10-Q 1 e10-q.txt SOUTHDOWN, INC. - DATED JUNE 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 JUNE 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 incorporation or organization) Identification No.)~~

~~1200 SMITH STREET SUITE 2400 HOUSTON, TEXAS 77002 (Address of principal executive offices) (Zip Code)~~

Registrant's telephone number, including area code: (713) 650-6200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At July 31, 2000 there were 35.9 million common shares outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES INDEX

i 3 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 $27.6 million and $31.3 million for the six months ended June 30, 2000 and 1999, respectively. Interest paid, net of amounts capitalized, was $4.1 million and $6.3 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)

5 8 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (UNAUDITED)

6 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 June 30, 2000 and December 31, 1999. - The Statements of Consolidated Earnings, Selected Consolidated Segment Data, and Consolidated Comprehensive Income for the three and six month periods ended June 30, 2000 and 1999. - The Statements of Consolidated Cash Flows for the six months ended June 30, 2000 and 1999. - The Statement of Consolidated Shareholders' Equity for the six months ended June 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 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 June 30, 2000 do not necessarily indicate what Southdown's results will be for the full year. 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 June 30, 2000 of $.9 million relate to ongoing lease payment obligations for the closed Medusa corporate office. Details of the merger related costs are as follows:

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 and six-month periods ended June 30, 2000 and 1999. Diluted earnings per share assume the dilutive impact of stock options. 7 10 SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Earnings available to common shareholders and share amounts used in the computation of basic and diluted earnings per share follow:

NOTE 4 -- INVENTORIES:

Inventories stated on the Last In, First Out method were $72.2 million of total inventories at June 30, 2000 and $60 million of total inventories at December 31, 1999 compared with current costs of $89.1 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 purchases of 2.9 million shares of common stock at a cost of $159 million during 1999. During the first six months 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 another financial instrument or instruments. Statement No. 133 requires that a company recognize all 8 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. 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 Southdown'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. NOTE 7 -- 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 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 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 June 30, 2000 and for the three and six months ended June 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 June 30, 2000, and the related statements of consolidated earnings and comprehensive income for the three and six month periods ended June 30, 2000 and 1999 and the consolidated statements of cash flows and shareholders' equity for the six month period ended June 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 July 18, 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 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 Second Quarter Results Net earnings for the second quarter of 2000 were $61.4 million, or $1.69 per diluted share, compared with $60.5 million, or $1.57 per share, in the second quarter of 1999. Consolidated revenues in the second quarter of 2000 increased 6% over the same period of the prior year reflecting improvement in all three operating segments. Excluding the prior year $1.5 million Medusa acquisition credit, second quarter 2000 earnings before interest, income taxes and minority interest increased slightly because of higher earnings from the Concrete Products and Aggregates segments. 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 six months ended June 30, 2000 were $95.4 million or $2.63 per share compared with $90 million or $2.32 per share in 1999. The results for 1999 include a $6 million pre-tax gain, or $0.10 per share, from the sale of a non-core aggregates operation. Consolidated revenues for the 2000 period increased 10% over the same period of the prior year, driven by improvement in all three operating segments. Earnings before interest, income taxes and minority interest in 2000, excluding the prior year gain on the sale of the non-core aggregates operation ($6 million pre-tax), improved 10% over the prior year period primarily reflecting improved earnings achieved by all three operating segments. Interest income and interest expense also declined for the reasons discussed previously. SEGMENT OPERATING EARNINGS Cement Second Quarter -- Cement segment operating earnings were $89 million compared with record earnings of $89.7 million in the prior year quarter. Cement sales volumes increased 4% compared with the prior year quarter as a result of strong volume increases in the markets served by the Company's Victorville, California cement plant, which offset some softness in demand in the Midwestern markets. Average cement sales prices declined slightly as moderate price improvement during the quarter in the Midwest and Florida 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 slightly in the second quarter of 2000 because of a 4% decrease in clinker production. The decrease in clinker production resulted primarily from the plant expansion outage at the Louisville, Kentucky facility, which began in mid-April. Operating earnings were also negatively impacted by the loss of $1 million in earnings from a recently expired limestone supply agreement. Year-to-Date -- Cement segment earnings for the period ended June 30, 2000 increased 7% to $145.6 million compared with $135.8 million in the prior year. Cement sales volumes increased 6% compared with the prior year period, primarily reflecting higher sales volumes at the Company's Victorville, California plant. Cement sales prices declined slightly due primarily to lower prices resulting from market penetration efforts and customer mix effects in the California market and competitive price conditions in the Southeast markets partially offset by moderate price improvement in the Midwest and Florida markets. Unit cost of sales was slightly lower than prior year period because of a 5% increase in clinker production. The increase in clinker production resulted primarily from: (i) capacity improvements at the Charlevoix plant, (ii) the completion of the Clinchfield plant expansion project in mid-1999, and (iii) improved execution of 11 14 maintenance outages requiring less downtime than in the prior year. These increases more than offset the 81 days of downtime at the Louisville, Kentucky facility for the plant expansion tie-in. 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. Concrete Products Second Quarter -- Concrete Products operating earnings increased over 40% to $6.8 million compared with $4.8 million in the second quarter of 1999, excluding a prior year gain of $1 million from the sale of an inactive plant site in Florida. Ready-mixed concrete sales volumes increased 20% because of strong demand in both the California and Florida markets and contributions from the Sunshine Materials operation acquired in the third quarter of 1999. Operating margins improved 7% primarily as a result of lower per unit delivery costs in California. Year-to-Date -- Concrete Products operating earnings improved 36% to $13.3 million compared with $9.8 million in the prior year. The 1999 results excluded a $1 million gain on the sale of an inactive plant site in Florida. Ready-mixed concrete sales volumes increased 23% because of strong demand in both the California and Florida markets and contributions from the Sunshine Materials operation. Operating margins improved 6% primarily as a result of higher pricing in the Florida market attributable to a January 2000 price increase. 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:

--------------- (1) Includes plant costs, delivery, selling, general and administrative costs. (2) Does not include real estate gains of approximately $1 million for the three and six month periods ended June 30, 1999 or concrete block and other related products which totaled $1.8 million and $1 million of operating earnings for the three month periods ended June 30, 2000 and 1999, respectively, and $3.4 million and $2.3 million of operating earnings in the year-to-date 2000 and 1999 periods, respectively. 12 15 Aggregates Second Quarter -- Operating earnings from the Aggregates segment were $11.7 million in the 2000 quarter compared with $11.2 million in the second quarter of 1999. Aggregates sales volumes and pricing improved from the prior year quarter primarily reflecting contributions from the California construction aggregate operations. However, operating costs were adversely impacted by legal and consulting costs incurred at the Sparta facility relating to an environmental issue. Year-to-Date -- Operating earnings from the Aggregates segment increased 11% to $15.7 million compared with $14.1 million in the prior year period, excluding the prior year $6 million gain on the sale of a non-core aggregates operation. Aggregates sales volumes and sales prices increased significantly as a result of stronger demand in California and contributions from the recently acquired Sunshine Material operation. Per unit operating costs increased primarily because of legal and consulting costs incurred at the Sparta facility related 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:

--------------- (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 Second Quarter -- Corporate overhead expenses in the second quarter of 2000 were essentially 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 and the elimination of costs associated with the closed Medusa corporate office. LIQUIDITY AND CAPITAL RESOURCES The Company generated $104.7 million in cash from operating activities in the first half of 2000, a 31% 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 $130.3 million in capital additions, primarily related to several expansion/cost reduction projects in the Cement segment, (2) pay $10.8 million of dividends on common stock, and (3) meet all working capital requirements. During the first half 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 $68.4 million in property, plant and equipment additions, (2) repurchase 1 million shares of common stock at a cost of $58.9 million, (3) fund working capital requirements and (4) pay $11.5 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 June 30, 2000, there were $145 million of borrowings and $71.1 million in letters of credit outstanding under the revolving credit 13 16 facilities, leaving $233.9 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 June 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 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 June 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 of strong sales activity occurring in June 2000 relative to lower sales in December 1999. The increase in inventories reflecting the typical buildup of cement inventories during the second 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 period. 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 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., 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 14 17 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 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 15 18 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. 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 early November 2000. The Company is in the process of evaluating the impact of this regulation. - 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. Sparta Quarry -- The Company has received administrative orders from the New Jersey Department of Environmental Protection for alleged violations of state and federal air regulations relating to particulate emissions at the Company's quarry operations in Sparta, New Jersey. The Company and the NJDEP have entered into an administrative consent order pursuant to which the Company is obligated to pay a civil penalty of $246,350, of which $141,350 has been paid. 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 the second quarter of 2000, Kosmos settled this matter by paying $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 July 31, 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 16 19 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. 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 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 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 18, 2000, the Company held its 2000 Annual Meeting of Shareholders. At the Annual Meeting, shareholders approved proposals to: (1) elect four directors to serve as members of the Company's Board of Directors to serve until the 2003 Annual Meetings of Shareholders and until their successors are duly elected and have qualified and (2) appoint Deloitte & Touche LLP as the independent auditors of the books and accounts of the Company for the year ending December 31, 2000. The votes of the shareholders of the Company on these proposals were as follows: (1) With respect to the election of the following persons to the Board of Directors of the Company to serve until the Annual Meeting of Shareholders to be held in 2003 and until their successors have been elected and qualified:

(2) With respect to the ratification of the appointment of Deloitte & Touche LLP as independent auditors of the books and accounts of the Company for the year ending December 31, 2000:

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 -- Six Months Ended June 30, 2000

(b) Reports on Form 8-K No Reports on Form 8-K were filed during the quarter ended June 30, 2000. 18 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: August 9, 2000 By: /s/ RICARDO ARREDONDO ---------------------------------- Ricardo Arredondo Vice President and Controller (Principal Accounting Officer) Date: August 9, 2000 19 22 EXHIBIT INDEX

SOUTHDOWN INC 10-Q