<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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 (I.R.S. Employer
incorporation or organization) 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 April 30, 2000 there were 35.9 million common shares outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets March 31, 2000 and December 31,
1999...................................................... 1
Statements of Consolidated Earnings Three months ended March
31, 2000 and 1999......................................... 2
Statements of Consolidated Cash Flows Three months ended
March 31, 2000 and 1999................................... 3
Statements of Selected Consolidated Segment Data Three
months ended March 31, 2000 and 1999...................... 4
Statements of Consolidated Shareholders' Equity Three months
ended March 31, 2000...................................... 5
Statements of Consolidated Comprehensive Income Three months
ended March 31, 2000 and 1999............................. 6
Notes to Consolidated Financial Statements.................. 7
Independent Accountants' Review Report...................... 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................ 11
Item 3. Qualitative and Quantitative Disclosures about Market
Risk...................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
</TABLE>
i
<PAGE> 3
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 18.3 $ 21.8
Accounts and notes receivable, less allowance for doubtful
accounts of $5.4 and $5.4.............................. 145.4 129.4
Inventories............................................... 151.4 135.4
Prepaid expenses and other................................ 17.2 20.0
-------- --------
Total current assets.............................. 332.3 306.6
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of $695.5 and
$679.4.................................................... 958.6 920.3
Goodwill.................................................... 132.8 134.2
Other long-term assets...................................... 72.0 69.6
-------- --------
$1,495.7 $1,430.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt and current maturities of long-term
debt................................................... $ 13.4 $ 0.4
Accounts payable and accrued liabilities.................. 151.3 146.8
-------- --------
Total current liabilities......................... 164.7 147.2
Long-term debt.............................................. 181.1 165.7
Deferred income taxes....................................... 132.4 131.1
Minority interest in consolidated joint venture............. 39.3 35.9
Long-term portion of postretirement benefit obligation...... 86.7 87.7
Other long-term liabilities and deferred credits............ 29.5 30.0
-------- --------
633.7 597.6
-------- --------
Shareholders' equity:
Common stock, $1.25 par value............................. 50.0 50.0
Capital in excess of par value............................ 376.5 376.3
Reinvested earnings....................................... 640.9 612.2
Currency translation adjustment........................... (1.2) (1.2)
Treasury stock, at cost................................... (204.2) (204.2)
-------- --------
862.0 833.1
-------- --------
$1,495.7 $1,430.7
======== ========
</TABLE>
1
<PAGE> 4
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999
--------- ---------
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $279.5 $244.9
------ ------
Costs and expenses:
Operating................................................. 180.1 163.5
Depreciation, depletion and amortization.................. 20.3 17.4
Selling and marketing..................................... 8.1 6.8
General and administrative................................ 16.9 18.0
Other income, net......................................... (0.6) (6.7)
------ ------
224.8 199.0
------ ------
Earnings before interest, income taxes and minority
interest.................................................. 54.7 45.9
Interest income............................................. -- 1.8
Interest expense, net of amounts capitalized................ (2.3) (3.2)
------ ------
Earnings before income taxes and minority interest.......... 52.4 44.5
Income tax expense.......................................... (18.1) (14.6)
------ ------
Earnings before minority interest........................... 34.3 29.9
Minority interest, net of income taxes...................... (0.3) (0.4)
------ ------
Net earnings................................................ $ 34.0 $ 29.5
====== ======
Earnings per common share:
Basic..................................................... $ 0.95 $ 0.76
====== ======
Diluted................................................... $ 0.94 $ 0.75
====== ======
Weighted average shares outstanding:
Basic..................................................... 35.9 38.7
====== ======
Diluted................................................... 36.3 39.1
====== ======
</TABLE>
2
<PAGE> 5
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Operating activities:
Net earnings.............................................. $ 34.0 $ 29.5
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation, depletion and amortization............... 20.3 17.4
Changes in operating assets and liabilities............ (28.9) (19.6)
Other adjustments...................................... 1.9 (6.2)
Net cash used in discontinued operations.................. -- (0.5)
------ ------
Net cash provided by operating activities................... 27.3 20.6
------ ------
Investing activities:
Additions to property, plant and equipment................ (57.2) (36.8)
Purchase of short-term investments........................ -- (14.8)
Maturity of short-term investments........................ -- 14.8
Proceeds from asset sales................................. 0.3 10.8
Other investing activities................................ (0.2) 1.1
------ ------
Net cash used in investing activities....................... (57.1) (24.9)
------ ------
Financing activities:
Additions to debt......................................... 28.8 --
Reductions in debt........................................ (0.4) (0.6)
Dividends................................................. (5.4) (5.8)
Contributions from minority partner....................... 3.0 1.8
Distributions to minority partner......................... -- (0.8)
Other financing activities................................ 0.3 0.5
------ ------
Net cash provided by (used in) financing activities......... 26.3 (4.9)
------ ------
Net decrease in cash and cash equivalents................... (3.5) (9.2)
Cash and cash equivalents at beginning of period............ 21.8 143.8
------ ------
Cash and cash equivalents at end of period.................. $ 18.3 $134.6
====== ======
</TABLE>
Cash payments for income taxes totaled $2.2 million and $5.0 million in the
first quarter of 2000 and 1999, respectively. Interest paid, net of amounts
capitalized, was $2.3 million and $6.1 million in the 2000 and 1999 periods,
respectively.
3
<PAGE> 6
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF SELECTED CONSOLIDATED SEGMENT DATA
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Contributions to revenues:
Cement
Sales to customers..................................... $176.4 $161.5
Freight to customers and other......................... 11.4 9.2
------ ------
Total cement revenues............................. 187.8 170.7
Concrete products......................................... 76.3 59.7
Aggregates................................................ 38.0 29.9
Intersegment sales........................................ (22.6) (15.4)
------ ------
$279.5 $244.9
====== ======
Contributions to earnings before interest, income taxes and
minority interest:
Operating profit
Cement................................................. $ 56.6 $ 46.1
Concrete products...................................... 6.5 5.0
Aggregates............................................. 4.0 8.9
------ ------
67.1 60.0
Corporate overhead........................................ (12.4) (14.1)
------ ------
$ 54.7 $ 45.9
====== ======
</TABLE>
4
<PAGE> 7
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN CURRENCY
--------------- EXCESS OF REINVESTED TRANSLATION TREASURY
SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENT STOCK
------ ------ ------------ ---------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999....... 40.0 $50.0 $376.3 $612.2 $(1.2) $(204.2)
Net earnings....................... -- -- -- 34.0 -- --
Dividends paid on common stock..... -- -- -- (5.4) -- --
Exercise of stock options.......... -- -- 0.2 0.1 -- --
---- ----- ------ ------ ----- -------
BALANCE AT MARCH 31, 2000.......... 40.0 $50.0 $376.5 $640.9 $(1.2) $(204.2)
==== ===== ====== ====== ===== =======
</TABLE>
5
<PAGE> 8
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Net earnings................................................ $34.0 $29.5
Foreign currency translation adjustments, net of tax........ -- (0.1)
----- -----
Comprehensive income........................................ $34.0 $29.4
===== =====
</TABLE>
6
<PAGE> 9
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
This quarterly report presents the following financial statements of
Southdown, Inc. and subsidiary companies ("Southdown" or the "Company"):
- The Consolidated Balance Sheets at March 31, 2000 and December 31, 1999.
- The Statements of Consolidated Earnings, Selected Consolidated Segment
Data, and Consolidated Comprehensive Income for the three-month periods
ended March 31, 2000 and 1999.
- The Statements of Consolidated Cash Flows for the three months ended
March 31, 2000 and 1999.
- The Statements of Consolidated Shareholders' Equity for the three months
ended March 31, 2000.
The financial statements presented in this report were not audited. This
report presents extracts from the Consolidated Balance Sheet at December 31,
1999 drawn from the December 31, 1999 audited financial statements of Southdown.
This report does not include all disclosures required by generally accepted
accounting principles. The reader should also review the 1999 consolidated
financial statements and the notes to those statements included in Southdown's
Annual Report on Form 10-K.
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 March 31, 2000 do not necessarily indicate what
Southdown's results will be for the full year. Southdown reclassified certain
data from the prior period to make it easier to compare both periods.
NOTE 2 -- ACQUISITION OF MEDUSA CORPORATION:
On June 30, 1998, Southdown concluded a merger transaction with Medusa
Corporation, which 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.
Remaining merger transaction liabilities at March 31, 2000 were $926,000.
These liabilities relate to ongoing lease payment obligations associated with
the closure of the Medusa corporate office, which was closed at the end of the
first quarter of 1999. Details of the merger related costs are as follows:
<TABLE>
<CAPTION>
ORIGINAL
MERGER AMOUNTS BALANCE AT
COSTS PAID ADJUSTMENTS MARCH 31, 2000
-------- ------- ----------- --------------
(IN MILLIONS)
<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 6.7 (2.6) 0.9
----- ----- ----- ----
Total........................... $82.9 $72.8 $(9.2) $0.9
===== ===== ===== ====
</TABLE>
NOTE 3 -- EARNINGS PER SHARE:
Basic earnings per share were computed using the weighted average number of
common shares outstanding in each of the three-month periods ending March 31,
2000 and 1999. Diluted earnings per share assume the dilutive impact of stock
options.
7
<PAGE> 10
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income available to common shareholders and share amounts used in the
computation of basic and diluted earnings per share follow:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
2000 1999
------- -------
(IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
BASIC CALCULATION
Net earnings................................................ $34.0 $29.5
===== =====
Weighted average outstanding common shares.................. 35.9 38.7
===== =====
Basic earnings per share.................................... $0.95 $0.76
===== =====
DILUTED CALCULATION
Net earnings................................................ $34.0 $29.5
===== =====
Weighted average outstanding common shares.................. 35.9 38.7
Effect of dilutive stock options............................ 0.4 0.4
----- -----
Total outstanding shares for diluted earnings per
share........................................... 36.3 39.1
===== =====
Diluted earnings per share.................................. $0.94 $0.75
===== =====
</TABLE>
NOTE 4 -- INVENTORIES:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN MILLIONS)
<S> <C> <C>
Finished goods.............................................. $ 49.0 $ 45.7
Work in progress............................................ 36.9 22.7
Raw materials............................................... 9.1 10.4
Parts and supplies.......................................... 56.4 56.6
------ ------
$151.4 $135.4
====== ======
</TABLE>
Inventories stated on the Last In, First Out method were $78.1 million of
total inventories at March 31, 2000 and $60 million of total inventories at
December 31, 1999 compared with current costs of $95.0 million and $76.9
million, respectively.
NOTE 5 -- COMMON STOCK:
The Company has paid a quarterly dividend of $0.15 per share of common
stock since December 1998, when the quarterly dividend was increased from $0.10
per share.
During 1999, the Board of Directors approved and expanded a common stock
repurchase program under which Southdown was authorized to repurchase up to 4
million shares of its common stock. Southdown made open market purchase of 2.9
million shares of common stock at a cost of $159 million during 1999. During the
first quarter of 2000, there have been no purchases of shares of common stock.
NOTE 6 -- NEW ACCOUNTING STANDARDS:
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." A derivative is a financial instrument that
takes or "derives" its value from the value of some other financial instrument
or instruments. SFAS No. 133 requires that a company recognize all
8
<PAGE> 11
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
derivatives as either assets or liabilities on its balance sheet and measure
those instruments at fair value. Fair value is the amount for which an object
would currently change hands between a willing buyer and an independent willing
seller. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000 and management is
currently evaluating what, if any, impact this new accounting standard may have
on Southdown's consolidated financial statements. Southdown held no derivative
financial instruments during 1999 or the three months ended March 31, 2000.
NOTE 7 -- 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 other hold-harmless agreements, (3)
environmental remediation liabilities, (4) product liability claims, (5)
commercial disputes and litigation, and (6) claims by disgruntled employees.
These various commitments and contingent liabilities, in the judgment of
management, will not result in losses that would materially affect Southdown'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 8 -- 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 March 31, 2000
and for the three months then ended follows.
9
<PAGE> 12
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, 2000, and the related statements
of consolidated earnings, comprehensive income and cash flows for the three
months ended March 31, 2000 and 1999 and shareholders' equity for the three
months ended March 31, 2000. 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 auditing standards generally accepted in the United States of
America, 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 consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Southdown, Inc. and subsidiary companies as of December 31, 1999 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 26, 2000, 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, 1999 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 17, 2000
10
<PAGE> 13
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 21 through 30 of Southdown's Annual Report on Form
10-K for the year ended December 31, 1999 should be read in conjunction with the
discussion contained herein.
RESULTS OF OPERATIONS
Consolidated First Quarter Results
Net earnings for the first quarter of 2000 were $34 million, or $0.94 per
diluted share, compared with $29.5 million, or $0.75 per share, in the first
quarter of 1999. The prior year quarter included a $4 million after-tax gain, or
$0.10 per share, from the sale of a non-core aggregates operation.
Consolidated revenues in the first quarter of 2000 increased 14% over the
same period of the prior year, driven by improvement in all three operating
segments. First quarter 2000 earnings before interest, income taxes and minority
interest improved 19% over the same quarter of the prior year, primarily
reflecting improved earnings achieved by the Cement segment. Operating profits,
excluding the prior year gain on the sale of the non-core aggregates operation
($6 million pre-tax), increased 24% for the quarter ended March 31, 2000
compared with the same quarter of 1999.
Interest income decreased because of lower levels of investable cash during
the current quarter. Interest expense also declined as a result of the December
1999 retirement of $123.2 million of 10% Senior Subordinated Notes, which was
replaced with lower cost bank debt.
SEGMENT OPERATING EARNINGS
Cement
Cement segment operating earnings increased 23% to $56.6 million compared
with $46.1 million in the prior year quarter. Demand for cement was very strong
throughout most of the Company's marketing regions, which resulted in a 10%
increase in sales volumes compared with the prior year quarter. Part of the
consumption increase was weather-related, but construction activity continued to
grow in all of the Company's markets. Average cement sales prices declined
slightly due primarily to customer mix effects in Arizona and southern
California and competitive pricing pressure in the Las Vegas market. Unit
manufacturing and other costs declined 6% in the first quarter of 2000 resulting
from a 16% increase in clinker production. The increase in clinker production
resulted primarily from capacity improvements at the Charlevoix plant and from
the Company's Manufacturing Improvement Program initiative, which improved
execution of several maintenance outages requiring less downtime than in the
prior year quarter.
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,
---------------
2000 1999
------ ------
<S> <C> <C>
Tons of cement sold (thousands)............................. 2,452 2,233
====== ======
Weighted average per ton data:
Sales price (net of freight).............................. $71.94 $72.32
Manufacturing and other costs(1).......................... 48.86 52.00
------ ------
Margin.................................................... $23.08 $20.32
====== ======
</TABLE>
- ---------------
(1) Includes manufacturing costs, freight to terminals, purchased cement,
selling expenses, plant general and administrative costs and other plant
overhead costs.
11
<PAGE> 14
Concrete Products
Concrete Products operating earnings increased 30% to $6.5 million compared
with $5 million in the first quarter of 1999. Operating margins improved 5% as a
result of year 2000 price increases in the Florida market. Ready-mixed concrete
sales volumes increased 25% primarily because of contributions from the Sunshine
Materials operation which was acquired in the third quarter of 1999, and higher
Florida market sales.
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 MARCH 31,
---------------
2000 1999
------ ------
<S> <C> <C>
Cubic yards of ready-mixed concrete sold (thousands)........ 1,063 849
====== ======
Weighted average per cubic yard data:
Sales price............................................... $59.93 $59.21
Operating and other costs(1).............................. 55.37 54.86
------ ------
Margin(2)................................................. $ 4.56 $ 4.35
====== ======
</TABLE>
- ---------------
(1) Includes plant costs, delivery, selling, general and administrative costs.
(2) Does not include concrete block and other related products, which totaled
$1.6 million and $1.3 million of operating earnings for the three month
periods ended March 31, 2000 and 1999, respectively.
Aggregates
Operating earnings for the Aggregates segment were $4 million in the 2000
quarter compared with $2.9 million, excluding the $6 million pre-tax gain from
the sale of a non-core aggregates operation in the prior year quarter.
Construction aggregates sales volumes and average pricing improved from the
prior year quarter primarily reflecting contributions from the recently acquired
Sunshine Materials operation. The specialty minerals sales volumes and average
pricing also improved from the prior year quarter as a result of favorable
weather and demand. This improvement, however, was offset by legal and
consulting costs incurred at one facility relating to an environmental issue.
Sales volumes, average unit sales price and cost data, and unit operating
profit margins relating to the Company's aggregates operations appear in the
following table:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
2000 1999
------ ------
<S> <C> <C>
Tons of aggregates sold (thousands)......................... 2,871 2,394
====== ======
Weighted average per ton data:
Sales price............................................... $ 9.64 $ 8.95
Operating and other costs(1).............................. 8.16 7.61
------ ------
Margin.................................................... $ 1.48 $ 1.34(2)
====== ======
</TABLE>
- ---------------
(1) Includes plant costs, delivery, selling, general and administrative costs.
(2) Excludes a $6 million gain on the sale of a non-core aggregates operation in
January 1999.
Corporate
Corporate overhead expenses in the first quarter of 2000 declined $1.7
million compared with the prior year quarter. This reduction in expense
primarily reflects the absence of a $1 million charge related to the prior year
termination of the Board of Directors' retirement plan and the elimination of
costs associated with the closed Medusa corporate office.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $27.3 million in cash from operating activities for
the three months ended March 31, 2000, a 33% increase over the comparable period
in 1999. The Company has used these operating cash flows and borrowings under
the Company's credit lines to (1) fund $57.2 million in capital additions,
primarily related to several expansion/cost reduction projects in the Cement
segment, (2) pay $5.4 million of dividends on common stock, and (3) meet all
working capital requirements. During the first three months of 1999, internally
generated cash flow, plus existing cash and short term investment balances and
proceeds from asset sales, were used to (1) invest approximately $36.8 million
in property, plant and equipment additions, (2) fund working capital
requirements and (3) pay $5.8 million of dividends on common stock.
The Company has a $200 million revolving credit facility that matures in
June 2002 and a second $250 million revolving credit facility that matures in
December 2001. The $200 million revolving facility permits standby letters of
credit up to a maximum of $95 million in lieu of borrowings. At March 31, 2000,
there were $132 million of borrowings and $62.5 million in letters of credit
outstanding under the revolving credit facilities, leaving $255.5 million of
unused capacity. The Company is in compliance with the financial ratios and
other covenants contained in the revolving credit arrangements.
In addition to the borrowing capacity under the Company's revolving credit
facilities, the Company increased its borrowing flexibility by providing
additional borrowing capacity for working capital and other liquidity
requirements when it entered into a $20 million unsecured line of credit,
payable on demand, with a commercial bank in February 2000. At March 31, 2000,
there were $13.3 million in borrowings outstanding under the line of credit
leaving $6.7 million of unused capacity.
Management believes the Company's operating cash flows plus the unused
capacity under its outstanding credit facilities provide ample liquidity to fund
anticipated capital additions and meet other working capital requirements of the
Company.
In March 2000, the Company announced that its Board of Directors is
exploring and evaluating several options to enhance the value of Southdown's
shares. These options include, among other things, a significant share
repurchase, the expansion of the Company's business through domestic or
international acquisitions or, alternatively, a sale or merger of the Company.
The Company can provide no assurance as to the ultimate outcome of this process.
Changes in Financial Condition
The change in the financial condition of Southdown between December 31,
1999 and March 31, 2000 reflected the utilization of internally generated cash
flow and borrowings under the Company's credit facilities during the period to
fund capital expenditures, working capital requirements and common stock
dividends. Accounts and notes receivable increased primarily because of strong
sales activity occurring in March 2000 relative to lower sales in December 1999.
The increase in inventories reflecting the typical buildup of cement inventories
during the first quarter of the year was a result of an increase in
manufacturing performance from capacity improvements and improved execution
during several maintenance outages, which required less downtime than the prior
year quarter. Accounts payable and accrued liabilities increased because of the
timing of payments on normal trade and other obligations. Minority interest in
consolidated joint venture increased primarily because of contributions made by
the minority partner to fund the expansion of the Kosmosdale plant.
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 120.5 million tons in 1999 to over 132 million tons in 2004. Despite a
number of announced capacity expansions in the industry, management believes
industry dynamics will remain favorable for the next several years. Because of
the logistics involved in the design, permitting and construction of major
cement plant expansions and new cement plants, there is generally a several year
lead time between the announcement of major cement capacity expansions and the
actual
13
<PAGE> 16
availability of such production capacity. In the meantime, the shortfall between
domestic demand and domestic production capacity is being met by imports
(approximately 26% of 1999 consumption according to the Portland Cement
Association). These imports serve as a buffer; and cutbacks in imports should
bear the brunt of any increase in domestic production capacity or any decrease
in domestic consumption. One of the reasons why the Company withdrew its support
from the committees pursuing the continuation of anti-dumping duty orders
against certain foreign cement producers was the largely supplemental role which
imports have played in the United States markets over the past several years. If
these conditions change and unfairly priced cement and clinker were imported
into the U.S., Southdown would not hesitate to initiate proceedings seeking
relief from unfair trade practices.
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, noise,
air emissions including dust, as well as the handling, use and disposal of
hazardous and non-hazardous waste materials. These laws also create a shared
liability by responsible parties for the cost of cleaning up or correcting
releases to the environment of designated hazardous substances. The Company,
therefore, may have to remove or mitigate the environmental effects of the
disposal or release of certain substances at the Company's various operating
facilities or elsewhere.
The Company or its predecessors have conducted industrial operations at the
Company's 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.
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 is impossible for the Company to determine the
ultimate cost that it might incur to resolve these environmental matters.
Cement Kiln Dust -- Cement manufacturing plants, depending on their process
design, raw materials characteristics, product specifications and other factors,
may generate a low toxicity by-product known as cement kiln dust or CKD. Most
manufacturing plants in the industry typically disposed of CKD in and around
their plant sites since the inception of cement manufacturing operations. If CKD
comes into contact with water, liquid that leaches out may have an alkalinity
level high enough to be classified as hazardous waste, if discarded. CKD in
contact with water may also leach out trace amounts of certain hazardous metals
if they are present. CKD is currently not regulated as a hazardous waste, but in
1995, the U.S. EPA began a rulemaking process in order to develop specifically
tailored CKD management standards. On August 20, 1999, EPA published a proposed
rule addressing CKD management. As proposed, these CKD standards may require the
cement industry to adopt more stringent management, monitoring and record
keeping practices for this material. No final action is scheduled in this
rulemaking until 2001, and if a final rule is adopted, it could be substantially
different from that initially proposed.
The Company has been investigating potential contamination from several CKD
piles at its cement plant in Michigan. A remediation proposal for the remaining
unresolved CKD piles was submitted to the Michigan Department of Environmental
Quality on September 1, 1999 for approval by March 1, 2000. On March 1, 2000,
that department confirmed that the parties have agreed in principle to an
alternative remediation plan and will begin negotiating the terms of a consent
order. Management believes, based on current information, that the reserves
previously accrued on the books of the Company are adequate to cover the
estimated cost of remediation and penalty payments. However, it is possible that
the ultimate remediation costs will be greater than current estimates.
14
<PAGE> 17
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. The Company does not know the precise amount of these costs but,
because of the age, condition and design of its plants, management does not
believe the Company would be at a disadvantage as a result of these regulations
with respect to its competitors. Some of the more significant regulatory
developments pertaining to air quality issues are as follows:
- 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 the Company's operations because a federal appeals court
in May 1999 sent the matter back to the U.S. EPA. Even if the rules
ultimately become effective as proposed, the Company has not determined
that the impact would be material.
- In October 1998, the U.S. EPA issued regulations requiring 22 states to
adopt new measures by September 1999 to reduce emissions of various
nitrogen oxides by specific percentages. While the states are free to
adopt whatever measures state officials believe will meet the targets,
cement kilns were specifically mentioned in the U.S. EPA rule as
potential sources for further nitrogen oxides emissions reductions. While
the September 1999 submittal date has been postponed pending resolution
of legal challenges, if the courts reject the challenges, the cement
industry could be obligated to make substantial capital expenditures in
order to meet these additional emissions controls.
- In June 1999, the U.S. EPA issued air toxics standards for portland
cement plants that will take effect for existing facilities in 2002. The
Company is in the process of evaluating the impact of these air toxics
standards.
- Global warming and the international accord to move toward greenhouse gas
stabilization or reduction are potentially significant to the cement
industry because carbon dioxide is generated from combustion of fuels and
from the calcination 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.
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. As a
consequence, management does not believe that environmental compliance
expenditures place the Company at a competitive disadvantage with respect to
other companies engaged in similar lines of business operating in the U.S.
However, because of the complexity and uncertainty of existing and future
environmental requirements, permit conditions, cost of new and existing
technology, potential remedial costs and insurance coverages, and/or
enforcement-related activities and costs, it is difficult for management to
estimate the ultimate level of Company expenditures related to environmental
matters. 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. With respect to known environmental contingencies, the Company
has recorded provisions for estimated probable liabilities and does not believe
that the ultimate resolution of such matters will have a material adverse effect
on the Company's Consolidated Financial Statements.
The Company has received administrative orders from the New Jersey
Department of Environmental Protection for alleged violations of New Jersey air
regulations relating to particulate emissions at the Company's quarry operations
in Sparta, New Jersey. The Company and the NJDEP are currently negotiating a
settlement of all outstanding administrative orders. While not yet finalized,
the NJDEP has proposed that the Company pay a civil penalty of approximately
$141,000 and has informed the Company that it may seek an additional penalty of
approximately the same amount.
15
<PAGE> 18
Year 2000 Compliance -- The Company was faced with the task of assuring
that its automated data processing and other microprocessor controlled equipment
were capable of distinguishing 21st Century dates. This year, only minor Year
2000 problems have been encountered, which caused virtually no impact to
business operations. The Company believes there are no significant remaining
contingencies related to the Year 2000 issue. However, final resolution of the
Company's Year 2000 compliance cannot be fully verified until all possible
computer applications and processes have been exercised and Year 2000 readiness
of key third party suppliers, service providers and customers have been
completely validated.
Kosmos Joint Venture Severance Tax Audit -- Kosmos Cement Company is a
partnership operated and 75% owned by Southdown. As a result of an audit
conducted for the period from September 1, 1991 through December 31, 1996, the
State of Kentucky proposed a deficiency assessment against Kosmos for severance
tax payments related to limestone mined at its Battletown, Kentucky quarry. In
April 2000, Kosmos settled this matter by agreeing to pay $1.7 million in full
and complete satisfaction of all severance tax assessed or assessable against
Kosmos for the period from September 1, 1991 through March 1, 2000. Kosmos
believes that, under the terms of a supply agreement with a local electric
utility company, the utility company is responsible for severance taxes on
limestone provided to it and plans to pursue recourse against the utility
company.
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, it
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.
Several years ago, the Company learned of some soil and groundwater
contamination at or near a subsidiary's former Alabama hazardous waste
processing facility. The Company discontinued its hazardous waste disposal
business in 1994. Although the Company sold the facility in April 1995, it
agreed to retain some liability for the existing soil and groundwater
contamination at the facility prior to that time. The Company'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 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, 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
the Company's 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, (5) commercial disputes
and litigation, and (6) claims by disgruntled employees. These various
commitments and contingent liabilities, in the judgment of management 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
16
<PAGE> 19
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," "will,"
"should," or similar expressions. Statements related to future performance
involve certain assumptions, risks and uncertainties, many of which are beyond
the control of the Company, and cannot be guaranteed.
Although the Company believes that the expectations reflected in such
forward looking statements are based upon reasonable assumptions, it can not say
with certainty that what it expects will actually happen. Important factors that
could cause actual results to differ materially from the Company's expectations
include, among others, (1) excess cement production capacity in other parts of
the world, (2) foreign and domestic price competition, (3) cost effectiveness,
(4) environmental problems or 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. 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. QUALITATIVE AND QUANTITATIVE 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,
1999.
17
<PAGE> 20
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, employment matters and commercial disputes and litigation. Other than
those disclosed elsewhere in this document, based on the information developed
to date and advice of outside counsel, the Company is of the opinion the
liability related to these lawsuits individually or in the aggregate, if any,
will not result in losses that would materially affect the Company's
consolidated balance sheet as of March 31, 2000. However, the Company'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 the Company'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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 -- Statement of Computation of Per Share Earnings
15 -- Independent Accountants' Letter re Unaudited Interim
Financial Information
27 -- Financial Data Schedule -- Three Months Ended March 31,
2000
</TABLE>
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31, 2000.
18
<PAGE> 21
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)
By: /s/ DENNIS M. THIES
----------------------------------
Dennis M. Thies
Executive Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
Date: May 11, 2000
By: /s/ RICARDO ARREDONDO
----------------------------------
Ricardo Arredondo
Vice President and Controller
(Principal Accounting Officer)
Date: May 11, 2000
19
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 -- Statement of Computation of Per Share Earnings
15 -- Independent Accountants' Letter re Unaudited Interim
Financial Information
27 -- Financial Data Schedule -- Three Months Ended March 31,
2000
</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
MARCH 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Net earnings for basic and diluted earnings per share $ 34.0 $ 29.5
========== ==========
Weighted average outstanding common shares for
basic earnings per share 35.9 38.7
Dilutive effect from assumed exercise of stock options 0.4 0.4
---------- ----------
Total outstanding shares for diluted earnings per share $ 36.3 $ 39.1
========== ==========
Earnings per common share:
Basic $ 0.95 $ 0.76
========== ==========
Diluted $ 0.94 $ 0.75
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 15
May 10, 2000
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, 2000 and 1999, as indicated in our report dated April 17, 2000;
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, 2000, 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, Registration
Statement No. 333-59349, Registration Statement No. 333-78887, Registration
Statement No. 333-78955 and Registration Statement No. 333-94097, 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 THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 151
<ALLOWANCES> 5
<INVENTORY> 151
<CURRENT-ASSETS> 332
<PP&E> 1,654
<DEPRECIATION> 696
<TOTAL-ASSETS> 1,496
<CURRENT-LIABILITIES> 165
<BONDS> 181
0
0
<COMMON> 50
<OTHER-SE> 812
<TOTAL-LIABILITY-AND-EQUITY> 1,496
<SALES> 280
<TOTAL-REVENUES> 280
<CGS> 200
<TOTAL-COSTS> 225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 52
<INCOME-TAX> 18
<INCOME-CONTINUING> 34
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.94
</TABLE>
