<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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 July 31, 1999 there were 37.8 million common shares outstanding.
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<PAGE> 2
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet
June 30, 1999 and December 31, 1998 1
Statement of Consolidated Earnings
Three and Six months ended June 30, 1999 and 1998 2
Statement of Consolidated Cash Flows
Six months ended June 30, 1999 and 1998 3
Statement of Selected Consolidated Segment Data
Three and Six months ended June 30, 1999 and 1998 4
Statement of Consolidated Shareholders' Equity
Six months ended June 30, 1999 5
Statement of Consolidated Comprehensive Income
Three and Six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Independent Accountants' Review Report 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Qualitative and Quantitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------------
JUNE 30, DECEMBER 31,
1999 1998
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 117.2 $ 143.8
Short-term investments -- 14.8
Accounts and notes receivable, less allowance for doubtful
accounts of $5.0 and $4.9 157.5 120.0
Inventories (Note 5) 128.8 107.7
Prepaid expenses and other 14.4 18.4
-------- --------
Total current assets 417.9 404.7
Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $699.0 and $679.0 850.1 819.9
Goodwill 103.6 105.5
Other long-term assets 71.7 70.3
-------- --------
$1,443.3 $1,400.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 0.4 $ 0.6
Accounts payable and accrued liabilities 152.2 139.3
-------- --------
Total current liabilities 152.6 139.9
Long-term debt 166.9 167.3
Deferred income taxes 141.9 139.4
Minority interest in consolidated joint venture 32.5 27.7
Long-term portion of postretirement benefit obligation 89.7 91.5
Other long-term liabilities and deferred credits 31.0 30.4
-------- --------
614.6 596.2
-------- --------
Shareholders' equity:
Common stock, $1.25 par value (Note 6) 50.0 49.8
Capital in excess of par value 373.9 370.6
Reinvested earnings 510.2 431.6
Currency translation adjustment (1.3) (1.5)
Treasury stock, at cost (104.1) (46.3)
-------- --------
828.7 804.2
-------- --------
$1,443.3 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 333.4 $ 317.7 $ 578.3 $ 542.6
-------- -------- -------- --------
Costs and expenses:
Operating 199.7 192.3 363.2 348.5
Depreciation, depletion and amortization 17.9 19.3 35.3 36.5
Selling and marketing 7.5 7.4 14.3 14.3
General and administrative 15.2 18.4 33.2 36.0
Acquisition (credit) charge (Note 2) (1.5) 82.9 (1.5) 82.9
Other income, net (2.7) (2.1) (9.4) (3.2)
-------- -------- -------- --------
236.1 318.2 435.1 515.0
-------- -------- -------- --------
Earnings (loss) before interest, income taxes
and minority interest 97.3 (0.5) 143.2 27.6
Interest income 1.1 1.2 2.9 2.3
Interest expense, net of amounts capitalized (3.6) (4.8) (6.8) (9.2)
-------- -------- -------- --------
Earnings (loss) before income taxes and minority interest 94.8 (4.1) 139.3 20.7
Income tax expense (31.8) (17.7) (46.4) (26.5)
-------- -------- -------- --------
Earnings (loss) before minority interest 63.0 (21.8) 92.9 (5.8)
Minority interest, net of income taxes (1.5) (1.3) (1.9) (1.6)
-------- -------- -------- --------
Earnings (loss) from continuing operations 61.5 (23.1) 91.0 (7.4)
Loss from discontinued operations,
net of income taxes (Note 3) (1.0) -- (1.0) --
-------- -------- -------- --------
Net earnings (loss) $ 60.5 $ (23.1) $ 90.0 $ (7.4)
======== ======== ======== ========
Earnings (loss) per common share:
Basic
Earnings (loss) from continuing operations $ 1.62 $ (0.60) $ 2.37 $ (0.19)
Loss from discontinued operations, net of income taxes (0.03) -- (0.03) --
-------- -------- -------- --------
$ 1.59 $ (0.60) $ 2.34 $ (0.19)
======== ======== ======== ========
Diluted
Earnings (loss) from continuing operations $ 1.60 $ (0.60) $ 2.35 $ (0.19)
Loss from discontinued operations, net of income taxes (0.03) -- (0.03) --
-------- -------- -------- --------
$ 1.57 $ (0.60) $ 2.32 $ (0.19)
======== ======== ======== ========
Average shares outstanding:
Basic 38.1 38.1 38.4 38.0
======== ======== ======== ========
Diluted 38.6 38.1 38.8 38.0
======== ======== ======== ========
</TABLE>
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<PAGE> 5
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
------------------
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Operating activities:
Net earnings (loss) from continuing operations $ 91.0 $ (7.4)
Adjustments to reconcile earnings (loss) from continuing
operations to cash provided by (used in) operating activities:
Depreciation, depletion and amortization 35.3 36.5
Other non-cash charges 2.9 13.8
Changes in operating assets and liabilities (43.4) 22.1
Other adjustments (4.9) 1.8
Net cash used in discontinued operations (1.0) (0.4)
------- -------
Net cash provided by operating activities 79.9 66.4
------- -------
Investing activities:
Additions to property, plant and equipment (68.4) (50.1)
Purchase of short-term investments (14.8) (3.9)
Maturity of short-term investments 29.6 7.9
Proceeds from asset sales 12.9 2.9
Acquisitions, net of cash acquired -- (6.9)
Other investing activities -- (0.2)
------- -------
Net cash used in investing activities (40.7) (50.3)
------- -------
Financing activities:
Purchase of treasury stock (58.9) --
Additions to long-term debt -- 30.9
Reductions in long-term debt (0.6) (63.4)
Dividends (11.5) (9.8)
Contributions from minority partner 4.0 --
Distributions to minority partner (2.3) (1.0)
Other financing activities 3.5 (0.6)
------- -------
Net cash used in financing activities (65.8) (43.9)
------- -------
Net decrease in cash and cash equivalents (26.6) (27.8)
Cash and cash equivalents at beginning of period 143.8 98.9
------- -------
Cash and cash equivalents at end of period $ 117.2 $ 71.1
======= =======
</TABLE>
Cash payments for income taxes totaled $31.3 million and $18.5 million
in the first half of 1999 and 1998, respectively. Interest paid, net of amounts
capitalized, was $6.3 million and $9.5 million in the six month year-to-date
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Contributions to revenues:
Cement
Sales to customers $ 226.8 $ 220.3 $ 388.3 $ 366.9
Freight to customers and other 11.5 11.2 20.7 20.0
------- ------- ------- -------
Total cement revenues 238.3 231.5 409.0 386.9
Concrete products 65.3 61.9 125.0 117.1
Aggregates 47.4 41.8 77.3 70.0
Intersegment sales (17.6) (17.5) (33.0) (31.4)
------- ------- ------- -------
$ 333.4 $ 317.7 $ 578.3 $ 542.6
======= ======= ======= =======
Contributions to earnings from continuing operations
before interest, income taxes and minority interest:
Operating profit
Cement $ 89.7 $ 83.4 $ 135.8 $ 119.2
Concrete products 5.8 5.1 10.8 7.4
Aggregates 11.2 7.5 20.1 9.6
------- ------- ------- -------
106.7 96.0 166.7 136.2
Corporate overhead (10.9) (13.6) (25.0) (25.7)
Acquisition credit (charge) (Note 2) 1.5 (82.9) 1.5 (82.9)
------- ------- ------- -------
$ 97.3 $ (0.5) $ 143.2 $ 27.6
======= ======= ======= =======
</TABLE>
As of June 30, 1999, there were no material changes in total assets by
segment as disclosed in the December 31, 1998 financial statements. In July
1999, Southdown signed a definitive agreement to acquire a Florida ready-mix
concrete products and construction aggregates company for $56.5 million plus
working capital.
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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 -- -- -- 90.0 -- --
Dividends paid on common stock -- -- -- (11.5) -- --
Exercise of stock options 0.2 0.2 3.1 0.1 -- --
Purchase of treasury stock -- -- -- -- -- (58.9)
Issuance of treasury stock -- -- 0.2 -- -- 1.1
Foreign currency translation
adjustment -- -- -- -- 0.2 --
------ ------ ------ ------ ------ -------
Balance at June 30, 1999 40.0 $ 50.0 $373.9 $510.2 $ (1.3) $(104.1)
====== ====== ====== ====== ====== =======
</TABLE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(IN MILLIONS)
-----------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 60.5 $ (23.1) $ 90.0 $ (7.4)
Foreign currency translation
adjustments, net of tax 0.3 (0.1) 0.2 (0.1)
------- ------- ------- -------
Comprehensive income (loss) $ 60.8 $ (23.2) $ 90.2 $ (7.5)
======= ======= ======= =======
</TABLE>
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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 ("Southdown"):
- The Consolidated Balance Sheet at June 30, 1999, and December
31, 1998.
- The Statements of Consolidated Earnings, Selected Consolidated
Segment Data, and Consolidated Comprehensive Income for the
three and six month periods ended June 30, 1999 and 1998, and
- The Statements of Consolidated Cash Flows and Consolidated
Shareholders' Equity for the six months ended June 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 June 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.
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<PAGE> 9
NOTE 2 - ACQUISITION OF MEDUSA CORPORATION:
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 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 Southdown common stock. The exchange of Medusa
shares and options for Southdown 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.
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)
---------------------------------
PERIODS ENDED JUNE 30, 1998
---------------------------------
THREE MONTHS SIX MONTHS
------------ ----------
<S> <C> <C>
Revenues
Southdown $ 202.1 $ 357.9
Medusa 115.6 184.7
---------- ----------
Combined $ 317.7 $ 542.6
========== ==========
Net earnings (loss)
Southdown $ 22.7 $ 39.2
Medusa (45.8) (46.6)
---------- ----------
Combined $ (23.1) $ (7.4)
========== ==========
</TABLE>
Southdown recorded second quarter 1998 charges to operating expenses
totaling $82.9 million ($73.9 million after taxes, or $1.90 per common share,
diluted) for direct and other merger related transaction costs. These
transaction costs included severance related costs for approximately 150 former
employees at the Medusa corporate office, professional fees, financial printing,
and anticipated closure of duplicate corporate office facilities and
incompatible business practices, processes and activities. Remaining merger
transaction liabilities at June 30, 1999 were $1.1 million. These liabilities
relate to ongoing lease payment obligations associated with the closure of the
Medusa
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<PAGE> 10
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)
------------------------------------------------
ACCRUED CURRENT
MERGER AMOUNTS BALANCE
COSTS PAID ADJUSTMENTS AT 6/30/99
------- ------- ----------- ---------
<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 6.5 (2.6) 1.1
----- ----- ----- -----
Total $82.9 $72.6 $(9.2) $ 1.1
===== ===== ===== =====
</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 its 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 has
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
hazardous waste disposal business in 1994, the charge is reflected as a "loss
from discontinued operations, net of income taxes" on Southdown's Statement of
Consolidated Earnings. 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.
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<PAGE> 11
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 six month periods ending June
30, 1999 and 1998. Diluted earnings per share for the three and six month
periods ending June 30, 1999 assume the dilutive impact of stock options.
Because including potential shares in the denominator of an earnings per share
computation will always be anti-dilutive when an entity has incurred a loss for
the period, only the average number of common shares outstanding (the same
number used in the basic earnings per share computation) were used in computing
diluted earnings per share for the three and six month periods ending June 30,
1998.
NOTE 5 - INVENTORIES:
<TABLE>
<CAPTION>
(IN MILLIONS)
--------------------------------
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Finished goods $ 37.6 $ 36.1
Work in progress 32.0 14.7
Raw materials 7.2 7.1
Supplies 52.0 49.8
---------- ------------
$ 128.8 $ 107.7
========== ============
</TABLE>
Inventories stated on the Last In, First Out method were $63.7 million
of total inventories at June 30, 1999 and $46.3 million of total inventories at
December 31, 1998 compared with current costs of $80.6 million and $63.2
million, respectively.
NOTE 6 - CAPITAL STOCK:
In June 1998, the shareholders of Southdown voted to amend Southdown's
Restated Articles of Incorporation, as amended, to increase the authorized
number of shares of common stock. The authorized capital stock of Southdown
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.
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<PAGE> 12
At June 30, 1999, there were approximately 39,964,000 shares of common
stock issued and approximately 37,821,000 shares of common stock outstanding and
held of record by approximately 4,143 shareholders. Approximately 4.9 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.
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 Southdown's outstanding common stock. Subsequent to that time,
Southdown has made open market purchases of common stock for a total since the
authorization of 1 million shares through August 6, 1999 at a cost of $58.9
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-employee 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
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<PAGE> 13
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 all fiscal quarters of
all fiscal years beginning after June 15, 2000 and management is currently
evaluating what, if any, impact this new accounting standard may have on
Southdown's consolidated financial statements. Southdown held no derivative
financial instruments during 1998 or the six months ended June 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, and (5)
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 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 June 30, 1999
and for the six months then ended follows:
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<PAGE> 14
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 June 30, 1999, and the related
consolidated statements of earnings, and comprehensive income for the three and
six months ended June 30, 1999 and 1998 and the consolidated statements of cash
flows and shareholders' equity for the six months ended June 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
July 20, 1999
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<PAGE> 15
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 SECOND QUARTER EARNINGS
In the second quarter of 1999, Southdown continued its pattern of
revenues and earnings growth. Net earnings from continuing operations increased
19% over net earnings for the prior year quarter excluding the non-recurring
special charges and credits related to the merger with Medusa Corporation. On
the one year anniversary of the consummation of the merger transaction, the
acquisition reserve established on the date of the merger was reduced by $1.5
million to leave remaining only the ongoing lease obligation associated with the
closing of Medusa's former corporate headquarters in Cleveland, Ohio. The
adjustment was included in income in the quarter ended June 30, 1999. Net
earnings for the 1999 quarter were also impacted by a $1.5 million ($1 million
after tax) discontinued operations charge related to environmental remediation
at Southdown's former Birmingham, Alabama hazardous waste facility.
Consolidated revenues in the second quarter of 1999 increased 5% over
the same period of the prior year, primarily driven by the Cement and Aggregates
segments. Second quarter 1999 earnings before interest, income taxes and
minority interest improved 16% (excluding the Medusa transaction charges and
credits) over the same quarter of the prior year, primarily reflecting improved
earnings achieved by the Cement segment in 1999. Segment operating profits for
the quarter ended June 30, 1999 increased 11% compared with the same quarter of
1998, with all three operating segments showing quarter-over-quarter
improvements.
Interest expense decreased 25%, primarily because of higher capitalized
interest related to construction projects and because there were no revolving
credit facility borrowings in the second
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<PAGE> 16
quarter of 1999. The effective tax rate for the second quarter was slightly
higher than the rate used in the first quarter because of revised estimates of
the impact of permanent differences related to federal statutory depletion based
on annualized actual results for the first half of 1999. The effective tax rate
for the second quarter of 1999 is lower than the prior year quarter because the
prior year tax rate was inflated by certain non-deductible merger related
transaction costs.
CONSOLIDATED YEAR-TO-DATE RESULTS
Consolidated year-to-date earnings for the comparable six month periods
showed a trend similar to that of the three month periods. Net earnings for the
six months ended June 30, 1999 increased 35% over net earnings in the comparable
prior year period excluding the Medusa acquisition charges and credits.
Consolidated revenues year-to-date 1999 were 7% higher than those of the prior
year six month period. Excluding Medusa acquisition charges and credits,
earnings before interest, income taxes and minority interest improved 28% over
the first half of 1998 and segment operating profits increased 22% over the same
period of the prior year. Again, the Cement segment led the way, but all three
operating segments showed solid improvements year-over-year.
The increase in interest income reflects higher levels of investable
cash during the first half 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 no borrowings on the
Medusa revolving credit facility in the current period. The 1999 effective tax
rate is lower than the prior year period because of the non-deductible 1998
merger costs discussed above.
SEGMENT OPERATING EARNINGS
CEMENT
Second Quarter - Cement price increases moderated somewhat compared
with prior year increases, but still reflected a small quarter-over-quarter
improvement, while sales volumes increased 2%. A 2% decline in
quarter-over-quarter unit costs and an 8% increase in clinker production
improved margins on the higher sales volumes. Higher sales volumes and sales
prices reflected strong
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<PAGE> 17
demand in most market areas. The decline in average unit cost of sales was
primarily because of the increase in clinker production, which enabled fixed
costs to be averaged over a larger number of units.
Year-to-Date - The segment achieved a year-over-year, 4% increase in
cement sales volumes and a $1.21 per ton or 2.4% increase in average sales price
for the six months ended June 30. Year-over-year cement plant comparisons are
difficult because of changes in the alignment of certain cement terminals with
different cement plants between the two periods. In summary, however,
significant improvements in the operating results at the Brooksville, Florida
and the Charlevoix, Michigan plants were somewhat offset by the results for the
cement plants in the southwest region, which were impacted by a combination of
inclement weather and competitive conditions. A $1.06 decrease in average unit
costs, combined with a 274,000 ton increase in clinker production, resulted in a
14% increase in Cement segment operating earnings in 1999 compared with 1998.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tons of cement sold (thousands) 3,109 3,037 5,342 5,132
========= ========= ========= =========
Weighted average per ton data:
Sales price (net of freight to customers) $ 72.97 $ 72.55 $ 72.70 $ 71.49
Manufacturing and other plant
operating costs(1) 44.43 45.43 47.60 48.66
--------- --------- --------- ---------
Margin $ 28.54 $ 27.12 $ 25.10 $ 22.83
========= ========= ========= =========
</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
Second Quarter - Excluding second quarter gains on sales of surplus
real estate in both years ($900,000 in the 1999 quarter and $1.4 million in the
1998 quarter), the Concrete Products segment operating earnings improved almost
30% compared with operating earnings in the second quarter of 1998. Concrete
Products revenues for the June 30, 1999 quarter were higher than the prior year
quarter
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<PAGE> 18
because of both improved ready-mixed concrete sales volumes and prices. A 5%
improvement in average concrete products sales prices combined with a 2%
increase in ready-mix concrete sales volumes in Florida resulted in higher
operating earnings. Both the Florida and the California market areas realized
improved pricing.
Year-to-Date - For the six months year-to-date, Concrete Products sales
volumes increased 3% over the prior year period results, with both Florida and
California participating. Unit sales prices increased 4% while average unit
operating costs increased less than 1%. Overall operating earnings for the
Concrete Products segment increased 46% in the first half of 1999 compared with
the same period of 1998.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cubic yards of ready-mixed concrete
sold (thousands) 942 926 1,791 1,733
========= ========= ========= =========
Weighted average per cubic yard data:
Sales price $ 59.88 $ 57.21 $ 59.57 $ 57.34
Operating costs(1) 55.75 54.08 55.33 54.83
--------- --------- --------- ---------
Margin(2) $ 4.13 $ 3.13 $ 4.24 $ 2.51
========= ========= ========= =========
</TABLE>
- --------------
(1) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs.
(2) Does not include real estate gains of approximately $1 million for the three
and six month periods ended June 30, 1999, respectively, and $1.4 million
for the three and six month periods of 1998, respectively, or concrete block
and other related products which totaled $1 million and $0.9 million of
operating earnings for the three month periods ended June 30, 1999 and 1998,
respectively, and $2.3 million and $1.7 million of operating earnings in the
year-to-date 1999 and 1998 periods, respectively.
AGGREGATES
Second Quarter - The Aggregates segment showed the largest percentage
improvement in operating earnings rising 49% compared with the June 1998
quarter. Revenues for the Aggregates segment increased 13% for the second
quarter of 1999 compared with the prior year quarter. Sales volumes for the
Aggregates segment increased 9% to 3.4 million tons in the second quarter of
1999
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<PAGE> 19
because of improved construction aggregates sales volume in both the Eastern and
California regions. A 4% increase in aggregates sales prices also contributed to
improved operating earnings in the current quarter compared with the prior year
quarter.
Year-to-Date - Year-to-date segment results for 1999 also include a $6
million pre-tax gain realized on the January 1999 sale of Southdown's North
Carolina quarry. Excluding the gain realized in the sale of the quarry, the
Aggregates segment operating earnings increased $4.5 million or almost 47% from
1998 to 1999 as revenues increased 10% on a small increase in average unit sales
prices and a 10% increase in sales volumes. The increase in sales volumes is
primarily because of improved construction aggregates sales volumes in both of
Southdown's Eastern and California aggregate marketing regions.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Tons of aggregates sold (thousands) 3,443 3,173 5,837 5,310
========= ========= ========= =========
Weighted average per ton data:
Sales price $ 9.67 $ 9.26 $ 9.38 $ 9.32
Operating costs (1) 6.60 7.25 7.02 7.66
--------- --------- --------- ---------
Margin $ 3.07 $ 2.01 $ 2.36 $ 1.66
========= ========= ========= =========
</TABLE>
- --------------
(1) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs.
(2) Excludes $6 million gain on sale of North Carolina quarry in January 1999.
CORPORATE
Second Quarter - The decline in corporate overhead expenses in the
second quarter of 1999 compared with the prior year resulted from (1) the
closing of the Medusa Cleveland corporate office in early 1999, (2) greater
capitalized salaries because of the higher level of capital spending on
projects, and (3) the settlement of certain liabilities from prior Medusa
acquisitions.
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<PAGE> 20
Year-to-Date - Year-to-date corporate overhead was slightly lower in
the 1999 period for the reasons discussed above offset by a $1 million first
quarter charge related to the Board of Directors' retirement plan and certain
expenses related to Medusa operations, which could not be charged against the
acquisition reserve. Management still 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
begin to have an impact in the second half 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 longer term in order to meet
Southdown's stated long-term goals and objectives. Strong cash flows from
operations in the first half of 1999 have enabled Southdown to pursue
investments in cost-efficient capital projects at its cement plants while
simultaneously repurchasing half of the up to 2 million share buy-back program
authorized in March 1999. Southdown generated $79.9 million in positive cash
flow from operating activities for the six months ended June 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 $68.4 million in capital
additions, primarily related to several expansion/cost reduction projects in the
Cement segment, (2) repurchase 1 million shares of common stock at a cost of
$58.9 million, (3) pay $11.5 million of dividends on common stock, in addition
to (4) meeting all working capital requirements. During the first six months of
1998, internally generated cash flow and borrowings under the Medusa revolving
credit facility were utilized to (1) invest approximately $57 million in
property, plant and equipment and in acquisition of Aggregates operations, (2)
repay $63.4 million in long-term debt, (3) fund working capital requirements,
and (4) pay 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 June 30, 1999, there were no borrowings and $66.8 million in letters of
credit outstanding under the revolving credit
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<PAGE> 21
facility, leaving $133.2 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 its unused capacity under Southdown'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 Southdown. In addition, management believes Southdown's
debt-to-capitalization ratio of 17% as of June 30, 1999 and the July 1999
upgrade of Southdown's investment grade senior debt rating to Baa1 by Moody's
Investor's Service, Inc. and BBB+ 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 June 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 June 1999 relative to lower December 1998 sales. The increase in inventories
reflecting the typical build-up of cement inventories during the second 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
Industry Dynamics - A recent economic and construction forecast by the
Portland Cement Association suggests that total cement consumption should grow
from 113.7 million tons in 1998 to over 130.4 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
phases of major cement plant expansions and new "greenfield" plants, there is
generally a several year lead time between the
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<PAGE> 22
announcing of major cement capacity expansions and the actual bringing of such
production capacity on line. 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
relatively high cost 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.
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
an impact beginning some time later in 1999. 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
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<PAGE> 23
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, except
as noted below.
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 becomes saturated with water, liquid that leaches out may have an
alkalinity level high enough to be classified as hazardous. Saturated 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 rulemaking process in order to develop
specifically tailored CKD management standards. Southdown expects the U.S. EPA
to propose new CKD standards by the end of 1999. Once finalized, these new CKD
standards may require the cement industry to implement new management practices
for this waste 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 is scheduled to be submitted
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<PAGE> 24
to the Michigan Department of Environmental Quality 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 penalty payments, if any, and
remediation. 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 deleterious
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.
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<PAGE> 25
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 effective date
has been postponed pending resolution of legal challenges to
the U.S. EPA action, 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.
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, but management does not believe Southdown will be
at a competitive disadvantage with respect to others in the
industry.
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.
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<PAGE> 26
During 1997-1998, 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 Commonwealth of
Pennsylvania has prepared a complaint against Southdown for the same alleged
violations. The U.S. EPA also referred these notices to the U.S. Department of
Justice for civil enforcement. All parties have negotiated a settlement in
principle subject to the negotiation of a mutually agreeable consent decree,
which Southdown and the government entities are in the process of drafting. The
consent decree will include penalty payments as well as future compliance
obligations. Management believes the agreed to penalty payments will not exceed
the amount Southdown has already reserved for this matter.
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 import of foreign
cement into the U.S. Changes in competitive pressures from imported foreign
cement into the U.S. could have a negative impact on Southdown's
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<PAGE> 27
results of operations. 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 will conduct "sunset" reviews of the antidumping orders and
suspension agreements beginning in the third quarter of 1999 to determine
whether they should be revoked or remain in effect for another five years.
Southdown 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.
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 imports represented approximately 23% 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
supplemented domestic production rather than disrupting the market with unfair
prices.
As U.S. demand strengthened over the last several years, the prices of
cement imports rose. The average cost of imported cement continued to rise
during 1998, but the cost of cement imports from some countries, particularly
those from Southeast Asia, declined. New, independently owned cement import
operations could undertake to construct new import facilities and begin to
purchase large
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<PAGE> 28
quantities of low-priced cement from countries not yet subject to antidumping
orders such as those in Asia, which could compete with domestic producers.
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 the Year 2000. 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. At the midpoint of 1999,
Southdown is actively completing its review, correction and testing all of its
Year 2000 compliance issues. Southdown is at various stages in the processes of
modifying or replacing some of its manufacturing process control systems and
assessing the need to modify or replace embedded microprocessor controlled
equipment. 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 June 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, or will be by the end of the third quarter of 1999. Southdown's
main focus now is on embedded processors in cement, concrete products and
aggregates facilities and equipment and assessing potential Year 2000 compliance
problems with Southdown's material external suppliers of goods, services and
data. 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 some, 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.
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,
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<PAGE> 29
accelerated software replacement beyond the normal upgrade cycle and the
replacement or modification of equipment with embedded microprocessor controls.
It is not certain that Year 2000 compliance can be fully achieved. With
respect to Southdown's own 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 is in the process of formulating a Year 2000 contingency plan 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. Management expects to
have its Year 2000 contingency plans in place by mid-third quarter of 1999. It
may not be 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 $3.7 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.
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<PAGE> 30
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 neither affirmed nor 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 September 1999. 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,
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
-28-
<PAGE> 31
cost or recoverability of cost from prior owners, if any, regarding these
discontinued operations, except as noted below.
In late 1994 and the second quarter of 1995, Southdown learned of some
soil and groundwater contamination at its 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 has
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" on Southdown's Statement of
Consolidated Earnings. 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, 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
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
-29-
<PAGE> 32
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.
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" 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, particularly Asia, (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.
-30-
<PAGE> 33
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 and employment matters. 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 June 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.
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 - Six Months Ended June 30, 1999
(b) Reports on Form 8-K
On June 3, 1999, Southdown filed a Current Report on Form 8-K reporting
on the results of matters submitted to a vote of the shareholders of
Southdown at its Annual Meeting on May 20, 1999, namely the election of
five directors to Southdown's Board of Directors, the approval of
amendments of the 1991 Nonqualified Stock Option Plan for Non-Employee
Directors and the ratification of the appointment of Deloitte & Touche
LLP as the independent auditors of Southdown for the year ending
December 31, 1999.
No other Reports on Form 8-K were filed during the quarter ended June
30, 1999.
-31-
<PAGE> 34
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: August 6, 1999 By: DENNIS M. THIES
---------------------------------------
Dennis M. Thies
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: August 6, 1999 By: ALLAN KORSAKOV
---------------------------------------
Allan Korsakov
Vice President and Corporate Controller
(Principal Accounting Officer)
-32-
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. 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 - Six Months Ended June 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings (loss) for basic earnings per share:
Earnings (loss) from continuing operations $ 61.5 $ (23.1) $ 91.0 $ (7.4)
Loss from discontinued operations, net of taxes (1.0) -- (1.0) --
-------- -------- -------- --------
Net (loss) earnings for basic earnings per share $ 60.5 $ (23.1) $ 90.0 $ (7.4)
======== ======== ======== ========
Earnings (loss) for diluted earnings per share
Earnings (loss) from continuing operations $ 61.5 $ (23.1) $ 91.0 $ (7.4)
Loss from discontinued operations, net of taxes (1.0) -- (1.0) --
-------- -------- -------- --------
Net earnings (loss) for diluted earnings per share $ 60.5 $ (23.1) $ 90.0 $ (7.4)
======== ======== ======== ========
Average outstanding common shares for basic
earnings per share 38.1 38.1 38.4 38.0
Other potentially dilutive securities:
-- common stock equivalents from assumed
exercise of stock options 0.5 0.8 0.5 0.8
-------- -------- -------- --------
Total for diluted earnings per share 38.6 38.9 38.9 38.8
Less: antidilutive stock options -- (0.8) -- (0.8)
-------- -------- -------- --------
$ 38.6 $ 38.1 $ 38.9 $ 38.0
======== ======== ======== ========
Earnings (loss) per common share:
Basic
Earnings from continuing operations $ 1.62 $ (0.60) $ 2.37 $ (0.19)
Loss from discontinued operations, net of taxes (0.03) -- (0.03) --
-------- -------- -------- --------
$ 1.59 $ (0.60) $ 2.34 $ (0.19)
======== ======== ======== ========
Diluted
Earnings from continuing operations $ 1.60 $ (0.60) $ 2.35 $ (0.19)
Loss from discontinued operations, net of taxes (0.03) -- (0.03) --
-------- -------- -------- --------
$ 1.57 $ (0.60) $ 2.32 $ (0.19)
======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15
August 6, 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
June 30, 1999 and 1998, as indicated in our report dated July 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 June 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 JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 117
<SECURITIES> 0
<RECEIVABLES> 163
<ALLOWANCES> 5
<INVENTORY> 129
<CURRENT-ASSETS> 418
<PP&E> 1,549
<DEPRECIATION> 699
<TOTAL-ASSETS> 1,443
<CURRENT-LIABILITIES> 153
<BONDS> 167
0
0
<COMMON> 50
<OTHER-SE> 779
<TOTAL-LIABILITY-AND-EQUITY> 1,443
<SALES> 578
<TOTAL-REVENUES> 578
<CGS> 396
<TOTAL-COSTS> 435
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 139
<INCOME-TAX> 46
<INCOME-CONTINUING> 91
<DISCONTINUED> (1)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90
<EPS-BASIC> 2.34
<EPS-DILUTED> 2.32
</TABLE>
