10-Q 1 h81388e10-q.txt SOUTHDOWN, INC. - DATED SEPTEMBER 30, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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) LOUISIANA 72-0296500 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1200 SMITH STREET SUITE 2400 HOUSTON, TEXAS 77002 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 650-6200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_X_ No___ At October 31, 2000 there were 36.0 million common shares outstanding. ================================================================================ 2 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES INDEX

3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)

-1- 4 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)

-2- 5 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

Cash payments for income taxes totaled $63.8 million and $67.7 million for the nine months ended September 30, 2000 and 1999, respectively. Interest paid, net of amounts capitalized, was $5.3 million and $12.9 million in the 2000 and 1999 periods, respectively. -3- 6 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES STATEMENTS OF SELECTED CONSOLIDATED SEGMENT DATA (UNAUDITED)

-4- 7 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (UNAUDITED)

SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

-5- 8 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION: This quarterly report presents the following financial statements of Southdown, Inc. and subsidiary companies ("Southdown" or the "Company"): - The Consolidated Balance Sheets at September 30, 2000 and December 31, 1999. - The Statements of Consolidated Earnings, Selected Consolidated Segment Data, and Consolidated Comprehensive Income for the three and nine month periods ended September 30, 2000 and 1999. - The Statements of Consolidated Cash Flows for the nine months ended September 30, 2000 and 1999. - The Statement of Consolidated Shareholders' Equity for the nine months ended September 30, 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 the Company. 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 the Company'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 the Company on a consolidated basis. Management also believes that all such adjustments are of a normal recurring nature. The interim statements for the period ended September 30, 2000 do not necessarily indicate what the Company's results will be for the full year. NOTE 2 - PENDING MERGER: On September 28, 2000, the Company entered into a definitive merger agreement with CEMEX, S.A. de C.V., a large international company engaged in the production and sale of cement, ready-mixed concrete and aggregates. Pursuant to the merger agreement, an indirect subsidiary of CEMEX has commenced a tender offer to purchase all of the outstanding stock of the Company for $73 per share in cash or a total of approximately $2.8 billion including long-term debt. The tender offer is conditioned upon, among other things, (i) the tender of at least two-thirds of the outstanding shares of the Company's common stock, (ii) regulatory approvals, and (iii) certain consents. Consummation of the tender offer would be followed by a merger in which each share of the Company's common stock not purchased in the tender offer will be converted into the right to receive in cash the price paid in the tender offer. -6- 9 NOTE 3 - ACQUISITION OF MEDUSA CORPORATION: On June 30, 1998, the Company concluded a merger transaction with Medusa Corporation and issued approximately 14.7 million shares of its common stock for all of the outstanding common stock of Medusa. Remaining merger transaction liabilities at September 30, 2000 of $.8 million relate to ongoing lease payment obligations for the closed Medusa corporate office. Details of the merger related costs are as follows:

NOTE 4 - EARNINGS PER SHARE: Basic earnings per share were computed using the weighted average number of common shares outstanding in each of the three and nine month periods ended September 30, 2000 and 1999. Diluted earnings per share assume the dilutive impact of stock options. Earnings available to common shareholders and share amounts used in the computation of basic and diluted earnings per share follow:

-7- 10 NOTE 5 - INVENTORIES:

Inventories stated on the Last In, First Out method were $67.1 million of total inventories at September 30, 2000 and $60 million of total inventories at December 31, 1999 compared with current costs of $84.0 million and $76.9 million, respectively. NOTE 6 - 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 the Company was authorized to purchase up to 4 million shares of its common stock. The Company made open market purchases of 2.9 million shares of common stock at a cost of $159 million during 1999. During the first nine months of 2000, there have been no purchases of shares of common stock. Pursuant to the merger agreement between the Company and CEMEX, the Company is precluded from purchasing shares of common stock until the merger is terminated or consummated. NOTE 7 - 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 another financial instrument or instruments. Statement 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. Statement No. 133, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management currently believes that this new accounting standard should not have any material impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101, as amended, is effective beginning in the fourth quarter of 2000. Management currently believes that this new accounting pronouncement should not have any material effect on the Company's consolidated financial statements. -8- 11 NOTE 8 - CONTINGENCIES: See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Known Events, Trends and Uncertainties" for a discussion of certain contingencies. NOTE 9 - REVIEW BY INDEPENDENT ACCOUNTANTS: The unaudited financial information presented in this report has been reviewed by the Company's independent public accountants. The review was limited in scope and did not constitute an audit of the financial information in accordance with auditing standards generally accepted in the United States of America such as is performed in the year-end audit of financial statements. The report of Deloitte & Touche LLP relating to its limited review of the financial information as of September 30, 2000 and for the three and nine months ended September 30, 2000 and 1999 follows. -9- 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 September 30, 2000, and the related statements of consolidated earnings and comprehensive income for the three and nine month periods ended September 30, 2000 and 1999 and the consolidated statements of cash flows for the nine month periods ended September 30, 2000 and 1999 and shareholders' equity for the nine month period ended September 30, 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 October 12, 2000 -10- 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 the Company's Annual Report on Form 10-K for the year ended December 31, 1999 should be read in conjunction with the following discussion. RESULTS OF OPERATIONS CONSOLIDATED THIRD QUARTER RESULTS Net earnings for the third quarter of 2000 were $58.4 million, or $1.60 per diluted share, compared with $67.4 million, or $1.78 per share, in the third quarter of 1999. The current quarter includes a $4.8 million pre-tax charge, $0.08 per diluted share after-tax, for fees and expenses related to the proposed merger of the Company. Despite improved revenues from the Concrete Products and Aggregates operating segments, consolidated revenues in the third quarter of 2000 decreased slightly over the same period of the prior year because of reduced cement demand caused by delays in anticipated public infrastructure work, a modest slowing in residential and commercial activity and an increase in wet weather conditions compared with the prior year. Third quarter 2000 earnings before interest, income taxes and minority interest declined because of lower earnings from the Cement segment. Interest income decreased because of lower levels of investable cash during the current quarter. Interest expense also declined as a result of higher capitalized interest on construction projects and the retirement of $123.5 million of 10% Senior Subordinated Notes, which was replaced with lower cost bank debt. CONSOLIDATED YEAR-TO-DATE RESULTS Net earnings for the nine months ended September 30, 2000 were $153.8 million or $4.23 per share compared with $157.4 million or $4.09 per share in 1999. The current period includes a $4.8 million pre-tax charge, $0.08 per diluted share after-tax, for fees and expenses related to the proposed merger of the Company. The results for 1999 include a $6 million pre-tax gain, or $0.10 per share after-tax, from the sale of a non-core aggregates operation. Consolidated revenues for the 2000 period increased 5% over the same period of the prior year, because of improvement in all three operating segments. Earnings before interest, income taxes and minority interest in 2000, excluding the $4.8 million acquisition charge in 2000, the $1.5 million acquisition credit in 1999 and the 1999 gain on the sale of the non-core aggregates operation ($6 million pre-tax), improved slightly over the prior year period primarily reflecting improved earnings from the Concrete Products and Aggregates segments. Interest income and interest expense declined for the reasons discussed previously. SEGMENT OPERATING EARNINGS CEMENT Third Quarter - Cement segment operating earnings were $91.9 million compared with earnings of $105.4 million in the prior year quarter. Cement sales volumes decreased 4% compared with the prior year quarter as a result of reduced demand in the Midwestern and Southeastern markets, primarily due to a modest slowing in residential and commercial construction and delays in public works spending, partially offset by -11- 14 higher sales volumes in the markets served by the Company's Victorville, California cement plant. Average cement sales prices declined slightly as moderate price improvement in Florida and certain Midwest markets were offset by lower prices attributable to competitive price conditions in the Southeast and market penetration efforts in California. Per unit operating costs increased 5% in the third quarter of 2000 because of lower clinker production and higher maintenance costs resulting from kiln outages in California caused by electrical power interruptions from extreme summer heat conditions and the slower than anticipated start-up of the Louisville, Kentucky plant expansion. Operating earnings were also negatively impacted by the loss of $1.3 million in earnings from the March 2000 expiration of a limestone supply agreement. Year-to-Date - Cement segment earnings for the period ended September 30, 2000 decreased slightly to $237.5 million compared with $241.2 million in the prior year period. Cement sales volumes increased 2% compared with the prior year period, reflecting higher sales volumes at the Company's western region plants, which more than offset some softness in demand in the Midwestern and Southeastern markets. Cement sales prices declined slightly as moderate price improvement in the Florida and certain Midwest markets were offset by lower prices attributable to competitive price conditions in the Southeast and market penetration efforts in California. Despite a 3% improvement in clinker production, per unit operating costs increased slightly compared with the prior year period. The increase in clinker production resulted primarily from: (i) capacity improvements at the Charlevoix, Michigan plant, (ii) the completion of Clinchfield, Georgia plant expansion project in mid-1999 and (iii) improved execution of maintenance outages requiring less downtime than in the prior year. The favorable effect from this production increase was offset by 103 days of downtime combined with start-up costs incurred for the plant expansion at the Louisville, Kentucky facility. Operating earnings were also negatively impacted by the loss of $3.3 million in earnings from the recent expiration of the previously mentioned limestone supply agreement. 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:

---------- (1) Includes manufacturing costs, freight to terminals, purchased cement, selling expenses, plant general and administrative costs and other plant overhead costs. -12- 15 CONCRETE PRODUCTS Third Quarter - Concrete Products operating earnings increased to $6.3 million compared with $5.3 million in the third quarter of 1999. Ready-mixed concrete sales volumes increased 13% as a result of strong demand in both the California and Florida markets and contributions from the Sunshine Materials operation acquired in late August 1999. Operating margins were 11% lower as higher prices in Florida were more than offset by higher costs for materials and fuel in all markets. Year-to-Date - Concrete Products operating earnings improved 22% to $19.6 million compared with $16.1 million in the prior year period including gains on sales of inactive plant sites of $0.5 million and $1.8 million, respectively. Ready-mixed concrete sales volumes increased 19% because of strong demand in both the California and Florida markets and contributions from the Sunshine Materials operation, which was acquired in the third quarter of 1999. Operating margins increased slightly as a result of higher pricing in the Florida market attributable to a price increase in the current year. Sales volumes, average unit price and cost data, and unit operating profit margins relating to the Company's sales of ready-mixed concrete appear in the following table:

---------- (1) Includes plant costs, delivery, selling, general and administrative costs. (2) Does not include real estate gains of approximately $0.5 million for the three and nine month periods ended September 30, 2000 and $0.8 million and $1.8 million for the three and nine month periods ended September 30, 1999, respectively, or concrete block and other related products which totaled $2.5 million and $1.1 million of operating earnings for the three month periods ended September 30, 2000 and 1999, respectively, and $5.9 million and $3.4 million of operating earnings in the year-to-date 2000 and 1999 periods, respectively. AGGREGATES Third Quarter - Operating earnings for the Aggregates segment increased 7% to $9.6 million in the current quarter compared with $9.0 million in the third quarter of 1999 because of improved results from the Company's highway safety business, which more than offset a slight decline from the construction and specialty aggregates operations. Aggregates sales volumes improved from the prior year quarter primarily reflecting contributions from the Sunshine Materials operation, which was acquired in the third quarter of 1999. The improvement in aggregates sales prices reflects a favorable product mix of higher priced specialty aggregates and realization of price increases in California. However, operating costs were adversely impacted by (i) legal and consulting costs incurred at the Sparta facility relating to an environmental issue and (ii) higher fuel costs and contract quarrying expenses. -13- 16 Year-to-Date - Operating earnings from the Aggregates segment increased 10% to $25.3 million compared with $23.1 million in the prior year period, excluding the prior year $6 million gain on the sale of a North Carolina quarry. Aggregates sales volumes and sales prices increased significantly as a result of contributions from the Sunshine Material operation, which was acquired in the third quarter of 1999, and stronger demand in California. Per unit operating costs increased primarily because of (i) legal and consulting costs incurred at the Sparta facility relating to an environmental issue and (ii) higher fuel costs and contract quarrying expenses. 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:

---------- (1) Includes plant costs, delivery, selling, general and administrative costs. (2) Excludes $6 million gain on sale of a non-core aggregates operation in January 1999. CORPORATE Third Quarter - Corporate overhead expenses in the third quarter of 2000 were unchanged compared with the prior year quarter. Year-to-Date - Corporate overhead expenses for 2000 declined $1.8 million compared with the prior year period. 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. The current period was also favorably impacted by a higher than expected credit to pension expense and lower consulting expenses. LIQUIDITY AND CAPITAL RESOURCES The Company generated $186.5 million in cash from operating activities in the first nine months of 2000, a 19% 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 $195.1 million in capital additions, primarily related to several expansion/cost reduction projects in the Cement segment, (2) pay $16.2 million of dividends on common stock, and (3) meet all working capital requirements. During the first nine 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 $94.2 million in property, plant and equipment additions, (2) acquire additional ready-mixed concrete operations and a construction aggregates quarry in Florida, (3) repurchase 2.2 million shares of common stock at a cost of $124 million, (4) fund working capital requirements and (5) pay $17.2 million of dividends on common stock. -14- 17 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 September 30, 2000, there were $125 million of borrowings and $71.1 million in letters of credit outstanding under the revolving credit facilities, leaving $253.9 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 September 30, 2000, there were no borrowings outstanding under the line of credit. 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 late March 2000, the Company announced that its Board of Directors was exploring and evaluating several options to enhance the value of the Company's shares. On September 28, 2000, the Company entered into a definitive merger agreement with CEMEX, S.A. de C.V., a large international company engaged in the production and sale of cement, ready-mixed concrete and aggregates. Pursuant to the merger agreement, an indirect subsidiary of CEMEX has commenced a tender offer to purchase all of the outstanding stock of the Company for $73 per share in cash or a total of approximately $2.8 billion including long-term debt. The tender offer is conditioned upon, among other things, (i) the tender of at least two-thirds of the outstanding shares of the Company's common stock, (ii) regulatory approvals, and (iii) certain consents. The Company can provide no assurance as to the ultimate outcome of the proposed merger of the Company. CHANGES IN FINANCIAL CONDITION The change in the financial condition of the Company between December 31, 1999 and September 30, 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 sales activity occurring in September 2000 was higher than in December 1999. The increase in inventories 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 period combined with lower than expected cement sales volumes. The increase in other assets reflects higher prepaid pension costs. 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 Louisville plant. KNOWN EVENTS, TRENDS AND UNCERTAINTIES Industry Dynamics - Although the industry and the Company are experiencing reduced demand because of delays in public sector spending and a slowing in residential and commercial activity, the Company believes that current overall market conditions continue to support cement demand at or slightly below prior year levels. The Transportation Equity Act for the 21st Century related to public infrastructure spending should -15- 18 have a more significant impact in 2001 as committed appropriations are translated into actual construction activity. 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 131 million tons in 2004. Despite a number of announced capacity expansions in the industry, management believes industry dynamics should 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 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 imports would be expected to decline as a result 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., the Company 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. Currently, the Company commits substantial resources to complying with the laws and regulations concerning the protection of human health and the environment. 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 -16- 19 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. 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 on August 20, 1999, EPA published a proposed rule addressing CKD management standards. As proposed, these CKD standards may require the cement industry to adopt more stringent management, monitoring and recordkeeping practices for this material. No final action is scheduled in this rulemaking until 2001. 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. On March 1, 2000, the Michigan Department of Environmental Quality confirmed that the parties had agreed in principle to a remediation plan. The parties are continuing to negotiate the terms of a consent order, which would incorporate the terms of the remediation plan, among other things. 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. 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: 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 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. o 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. Legal challenges filed against this rule resulted in the court finding cause to remand the rule back to the U.S. EPA and to stay the date for affected states to submit implementation plans to the U.S. EPA. In two recent court rulings, in response to the U.S. EPA's appeal, the D.C. circuit court affirmed the U.S. EPA rule, with some modifications, and lifted the stay on the submittal date, changing it to late October 2000. Once submitted, the implementation plans would be subject to U.S. EPA -17- 20 review and approval. The effective date of this rule is May 31, 2004. The Company is in the process of evaluating the impact of this regulation. o In June 1999, the U.S. EPA issued air toxics standards for portland cement plants that will take effect for existing facilities in 2002 and upon start-up for new or significantly modified facilities. The new rule establishes, among other things, a limit on emissions of dioxin/furans. The Company is in the process of evaluating the impact of these air toxics standards. o Global warming and the international accord to move toward greenhouse gas stabilization or reduction 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. Sparta Quarry - The Company and the New Jersey Department of Environmental Protection have entered into an administrative consent order, which resolves some previously issued administrative orders from the NJDEP. The Company has paid a civil penalty of $246,350 pursuant to the consent order. Louisville, Kentucky Expansion Project - In late October 2000, Kosmos Cement Company received a claim from the general contractor for the recent expansion of its cement plant located in Louisville, Kentucky. The contractor is claiming approximately $18.5 million in additional compensation in excess of the guaranteed contract amount. The Company is only beginning its evaluation of the claim, and at this time is unable to predict how much it may have to pay with respect to the claim. Any payments as a result of the claim would be included as part of the capitalized cost of the project and amortized over the life of the project. The Company believes that any payments made as a result of the claim would not have a material effect on its financial condition or results of operations. 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. -18- 21 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. 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 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 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 -19- 22 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. 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. 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 11 Statement of Computation of Per Share Earnings 15 Independent Accountants' Letter re Unaudited Interim Financial Information 27 Financial Data Schedule - Nine Months Ended September 30, 2000 (b) Reports on Form 8-K On September 29, 2000, the Company filed a Current Report on Form 8-K reporting that the Company and CEMEX, S.A. de C.V., have entered into a definitive merger agreement under which CEMEX will acquire all of the outstanding shares of common stock of the Company for $73 in cash per share. On October 20, 2000, the Company filed a Current Report on Form 8-K reporting that the Bylaws and Rights Agreement of the Company have been amended. No other reports on Form 8-K were filed during the quarter ended September 30, 2000. -20- 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHDOWN, INC. --------------------------------- (Registrant) Date: November 3, 2000 By: /s/ DENNIS M. THIES --------------------------------- Dennis M. Thies Executive Vice President-Finance and Chief Financial Officer (Principal Financial Officer) Date: November 3, 2000 By: /s/ RICARDO ARREDONDO --------------------------------- Ricardo Arredondo Vice President and Controller (Principal Accounting Officer) -21- 24 INDEX TO EXHIBITS

SOUTHDOWN INC 10-Q