining merger transaction
liabilities at September 30, 1999 were $1 million. These liabilities relate to
ongoing lease payment obligations associated with the closure of the Medusa
corporate office, which was closed at the end of the first quarter of 1999.
Details of the merger related costs are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------------------------------------------------
ORIGINAL
MERGER AMOUNTS BALANCE
COSTS PAID ADJUSTMENTS AT 9/30/99
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Merger transaction costs and
professional fees $ 18.4 $ 18.9 $ 0.5 $ --
Severance costs 54.3 47.2 (7.1) --
Closure costs 10.2 6.6 (2.6) 1.0
-------- -------- -------- --------
Total $ 82.9 $ 72.7 $ (9.2) $ 1.0
======== ======== ======== ========
</TABLE>
NOTE 3 - LOSS FROM DISCONTINUED OPERATIONS:
In late 1994 and the first quarter of 1995, Southdown became aware of
some soil and groundwater contamination at or near a subsidiary's former Alabama
hazardous waste processing facility. Although Southdown sold the Alabama
facility to Nortru, Inc. in April 1995, Southdown 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.
Southdown hired a qualified consultant to conduct the investigation of the
contamination at the facility and, as a result of the consultant's preliminary
report, Southdown 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.
Additional information gathered during preliminary work at the site
caused Southdown to increase the estimate of the total cost to remediate the
contamination. Accordingly, Southdown recorded a $1.5 million charge ($1 million
after-tax) in the second quarter of 1999. Because Southdown discontinued its
-7-
<PAGE> 10
hazardous waste disposal business in 1994, the charge is reflected as a "loss
from discontinued operations, net of income taxes." Southdown's consultant has
only preliminarily determined the scope of the contamination and is still
assessing the extent of any cleanup that may be required. Accordingly, it is not
yet possible to determine the amount of Southdown's loss exposure with any
degree of certainty. Southdown has filed lawsuits against the former owner and
former customers of the facility. The claims against that former owner and other
potentially responsible parties could significantly reduce or eliminate
Southdown's loss exposure.
NOTE 4 - EARNINGS PER SHARE:
Basic earnings per share were computed using the average number of
common shares outstanding in each of the three and nine-month periods ending
September 30, 1999 and 1998. Diluted earnings per share for the three and
nine-month periods ending September 30, 1999 assume the dilutive impact of stock
options.
Income available to common shareholders and share amounts used in the
computation of basic and diluted earnings per share follows:
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic calculation
Earnings from continuing operations $ 67.4 $ 73.1 $ 158.4 $ 65.7
======== ======== ======== ========
Average outstanding common shares 37.4 38.4 38.1 38.1
======== ======== ======== ========
Basic earnings per share from
continuing operations $ 1.80 $ 1.90 $ 4.16 $ 1.72
======== ======== ======== ========
Diluted calculation
Earnings from continuing operations $ 67.4 $ 73.1 $ 158.4 $ 65.7
======== ======== ======== ========
Average outstanding common shares 37.4 38.4 38.1 38.1
Effect of dilutive stock options 0.4 0.5 0.4 0.7
-------- -------- -------- --------
Total outstanding shares for diluted
earnings per share 37.8 38.9 38.5 38.8
======== ======== ======== ========
Diluted earnings per share from
continuing operations $ 1.78 $ 1.88 $ 4.12 $ 1.69
======== ======== ======== ========
</TABLE>
-8-
<PAGE> 11
NOTE 5 - INVENTORIES:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods $ 38.3 $ 36.1
Work in progress 27.8 14.7
Raw materials 8.7 7.1
Supplies 54.3 49.8
-------- --------
$ 129.1 $ 107.7
======== ========
</TABLE>
Inventories stated on the Last In, First Out method were $61.5 million
of total inventories at September 30, 1999 and $46.3 million of total
inventories at December 31, 1998 compared with current costs of $78.4 million
and $63.2 million, respectively.
NOTE 6 - CAPITAL STOCK:
Southdown paid a quarterly dividend of $0.10 per share of common stock
from March 1997 to September 1998. In December 1998, the quarterly dividend was
increased to $0.15 per share of common stock.
On March 25, 1999, the Board of Directors approved a common stock
repurchase program under which Southdown was authorized to repurchase up to 2
million shares of its common stock. On September 16, 1999, the Board of
Directors expanded the repurchase program to include an additional 2 million
shares of common stock. During 1999, Southdown has made open market purchases of
2.9 million shares of common stock through October 31, 1999 at a cost of $159
million.
NOTE 7 - AMENDMENTS TO NON-EMPLOYEE DIRECTORS' COMPENSATION ARRANGEMENTS:
At the May 1999 Annual Meeting, the shareholders approved certain
amendments to non-employee directors' compensation arrangements. These
amendments replaced all directors' fees previously paid in cash and froze
benefits under previously existing phantom stock, deferred compensation and
directors' retirement plans. In place of these previously existing compensation
arrangements, the amended stock option plan for non-employees became the source
of all compensation for future service as directors of Southdown. Starting with
the May 1999 annual meeting, each director who is not an employee receives, in
addition to the 10,000 options granted when first elected to the Board, 7,500
options at each annual meeting after his first election. Chairmen of each of the
Board committees annually receive an additional 500 options. The Chairman of the
Board of Directors annually receives an additional 18,500 options.
NOTE 8 - NEW ACCOUNTING STANDARDS:
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities." A derivative is a financial
instrument that takes or "derives" its value from the value of some other
financial instrument or instruments. 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, as amended by SFAS No. 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 and management is currently evaluating what, if
-9-
<PAGE> 12
any, impact this new accounting standard may have on Southdown's consolidated
financial statements. Southdown held no derivative financial instruments during
1998 or the nine months ended September 30, 1999.
NOTE 9 - CONTINGENCIES:
Southdown has incurred in the regular course of business certain
commitments and contingent liabilities including, among other things, (1)
personal injury lawsuits, (2) indemnity and other hold-harmless agreements, (3)
environmental remediation liabilities, (4) product liability claims, (5)
commercial disputes and litigation, and (6) claims by disgruntled employees.
Other than those disclosed elsewhere in this document, in the judgment of
management, these various commitments and contingent liabilities do not total
more than 10% of current assets and will not result in losses that would
materially affect Southdown's consolidated balance sheet. However, Southdown's
results of operations can vary considerably with construction activity and other
factors. It is, therefore, 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 Southdown's results of operations or
cash flows for that 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 a discussion of certain contingencies.
NOTE 10 - REVIEW BY INDEPENDENT ACCOUNTANTS:
The unaudited financial information presented in this report has been
reviewed by Southdown's independent public accountants. The review was limited
in scope and did not constitute an audit of the financial information in
accordance with generally accepted auditing standards such as is performed in
the year-end audit of financial statements. The report of Deloitte & Touche LLP
relating to its limited review of the financial information as of September 30,
1999 and for the nine months then ended follows.
-10-
<PAGE> 13
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, 1999, and the
related consolidated statements of earnings, and comprehensive income for the
three and nine months ended September 30, 1999 and 1998 and the consolidated
statements of cash flows and shareholders' equity for the nine months ended
September 30, 1999. These financial statements are the responsibility of
Southdown'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, 1998 and the related consolidated
statements of earnings, shareholders' equity, cash flows and comprehensive
income for the year then ended (not presented herein); and in our report dated
January 27, 1999, 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, 1998 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 19, 1999
-11-
<PAGE> 14
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 65 through 74 of Southdown's Annual Report to
Shareholders for the year ended December 31, 1998 should be read in conjunction
with the discussion contained herein.
RESULTS OF OPERATIONS
CONSOLIDATED THIRD QUARTER RESULTS
Net earnings for the third quarter of 1999 were $67.4 million, or $1.78
per diluted share, compared with net earnings of $71.5 million, or $1.84 per
diluted share, in the third quarter of 1998. The prior year quarter included a
$7 million after-tax credit, $0.18 per diluted share, reflecting a reduction in
the Medusa acquisition charge and the beneficial tax effect of an increase in
deductible acquisition costs. Excluding the prior year Medusa acquisition charge
adjustment, earnings from continuing operations of $1.78 per share for the 1999
quarter are slightly higher than the prior year results of $1.70. Net earnings
for the prior year quarter were also impacted by a $1.6 million after-tax charge
related to environmental remediation at the Company's former Birmingham, Alabama
hazardous waste facility.
Consolidated revenues in the third quarter of 1999 increased 6% over
the same period of the prior year, driven by improvement in all three operating
segments. Third quarter 1999 earnings before interest, income taxes and minority
interest improved 3% (excluding the Medusa transaction credits) over the same
quarter of the prior year, primarily reflecting improved earnings achieved by
the Cement segment and lower corporate overhead expenses in 1999. Aggregate
operating profits before corporate overhead for the quarter ended September 30,
1999 increased 1% compared with the same quarter of 1998.
Interest expense decreased 12%, primarily because of higher capitalized
interest related to significant levels of ongoing construction activity. The
effective tax rate for the third quarter of 1999 was higher than the rate used
in the second quarter because of revised estimates of the impact of permanent
differences related to federal statutory depletion on annualized actual results
for the nine months of 1999. The effective tax rate for the prior year quarter
of 30% is lower than the federal statutory rate of 35% because of an increase in
deductible Medusa acquisition costs.
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated net earnings for the nine months ended September 30, 1999
were $157.4 million, $4.09 per diluted share, compared with net earnings in the
prior year period of $64.1 million. The prior year period included a $66.9
million, or $1.72 per diluted share, after-tax charge related to the Medusa
merger. Consolidated revenues year-to-date 1999 were 6% higher than those of the
prior year period. Excluding Medusa acquisition charges and credits, earnings
before interest, income taxes and minority interest improved 16% over the first
nine months of 1998 and aggregate operating profits before corporate overhead
increased 13% over the same period of the prior year. All three operating
segments showed solid improvements year-over-year.
The increase in interest income reflects higher levels of investable
cash during the first nine months of 1999 compared with the prior year period.
Interest expense in 1999 decreased compared with the prior year period primarily
because of higher capitalized interest on construction projects and the
elimination
-12-
<PAGE> 15
of the Medusa revolving credit facility in June 1998. The 1999 year-to-date
effective tax rate of 34% is lower than the prior year rate of 46%. The prior
year tax rate was higher than the federal statutory rate because a significant
portion of the Medusa merger related costs was non-deductible.
SEGMENT OPERATING EARNINGS
CEMENT
Third Quarter - The Cement segment operating earnings increased to
$105.4 million compared with $104.4 million in the prior year quarter,
reflecting a 5% improvement in cement sales volumes. Higher cement sales volumes
continued to drive the gain in earnings because of healthy cement demand
conditions in most of the Company's marketing regions. Average cement sales
prices declined slightly, primarily as a result of a slight reduction in
California pricing related to a shift in customer mix. Despite an 8%
quarter-over-quarter improvement in clinker production, unit costs of sales
increased during the third quarter of 1999 because of earlier than planned
maintenance outages at several plants.
Year-to-Date - For the nine months ended September 30, 1999, the Cement
segment operating earnings increased $17.6 million, or 8%, compared with the
prior year period. The Cement segment achieved a year-over-year 5% increase in
cement sales volumes and a $0.58 per ton increase in average sales price for the
nine months ended September 30. Higher sales volumes and prices reflected strong
demand in most market areas. Unit cost of sales declined for the year-to-date
period because of a 7% increase in clinker production.
Sales volumes, average unit price and cost data and unit operating
profit margins relating to Southdown's cement plant operations appear in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tons of cement sold (thousands) 3,521 3,349 8,863 8,481
========== ========== ========== ==========
Weighted average per ton data:
Sales price (net of freight to customers) $ 72.26 $ 72.63 $ 72.52 $ 71.94
Manufacturing and other costs(1) 42.81 41.79 45.69 45.95
---------- ---------- ---------- ----------
Margin $ 29.45 $ 30.84 $ 26.83 $ 25.99
========== ========== ========== ==========
</TABLE>
- --------------
(1) Includes manufacturing costs, freight to terminals, purchased cement,
selling expenses, plant general and administrative costs and other plant
overhead costs.
CONCRETE PRODUCTS
Third Quarter - Concrete Products segment operating earnings increased
to $5.3 million compared with $4.8 million in the third quarter of 1998. The
earnings improvement reflects higher pricing in both the California and Florida
markets, which helped increase ready-mixed concrete operating margins by 10%. In
spite of adverse weather conditions in Florida, ready-mixed concrete sales
volumes increased 6%, primarily
-13-
<PAGE> 16
because of higher Florida market sales and contributions from the new Sunshine
Materials operation, which was acquired on August 31, 1999.
Year-to-Date - Operating earnings for the Concrete Products segment
increased to $16.1 million in the first nine months of 1999 compared with $12.2
million in the prior year period. Ready-mixed concrete sales prices improved 3%
for the nine months ended September 30, 1999. Both the Florida and California
market areas realized improved pricing. Ready-mixed concrete volumes increased
by 4% for the year-to-date period because of a strong Florida market and
contributions from the recently acquired Sunshine Materials operation.
Sales volumes, average unit price and cost data and unit operating
profit margins relating to Southdown's sales of ready-mixed concrete appear in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cubic yards of ready-mixed concrete
sold (thousands) 949 899 2,740 2,632
======== ======== ======== ========
Weighted average per cubic yard data:
Sales price $ 59.00 $ 58.19 $ 59.37 $ 57.63
Operating and other costs(1) 55.49 55.00 55.39 54.89
-------- -------- -------- --------
Margin(2) $ 3.51 $ 3.19 $ 3.98 $ 2.74
======== ======== ======== ========
</TABLE>
- --------------
(1) Includes plant costs, delivery, selling, general and administrative costs.
(2) Does not include real estate gains of approximately $0.8 million and $1.8
million for the three and nine month periods ended September 30, 1999,
respectively, and $0.6 million and $2 million for the three and nine month
periods of 1998, respectively, or concrete block and other related products
which totaled $1.1 million and $1.3 million of operating earnings for the
three month periods ended September 30, 1999 and 1998, respectively, and
$3.4 million and $3.0 million of operating earnings in the year-to-date 1999
and 1998 periods, respectively.
AGGREGATES
Third Quarter - Operating earnings for the Aggregates segment were $9
million compared with $9.1 million in the September 1998 quarter. Construction
aggregates sales volume and average pricing improved from the prior year
quarter, but the specialty minerals business was adversely affected by lower
sales volumes and operating margins.
Year-to-Date -Excluding a $6 million pre-tax gain realized on the sale
of a North Carolina quarry in 1998, the Aggregates segment operating earnings
increased $4.4 million or almost 24% from the same period in 1998. Aggregates
sales volume increased 5% for the year compared with the same period in 1998
because of improved construction aggregates sales volumes. Operating earnings
were also favorably impacted by higher prices in both of Southdown's Eastern and
California construction aggregate marketing regions.
-14-
<PAGE> 17
Sales volumes, average unit sales price and cost data and unit
operating profit margins relating to Southdown's aggregates operations appear in
the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Tons of aggregates sold (thousands) 3,775 3,856 9,612 9,166
======== ======== ======== ========
Weighted average per ton data:
Sales price $ 8.06 $ 7.51 $ 8.86 $ 8.56
Operating and other costs (1) 5.86 5.36 6.56 6.69
-------- -------- -------- --------
Margin $ 2.20 $ 2.15 $ 2.30(2) $ 1.87
======== ======== ======== ========
</TABLE>
- --------------
(1) Includes plant costs, delivery, selling, general and administrative costs.
(2) Excludes $6 million gain on sale of North Carolina quarry in January 1999.
CORPORATE
Third Quarter - The decline in corporate overhead expenses in the third
quarter of 1999 compared with the prior year quarter resulted from (1) the
closing of the Medusa Cleveland corporate office in early 1999, and (2) higher
capitalized salaries related to the significant level of ongoing construction
activity.
Year-to-Date - Year-to-date corporate overhead was lower in the 1999
period for the reasons discussed above offset by a $1 million first quarter
charge related to the termination of the Board of Directors' retirement plan and
by certain expenses related to Medusa corporate headquarters. Management expects
corporate overhead for the full year will be below general and administrative
expenses incurred in 1998 as efficiencies created by the closing of the Medusa
corporate office in March 1999 will continue to impact the remainder of 1999.
LIQUIDITY AND CAPITAL RESOURCES
"Liquidity" relates to the ability of Southdown to pay its short-term
liabilities in the near future. "Capital Resources" relates to the ability of
Southdown to pay bills and raise capital in the long term in order to meet
Southdown's stated long-term goals and objectives. Strong cash flows from
operations during 1999 have enabled Southdown to pursue investments in
cost-efficient capital projects at its cement plants and acquire a strategic
ready-mixed concrete and aggregates company in Florida, while simultaneously
repurchasing 2.2 million shares of common stock through September 30, 1999.
Southdown generated $156.7 million in positive cash flow from operating
activities for the nine months ended September 30, 1999, a significant increase
over the comparable period in 1998. Southdown has used these 1999 operating cash
flows, plus existing cash and short-term investment balances and the proceeds
from asset sales, to (1) fund $94.2 million in capital additions, primarily
related to several expansion/cost reduction projects in the Cement segment, (2)
acquire additional ready-mixed concrete operations and a construction aggregates
quarry in Florida, (3) repurchase 2.2 million shares of common stock at a cost
of $124 million, (4) pay $17.2 million of dividends on common stock, in addition
to (5) meeting all working capital requirements. During the first nine months of
1998, internally generated cash flow and borrowings under the Medusa revolving
credit facility were utilized to (1) invest approximately $82 million in
property,
-15-
<PAGE> 18
plant and equipment and in a small aggregates acquisition, (2) repay $63.5
million in long-term debt, (3) fund working capital requirements, (4) incur
$56.5 million in transaction and other costs related to the Medusa merger, and
(5) pay $13.6 million of dividends on capital stock.
In addition to positive operating cash flows and existing cash and
short-term investments, Southdown's main source of liquidity is its revolving
credit facility. Southdown's revolving credit facility totals $200 million and
matures in June 2002. 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.
At September 30, 1999, there were no borrowings and $59.7 million in letters of
credit outstanding under the revolving credit facility, leaving $140.3 million
of unused capacity. Southdown is in compliance with the financial ratios and
covenants contained in its revolving credit agreement and subordinated debt
indenture. Management believes Southdown's operating cash flows plus the unused
capacity under its revolving credit facility provide ample liquidity to fund
anticipated capital additions and treasury stock purchases as well as meeting
other working capital requirements of Southdown. In addition, management
believes Southdown's debt-to-capitalization ratio of 16.9% as of September 30,
1999 and the recent upgrade of Southdown's investment grade senior debt rating
to Baa1 by Moody's Investor's Service, Inc., BBB+ by Standard and Poor's, a
division of The McGraw-Hill Companies, and A- by Duff & Phelps Credit Rating
Co., provide Southdown with unprecedented capital resources and flexibility to
meet Southdown's longer term growth objectives.
CHANGES IN FINANCIAL CONDITION
The change in the financial condition of Southdown between December 31,
1998 and September 30, 1999 reflected the utilization of internally generated
cash flow during the period to fund capital expenditures, common stock
repurchases, working capital requirements and common stock dividends. Accounts
and notes receivable increased, primarily because of the strong sales activity
occurring in September 1999 relative to lower December 1998 sales. The increase
in inventories was a result of an increase in manufacturing performance relative
to the increased sales volume and a temporary excess inventory condition in the
California market attributable to over-importation by domestic producers
attempting to supplement sold out regional capacity. The increase in goodwill
reflects the acquisition of SMI in August 1999. Accounts payable and accrued
liabilities increased because of the timing of payments on normal trade and
other obligations.
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
Industry Dynamics - A recent economic and construction forecast by the
Portland Cement Association suggests that total cement consumption should grow
from 113.8 million tons in 1998 to over 126.0 million tons in 2003. Despite a
number of announced capacity expansions in the industry, management believes
industry dynamics will remain favorable for at least the next several years.
Because of the logistics involved in the design, permitting and construction of
major cement plant expansions and new cement plants, there is generally a
several year lead time between the announcement of major cement capacity
expansions and the actual availability of such production capacity. In the
meantime, the shortfall between domestic demand and domestic production capacity
is being met by imports (approximately 23% of consumption in 1998 according to
the Portland Cement Association). These imports serve as a buffer; and cutbacks
in imports should bear the brunt of any increase in domestic production capacity
or any decrease in domestic consumption.
-16-
<PAGE> 19
Although inflation concerns should always be a consideration,
management believes a modest preemptive firming of interest rates may flatten
out the historical business cycle and not be detrimental to the industry in the
long run. Management also believes cement industry interest rate sensitivity has
actually moderated somewhat from prior years. The moderation is because the
proportion of cement industry sales related to the more interest rate sensitive
housing and commercial construction markets is less than half of total domestic
cement usage and is decreasing, while the proportion of industry sales related
to the less interest rate sensitive infrastructure sector is increasing. That
shift in domestic cement usage is expected to accelerate as the Transportation
Equity Act for the 21st Century (TEA-21) federal highway funding starts to have
a more significant impact in the second half of 2000. TEA-21 spending is also
expected to have a positive impact on Aggregate and Concrete Products segment
results as well.
Environmental Matters - Southdown 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. Southdown,
therefore, may have to remove or mitigate the environmental effects of the
disposal or release of certain substances at Southdown's various operating
facilities or elsewhere.
Southdown or its predecessors have conducted industrial operations at
Southdown's cement manufacturing facilities for many years. As was common in the
industry, Southdown in the past disposed of various materials used in or
generated by its cement manufacturing, concrete products and aggregates
operations in onsite and offsite facilities. Today, some of these materials may
be classified as hazardous substances. In addition, revisions to air quality
standards may result in increased capital and operational expenses for a broad
range of industrial sectors, including portland cement manufacturing.
Several of Southdown'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, Southdown does not believe it will be required to spend
significantly more on these matters than the amounts already recorded in
Southdown's financial statements. However, until all (1) environmental studies
and investigations, (2) remediation work, (3) negotiations with other parties
that may be responsible, or (4) litigation against other potential sources of
recovery have been completed, it is impossible for Southdown to determine the
ultimate cost that it might incur to resolve these environmental matters.
Cement Kiln Dust - 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.
If CKD comes into contact with water, liquid that leaches out may have an
alkalinity level high enough to be classified as hazardous. CKD may also leach
out trace amounts of certain hazardous metals if they are present. CKD is
currently not regulated as a hazardous waste, but the U.S. Environmental
Protection Agency decided in 1995 that some further regulation of CKD was
necessary. At the same time, the U.S. EPA stated that it (1) found no evidence
of risks associated with the use of cement products and (2) believes most
secondary uses of CKD do not present significant risks to people or the
environment. The U.S. EPA began a
-17-
<PAGE> 20
rulemaking process in order to develop specifically tailored CKD management
standards. On August 20, 1999, EPA published its proposed rule addressing CKD
management. If finalized, these CKD standards may require the cement industry to
adopt more stringent management and record keeping practices for this material.
Southdown has been investigating potential contamination from several
CKD piles at its cement plant in Michigan. A remediation proposal for all
unresolved CKD piles was submitted to the Michigan Department of Environmental
Quality ("MDEQ") on September 1, 1999. Although MDEQ has been asked to approve
the remediation plan by December 1, 1999, Southdown does not know if MDEQ will
approve the remediation proposal. Management believes the reserves previously
accrued on the books of Southdown are adequate to cover the estimated cost of
remediation and penalty payments, if any. At the present time, Southdown does
not know the ultimate cost to resolve these issues or over what period Southdown
will incur these costs.
The California Regional Water Quality Control Board required Southdown
to investigate the status of two CKD disposal sites at Southdown's California
cement plant. The initial phase of the investigation showed no harmful impacts
to groundwater at one site at Southdown's River Plant, but Southdown is
continuing to monitor the groundwater at this location. Southdown has also
investigated the other site which is located at the plant's quarry and has
determined that groundwater there has not been impacted. Southdown has
recommended closure of this CKD disposal site and a final closure plan has been
submitted and is awaiting approval by the California regional board.
Air Quality Issues - Regulations issued under the Clean Air Act
Amendments of 1990 may result in increased capital and operational expenses in
the future for a broad range of industrial sectors, including portland cement
manufacturing. Southdown does not know the precise amount of these costs but,
because of the age, condition and design of its plants, management does not
believe Southdown would be at a disadvantage as a result of these regulations
with respect to its competitors. These developments are significant, however,
and the air quality issues are still evolving. Some of the more significant
regulatory developments pertaining to air quality issues are as follows:
o In July 1997, the U.S. EPA promulgated revisions to two
National Ambient Air Quality Standards under the Clean Air Act
- particulate matter and photochemical oxidants (ozone). There
will be no immediate impact from these rules on Southdown's
operations because a federal appeals court in May 1999 sent
the matter back to the U.S. EPA. Nevertheless, because of the
nature of Southdown's operations, the proposed addition of a
particulate matter standard that would regulate particles 2.5
microns or less in diameter and the more stringent ozone
standard are of potential concern.
o In October 1998, the U.S. EPA issued regulations requiring 22
states and the District of Columbia to adopt new measures by
September 1999 to reduce emissions of various nitrogen oxides
by specific percentages. While the states are free to adopt
whatever measures state officials believe will meet the
targets, cement kilns were specifically mentioned in the U.S.
EPA rule as potential sources for further nitrogen oxides
emissions reductions. While the September 1999 submittal date
has been postponed pending resolution of legal challenges, if
the courts reject the challenges, the cement industry could be
obligated to make substantial capital expenditures in order to
meet these additional emissions controls.
-18-
<PAGE> 21
o In June 1999, the U.S. EPA issued air toxics standards for
portland cement plants that apply to all companies with cement
manufacturing facilities in the United States. Southdown is in
the process of evaluating the impact of these air toxics
standards.
o Global warming and the international accord to move toward
greenhouse gas stabilization or reduction after the turn of
the century are also issues of potential significance to
Southdown. The consequences of greenhouse gas reduction
measures for cement producers are potentially significant
because carbon dioxide is generated from combustion of fuels
such as coal and coke in order to generate the high
temperatures necessary to manufacture cement clinker (which is
then ground with gypsum to make cement). In addition,
substantial carbon dioxide is generated in the calcining of
limestone to make cement clinker. Any imposition of raw
material or production limitations or fuel-use or carbon taxes
could have a significant impact on the cement manufacturing
industry. It will not be possible to determine the impact on
Southdown until governmental requirements are defined and/or
Southdown can determine whether emission offsets and/or
credits are obtainable, and whether alternative cementitious
products or alternative fuel can be substituted.
During 1997 and 1998, Southdown's Wampum, Pennsylvania cement plant,
which was acquired in the 1998 Medusa merger, received five Notices of Violation
from the U.S. EPA alleging certain air emission violations. The U.S. EPA
referred these notices to the U.S. Department of Justice for civil enforcement.
The Commonwealth of Pennsylvania, the U.S. Department of Justice and Southdown
have negotiated a mutually agreeable consent decree. The consent decree contains
certain penalty payments, which have been accrued, as well as future compliance
obligations. The consent decree has been lodged for public comment with the U.S.
District Court, Western District of Pennsylvania and should be finalized before
the end of the year.
While Southdown commits substantial resources to complying with the
laws and regulations concerning the protection of human health and the
environment, Southdown considers this to be an integral part of its business.
Management believes that Southdown's current procedures and practices for
handling and management of materials are generally consistent with industry
standards and legal and regulatory requirements and that Southdown takes
appropriate precautions to protect employees and others from harmful exposure to
hazardous materials. However, because of the complexity of operations and legal
and regulatory requirements, there can be no assurance that past or future
Southdown operations will not result in operational errors, violations,
remediation liabilities or claims by employees or others alleging exposure to
toxic or hazardous materials. Regulatory changes, enforcement activities or
other factors could alter environmental compliance costs at any time. In
addition, future changes in regulatory requirements related to the protection of
human health and the environment may require Southdown and others engaged in
industrial operations to modify various facilities and alter methods of
operations at costs that may be substantial. Management, however, does not
believe that Southdown would be placed at a competitive disadvantage with
respect to other companies engaged in similar lines of business in the U.S.
OTHER CONTINGENCIES
Import Competition - In addition to competition from the rest of the
domestic cement industry, Southdown faces competition from the importation of
foreign cement. U.S. imports of foreign cement began to increase in the
mid-1990's as the consumption of cement in the U.S. began to increase beyond the
domestic cement industry's production capacity. The Portland Cement Association
has estimated that
-19-
<PAGE> 22
imports represented approximately 23% of cement used in the U.S. during 1998 as
compared with approximately 18% in 1997 and 16% in 1996.
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
Southdown, 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 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, Commerce
suspended investigations of dumped and subsidized imports of cement and clinker
from Venezuela, based upon 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 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,
Commerce and the ITC are presently conducting "sunset" reviews of the
antidumping orders and suspension agreements to determine whether they should be
revoked or remain in effect for another five years. In October 1999, the Company
decided to withdraw its support from the committees which are presently pursuing
the continuation of anti-dumping duties or suspension agreement against Mexico,
Japan and Venezuela. This decision recognizes the current robust financial
health of the U.S. cement industry and the fact that imported cement over the
past several years has played a largely supplemental role in the market. Still,
changes in competitive pressures from imported foreign cement into the U.S.
could have a negative impact on Southdown's results of operations. If these
conditions change, Southdown would not hesitate to reinstate proceedings seeking
relief from unfair trade practices.
Year 2000 Compliance - Southdown, 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 that they will continue to
function properly after December 31, 1999. To determine Southdown's current
exposure, corporate personnel, along with an outside consulting firm
specializing in Year 2000 problems, conducted a formal assessment to determine
the extent of Southdown's exposure to the Year 2000 compliance issue and to
formulate an action plan to remedy any known exposure. Currently, Southdown is
actively completing its review, correction and testing of its Year 2000
compliance of business applications and manufacturing process control systems.
Southdown has also taken steps designed to verify the Year 2000 readiness of key
third party suppliers, service providers and customers by contacting these third
party sources and attempting to assess and validate their compliance efforts.
As of September 30, 1999, Southdown believes it has made significant
progress toward resolving its Year 2000 compliance issues. Southdown believes
that the majority of its financial and other business applications are now Year
2000 compliant, and that the remainder will be by the end of 1999. Southdown is
continuing to conduct internal investigations of its manufacturing plant control
systems, its mobile equipment and its other field equipment and devices with
embedded microprocessor controls. In most, but not all instances, Southdown has
already upgraded or replaced known time sensitive programs or microprocessors.
Southdown expects to have all modifications completed during the fourth quarter
of 1999.
-20-
<PAGE> 23
Costs incurred relating to making Southdown Year 2000 compliant are
expensed in the period in which they are incurred. Southdown currently estimates
that the cost to comply with Year 2000 requirements will total approximately
$1.5 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. Through September 30, 1999,
approximately $0.9 million has been expended to comply with Year 2000
requirements.
It is not certain that Year 2000 compliance can be fully achieved. With
respect to Southdown's internal operations, the most reasonably likely worst
case scenario would be a temporary shut down of a production system because of
some unforeseen problem with an automated monitoring or control device.
Southdown has completed a Year 2000 contingency plan to address risks and
possible countermeasures that include plans for manual intervention of control
systems and equipment and replacement of certain equipment on an emergency
basis. It is not possible, however, to adequately plan for all contingencies.
Southdown does not expect that it will experience a disruption of its
operations, but actual results could differ greatly from Southdown's plans. Some
of the specific problem areas that might cause material differences to occur are
(1) the availability and cost of personnel trained in this area, (2) the ability
to identify and correct all relevant computer codes, (3) the ability to identify
and correct non-complying microprocessors embedded in other digitally controlled
equipment, and (4) the significant degree of interdependence with third party
suppliers, service providers and customers. Conditions outside of Southdown's
control, such as problems in the transportation, postal, banking, utility or
telecommunication systems, may have a material disruptive effect on Southdown's
ability to process orders, effect delivery of materials or finished goods,
invoice customers or disburse or receive funds. Southdown is presently unable to
determine the impact on its business if it and the other companies on which it
relies do not achieve Year 2000 compliance, or that the impact will not have a
material adverse affect on Southdown's financial condition or results of
operations.
Kosmos Joint Venture Severance Tax Audit - Kosmos Cement Company is a
partnership operated and 75% owned by Southdown. 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 $4.2 million, including penalty and interest
for the period under audit, 1991 through 1996. A major portion of the Kentucky
severance tax assessment relates to limestone mined by Kosmos specifically for
use by a local electric utility company. Southdown believes that, under the
terms of a supply agreement, the utility company is responsible for severance
taxes on limestone provided to it, but the utility company has denied any
liability related to the deficiency.
Kosmos is contesting the assessment and entered into discussions with
the Kentucky Revenue Cabinet over a year ago. Discussions are still ongoing and
Southdown is at present unable to evaluate whether an unfavorable outcome is
either probable or remote. A hearing before the Kentucky Board of Tax Appeals is
scheduled for April 2000. For amounts agreed to in any settlement and for
amounts not paid by the local electric utility, Southdown would indirectly bear
75% of any settlement and legal costs through its ownership interest in Kosmos.
Kosmos could then pursue legal recourse against the utility company.
Claims for Indemnification - The Mineral Management Service of the
Department of the Interior claimed that Southdown's former oil and gas
subsidiary, Pelto Oil Company, owed royalties on two separate gas contract
settlement payments that Pelto received. When Southdown sold Pelto in 1989,
-21-
<PAGE> 24
Southdown agreed to protect the purchaser from any future claims related to
these two payments. In a 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 1997 court ruling, 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.
Southdown 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,
Southdown could have liability for royalties, plus late payment charges, in
amounts which are not currently determinable. Such expenditures would result in
a charge to discontinued operations.
Discontinued Environmental Services Segment - Southdown has both given
and received environmental and other indemnifications related to properties
Southdown previously owned. A few courts have held that such promises to protect
other parties from loss for environmental liabilities are unenforceable. At
present, Southdown 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 second quarter of 1995, Southdown learned of some
soil and groundwater contamination at or near a subsidiary's former Alabama
hazardous waste processing facility. Although Southdown sold the facility in
April 1995, Southdown agreed to keep some liability for soil and groundwater
contamination at the facility prior to that time. Southdown hired a qualified
consultant to conduct the investigation of the contamination at the facility and
as a result of the consultant's preliminary report, Southdown 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.
Additional information gathered during preliminary work at the site
caused Southdown to increase the estimate of the total cost to resolve this
matter. Accordingly, Southdown recorded a $1.5 million charge ($1 million
after-tax) in the second quarter of 1999. Because Southdown discontinued its
hazardous waste disposal business in 1994, the charge is reflected as a "loss
from discontinued operations, net of income taxes." Southdown's investigation
has not definitively determined the scope of the contamination or the extent of
any cleanup that may be required. It is too early to determine the amount of
Southdown's exposure to loss with any degree of certainty. Southdown has agreed
to remediate the soil and groundwater contamination at the Alabama facility to
the extent required by law, and it has filed lawsuits against the former owner
and former customers of the facility. The claims against that former owner and
other potentially responsible parties could significantly reduce or eliminate
Southdown's loss exposure.
Other - In addition to those matters separately disclosed above,
Southdown has incurred in the regular course of business certain other
commitments and contingent liabilities including, among other things, (1)
personal injury lawsuits, (2) indemnity and other hold harmless agreements, (3)
environmental remediation liabilities, (4) product liability claims, (5)
commercial disputes and litigation, and (6) claims by disgruntled 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 Southdown's consolidated balance sheet.
However, because Southdown'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
-22-
<PAGE> 25
relative to results of operations or cash flows for a particular period, have a
material negative impact on Southdown'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. Southdown based these statements on current
expectations, estimates and projections about the general economy and
Southdown's lines of business. These statements are generally identifiable by
phrases containing words such as "expects," "believes," "anticipates,"
"estimates," "will," "should," or similar expressions. Statements related to
future performance involve certain assumptions, risks and uncertainties, many of
which are beyond the control of Southdown, and cannot be guaranteed.
Although Southdown 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 Southdown's expectations
include, among others, (1) significant excess cement production capacity in
other parts of the world, (2) foreign and domestic price competition, (3) cost
effectiveness, (4) changes in environmental regulation, (5) abnormal periods of
inclement weather, and (6) general economic and market conditions such as
interest rates, the availability of capital and the cyclical nature of the
construction industry. Southdown cautions the reader to consider these
disclosures when reading the forward-looking statements included in this report.
Subsequent written and oral forward looking statements made by Southdown or by
persons acting on behalf of Southdown are completely qualified by these
cautionary disclosures.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Southdown does not enter into derivatives or other financial
instruments for trading or speculative purposes. Because of the short duration
of Southdown's investments, changes in market interest rates would not have a
significant impact on their fair value. Expected maturity dates and average
interest rates of long-term debt are essentially unchanged since December 31,
1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, Southdown may from time-to-time be
a named defendant in lawsuits related to various matters including personal
injury, contractual indemnifications, environmental remediation, product
liability, employment matters and commercial disputes and litigation. Other than
those disclosed elsewhere in this document, based on the information developed
to date and advice of outside counsel, Southdown is of the opinion the liability
related to these lawsuits individually or in the aggregate, if any, does not
total more than 10% of current assets and will not result in losses that would
materially affect Southdown's consolidated balance sheet as of September 30,
1999. However, Southdown's results of operations vary considerably with
construction activity and other factors. It is, therefore, 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 Southdown's
results of operations or cash flows for that period.
-23-
<PAGE> 26
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, 1999
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1999.
-24-
<PAGE> 27
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 8, 1999 By: DENNIS M. THIES
-------------------------------------
Dennis M. Thies
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 1999 By: RICARDO ARREDONDO
-------------------------------------
Ricardo Arredondo
Vice President and Controller
(Principal Accounting Officer)
-25-
<PAGE> 28
EXHIBIT INDEX
<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, 1999
</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,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings for basic earnings per share:
Earnings from continuing operations $ 67.4 $ 73.1 $ 158.4 $ 65.7
Loss from discontinued operations, net of taxes -- (1.6) (1.0) (1.6)
-------- -------- -------- --------
Net earnings for basic earnings per share $ 67.4 $ 71.5 $ 157.4 $ 64.1
======== ======== ======== ========
Earnings for diluted earnings per share
Earnings from continuing operations $ 67.4 $ 73.1 $ 158.4 $ 65.7
Loss from discontinued operations, net of taxes -- (1.6) (1.0) (1.6)
-------- -------- -------- --------
Net earnings for diluted earnings per share $ 67.4 $ 71.5 $ 157.4 $ 64.1
======== ======== ======== ========
Average outstanding common shares for basic
earnings per share 37.4 38.4 38.1 38.1
Other potentially dilutive securities:
-- common stock equivalents from assumed
exercise of stock options 0.4 0.5 0.4 0.7
-------- -------- -------- --------
Total for diluted earnings per share 37.8 38.9 38.5 38.8
======== ======== ======== ========
Earnings (loss) per common share:
Basic
Earnings from continuing operations $ 1.80 $ 1.90 $ 4.16 $ 1.72
Loss from discontinued operations, net of taxes -- (0.04) (0.03) (0.04)
-------- -------- -------- --------
$ 1.80 $ 1.86 $ 4.13 $ 1.68
======== ======== ======== ========
Diluted
Earnings from continuing operations $ 1.78 $ 1.88 $ 4.12 $ 1.69
Loss from discontinued operations, net of taxes -- (0.04) (0.03) (0.04)
-------- -------- -------- --------
$ 1.78 $ 1.84 $ 4.09 $ 1.65
======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15
November 5, 1999
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, 1999 and 1998, as indicated in our report dated October 19, 1999;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which was included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, 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.
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHDOWN'S
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED STATEMENT OF
CONSOLDIATED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 35
<SECURITIES> 0
<RECEIVABLES> 168
<ALLOWANCES> 5
<INVENTORY> 129
<CURRENT-ASSETS> 345
<PP&E> 1,559
<DEPRECIATION> 669
<TOTAL-ASSETS> 1,435
<CURRENT-LIABILITIES> 153
<BONDS> 167
0
0
<COMMON> 50
<OTHER-SE> 773
<TOTAL-LIABILITY-AND-EQUITY> 1,435
<SALES> 941
<TOTAL-REVENUES> 941
<CGS> 629
<TOTAL-COSTS> 689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 246
<INCOME-TAX> 84
<INCOME-CONTINUING> 158
<DISCONTINUED> (1)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157
<EPS-BASIC> 4.13
<EPS-DILUTED> 4.09
</TABLE>
