10-Q 1 e10-q.txt LAFARGE CORPORATION FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2000 Commission File Number 0-11936 LAFARGE CORPORATION Incorporated in Maryland 12950 Worldgate Dr., Suite 500 Herndon, Virginia 20170 (703) 480-3600 I.R.S. Employer Identification No. 58-1290226 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 period 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 [ ] There were 69,352,226 shares of our Common Stock and 4,527,983 Exchangeable Preference Shares of our subsidiary, Lafarge Canada Inc., outstanding as of July 31, 2000, the latest practicable date. The Exchangeable Preference Shares are exchangeable at any time into our Common Stock on a one-for-one basis, entitle their holders to dividend and other rights economically equivalent to those of the Common Stock, and through a voting trust, vote at meetings of our stockholders. 2 LAFARGE CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income (unaudited) - Three-Month, Six-Month and Twelve-Month Periods Ended June 30, 2000 and 1999.............................................................................1 Condensed Consolidated Balance Sheets - June 30, 2000 (unaudited), June 30, 1999 (unaudited) and December 31, 1999....................................................2 Condensed Consolidated Statements of Cash Flows (unaudited) - Six-Month and Twelve-Month Periods Ended June 30, 2000 and 1999....................................3 Notes to Condensed Consolidated Financial Statements...............................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................15 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................................................16 Item 6. Exhibits and Reports on Form 8-K..................................................................16 SIGNATURE......................................................................................................17 INDEX TO EXHIBITS..............................................................................................18
i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LAFARGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30 ---------------------- -------------------------- ------------------------- 2000 1999 2000 1999 2000 1999 ---------- -------- ---------- ---------- ---------- ---------- NET SALES $ 751,208 $720,214 $1,181,795 $1,089,995 $2,746,162 $2,528,613 --------- -------- ---------- ---------- ---------- ---------- Costs and expenses Cost of goods sold 520,387 505,147 916,404 855,227 1,990,222 1,847,774 Selling and administrative 68,122 59,685 130,133 111,108 254,053 221,084 Amortization of goodwill 4,317 4,406 8,470 8,833 16,801 18,399 Other income, net (2,241) (5,560) (2,047) (5,207) (5,332) (3,291) --------- ---------- ---------- ---------- ---------- ---------- Earnings from operations 160,623 156,536 128,835 120,034 490,418 444,647 Interest expense 12,455 16,654 24,178 30,912 56,002 60,368 Interest income (3,471) (3,646) (7,615) (7,217) (18,303) (18,021) --------- ---------- ---------- ---------- ---------- ---------- Earnings before income taxes 151,639 143,528 112,272 96,339 452,719 402,300 Income tax expense (55,921) (54,919) (41,102) (36,782) (165,732) (152,535) --------- --------- ---------- ---------- ---------- ---------- NET INCOME $ 95,718 $ 88,609 $ 71,170 $ 59,557 $ 286,987 $ 249,765 ========= ========= ========== ========== ========== ========== NET INCOME PER SHARE - BASIC $ 1.30 $ 1.22 $ 0.97 $ 0.82 $ 3.93 $ 3.45 ========= ========= ========== ========== ========== ========== NET INCOME PER SHARE - DILUTED $ 1.30 $ 1.22 $ 0.97 $ 0.82 $ 3.92 $ 3.43, ========= ========= ========== ========== ========== =========== DIVIDENDS PER SHARE $ 0.15 $ 0.15 $ 0.30 $ 0.30 $ 0.60 $ 0.57 ========= ========= ========== ========== ========== ==========
See Notes to Condensed Consolidated Financial Statements. 1 4 LAFARGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30 JUNE 30 DECEMBER 31 2000 1999 1999 (UNAUDITED) (UNAUDITED) (AUDITED) ----------- ----------- ----------- ASSETS Cash and cash equivalents $ 165,342 $ 173,506 $ 237,812 Short-term investments 3,377 6,789 91,626 Receivables, net 591,206 497,746 421,796 Inventories 333,441 300,277 288,200 Other current assets 110,471 80,218 96,067 ----------- ----------- ----------- Total current assets 1,203,837 1,058,536 1,135,501 Property, plant and equipment (less accumulated depreciation and depletion of $1,365,552, $1,225,258 and $1,312,260) 1,818,006 1,520,303 1,618,319 Excess of cost over net tangible assets of businesses acquired, net 370,395 353,933 335,464 Other assets 211,126 208,969 214,962 ----------- ----------- ----------- TOTAL ASSETS $3,603,364 $ 3,141,741 $ 3,304,246 ========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $ 408,139 $ 374,443 $ 411,677 Income taxes payable 72,485 40,798 60,222 Short-term borrowings and current portion of long-term debt 296,850 160,903 38,344 ----------- ----------- ----------- Total current liabilities 777,474 576,144 510,243 Long-term debt 693,352 743,616 719,781 Deferred income taxes 126,987 112,095 118,699 Accrued post-retirement benefit cost 169,971 153,525 153,476 Other long-term liabilities 74,823 62,146 79,163 ----------- ----------- ----------- Total Liabilities 1,842,607 1,647,526 1,581,362 ----------- ----------- ----------- Common Equity Common Stock ($1.00 par value; authorized 150.0 million shares; issued 69.3, 68.1 and 68.7 million shares) 69,286 68,125 68,686 Exchangeable Shares (no par or stated value; authorized 24.3 million shares; issued 4.5 million shares) 33,314 32,800 32,957 Additional paid-in-capital 709,658 683,205 697,324 Retained earnings 1,072,905 829,783 1,023,736 Accumulated other comprehensive income (loss) (124,406) (119,698) (99,819) ----------- ----------- ----------- Total Shareholders' Equity 1,760,757 1,494,215 1,722,884 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,603,364 $ 3,141,741 $ 3,304,246 =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements. 2 5 LAFARGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS)
SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------------- ------------------- 2000 1999 2000 1999 ------- -------- ------ ------- CASH FLOWS FROM OPERATIONS Net income $ 71,170 $ 59,557 $286,987 $249,765 Adjustments to reconcile net income to net cash provided by (used in) operations: Depreciation, depletion and amortization 83,366 81,134 170,504 159,875 Provision for bad debts 130 1,562 1,058 3,632 Gain on sale of assets (2,256) (4,734) (8,272) (5,503) Accrued post-retirement benefit cost 1,641 2,758 1,181 3,629 Other noncash charges and credits, net (2,144) (7,378) 19,565 (1,051) Net change in operating working capital (216,313) (172,533) (97,277) (17,492) --------- --------- -------- -------- NET CASH PROVIDED BY (USED IN) OPERATIONS (64,406) (39,634) 373,746 392,855 --------- --------- -------- -------- CASH FLOWS FROM INVESTING Capital expenditures (237,607) (137,026) (416,305) (258,924) Acquisitions (82,318) (49,554) (91,032) (112,509) Redemptions of short-term investments, net 88,249 10,281 3,412 51,715 Proceeds from property, plant and equipment dispositions 5,282 11,727 39,494 22,848 Other -- 3,983 8,620 (43,720) -------- --------- -------- --------- NET CASH USED FOR INVESTING (226,394) (160,589) (455,811) (340,590) --------- --------- --------- -------- CASH FLOWS FROM FINANCING Net increase in short-term and long-term borrowings (includes current portion) 232,185 105,560 85,764 46,323 Issuance of equity securities, net 686 1,247 3,383 4,012 Dividends, net of reinvestments (9,394) (14,688) (18,928) (32,272) Financing costs and other -- -- -- (12,818) -------- --------- -------- -------- NET CASH PROVIDED BY FINANCING 223,477 92,119 70,219 5,245 -------- --------- -------- -------- Effect of exchange rate changes (5,147) 10,472 3,682 (2,925) -------- --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (72,470) (97,632) (8,164) 54,585 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 237,812 271,138 173,506 118,921 -------- --------- -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $165,342 $ 173,506 $165,342 $173,506 ======== ========= ======== ========
See Notes to Condensed Consolidated Financial Statements 3 6 LAFARGE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Lafarge Corporation, together with its subsidiaries, is North America's largest diversified supplier of aggregate, concrete and concrete products, cement and cementitious materials, gypsum wallboard and other construction materials used for residential, commercial, institutional and public works construction. Our business is organized into three operating segments: Construction Materials, Cement and Gypsum. Each represents a separately managed strategic business unit with different capital requirements and marketing strategies. See Note 8 below for information regarding these segments. We have approximately 800 operations doing business in most states and throughout Canada, where we conduct our business through our subsidiary, Lafarge Canada Inc. Lafarge S.A., a French company, and its affiliates hold over 50 percent of our common stock. 2. The condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the disclosures made are adequate to make the information presented not misleading. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of the applicable dates and the results of our operations and our cash flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 1999 Annual Report on Form 10-K. 3. Most of our markets are affected by seasonal, weather-related conditions. Therefore, you should not view our quarterly earnings as indicative of results to be expected for a full year or any other interim period. 4. We value our inventories at the lower of cost or market. Other than maintenance and operating supplies, we value the majority of our U.S. cement inventories using the last-in, first-out method. We value all other inventories at average cost. At June 30, 2000 and 1999 and at December 31, 1999, our inventories consisted of the following (in thousands):
JUNE 30 ----------------------------------- DECEMBER 31 2000 1999 1999 --------- -------- ----------- Finished products $182,055 $162,966 $154,567 Work in process 33,228 22,884 16,639 Raw materials and fuel 56,687 61,826 52,650 Maintenance and operating supplies 61,471 52,601 64,344 -------- -------- -------- TOTAL INVENTORIES $333,441 $300,277 $288,200 ======== ======== ========
4 7 5. We paid the following amounts in cash during the period for interest and income taxes (in thousands):
SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------------------- -------------------------------- 2000 1999 2000 1999 --------- ---------- ---------- --------- Interest $28,516 $30,438 $ 49,280 $ 63,722 Income taxes (net of refunds) $37,925 $24,520(a) $145,351 $123,886(a)
(a) Includes a refund of $23.4 million from the Internal Revenue Service. 6. Net income per share for the three, six and twelve months ended June 30, 2000 and 1999 (in thousands, except per share amounts) are as follows:
THREE MONTHS SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30 ----------------------- ----------------------- ------------------------ 2000 1999 2000 1999 2000 1999 -------- --------- -------- --------- --------- --------- BASIC CALCULATION Net income $95,718 $88,609 $71,170 $59,557 $286,987 $249,765 ======= ======= ======= ======= ======== ======== Weighted average number of shares outstanding 73,593 72,459 73,425 72,406 73,019 72,328 ======= ======= ======= ======= ======== ======== Basic net income per share $ 1.30 $ 1.22 $ 0.97 $ 0.82 $ 3.93 $ 3.45 ======= ======= ======= ======= ======== ======== DILUTED CALCULATION Net income assuming dilution $ 95,718 $88,609 $71,170 $59,557 $286,987 $249,765 ======== ======= ======= ======= ======== ======== Weighted average number of shares outstanding 73,593 72,459 73,425 72,406 73,019 72,328 Net effect of dilutive stock options based on the treasury stock method 202 419 162 424 269 448 -------- ------- ------- ------- -------- -------- Weighted average number of shares outstanding assuming full conversion of all potentially dilutive securities 73,795 72,878 73,587 72,830 73,288 72,776 ======== ======= ======= ======= ======== ======== Diluted net income per share $ 1.30 $ 1.22 $ 0.97 $ 0.82 $ 3.92 $ 3.43 ======== ======= ======= ======= ======== ========
Basic net income per common equity share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common equity share assumed the exercise of stock options, to the extent such conversion is dilutive, for all periods presented. 7. Comprehensive income consists of the following (in thousands):
THREE MONTHS SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30 --------------------- ------------------------- ------------------------ 2000 1999 2000 1999 2000 1999 -------- -------- --------- -------- ----------- -------- Net income $95,718 $ 88,609 $71,170 $59,557 $286,987 $249,765 Foreign currency translation adjustments (18,993) 20,978 (24,587) 32,925 (4,708) (1,486) ------- -------- ------- ------- -------- -------- COMPREHENSIVE INCOME $76,725 $109,587 $46,583 $92,482 $282,279 $248,279 ======= ======== ======= ======= ======== ========
5 8 8. The operating segments reported below are those for which separate financial information is available and for which executive management regularly evaluates operating income or loss amounts (before other post-retirement benefit expense for retirees, goodwill amortization related to the 1998 acquisition of certain Redland PLC businesses in North America from Lafarge S.A., income taxes, interest and foreign exchange gains and losses) in deciding how to allocate resources and in assessing performance. Each of our three reportable operating segments, Construction Materials, Cement and Gypsum, represents a separately managed strategic business unit with its own capital requirements and marketing strategies. The basis of segmentation is consistent with our year-end consolidated financial statements. We account for intersegment sales and transfers at market prices. We attribute revenue to geographic areas based on the location of the assets producing the revenue. Operating segment information consists of the following (in millions):
THREE MONTHS SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30 -------------------- ----------------------- ---------------------- 2000 1999 2000 1999 2000 1999 ------ ------- --------- -------- -------- ------- Net sales: Construction Materials Revenues from external customers $ 408.2 $384.3 $ 621.6 $ 572.0 $1,466.1 $1,372.9 Intersegment revenues -- 0.2 -- 2.0 0.7 3.0 Cement Revenues from external customers 306.4 296.7 483.6 447.5 1,121.5 1,030.9 Intersegment revenues 39.1 34.6 60.7 52.7 125.4 120.8 Gypsum Revenues from external customers 36.6 39.2 76.6 70.5 158.6 124.9 Eliminations (39.1) (34.8) (60.7) (54.7) (126.1) (123.9) ------- ------- -------- -------- -------- -------- TOTAL NET SALES $ 751.2 $720.2 $1,181.8 $1,090.0 $2,746.2 $2,528.6 ======= ====== ======== ======== ======== ======== Earnings from operations: Construction Materials (a) $ 67.2 $ 62.5 $ 45.6 $ 40.1 $ 195.0 $ 181.1 Cement (a) 110.0 98.7 110.1 91.0 339.6 298.6 Gypsum (a) 3.0 11.6 10.3 20.1 32.1 32.5 Corporate and other (19.6) (16.3) (37.2) (31.2) (76.3) (67.6) ------- ------ -------- -------- -------- -------- Earnings before interest and income taxes 160.6 156.5 128.8 120.0 490.4 444.6 Interest expense, net (9.0) (13.0) (16.5) (23.7) (37.7) (42.3) ------- ------ -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES $ 151.6 $143.5 $ 112.3 $ 96.3 $ 452.7 $ 402.3 ======= ====== ======== ======== ======== ========
(a) Excludes other post-retirement benefit expense for retirees, goodwill amortization related to the 1998 acquisition of certain Redland PLC businesses in North America from Lafarge S.A., income taxes, interest and foreign exchange gains and losses. Condensed consolidated geographic information consists of the following (in millions):
THREE MONTHS SIX MONTHS TWELVE MONTHS ENDED JUNE 30 ENDED JUNE 30 ENDED JUNE 30 ------------------- ------------------------ ---------------------- 2000 1999 2000 1999 2000 1999 ------- ------- --------- --------- --------- -------- Net sales: United States $527.9 $506.3 $ 836.1 $ 778.1 $1,925.9 $1,773.3 Canada 223.3 213.9 345.7 311.9 820.3 755.3 ------ ------ --------- --------- -------- -------- TOTAL NET SALES $751.2 $720.2 $ 1,181.8 $1,090.0 $2,746.2 $2,528.6 ====== ====== ========= ======== ======== ======== Earnings from operations: United States $102.5 $108.1 $ 92.7 $ 95.2 $ 332.0 $ 298.4 Canada 58.1 48.4 36.1 24.8 158.4 146.2 ------ ------ --------- -------- -------- -------- Total earnings from operations: 160.6 156.5 128.8 120.0 490.4 444.6 Interest expense, net (9.0) (13.0) (16.5) (23.7) (37.7) (42.3) ------ ------ --------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES $151.6 $143.5 $ 112.3 $ 96.3 $ 452.7 $ 402.3 ====== ====== ========= ========== ======== ========
6 9 Assets by operating segment consist of the following (in millions):
JUNE 30 ----------------------------------- DECEMBER 31 2000 1999 1999 --------- --------- ----------- Construction Materials $1,300.0 $1,235.5 $1,239.1 Cement 1,312.4 1,067.2 1,098.3 Gypsum 214.7 89.3 125.1 Corporate, Redland goodwill and other 776.3 749.7 841.7 --------- --------- ---------- TOTAL ASSETS $3,603.4 $3,141.7 $3,304.2 ========= ========= ==========
9. In February 2000, we formed a joint venture with Rock-Tenn Company to produce gypsum paperboard liner. With full-scale production projected to commence in 2001, the joint venture intends to sell all of its production to our U.S. drywall plants. In late March 2000, we entered into an agreement with Ispat Inland Inc. to manage up to one million tons of blast furnace slag annually. Under the agreement, we will install slag-processing equipment, including our patented technology, at Ispat Inland's East Chicago, Indiana steel plant. When the facility comes on line in the spring of 2001, we intend to sell the processed slag into several core market segments. On June 30, 2000, we completed our acquisition of all the outstanding stock of Presque Isle Corporation, a Michigan-based company that operates one of the largest stone quarries in the U.S. The purchase price was approximately $56 million. Preliminary purchase price allocations have been completed and are subject to adjustment. On July 25, 2000, we announced an agreement to merge Kilmer Van Nostrand Co. Limited's ("KLN") wholly-owned subsidiary, The Warren Paving & Materials Group Limited ("Warren"), with our Construction Materials operations in Canada. Warren is Canada's largest privately held supplier of construction aggregate and a leader of asphalt and paving services, and has operations in five Canadian provinces. The transaction, in which a subsidiary of Lafarge Canada Inc. would acquire all of the outstanding shares of Warren, is valued at approximately Canadian $425 million. The acquisition would be financed through a combination of assumption of Warren's debt, cash and preferred shares. At closing, the subsidiary of Lafarge Canada Inc. would assume the existing debt of Warren and pay cash for a combined total of approximately Canadian $230 million, issuing preferred shares to KVN for the balance. Concurrently, KVN would buy a 4.4 million stock purchase warrant of Lafarge Corporation with a 15-year term and a strike price of $32 per share. The transaction will make us one of the largest aggregate suppliers in North America, with over 100 million tons of production a year. Closing on the merger is subject to certain conditions, including the completion of due diligence and Canadian regulatory review. 10. On April 17, 2000, the Ontario (Canada) Court (General Division) ruled against our subsidiary Lafarge Canada Inc. and other defendants in the 1992 lawsuit arising from claims of building owners, the Ontario New Home Warranty Program and other plaintiffs regarding allegedly defective concrete, flyash and cement used in defective footings, foundations and floors. The portion of the judgment attributed by the Court to Lafarge Canada Inc., net of insured amounts, was Canadian $9.9 million. Lafarge Canada Inc. has appealed this decision. We believe that our insurance coverage and recorded reserves are adequate to cover the defense expenses and liabilities arising from the 1992 lawsuit. To date, no further action has been taken before the Court in connection with the 7 10 related 1999 class action which had been stayed pending a decision in the 1992 lawsuit. Although the outcome of any legal proceedings related to the 1999 class action cannot be predicted with certainty, we believe that any liability which Lafarge Canada Inc. may incur arising from the 1999 class action will not have a material adverse effect on our financial condition. By order dated January 28, 2000, the Court granted summary judgment in favor of our directors in the stockholder derivative lawsuit filed against them on March 18, 1998 in the Circuit Court for Montgomery County, Maryland. This lawsuit alleged breach of fiduciary duty, corporate waste and gross negligence in connection with our purchase of certain North American construction materials assets from Lafarge S.A., our majority stockholder. Plaintiffs appealed the decision to the Maryland Court of Special Appeals. Upon its own motion, the Maryland Court of Appeals, Maryland's highest court, has selected the appeal for hearing and decision. The appeal is currently scheduled for hearing in December of this year. Currently, we are involved in two remediations under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, which together are referred to as Superfund. At one site where we have been named a potentially responsible party, the remedial activities are complete, long-term maintenance and monitoring are under way and partial contribution has been obtained from financially viable parties, including us. The U.S. Environmental Protection Agency ("EPA") delisted this site from the National Priority List in 1999. At the other site, which is on the National Priority List, some of the potentially responsible parties named by the EPA have initiated a third-party action against 47 other parties, including us. We also have been named a potentially responsible party at this site. The suit alleges that in 1969 one of our predecessor companies sold equipment containing hazardous substances that may now be present at the site. It appears that the largest disposer of hazardous substances at this site is the U.S. Department of Defense and numerous other large disposers of hazardous substances are associated with this site. We believe that neither matter is material to our financial condition, results of operations or liquidity. We are involved in one state site cleanup in the State of Michigan. In December 1999, we were served with a complaint alleging that some time between 1952 and 1992 air-scrubber baghouse bags were transported to and disposed of at the Arthur Fivenson Iron and Metal Company. We are one of six defendants in the State action to recover response activity costs which Michigan incurred in responding to releases and threatened releases of hazardous substances at this site. We intend to vigorously defend this action and believe that resolution of this matter will not have a material impact on our financial condition. When we determine that it is probable that a liability for our environmental matters or other legal actions has been incurred and the amount of the loss is reasonably estimable, an estimate of the required remediation costs is recorded as a liability in the financial statements. As of June 30, 2000, the liabilities recorded for the environmental obligations are not material to our financial statements. Although we believe our environmental accruals are adequate, environmental costs may be incurred that exceed the amounts provided at June 30, 2000. However, we have concluded that the possibility of material liability in excess of the amount reported in the June 30, 2000 Condensed Consolidated Balance Sheet is remote. In the ordinary course of business, we are involved in certain legal actions and claims, including proceedings under laws and regulations relating to environmental and other matters. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the total amount of these legal actions and claims cannot be determined with certainty. We believe that 8 11 all legal and environmental matters will be resolved without material adverse impact to our financial condition, results of operations or liquidity. 11. On July 25, 2000, we announced a buyback program of our common stock over the next 18 months. The plan will allow us, at management's discretion, to buy back our common stock from time to time on the market or through privately negotiated transactions. At the same time, the Board of Directors of Lafarge Canada Inc. ("LCI") approved a complementary share repurchase program in Canada through a normal course issuer bid. The LCI program, which is subject to approval by Canadian regulatory authorities, will permit LCI to repurchase, at market price, over a one-year period, up to 365,000 of its exchangeable preference shares, representing slightly less than 10 percent of LCI's public float. In total, up to $100 million may be spent for share repurchases under the two programs. 12. At our Annual Meeting of Stockholders held on May 2, 2000, our stockholders approved an amendment to our Articles of Incorporation to increase the number of shares of common stock we are authorized to issue from 110,100,000 to 150,000,000 shares. 13. As of May 2, 2000, we and Lafarge S.A. entered into Amendment No. 1 to Option Agreement for Common Stock. This amendment modified our existing agreement with Lafarge S.A. dated as of November 1, 1993 which is intended to enable Lafarge S.A. to maintain its existing margin of voting control. The amendment was approved by our independent directors (i.e., those directors with no affiliation with Lafarge S.A.) based upon the continuing business advantages to us which result from Lafarge S.A.'s majority ownership of us. The amendment clarifies the underlying purpose of the original agreement in connection with our issuance of convertible securities which do not dilute Lafarge S.A.'s voting interest until those securities are converted into voting securities. In such case, the amendment provides that Lafarge S.A. need not exercise its right to acquire voting securities from us unless and until the convertible securities are converted. A copy of Amendment No. 1 to Option Agreement for Common Stock is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q. 14. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of our adoption of SFAS No. 133 to no later than January 1, 2001. Certain provisions of SFAS No. 133 were subsequently further amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. We are reviewing FAS No. 133 and its amendments and do not currently expect it to materially impact our financial condition or results of operations. 9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Lafarge Corporation, together with its subsidiaries, is North America's largest diversified supplier of construction materials. Our core businesses are organized into three operating segments: Construction Materials - produces and distributes ready-mixed concrete, construction aggregate, other concrete products and asphalt and constructs and paves roads. Cement - produces and distributes portland and specialty cements and cementitious materials, and processes fuel-quality waste and alternative raw materials for use in cement kilns. Gypsum - produces and distributes gypsum wallboard and related products. Our broad range of products is complemented by our geographic diversity. We have approximately 800 operations doing business in most states and throughout Canada, where we operate through our major operating subsidiary, Lafarge Canada Inc. Historically, we incur a loss in the first quarter because sales and operating results in many of our operating regions are negatively impacted by winter weather conditions, which reduce construction activity. In addition, substantial portions of the year's major maintenance projects are performed during this period of low plant utilization with the associated costs expensed as incurred. Due to seasonal, weather-related conditions, earnings of any one quarter should not be considered indicative of results to be expected for a full year or any other interim period. THREE MONTHS ENDED JUNE 30, 2000 During the three months ended June 30, 2000, we had net income of $95.7 million, or $1.30 per share on a diluted basis. This compares with net income of $88.6 million, or $1.22 per diluted share, for the second quarter of 1999. Operating results improved in most of our main operating segments (construction materials and cement), reflecting higher sales volumes and prices. Our U.S. operations reported operating income of $102.5 million, $5.6 million lower than 1999 due to a reduction in earnings of Lafarge Gypsum, and Canadian operations reported operating income of $58.1 million, $9.7 million better than 1999. Net sales increased 4 percent to $751.2 million, up from $720.2 million in 1999. Net sales in the U.S. of $527.9 million and in Canada of $223.3 million were both up 4 percent from last year. In spite of poor weather in a number of regions in June and concrete drivers' strikes in Toronto, Denver and Chicago, product shipments and prices in most principal product categories increased from the 1999 comparable period. 10 13 CONSTRUCTION MATERIALS Our construction materials operations earned $67.2 million, an 8 percent improvement from last year. Net sales of $408.2 million were 6 percent higher than 1999, reflecting an increase in both ready-mixed concrete and aggregate shipments of 4 and 7 percent, respectively, and higher average selling prices of 4 and 1 percent, respectively. In the U.S., operating income of $41.3 million was 13 percent higher than 1999. Net sales were up 7 percent as a result of increased shipments and higher average selling prices for both ready-mixed concrete and aggregate. Despite wet weather in June and the concrete drivers' strike in Denver, ready-mixed concrete and aggregate volumes increased 11 and 10 percent, respectively, due to increased market demand, especially in the Denver market. Ready-mixed concrete average selling prices increased 4 percent. Although price increases between 2 and 5 percent were implemented, aggregate average selling prices decreased 1 percent mainly due to changes in sales mix. The increased volumes and ready-mixed concrete average selling prices were partially offset by higher fuel costs. In Canada, earnings of $25.9 million were relatively unchanged from last year. Net sales in Canada were 5 percent higher than 1999 due to a combination of higher aggregate volumes and ready-mixed concrete average selling prices. Ready-mixed concrete volumes in Canada decreased 2 percent due to the concrete drivers' strike in Toronto and poor weather conditions. Due to a strong market in Ontario and project work in Alberta and British Columbia, aggregate volumes in Canada increased 5 percent despite high levels of rainfall and the concrete drivers' strike in Toronto. Ready-mixed concrete and aggregate average selling prices increased 4 percent and 3 percent, respectively. CEMENT Our cement operations earned $110.0 million in the second quarter, an improvement of $11.3 million from last year. The improvement was due to an increase in cement shipments and higher prices in both the U.S. and Canada, which were partly offset by increased fuel and energy costs. Net sales increased 4 percent, reflecting the rise in shipments and prices. Our total clinker production volumes increased in most regions, with an overall increase of 165 thousand tons, or 6 percent. U.S. earnings from operations totaled $71.8 million, $3.5 million better than last year mainly due to increases in shipments and net realization (delivered price per ton to customers less freight). Net sales increased 3 percent, reflecting the increase in net realization of 3 percent. Poor weather in the Midwest U.S. and a concrete drivers' strike in Chicago limited growth in U.S. cement shipments to 1 percent. The Canadian earnings were $38.2 million, $7.8 million better than 1999. Net sales in Canada increased 7 percent primarily due to a 4 percent increase in shipments and 2 percent escalation in net realization. Canadian cement shipments increased due to strong demand in Alberta and other western provinces, while the concrete drivers' strike in Toronto limited shipments in that market. GYPSUM Operating profit from our gypsum wallboard operations was $3.0 million, $8.6 million worse than 1999 due to lower sales volumes of 10 percent, lower selling prices to customers net of freight of 4 percent, rising material costs and the costs associated with bringing on line the new Silver Grove, Kentucky plant, which began shipping drywall in late June 2000, as well as additional related administrative costs. Net sales decreased by 7 percent. Shipments declined due in large part to downtime at the Newfoundland plant, which is under going a capital improvement program resulting in lower sales to the plant's customers. 11 14 SELLING AND ADMINISTRATIVE Selling and administrative expenses increased by $8.4 million from 1999 mainly due to growth in our business, costs related to strategic development projects and increased staffing, particularly in the human resource and strategic development functions. INCOME TAXES For the quarters ended June 30, 2000 and 1999, we recorded income tax expense of $55.9 million and $54.9 million, respectively, as a result of earnings from U.S. and Canadian operations. Our effective income tax rate was 36.9 percent in 2000 and 38.3 percent in 1999. The reduction in our effective income tax rate resulted from a reduction in our state income taxes. SIX MONTHS ENDED JUNE 30, 2000 Net income of $71.2 million, or $0.97 per diluted common equity share, compares with net income of $59.6 million, or $0.82 per diluted share, for the first six months of 1999. U.S. net income of $44.7 million was $4.0 million higher than 1999. In Canada, net income was $26.5 million, $7.6 million higher than 1999. Net sales totaled $1.2 billion, an 8 percent increase over 1999 net sales. Ready-mixed concrete and aggregate volumes both increased 7 percent. Cement shipments were 6 percent higher than 1999, while gypsum volumes decreased 3 percent due to lower shipments in Canada. CONSTRUCTION MATERIALS Our construction materials operations earned $45.6 million, $5.5 million better than 1999. Net sales improved 8 percent. U.S. earnings were $33.4 million, $4.6 million better than 1999. U.S. net sales were up 7 percent. Ready-mixed concrete volumes increased 10 percent and aggregate volumes increased 8 percent. Ready-mixed concrete selling prices increased 3 percent. Although price increases between 2 and 5 percent have been implemented, aggregate average selling prices increased only 1 percent due to changes in sales mix. In Canada, earnings were $12.2 million, $0.9 million better than 1999. Canadian net sales were 10 percent greater, reflecting an increase in ready-mixed concrete and aggregate volumes of 4 and 5 percent, respectively. Ready-mixed concrete selling prices increased 3 percent and aggregate selling prices increased 4 percent from the prior year. CEMENT Earnings from our cement operations were $110.1 million, $19.1 million better than last year due to increased shipments and higher net realized prices partly offset by increased fuel and energy costs. Overall, net sales improved by 9 percent. Clinker production increased 232 thousand tons, or 4 percent. In the U.S., earnings were $75.2 million, $9.9 million or 15 percent higher than 1999. U.S. net sales increased 7 percent due to an increase in shipments of 5 percent and an increase in net realized prices of 2 percent. Earnings from Canadian operations of $34.9 million were $9.2 million higher than 1999. Canadian net sales increased by 14 percent. Overall Canadian cement shipments increased 9 percent and net realization increased 1 percent. 12 15 GYPSUM Our gypsum operations earned $10.3 million, $9.8 million lower than 1999 due to declining drywall prices, rising material costs and increased costs for the startup of the new Silver Grove, Kentucky plant and additional related administrative costs. Although selling prices have decreased nearly 20 percent since December 1999, average net selling price to customers for the six month period was 6 percent higher, which is partly offset by a decrease in shipments of 3 percent. SELLING AND ADMINISTRATIVE Selling and administrative expenses were $19.0 million higher than the comparable period in 1999 due to growth in our business, costs related to strategic development projects and increased staffing, particularly in the human resource and strategic development functions. INCOME TAXES Income tax expense was $41.1 million, $4.3 million greater than 1999. Our effective income tax rate is 36.6 percent in 2000 and 38.2 percent in 1999. The reduction in our effective income tax rate resulted from a reduction in our state income taxes. TWELVE MONTHS ENDED JUNE 30, 2000 We reported net income of $287.0 million for the twelve months ended June 30, 2000, a $37.2 million increase over the $249.8 million reported for the twelve months ended June 30, 1999. Operating profits were $490.4 million, a $45.8 million improvement over the $444.6 million earned in 1999. Net sales of $2.7 billion increased 9 percent from $2.5 billion in 1999 primarily due to greater product shipments and improved selling prices in most main product lines. Both U.S. and Canadian net sales increased 9 percent. CONSTRUCTION MATERIALS Our construction materials operations earned $195.0 million, $13.9 million better than the $181.1 million earned in 1999. In the U.S., earnings were $119.4 million, $12.8 million better than 1999. U.S. ready-mixed concrete volumes increased 8 percent and selling prices increased 3 percent. Aggregate volumes increased 1 percent while selling prices increased 4 percent. In Canada, earnings were $75.6 million, $1.1 million higher than 1999. Ready-mixed concrete volumes in Canada remained flat while aggregate volumes increased 11 percent. Canadian ready-mixed concrete average selling prices were 1 percent higher than last year and aggregate average selling prices increased 4 percent. CEMENT Earnings from our cement operations were $339.6 million, $41.0 million better than last year. Earnings from U.S. operations of $232.4 million were $34.1 million better than 1999. In the U.S., cement shipments and net realization increased 6 and 2 percent, respectively. Earnings from Canadian operations of $107.2 million were $6.9 million higher than 1999 due to the timing of winter maintenance. Shipments and net realization in Canada increased 6 and 2 percent, respectively. 13 16 GYPSUM Earnings from our gypsum wallboard operations were $32.1 million, $0.4 million lower than last year. Although shipments and net selling price to customers less freight were 8 and 14 percent higher, respectively, earnings were lower than 1999 due to restructuring the administrative functions to support continued growth and the costs, including related administrative costs, associated with bringing on line the new Silver Grove, Kentucky plant. SELLING AND ADMINISTRATIVE Selling and administrative expenses were $33.0 million higher than the prior year mainly due to growth in our business, costs related to strategic development projects and increased staffing, particularly in the human resource and strategic development functions. INCOME TAXES Our effective income tax rate was 36.6 percent in 2000 and 37.9 percent in 1999. The reduction in our effective income tax rate resulted from a reduction in our state income taxes. LIQUIDITY AND CAPITAL RESOURCES We have a syndicated, committed revolving credit facility totaling $300 million extending through December 8, 2003. At June 30, 2000, no amounts were outstanding under the facility. We are required to pay annual commitment fees of 0.10 percent of the total amount of the facility. Borrowings made under the revolving credit facility will bear interest at variable rates based on a bank's prime lending rate or the applicable federal funds rate and are subject to certain conditions. Net cash of $64.4 million was used in operating activities in the first six months of 2000 compared with net cash used of $39.6 million in the same period in 1999. The increase in cash used for operations was primarily due to an increase in operating working capital from higher levels of receivables due to increased sales. Net cash used for investing activities in the six-month period of 2000 was $65.8 million more than the same period last year due to higher capital expenditures primarily attributable to the construction of the Silver Grove, Kentucky and Palatka, Florida gypsum wallboard plants and the Sugar Creek, Missouri cement plant expansion and increased spending on acquisitions, partly offset by redemptions of short-term investments. In the first six months of 2000, net cash provided by financing activities was $223.5 million, compared with $92.1 million in the same period in 1999. The increase was due to an increase in short-term and long-term borrowings. During the first six months of 2000, the most significant uses of cash were capital expenditures of $237.6 million, net change in operating working capital of $216.3 million and acquisitions of $82.3 million. The most significant sources of funds were net redemptions of short-term investments of $88.2 million and net increase in short-term and long-term borrowings of $232.2 million. This compares with capital expenditures of $137.0 million, net increase in operating working capital of $172.5 million, acquisitions of $49.6 million, net redemptions of short-term investments of $10.3 million and a net increase in short-term and long-term borrowings of $105.6 million. Net cash provided by operating activities for the twelve-months ended June 30, 2000 decreased by $19.1 million over the same period in 1999 due to net change in operating working capital, offset 14 17 slightly by higher net income and non-cash charges. Increased depreciation, depletion and amortization charges are primarily related to increased capital expenditures on plant and equipment. Net cash used for investing activities compared with the same period in 2000 increased by $115.2 million due to increased capital spending. Net cash provided by financing activities increased $65.0 million compared with the twelve-months ended June 30, 1999 primarily due to a net increase in short-term and long-term borrowings. Capital expenditures (including acquisitions already completed or in process) are expected to be approximately $840 million to $940 million in 2000. We are exposed to foreign currency exchange rate risk inherent in our Canadian revenues, expenses, assets and liabilities denominated in Canadian dollars, as well as interest rate risk inherent in our debt. We primarily use fixed-rate debt instruments to reduce the risk of exposure to changes in interest rates and have used forward treasury lock agreements to hedge interest rate change on anticipated debt issuances. There has been no significant change from year-end. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS Statements made in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by the context of the statement and generally arise when we are discussing our beliefs, estimates or expectations. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions ("Factors") which are difficult to predict. Some of the Factors that could cause actual results to differ materially from those expressed in the forward-looking statements include, but are not limited to: the cyclical nature of our business; national and regional economic conditions in the U.S. and Canada; Canadian currency fluctuations; the seasonality of our operations; the levels of construction spending in major markets; supply/demand structure of our industry; competition from new or existing competitors; unfavorable weather conditions during peak construction periods; changes in and implementation of environmental and other governmental regulations; our ability to successfully identify, complete and efficiently integrate acquisitions; and other Factors disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. In general, we are subject to the risks and uncertainties of the construction industry and of doing business in the U.S. and Canada. The forward-looking statements are made as of this date, and we undertake no obligation to update them, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this Item is contained in "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations reported in Item 2 of Part I of this Quarterly Report on Form 10-Q and is incorporated herein by reference. 15 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information presented in Note 10 of the "Notes to Condensed Consolidated Financial Statements" is incorporated herein by reference, pursuant to Rule 12b-23. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit Number Description ------ ----------- 10.1 Amendment No. 1 to Option Agreement for Common Stock dated as of May 2, 2000 between Lafarge Corporation and Lafarge S.A. 27 Financial Data Schedule (b) Reports on Form 8-K. We did not file any reports on Form 8-K during the quarterly period ended June 30, 2000. 16 19 SIGNATURE 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. LAFARGE CORPORATION Date: August 14, 2000 By: /s/ Larry J. Waisanen ------------------------ Larry J. Waisanen Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 20 INDEX TO EXHIBITS
Exhibit Number Description ------- ----------- 10.1 Amendment No. 1 to Option Agreement for Common Stock dated as of May 2, 2000 between Lafarge Corporation and Lafarge S.A. 27 Financial Data Schedule