<PAGE> 1
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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)
LOUISIANA 72-0296500
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET
SUITE 2400
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 650-6200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
At April 30, 1999 there were 38.2 million common shares outstanding.
================================================================================
<PAGE> 2
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
----------------------------------------
INDEX
-----
PAGE
No.
---
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
March 31, 1999 and December 31, 1998 1
Statement of Consolidated Earnings
Three months ended March 31, 1999 and 1998 2
Statement of Consolidated Cash Flows
Three months ended March 31, 1999 and 1998 3
Statement of Selected Consolidated Segment Data
Three months ended March 31, 1999 and 1998 4
Statement of Consolidated Shareholders' Equity
Three months ended March 31, 1999 5
Statement of Consolidated Comprehensive Income
Three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Independent Accountants' Review Report 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 28
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
-----------------------------
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 134.6 $ 143.8
Short-term investments 14.8 14.8
Accounts and notes receivable, less
allowance for doubtful accounts
of $5.1 and $4.9 29.5 120.0
Inventories (Note 5) 130.5 107.7
Prepaid expenses and other 13.2 18.4
---------- ----------
Total current assets 422.6 404.7
Property, plant and equipment, less
accumulated depreciation, depletion
and amortization of $687.2 and $679.0 835.9 819.9
Goodwill 104.5 105.5
Other long-term assets 70.0 70.3
---------- ----------
$ 1,433.0 $ 1,400.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 0.5 $ 0.6
Accounts payable and accrued liabilities 152.9 139.3
---------- ----------
Total current liabilities 153.4 139.9
Long-term debt 166.9 167.3
Deferred income taxes 139.2 139.4
Minority interest in consolidated joint
venture 29.4 27.7
Long-term portion of postretirement
benefit obligation 90.8 91.5
Other long-term liabilities and deferred
credits 30.8 30.4
---------- ----------
610.5 596.2
Shareholders' equity:
Common stock, $1.25 par value (Note 6) 49.8 49.8
Capital in excess of par value 371.1 370.6
Reinvested earnings 455.3 431.6
Currency translation adjustment (1.6) (1.5)
Treasury stock, at cost (52.1) (46.3)
---------- ----------
822.5 804.2
---------- ----------
$ 1,433.0 $ 1,400.4
========== ==========
</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
MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Revenues $ 244.9 $ 224.9
---------- ----------
Costs and expenses:
Operating 163.5 156.2
Depreciation, depletion and
amortization 17.4 17.2
Selling and marketing 6.8 6.9
General and administrative 18.0 17.6
Other income, net (6.7) (1.1)
---------- ----------
199.0 196.8
---------- ----------
Earnings before interest, income
taxes and minority interest 45.9 28.1
Interest income 1.8 1.1
Interest expense, net of
amounts capitalized (3.2) (4.4)
---------- ----------
Earnings before income taxes
and minority interest 44.5 24.8
Income tax expense (14.6) (8.8)
---------- ----------
Earnings before minority interest 29.9 16.0
Minority interest, net of income taxes (0.4) (0.3)
---------- ----------
Net earnings $ 29.5 $ 15.7
========== ==========
Earnings per common share:
Basic $ 0.76 $ 0.41
========== ==========
Diluted $ 0.75 $ 0.41
========== ==========
Average shares outstanding:
Basic 38.7 38.0
========== ==========
Diluted 39.1 38.7
========== ==========
</TABLE>
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<PAGE> 5
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
IN MILLIONS
----------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net earnings $ 29.5 $ 15.7
Adjustments to reconcile net
earnings to cash provided by
(used in) operating activities:
Depreciation, depletion and amortization 17.4 17.2
Changes in operating assets and liabilities (19.6) (27.2)
Other adjustments (6.2) 2.0
Net cash used in discontinued operations (0.5) (0.2)
---------- ----------
Net cash provided by operating activities 20.6 7.5
---------- ----------
Investing activities:
Additions to property, plant and equipment (36.8) (26.1)
Purchase of short-term investments (14.8) (3.9)
Maturity of short-term investments 14.8 0.1
Proceeds from asset sales 10.8 -
Acquisitions, net of cash acquired - (5.5)
Other investing activities 1.1 (0.3)
---------- ----------
Net cash used in investing activities (24.9) (35.7)
---------- ----------
Financing activities:
Additions to long-term debt - 27.4
Reductions in long-term debt (0.6) (11.7)
Dividends (5.8) (5.0)
Contributions from minority partner 1.8 -
Distributions to minority partner (0.8) (0.3)
Other financing activities 0.5 (0.8)
---------- ----------
Net cash (used in) provided by financing activities (4.9) 9.6
---------- ----------
Net decrease in cash and cash equivalents (9.2) (18.6)
Cash and cash equivalents at beginning of period 143.8 98.9
---------- ----------
Cash and cash equivalents at end of period $ 134.6 $ 80.3
========== ==========
</TABLE>
Cash payments for income taxes totaled $5.0 million and $1.0 million in the
first quarters of 1999 and 1998, respectively. Interest paid, net of amounts
capitalized, was $6.1 million and $8.0 million in 1999 and 1998, respectively.
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<PAGE> 6
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF SELECTED CONSOLIDATED SEGMENT DATA
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Contributions to revenues:
Cement
Sales to customers $ 161.5 $ 146.6
Freight to customers and other 9.2 8.8
------------ -----------
Total cement revenues 170.7 155.4
Concrete products 59.7 55.2
Aggregates 29.9 28.2
Intersegment sales (15.4) (13.9)
------------ -----------
$ 244.9 $ 224.9
============ ===========
Contributions to earnings before interest,
income taxes and minority interest:
Operating profit
Cement $ 46.1 $ 35.8
Concrete products 5.0 2.3
Aggregates 8.9 2.1
------------ -----------
60.0 40.2
Corporate overhead (14.1) (12.1)
------------ -----------
$ 45.9 $ 28.1
============ ===========
</TABLE>
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<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 - - - 29.5 - -
Dividends paid on common stock - - - (5.8) - -
Exercise of stock options - - 0.5 - - -
Purchase of treasury stock - - - - - (5.8)
Foreign currency translation
adjustment - - - - (0.1) -
----------- ---------- --------------- ---------- ------------- -----------
Balance at March 31, 1999 39.8 $ 49.8 $ 371.1 $ 455.3 $ (1.6) $ (52.1)
=========== ========== =============== ========== ============= ===========
</TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- ---------
Net income $ 29.5 $ 15.7
Foreign currency translation
adjustments, net of tax (0.1) 0.1
--------- ---------
Comprehensive income $ 29.4 $ 15.8
========= =========
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<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 (the "Company"):
- The Consolidated Balance Sheet at March 31, 1999,
- The Statements of Consolidated Earnings, Consolidated Cash Flows,
Selected Consolidated Segment Data, and Consolidated Comprehensive
Income for the three month periods ended March 31, 1999 and 1998,
and
- The Statement of Consolidated Shareholders' Equity for the three
months ended March 31, 1999.
The financial statements presented in this report were not audited.
On June 30, 1998, the Company concluded its merger transaction with
Medusa Corporation. The March 31, 1998 consolidated financial statements
presented provide the combined results of operations, financial position and
cash flows of the Company and Medusa. These combined financial results include
adjustments to conform the historical accounting policies of Medusa to those of
the Company.
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
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<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 statements of earnings for the three months ended March 31, 1998
(1) report quarterly results based on actual costs, (2) value end of the period
inventory at actual cost, and (3) charge all maintenance costs to operating
costs as incurred.
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
March 31, 1998 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 March 31, 1998 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 period of the prior year are presented below:
(IN MILLIONS)
---------------------------
THREE MONTHS ENDED
MARCH 31, 1998
---------------------------
REVENUES NET EARNINGS (LOSS)
---------- -------------------
Southdown $ 155.8 $ 16.5
Medusa 69.1 (0.8)
--------- ---------
Combined $ 224.9 $ 15.7
========= =========
This report also presents extracts from the Consolidated Balance Sheet
at December 31, 1998 drawn from the December 31, 1998 audited financial
statements of the Company. 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 the Company's Annual Report to Shareholders.
-7-
<PAGE> 10
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 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 March 31, 1999 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 - ACQUISITION OF MEDUSA CORPORATION:
On June 30, 1998, the Company concluded a merger transaction with
Medusa Corporation. Medusa became a 100% owned subsidiary of the Company at that
time. 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
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.
At March 31, 1999, current liabilities related to merger transaction
costs were $3.8 million. While the closure of the Medusa corporate office was
completed by the end of the first quarter of 1999, the Company has remaining
lease payment obligations related to this office. In addition, the last of the
transitional Medusa corporate office personnel were terminated by the end of the
first quarter of 1999, but some severance costs were not paid until early in the
second quarter of 1999. Details of the merger related costs are as follows:
-8-
<PAGE> 11
<TABLE>
<CAPTION>
(IN MILLIONS)
---------------------------------------------------------------------
ACCRUED CURRENT
MERGER AMOUNTS BALANCE
COSTS PAID ADJUSTMENTS AT 3/31/99
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Merger transaction costs and
professional fees $ 18.4 $ 18.7 $ 0.9 $ 0.6
Severance costs 54.3 47.0 (6.7) 0.6
Closure costs 10.2 5.7 (1.9) 2.6
---------- ----------- --------- ---------
Total $ 82.9 $ 71.4 $ (7.7) $ 3.8
========== =========== ========= =========
</TABLE>
NOTE 3 - 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. 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 and
management is currently evaluating what, if any, impact this new accounting
standard may have on the Company's consolidated financial statements. The
Company held no derivative financial instruments during 1998 or the three months
ended March 31, 1999.
NOTE 4 - EARNINGS PER SHARE:
Basic earnings per share were computed using the average number of
common shares outstanding in each of the three month periods ending March 31,
1999 and 1998. Diluted earnings per share for 1999 and 1998 assume the dilutive
impact of stock options.
NOTE 5 - INVENTORIES:
(IN MILLIONS)
-----------------------------------
MARCH 31, DECEMBER 31,
1999 1998
-------------- ---------------
Finished goods $ 38.3 $ 36.1
Work in progress 34.1 14.7
Raw materials 7.1 7.1
Supplies 51.0 49.8
============== ===============
$ 130.5 $ 107.7
============== ===============
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<PAGE> 12
Inventories stated on the Last In, First Out method were $68.0 million
of total inventories at March 31, 1999 and $46.3 million of total inventories at
December 31, 1998 compared with current costs of $84.9 million and $63.2
million, respectively.
NOTE 6 - CAPITAL STOCK:
In June 1998, the shareholders of the Company voted to amend the
Company's Restated Articles of Incorporation, as amended, to increase the
authorized number of shares of common stock. The authorized capital stock of the
Company comprises 200,000,000 shares of Common Stock, $1.25 par value and
10,000,000 shares of Preferred Stock, $.05 par value. American Stock Transfer &
Trust Company serves as the registrar and transfer agent for the Common Stock.
At March 31, 1999, there were approximately 39,863,000 shares of common
stock issued and approximately 38,589,000 shares of common stock outstanding and
held of record by approximately 4,268 shareholders. Approximately 4.7 million
shares were reserved for future issuance upon exercise of options granted under
employee benefit and other plans and stock issued under phantom stock plans. The
Company paid a quarterly dividend of $.10 per share of common stock from March
1997 to September 1998. In December 1998, the quarterly dividend was increased
to $.15 per share of common stock.
On March 25, 1999, the Board of Directors approved a common stock
repurchase program under which the Company was authorized to repurchase up to 2
million shares of the Company's outstanding common stock. During the last few
days of the first quarter of 1999, the Company purchased 108,000 shares of
common stock at a cost of $5.8 million, which settled in early April. Subsequent
to March 31, 1999, the Company made additional open market purchases of common
stock for a total since the authorization of 572,500 shares through May 3, 1999
at a cost of $31.5 million.
NOTE 7 - PROPOSED AMENDMENTS TO NON-EMPLOYEE DIRECTORS'
COMPENSATION ARRANGEMENTS:
In March 1999, the Board of Directors of the Company embraced a
fundamental change in the way the company's non-employee directors should be
compensated The Board believes that it would be preferable for all of the
compensation of Board members who are not employees to depend on the
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<PAGE> 13
development of shareholder value as reflected by the company's stock
performance. Consequently, the Board has approved amendments to its compensation
arrangements, subject to approval of the amendments to the directors' option
plan by the shareholders at the May 1999 annual meeting. The amendments adopted
by the Board are:
Directors' Fees - After the May 1999 annual meeting, no more directors'
fees would be paid in cash. All such fees would be replaced by option grants, as
described below. The Chairman of the Board would no longer receive $12,500 per
month, and the other directors who are not employees would no longer receive
$3,000 per month for their services as directors.
Stock Option Plan for Non-Employee Directors - This plan would be the
source of all payments for future service as directors. The Board has approved
the following amendments, subject to approval by the shareholders at the May
meeting:
o Starting with the May 1999 annual meeting, each director who is not
an employee would receive 7,500 options at each annual meeting after
his first election. At the same time, chairmen of Board committees
would annually receive an additional 500 options, and the Chairman
of the Board would annually receive an additional 18,500 options.
o The total number shares on which options could be issued under the
plan would be increased from 400,000 to 725,000 shares. As of the
date of this report, 224,000 options have been issued under the
plan, leaving 176,000 available for grant.
The other material provisions of the plan would not be amended. Options
will not be issued under this plan to directors who are employees of the
Company. Each new director who is not an employee would still be granted 10,000
options when first elected. Annual grants would be made to each non-employee
director on the date of each annual meeting where they continue to serve as a
director after their first election. The exercise price of each option would
still be the fair market value of the common stock on the date of grant. Each
option would become exercisable six months after the date of grant. However, if
while the director was serving he dies or was disabled, or there was a change of
control of the Company, the options would become exercisable immediately. Each
option would still be exercisable
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<PAGE> 14
until the first to occur (1) ten years from the date of grant or (2) 90 days
after the director's service as a director terminates for any reason other than
death, disability or retirement under a company retirement plan. If a director's
service is terminated for any reason after a change of control, as defined in
the plan, the options continue to be exercisable for the full ten-year period.
Phantom Stock and Deferred Compensation Plan - Benefits under this plan
would be frozen, and no new phantom stock in lieu of directors' fees would be
paid. Common stock already earned under the plan would still be received by the
director when he or she leaves the board. At that time, directors will also
receive the fair market value of common stock equal to cash dividends on the
common stock that would have been received had the common stock been issued when
the directors' fees were earned.
Directors' Retirement Plan - Benefits under this plan would be frozen,
and no new retirement benefits would accrue. Directors would have two choices
with respect to benefits already accrued under the plan. They could (1) do
nothing, and receive those cash benefits when they retire under the present plan
provisions or (2) elect to give up their cash retirement benefits under the plan
and instead get phantom stock which they receive upon retirement. Included in
first quarter 1999 results is a $1 million charge to earnings related to the
discontinuance of the Directors' Retirement Plan.
Approval - The amendments to the non-employee directors stock option plan
require the approval of the company's shareholders. The other changes to the
company's directors compensation arrangements described above changes to the
directors' fees, the phantom stock plan and the retirement plan - do not require
shareholder approval. However, the Board has made its adoption of those changes
subject to the shareholders' approval of the amendments to the non-employee
directors stock option plan. If the amendments to the stock option plan are not
approved, the other amendments will not go into effect. In that case, the
existing directors' compensation arrangements would stay in effect, including
fees, retirement benefits and annual option grants under the present
non-employee directors option plan.
NOTE 8 - CONTINGENCIES:
The Company 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
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<PAGE> 15
other hold harmless agreements, (3) environmental remediation liabilities, (4)
product liability claims, and (5) 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 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.
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 9 - REVIEW BY INDEPENDENT ACCOUNTANTS:
The unaudited financial information presented in this report has been
reviewed by the Company's independent public accountants. The review was limited
in scope and did not constitute an audit of the financial information in
accordance with generally accepted auditing standards such as is performed in
the year-end audit of financial statements. The report of Deloitte & Touche LLP
relating to its limited review of the financial information as of March 31, 1999
and for the three months then ended follows.
-13-
<PAGE> 16
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
TO THE SHAREHOLDERS AND
BOARD OF DIRECTORS OF
SOUTHDOWN, INC.
HOUSTON, TEXAS
We have reviewed the accompanying consolidated balance sheet of
Southdown, Inc. and subsidiary companies as of March 31, 1999, and the related
consolidated statements of earnings, cash flows and comprehensive income for the
three months ended March 31, 1999 and 1998 and the consolidated statement of
shareholders' equity for the three months ended March 31, 1999. 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, 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
April 20, 1999
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<PAGE> 17
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 the Company'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 FIRST QUARTER EARNINGS
Net earnings for the first quarter of 1999 were $29.5 million, $0.75
per share on a diluted basis, an 88% increase over the $15.7 million, $0.41 per
share for the prior year quarter.
Consolidated revenues in the first quarter of 1999 increased 8.9%
over the same period of the prior year, primarily driven by the Cement segment.
First quarter 1999 earnings before interest, income taxes and minority interest
improved $17.8 million over the same quarter of the prior year, primarily
reflecting improved earnings achieved by the Cement segment in 1999.
The increase in interest income reflects higher levels of investable
cash during the first quarter of 1999 compared with the prior year period.
Interest expense decreased 27%, primarily because of higher capitalized
interest related to construction projects and because there were no revolving
credit facility borrowings in the first quarter of 1999.
SEGMENT OPERATING EARNINGS
CEMENT
Cement operating earnings for the quarter ended March 31, 1999 were
$46.1 million compared with $35.8 million in the prior year quarter. The Cement
segment benefited from a 6.6% increase in cement sales volumes and a 3.4%
improvement in the average sales price. Higher sales volumes and
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<PAGE> 18
sales prices reflected strong demand in most market areas. Unit cost of sales
declined slightly compared with the prior year quarter, primarily because of a
3.5% increase in clinker production.
Sales volumes, average unit price and cost data and unit operating
profit margins relating to the Company's cement plant operations appear in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Tons of cement sold (thousands) 2,233 2,095
============== ===============
Weighted average per ton data:
Sales price (net of freight to customers) $ 72.32 $ 69.96
Manufacturing and other plant operating costs (1) 52.00 53.36
-------------- ---------------
Margin $ 20.32 $ 16.60
============== ===============
</TABLE>
- --------------
(1) Includes fixed and variable manufacturing costs, freight to terminals, cost
of purchased cement, selling expenses, plant general and administrative
costs, other plant overhead and miscellaneous costs.
CONCRETE PRODUCTS
Concrete Products earnings improved to $5 million in the first
quarter of 1999 from the $2.3 million earned in 1998. Concrete Products
revenues for the March 31, 1999 quarter were higher than the prior year quarter
because of both improved ready-mixed concrete sales volumes and prices. A 3%
improvement in average concrete products sales prices combined with a 5.2%
increase in ready-mix concrete sales volumes resulted in higher operating
earnings. Both the Florida and the California market areas realized improved
volumes and pricing.
Sales volumes, average unit price and cost data and unit operating
profit margins relating to the Company's sales of ready-mixed concrete appear
in the following table:
-16-
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Cubic yards of ready-mixed concrete sold (thousands) 849 807
=============== ==============
Weighted average per cubic yard data:
Sales price $ 59.21 $ 57.50
Operating costs (1) 54.86 55.71
--------------- --------------
Margin (2) $ 4.35 $ 1.79
=============== ==============
</TABLE>
- --------------
(1) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs.
(2) Does not include concrete block and other related products which totaled
$1.3 million and $0.8 million of operating earnings for the three month
periods ended March 31, 1999 and 1998, respectively.
AGGREGATES
Operating earnings for the Aggregates segment increased to $8.9
million in the first quarter of 1999. Results for the first quarter of 1999
include a $6 million pre-tax gain realized on the sale of the Company's North
Carolina quarry. Revenues for the Aggregates segment increased 6% for the first
quarter of 1999 compared with the prior year quarter. Sales volumes for the
Aggregates segment increased 12% to 2.3 million tons in the first quarter of
1999 because of improved construction aggregates sales volume in both the
Mideast and California regions. A 6.6% decline in aggregates sales prices
resulted from a higher percentage of lower priced construction aggregates sales
in the current quarter compared with the prior year quarter.
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:
-17-
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Tons of aggregates sold (thousands) 2,263 2,020
========== ==========
Weighted average per ton data: (1)
Sales price $ 9.47 $ 9.72
Operating costs (2) 8.06 8.52
----------- ----------
Margin $ 1.41 $ 1.20
========== ==========
</TABLE>
- --------------
(1) Excludes $6 million gain on sale of North Carolina quarry in January 1999.
(2) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs.
CORPORATE
Corporate overhead expenses were $2 million higher for the quarter
ended March 31, 1999 than in the first quarter of 1998 because of (1) a $1
million charge related to the discontinuance of the Board of Directors'
retirement plan in keeping with proposed changes to the Board's compensation
arrangements, subject to shareholder approval, so as to make the arrangements
depend more on the development of shareholder value as reflected by the
Company's common stock performance and (2) higher corporate administration
costs, consulting fees and travel expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $20.6 million in cash provided by operating
activities for the three months ended March 31, 1999, a significant increase
over the comparable period in 1998. The Company has used these 1999 operating
cash flows, plus existing cash and short-term investment balances and the
proceeds from asset sales, to fund $36.8 million in capital additions,
primarily related to several expansion/cost reduction projects in the Cement
segment, and to pay $5.8 million of dividends on common stock, in addition to
meeting all working capital requirements. Internally generated cash flow during
the first three months of 1998 and borrowings under the Medusa revolving credit
facility were utilized to (1) invest approximately $26.1 million in property,
plant and equipment,
-18-
<PAGE> 21
(2) pay $11.7 million in long-term debt, (3) fund working capital requirements,
and (4) pay dividends on capital stock.
The Company'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 March 31, 1999, 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 contained in the revolving credit agreement and indenture. Management
believes the Company's operating cash flows plus its unused capacity under the
Company's revolving credit facility provide ample liquidity to fund anticipated
capital additions and treasury stock purchases as well as meeting other working
capital requirements of the Company.
CHANGES IN FINANCIAL CONDITION
The change in the financial condition of the Company between
December 31, 1998 and March 31, 1999 reflected the utilization of internally
generated cash flow during the period to fund capital expenditures, working
capital requirements and capital stock dividends. Accounts and notes receivable
increased, primarily because of the strong sales activity occurring in March
1999 relative to lower December 1998 sales. The increase in inventories
reflecting the typical build-up of cement inventories during the first quarter
of the year was a result of an even greater increase in manufacturing
performance relative to the increased sales volume. Prepaid expenses and other
decreased because of payments made by the Voluntary Employee Beneficiary
Association to fund employee health care costs. Accounts payable and accrued
liabilities increased because of the timing of payments on normal trade and
other obligations.
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
Environmental Matters - The Company is subject to a wide range of
federal, state and local laws, regulations and ordinances 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
-19-
<PAGE> 22
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.
The Company or its predecessors have conducted industrial operations
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
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.
Yet another evolving issue of potential significance to the Company
is global warming and the international accord to move toward greenhouse gas
stabilization or reduction after the turn of the century. The consequences of
greenhouse gas reduction measures for cement producers, if any, could be
potentially significant because carbon dioxide is generated from the combustion
of fuels and 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 the Company until governmental requirements
are defined and/or the Company can determine whether emission offsets and/or
credits are obtainable, and whether alternative cementitious products or
alternative fuel can be substituted.
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 (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
-20-
<PAGE> 23
is impossible for the Company to determine the ultimate cost that it might
incur to resolve these environmental matters, except as noted below.
During 1997-1998, the Company's Wampum, Pennsylvania cement plant
received five Notices of Violation from the U.S. EPA alleging certain air
emission violations. The U.S. EPA also referred these notices to the U.S.
Department of Justice for potential civil enforcement. The parties have
negotiated a settlement in principle subject also to the negotiation of a
mutually agreeable consent decree, which the Company and the government
entities are in the process of drafting. The agreed to penalty payments and
future compliance obligations will not exceed the amount the Company has
already reserved for this matter.
While the Company commits substantial resources to complying with
the laws and regulations concerning the protection of human health and the
environment, the Company considers this to be an integral part of its business.
Management believes that the Company's current procedures and practices for
handling and management of materials are generally consistent with industry
standards and legal requirements and that the Company takes appropriate
precautions to protect employees and others from harmful exposure to hazardous
materials. However, because of the complexity of operations and legal
requirements, there can be no assurance that past or future Company 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 the Company 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 the Company 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 - 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
-21-
<PAGE> 24
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 ("ITC") and the Department of
Commerce ("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 will conduct "sunset" reviews of the antidumping orders
and suspension agreements beginning in August 1999 to determine whether they
should be revoked or remain in effect for another five years. The Company
expects the sunset review process to take longer than a year and believes there
are strong arguments and evidence to convince Commerce and the ITC to leave the
antidumping remedies in effect. In addition to the sunset reviews, decisions by
Commerce, by NAFTA binational panels or by the U.S. Courts on appeal of
Commerce decisions in future administrative reviews could meaningfully reduce
the existing antidumping duties. If any of these events were to happen, there
could be a 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 increase. The Portland Cement
Association has estimated that imports represented approximately 25% of cement
used in the U.S. during 1998 as compared with approximately 18% in 1997 and 16%
in 1996. Unlike the imports during the 1980's, however, most of the recent
imports have provided an additional source of supply rather than disrupting the
market with unfair prices. During most of the recent period of strong demand,
the prices of cement imports rose. The increase is attributable, at least in
part, to the influence of the outstanding antidumping orders and suspension
agreements. While the average cost of imported cement rose during 1998, the
cost of cement imports from some countries, particularly those from Southeast
Asia, have declined. New, independently owned cement import operations could
undertake to construct new import facilities and begin to purchase large
quantities of low-priced cement from countries not yet subject to antidumping
-22-
<PAGE> 25
orders such as those in Asia, which could compete with domestic producers and
thereby could have a negative impact on the Company's results of operations.
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 that they 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 March 31,
1999, 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 2000 compliant, or soon will be. 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, the Company has already upgraded or replaced time sensitive
programs or microprocessors. The Company expects to have all modifications
completed by the third quarter of 1999.
Costs incurred relating to making the Company Year 2000 compliant
are expensed in the period in which they are incurred. The Company currently
estimates that the cost to comply with Year
-23-
<PAGE> 26
2000 requirements will total approximately $2 million to $3 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 fully achieved.
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 is in the process of formulating a Year 2000
contingency plan by the third quarter of 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 does not expect that it will 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 (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 the Company's control such as problems in the
transportation, postal, banking, utility 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. The Company 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
the Company's financial condition or results of operations.
Kosmos Joint Venture Severance Tax Audit - Kosmos Cement Company 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
-24-
<PAGE> 27
to discuss the disputed assessments. Discussions are still 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 of the
Department of the Interior claimed that the Company's former oil and gas
subsidiary, Pelto Oil Company, 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 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.
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 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, except as noted below.
-25-
<PAGE> 28
In late 1994 and the first quarter of 1995, the Company learned 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 it has 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.
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, (1)
personal injury lawsuits, (2) indemnity and other hold harmless agreements, (3)
environmental remediation liabilities, (4) product liability claims, and (5)
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 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.
-26-
<PAGE> 29
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, (1) significant excess cement production
capacity in other parts of the world, specifically Asia, (2) foreign and
domestic price competition, (3) the loss or material negative change of
existing antidumping orders, (4) cost effectiveness, (5) changes in
environmental regulation, (6) abnormal periods of inclement weather, and (7)
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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes. Because of the short duration
of the Company'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, the Company may from
time-to-time be a named 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
the liability related to these lawsuits individually or in the aggregate, if
any, will not materially exceed the amounts accrued on the Company's books as
of March 31, 1999 and will have no material adverse effect on the Company's
results of operations or cash flows.
-27-
<PAGE> 30
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 - Three months ended
March 31, 1999
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three month period
ended March 31, 1999.
-28-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHDOWN, INC.
---------------------------------------
(Registrant)
Date: May 10, 1999 By: DENNIS M. THIES
---------------------------------------
Dennis M. Thies
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 1999 By: ALLAN KORSAKOV
---------------------------------------
Allan Korsakov
Vice President and Corporate Controller
(Principal Accounting Officer)
-29-
<PAGE> 32
EXHIBIT INDEX
11 Statement of Computation of Per Share Earnings
15 Independent Accountants' Letter re Unaudited Interim
Financial Information
27.1 Financial Data Schedule - Three months ended
March 31, 1999
<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
MARCH 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Earnings for basic earnings per share $ 29.5 $ 15.7
======== ========
Earnings for diluted earnings per share $ 29.5 $ 15.7
======== ========
Average outstanding common shares for basic
earnings per share 38.7 38.0
Other potentially dilutive securities:
-- common stock equivalents from assumed
exercise of stock options 0.4 0.7
-------- --------
Total for diluted earnings per share 39.1 38.7
-------- --------
Earnings per share:
Basic $ 0.76 $ 0.41
======== ========
Diluted $ 0.75 $ 0.41
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15
May 7, 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
March 31, 1999 and 1998, as indicated in our report dated April 20, 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 is included in your
Quarterly Report on Form 10-Q for the quarter ended March 31, 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.
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 March 31, 1999 and the related
statement of consolidated earnings and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 135
<SECURITIES> 15
<RECEIVABLES> 135
<ALLOWANCES> 5
<INVENTORY> 131
<CURRENT-ASSETS> 423
<PP&E> 1,523
<DEPRECIATION> 687
<TOTAL-ASSETS> 1,433
<CURRENT-LIABILITIES> 153
<BONDS> 167
0
0
<COMMON> 50
<OTHER-SE> 773
<TOTAL-LIABILITY-AND-EQUITY> 1,433
<SALES> 245
<TOTAL-REVENUES> 245
<CGS> 180
<TOTAL-COSTS> 199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 45
<INCOME-TAX> 15
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.75
</TABLE>
