-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E3EMWpIkmLRYB8v96zNQ6CEtEb6mGhdf7Zx47XS67IMiaSx0ZE5LSYPh9oGxEhJj m2wq+MbzAUy9+i9dFo799A== 0000950133-98-003071.txt : 19980817 0000950133-98-003071.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950133-98-003071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAFARGE CORP CENTRAL INDEX KEY: 0000716783 STANDARD INDUSTRIAL CLASSIFICATION: CEMENT, HYDRAULIC [3241] IRS NUMBER: 581290226 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08584 FILM NUMBER: 98689028 BUSINESS ADDRESS: STREET 1: 11130 SUNRISE VALLEY DR STE 300 CITY: RESTON STATE: VA ZIP: 22091-4329 BUSINESS PHONE: 7032643600 10-Q 1 LAFARGE CORPORATION FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998 ------------------------------------------------- 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 0-11936 --------------------------------------------------------- LAFARGE CORPORATION - -------------------------------------------------------------------------------- (Exact name of Company as specified in its charter) MARYLAND 58-1290226 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11130 SUNRISE VALLEY DRIVE, SUITE 300, RESTON, VA 20191-4393 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 703-264-3600 - -------------------------------------------------------------------------------- (Company's telephone number, including area code) Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding as of Class July 31, 1998 ----------------------------------- ----------------- Common Stock of Lafarge Corporation ($1 par value) 66,975,132 Exchangeable Preference Shares of Lafarge Canada Inc. (no par value) 5,244,632 ---------- Total Common Equity Interests 72,219,764 ==========
Number of pages contained in this report 19 -- Total sequentially numbered pages 19 -- Exhibit index on page 18 --
1 2 LAFARGE CORPORATION AND SUBSIDIARIES FORM 10-Q - FOR THE QUARTER ENDED JUNE 30, 1998 INDEX PAGE
PART I. FINANCIAL INFORMATION Item 1. Financial Statements a) Condensed Consolidated Statements of Income - Three-Month, Six-Month and Twelve-Month Periods Ended June 30, 1998 and 1997 3 b) Condensed Consolidated Balance Sheets - June 30, 1998, June 30, 1997, and and December 31, 1997 4 c) Condensed Consolidated Statements of Cash Flows - Six-Month and Twelve-Month Periods Ended June 30, 1998 and 1997 5 d) Condensed Consolidated Geographic Information - Three-Month, Six-Month and Twelve-Month Periods Ended June 30, 1998 and 1997 6 e) Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 6(a). Exhibits 18 Item 6(b). Reports on Form 8-K 18 SIGNATURE 19
2 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 ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------------------ ------------------------------------- 1998 1997 1998 1997 ---------------- --------------- ---------------- ---------------- NET SALES $ 674,811 $ 476,911 $ 1,009,587 $ 720,945 ---------------- --------------- ---------------- ---------------- COSTS AND EXPENSES Cost of goods sold 473,032 333,771 806,439 589,094 Selling and administrative 53,171 40,666 106,853 78,122 Goodwill amortization 4,272 932 8,020 1,877 Other expense, net 823 179 5,841 3,126 ---------------- --------------- ---------------- ---------------- Total income from operations 143,513 101,363 82,434 48,726 Interest expense 10,569 5,431 18,196 10,990 Interest income (5,794) (1,877) (9,625) (4,794) ---------------- --------------- ---------------- ---------------- PRE-TAX INCOME 138,738 97,809 73,863 42,530 Income tax expense (53,692) (37,945) (28,571) (16,787) ---------------- --------------- ---------------- ---------------- NET INCOME $ 85,046 $ 59,864 $ 45,292 $ 25,743 ================ =============== ================ ================ NET INCOME PER COMMON EQUITY SHARE-BASIC $ 1.18 $ .84 $ .63 $ .36 ================ =============== ================ ================ NET INCOME PER COMMON EQUITY SHARE-DILUTED $ 1.17 $ .84 $ .62 $ .36 ================ =============== ================ ================ DIVIDENDS PER COMMON EQUITY SHARE $ .12 $ .10 $ .24 $ .20 ================ =============== ================ ================
TWELVE MONTHS ENDED JUNE 30 ------------------------------------ 1998 1997 ---------------- ---------------- NET SALES $ 2,094,993 $ 1,745,565 ---------------- ---------------- COSTS AND EXPENSES Cost of goods sold 1,552,551 1,310,092 Selling and administrative 189,694 155,115 Goodwill amortization 9,891 3,687 Other expense, net 8,251 6,194 ---------------- ---------------- Total income from operations 334,606 270,477 Interest expense 27,155 23,036 Interest income (18,116) (9,596) ---------------- ---------------- PRE-TAX INCOME 325,567 257,037 Income tax expense (124,042) (95,498) ---------------- ---------------- NET INCOME $ 201,525 $ 161,539 ================ ================ NET INCOME PER COMMON EQUITY SHARE-BASIC $ 2.81 $ 2.30 ================ ================ NET INCOME PER COMMON EQUITY SHARE-DILUTED $ 2.79 $ 2.24 ================ ================ DIVIDENDS PER COMMON EQUITY SHARE $ .46 $ .40 ================ ================
See Notes to Condensed Consolidated Financial Statements. 3 4 LAFARGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30 JUNE 30 DECEMBER 31 1998 1997 1997 (UNAUDITED) (UNAUDITED) (AUDITED) ------------- ------------ -------------- ASSETS Cash and cash equivalents $ 118,921 $ 112,904 $ 174,163 Short-term investments 58,504 48,006 155,368 Receivables, net 444,607 344,298 327,612 Inventories 264,880 216,643 233,972 Other current assets 71,140 39,459 58,331 ------------- ------------- -------------- Total current assets 958,052 761,310 949,446 Property, plant and equipment, (less accumulated depreciation and depletion of 1,316,718 886,018 1,290,182 $1,109,824, $1,055,985 and $1,067,927) Excess of cost over net assets of businesses acquired, net 335,547 29,753 335,487 Other assets 200,610 178,689 199,736 ------------- ------------- -------------- TOTAL ASSETS $ 2,810,927 $ 1,855,770 $ 2,774,851 ============= ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $ 323,395 $ 221,251 $ 321,450 Income taxes payable 28,851 17,155 35,364 Short-term borrowings and current portion of long-term debt 94,590 47,650 29,770 Short-term borrowings from related party --- 85,000 --- Payable to Lafarge S.A. --- --- 690,000 ------------- ------------- -------------- Total current liabilities 446,836 371,056 1,076,584 Bridge loan to Lafarge S.A. 650,000 --- --- Long-term debt 109,962 149,095 135,243 Deferred income tax 102,875 51,586 111,969 Other postretirement benefits 149,926 126,245 147,647 Other long-term liabilities 66,787 28,354 47,720 ------------- ------------- -------------- Total liabilities 1,526,386 726,336 1,519,163 ------------- ------------- -------------- Common equity interests Common shares 66,921 64,322 65,268 Exchangeable shares 37,814 47,201 45,259 Additional paid-in-capital 676,631 633,993 649,082 Retained earnings 621,387 453,039 593,438 Cumulative foreign currency translation adjustments (118,212) (69,121) (97,359) ------------- ------------- -------------- Total shareholders' equity 1,284,541 1,129,434 1,255,688 ------------- ------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,810,927 $ 1,855,770 $ 2,774,851 ============= ============= ==============
See Notes to Condensed Consolidated Financial Statements. 4 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 -------------------------------- --------------------------- 1998 1997 1998 1997 ------------ ------------- ----------- ----------- CASH FLOWS FROM OPERATIONS Net Income $ 45,292 $ 25,743 $ 201,525 $ 161,539 Adjustments to reconcile net income to net cash provided by operations: Depreciation, depletion and amortization 78,041 54,409 129,936 104,710 Provision for doubtful accounts 1,325 1,467 2,223 778 (Gain) loss on sale of assets (2,195) (3,821) (4,412) (7,917) Other postretirement benefits 2,772 1,510 3,607 1,737 Other non-cash charges and credits, net (2,587) 5,786 1,609 15,683 Changes in working capital (179,012) (88,165) (51,795) (34,108) ------------ ------------- ----------- ----------- Net cash provided (consumed) by operations (56,364) (3,071) 282,693 242,422 ------------ ------------- ----------- ----------- CASH FLOWS FROM INVESTING Capital expenditures (102,455) (72,599) (153,826) (131,321) Acquisitions (36,325) (4,267) (40,875) (79,158) Short-term investments 96,864 44,490 (10,498) 2,597 Proceeds from property, plant and equipment dispositions 11,789 10,941 19,795 27,058 Other 47,162 (1,782) 56,054 (3,330) ------------ ------------- ----------- ----------- Net cash provided by (used for) investing 17,035 (23,217) (129,350) (184,154) ------------ ------------- ----------- ----------- CASH FLOWS FROM FINANCING Payment to Lafarge S.A. (690,000) --- (690,000) --- Bridge loan from Lafarge S.A. 650,000 --- 650,000 --- Net increase (decrease) in long-term borrowings (includes current portion) 36,795 24,997 (4,960) (4,418) Short-term borrowings --- --- (77,850) --- Issuance of equity securities 9,992 7,829 22,362 9,341 Dividends, net of reinvestments (15,560) (8,898) (29,671) (14,941) ------------ ------------- ----------- ----------- Net cash provided (consumed) by financing (8,773) 23,928 (130,119) (10,018) ------------ ------------- ----------- ----------- Effect of exchange rate changes (7,140) (1,583) (17,207) (2,847) ------------ ------------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (55,242) (3,943) 6,017 45,403 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 174,163 116,847 112,904 67,501 ------------ ------------- ----------- ----------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 118,921 $ 112,904 $ 118,921 $ 112,904 ============ ============= =========== ===========
See Notes to Condensed Consolidated Financial Statements. 5 6 LAFARGE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED GEOGRAPHIC INFORMATION (UNAUDITED AND IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ------------------------------ ----------------------------- ---------------------------- 1998 1997 1998 1997 1998 1997 ------------- ------------- ------------ ------------- ------------ ------------ NET SALES Canada $ 203,738 $ 186,704 $ 304,563 $ 278,044 $ 795,986 $ 739,815 United States 471,073 290,207 705,024 442,901 1,299,007 1,005,750 ------------- ------------- ------------ ------------- ------------ ------------ TOTAL NET SALES $ 674,811 $ 476,911 $ 1,009,587 $ 720,945 $ 2,094,993 $ 1,745,565 ============= ============= ============ ============= ============ ============ INCOME FROM OPERATIONS (see Note 6) Canada $ 52,399 $ 38,189 $ 26,115 $ 7,930 $ 148,399 $ 119,898 United States 91,114 63,174 56,319 40,796 186,207 150,579 ------------- ------------- ------------ ------------- ------------ ------------ TOTAL INCOME FROM OPERATIONS 143,513 101,363 82,434 48,726 334,606 270,477 Interest expense, net (4,775) (3,554) (8,571) (6,196) (9,039) (13,440) ------------- ------------- ------------ ------------- ------------ ------------ PRE-TAX INCOME $ 138,738 $ 97,809 $ 73,863 $ 42,530 $ 325,567 $ 257,037 ============= ============= ============ ============= ============ ============
See Notes to Condensed Consolidated Financial Statements. 6 7 LAFARGE CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 1. The Company is engaged in the production and sale of cement, aggregates, ready-mixed concrete, asphalt, concrete blocks and pipes, precast and prestressed concrete components, reinforcing steel and gypsum wallboard. The Company operates in the U.S. and, through its major operating subsidiary, Lafarge Canada Inc. ("LCI"), in Canada. The Company's wholly-owned subsidiary, Systech Environmental Corporation, supplies cement plants with substitute fuels and raw materials. Lafarge S.A., a French corporation, and certain of its affiliates own a majority of the Company's outstanding voting securities. Lafarge S.A. acquired Redland PLC in December 1997. The Company acquired certain Redland PLC businesses in North America (Redland) from Lafarge S.A. on June 3, 1998 for $690 million, subject to working capital adjustments. Since the Company acquired Redland from its parent, the acquisition is accounted for similar to a pooling of interests for financial reporting purposes. Accordingly, Redland assets and liabilities acquired by the Company from Lafarge S.A. were transferred to the Company at Lafarge S.A.'s historical cost, which approximates the purchase price paid by the Company. The accompanying condensed consolidated balance sheets as of December 31, 1997 and June 30, 1998 include a combination of the accounts of Redland and the Company retroactive to the date of acquisition by Lafarge S.A. (December 1997). A payable to Lafarge S.A. for $690 million was recorded as part of the acquisition. A portion of this payable ($40 million) was paid in June 1998 and the remainder ($650 million) was refinanced in June 1998 with a note to Lafarge S.A. This note was refinanced in July 1998 with long-term public debt. The 1998 condensed consolidated financial statements include the accounts of Redland along with the Company. The Redland businesses acquired consist of the businesses of Western Mobile Inc. of Denver, Colorado; Redland Genstar Inc. of Towson, Maryland; and the aggregate operations of Redland Quarries Inc. of Hamilton, Ontario. Redland is engaged in the production and sale of aggregates, ready-mixed concrete and asphalt and performs paving and related contracting services. Redland operates primarily in the U.S. and owns two quarry operations in Ontario, Canada. The primary U.S. markets are in the western states of Colorado and New Mexico and the northeast (Maryland and New York). 2. The condensed consolidated financial statements have been prepared 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 7 8 accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes as of December 31, 1997 included in the Company's Form 8-K dated June 3, 1998. 3. Because of seasonal, weather-related conditions in most of the Company's marketing areas, earnings of any one quarter should not be considered as indicative of results to be expected for a full fiscal year or any other interim period. 4. U.S. cement inventories other than maintenance and operating supplies are costed using the last-in, first-out ("LIFO") method and all other inventories are valued at average cost. At June 30, 1998 and 1997, and at December 31, 1997, inventories consisted of the following (in thousands):
June 30 June 30 December 31 1998 1997 1997 ------------- -------------- ------------- Finished products $ 140,256 $ 103,224 $ 123,774 Work in process 23,788 22,040 8,483 Raw materials and fuel 55,153 47,690 55,341 Maintenance and operating supplies 45,683 43,689 46,374 ------------- -------------- ------------- Total inventories $ 264,880 $ 216,643 $ 233,972 ============= ============== =============
5. Cash paid during the period for interest and taxes is as follows (in thousands):
Six Months Twelve Months Ended June 30 Ended June 30 ------------------------- ---------------------------- 1998 1997 1998 1997 ------------ ----------- ----------- ------------ Interest $ 12,497 $ 10,866 $ 21,851 $ 26,360 Income Taxes (net of refunds) $ 53,579 $ 32,823 $ 113,801 $ 80,850
6. In prior years, an agreement was reached with Revenue Canada Taxation related to the pricing of certain cement sales between the Company's operations in Canada and the U.S. This increased 1997 and 1996 Canadian net sales and pre-tax income by U.S. $6.1 million and $13.7 million, respectively, with a corresponding decrease for the U.S. The impact of this agreement was immaterial to consolidated net income. The net sales and income from operations for Canada and the U.S. presented in the condensed consolidated geographic information for the twelve months ended June 30, 1998 and 1997 do not reflect this agreement. 8 9 7. Earnings per share for the three months, six months and twelve months ended June 30, 1998 and 1997 includes the following components (in thousands, except per share amounts):
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 ----------------------------- ------------------------------ ------------------------------ 1998 1997 1998 1997 1998 1997 ------------- ------------ ------------- ------------- ------------- ------------- BASIC CALCULATION Net income $ 85,046 $ 59,864 $ 45,292 $ 25,743 $ 201,525 $ 161,539 ============= ============ ============= ============= ============= ============= Weighted average number of common equity shares 72,039 70,876 71,887 70,697 71,718 70,384 ============= ============ ============= ============= ============= ============= Basic net income per common equity share $ 1.18 $ 0.84 $ 0.63 $ 0.36 $ 2.81 $ 2.30 ============= ============ ============= ============= ============= ============= DILUTED CALCULATION Net income $ 85,046 $ 59,864 $ 45,292 $ 25,743 $ 201,525 $ 161,539 ------------- ------------ ------------- ------------- ------------- ------------- Add after tax interest expense applicable to 7% Convertible Subordinated Debentures --- --- --- --- --- 1,980 ------------- ------------ ------------- ------------- ------------- ------------- Net income assuming dilution $ 85,046 $ 59,864 $ 45,292 $ 25,743 $ 201,525 $ 163,519 ============= ============ ============= ============= ============= ============= Weighted average number of common equity shares outstanding 72,039 70,876 71,887 70,697 71,718 70,384 Add additional shares assuming conversion of 7% Convertible --- --- --- --- --- 2,043 Subordinated Debentures Net effect of dilutive stock options based on the treasury stock method 661 593 627 543 588 465 ------------- ------------ ------------- ------------- ------------- ------------- Weighted average number of common equity shares assuming full conversion of all 72,700 71,469 72,514 71,240 72,306 72,892 potentially dilutive securities ============= ============ ============= ============= ============= ============= Diluted net income per common equity share $ 1.17 $ 0.84 $ 0.62 $ 0.36 $ 2.79 $ 2.24 ============= ============ ============= ============= ============= =============
9 10 8. In 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires that an enterprise display comprehensive income which for the Company is the total of net income (loss) and the current year foreign currency translation adjustment. Comprehensive income consists of the following (in thousands):
Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 -------------------------- ------------------------- --------------------------- 1998 1997 1998 1997 1998 1997 ------------ ------------ ------------ ----------- ------------- ------------ Net income $ 85,046 $ 59,864 $ 45,292 $ 25,743 $ 201,525 $ 161,539 Foreign currency translation adjustments (27,300) 1,576 (20,853) (5,779) (49,091) (9,480) ------------ ------------ ------------ ----------- ------------- ------------ Comprehensive income $ 57,746 $ 61,440 $ 24,439 $ 19,964 $ 152,434 $ 152,059 ============ ============ ============ =========== ============= ============
9. As discussed in Note 1, the Company refinanced a payable to Lafarge S.A. related to the Redland acquisition with a short-term bridge loan of $650 million from Lafarge S.A. on June 3, 1998. Interest on the loan was at LIBOR plus 30 basis points. This loan was repaid to Lafarge S.A. on July 15, 1998. The Company financed the acquisition of Redland through the issuance of $650 million in long-term public debt on July 14, 1998. In order to hedge the risk of interest rate fluctuations, the Company entered into forward treasury lock agreements totaling a notional $640 million. Gains and losses on these agreements have been deferred and are being amortized over the life of the debt. The debt has an effective interest rate of 6.88 percent and is due as follows:
Maturity Date Amount ------------- ------ July 2005 $ 250,000,000 July 2008 $ 200,000,000 July 2013 $ 200,000,000
10. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS 133 requires 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. The Statement also 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 items in the income statement and requires that the Company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999 but can be implemented earlier. Statement 133 cannot be applied retroactively and must be applied to 10 11 derivative instruments and certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. The Company has not yet quantified the impact of adopting Statement 133 on the financial statements and has not determined the timing of or method of adoption. 11. In December 1997, the Company announced that it was in discussions with Holnam, Inc. to acquire its cement plant in Seattle, Washington and related assets including a limestone quarry in Texada Island, British Columbia and two cement terminals. In February 1998, the Company and Holnam, Inc. entered into a letter of intent regarding the foregoing transaction. Closing on the acquisition is subject to final resolution of certain issues between the parties as well as certain regulatory matters, and the execution of a definitive asset purchase agreement. 12. As discussed in the Company's Form 8-K, dated June 3, 1998, LCI is a defendant in lawsuits in Canada arising from claims regarding alleged defective fly ash and cement. The amount of LCI's liability, if any, is uncertain. LCI has denied liability and is defending the lawsuits vigorously. The trial of this matter commenced in September 1997 and is expected to continue through the third quarter of 1998. LCI believes that it has substantial insurance coverage that will respond to defense expenses and liability, if any, in the lawsuits. Also, the Company, among others, has been named in two lawsuits in Texas alleging exposure to toxic substances. The amount of liability, if any, to the Company is uncertain. The Company filed general denials to both suits and is vigorously defending the lawsuits. Finally, the Company has been notified by the Environmental Protection Agency that it is one of several potentially responsible parties for clean-up costs at certain waste disposal sites. When the Company determines that it is probable that a liability for environmental matters or other legal actions has been incurred, an estimate of the required remediation costs is recorded as a liability in the financial statements. In addition, the Company is involved in certain other legal actions and claims. It is the opinion of management that all legal and environmental matters will be resolved without material effect on the Company's consolidated financial statements. 13. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (which included only normal recurring adjustments except as discussed in Note 6) necessary to present fairly the Company's financial position as of the applicable dates and the results of its operations and its cash flows for the interim periods presented. 11 12 LAFARGE CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Lafarge S.A., the majority shareholder of the Company acquired Redland PLC in December 1997. The Company acquired certain Redland PLC businesses in North America (Redland) from Lafarge S.A. on June 3, 1998 for $690 million, subject to working capital adjustments. Since the Company acquired Redland from its parent, the acquisition is accounted for similar to a pooling of interests for financial reporting purposes. Accordingly, Redland assets and liabilities acquired by the Company from Lafarge S.A. were transferred to the Company at Lafarge S.A.'s historical cost, which approximates the purchase price paid by the Company. The accompanying condensed consolidated balance sheets as of June 30, 1998 and December 31, 1997 include a combination of the accounts of Redland and the Company retroactive to the date of acquisition by Lafarge S.A. (December 1997). The 1998 condensed consolidated financial statements consolidate the accounts of Redland along with the Company. Redland is engaged in the production and sale of aggregates, asphalt, ready-mixed concrete and paving and related contracting services. The significant changes in the financial statements between June 30, 1998 and June 30, 1997 are due primarily to this acquisition. The amount reported for Canadian dollar-denominated net sales and net income was impacted by a decrease in the value of the Canadian dollar relative to the U.S. dollar from June 30, 1997 to June 30, 1998. The foreign currency translation impact on Canadian net sales, after translation to U.S. dollars during consolidation, was a reduction of $9.8 million for the three-months ended June 30, 1998, $14.6 million for the six-months ended June 30, 1998 and $25.0 million for the twelve-months ended June 30, 1998. The foreign currency translation impact on Canadian net income, after translation to U.S. dollars during consolidation, was a reduction of $1.7 million for the three-months ended June 30, 1998, $1.0 million for the six-months ended June 30, 1998 and $3.3 million for the twelve-months ended June 30, 1998. The following discussion and analysis includes sales, earnings and net income after translation into U.S. dollars. The comparison of prices between time periods does not include the exchange rate impact as prices changes reflect the change in local currency. THREE MONTHS ENDED JUNE 30, 1998 The Company's net income of $85.0 million in 1998 compares with $59.9 million for the same period in 1997. Net income per diluted common equity share was $1.17 compared 12 13 with $0.84. The earnings increase was due mainly to improved results in cement, construction materials and gypsum, including the Redland construction materials businesses acquired from Lafarge S.A. The earnings increase resulted from strong product shipments in the Company's cement and construction materials product lines coupled with price improvements and cost containment. In addition, benefiting from strong demand for gypsum wallboard and favorable pricing, the Company's two Gypsum wallboard plants posted higher profits. Redland had earnings of $27.0 million (before goodwill amortization). Canadian net income of $35.8 million was $12.3 million better than 1997. In the U.S., net income of $49.2 million was $12.8 million better. Excluding $163.3 million generated by Redland, net sales of $511.5 million were 7 percent higher than the $476.9 million reached in 1997. Excluding Redland, Canadian net sales were 4 percent higher. Redland had net sales of $8.9 million in Canada. Excluding Redland, U.S. net sales were 9 percent higher. The improvement is due to higher product shipments and higher cement prices. Redland had net sales of $154.4 million in the U.S. In addition, gypsum wallboard operations added $24.0 million of sales in the U.S., a 7 percent increase over 1997. Cement shipments reflect a 5 percent increase. Aggregate and ready-mixed concrete volumes rose 6 percent and 2 percent, respectively, excluding Redland volumes. Redland sold 9 million metric tonnes of aggregate and 600,000 cubic meters of ready-mixed concrete. Second quarter earnings from the Company's cement and waste management operations were $99.3 million, $11.8 million better than last year. The improvement is due to a 5 percent increase in shipments and 3 percent higher net reals (delivered price per ton to customer less freight). Net sales were 7 percent higher reflecting the rise in shipments and prices. Despite the sales increase, cost of sales per ton remained at the 1997 level due to higher production volumes and the benefits associated with the Company's ongoing cost containment program. Earnings from Canadian cement operations were $34.3 million, $4.9 million better than 1997. Shipments were 3 percent higher with increases of 15 percent in Quebec and 12 percent in Alberta compensating for weak market conditions in British Columbia and the Maritime provinces. Clinker capacity utilization at Canadian plants rose to 96 percent in 1998 from 85 percent in 1997 primarily due to higher demand. In the U.S., earnings of $65.0 million were $6.9 million better than 1997. Higher cement prices (3 percent) and an increase in shipments (5 percent) drove the improvement. Net sales rose 10 percent. Clinker capacity utilization at U.S. plants was 101 percent in 1998 compared to 100 percent in 1997. The improvement is mainly due to higher production at the Joppa and Paulding plants. Excluding Redland, earnings from the Company's construction materials operations were $33.0 million, $10.0 million better than 1997. The improvement was due mainly to higher shipments. Net sales, excluding Redland, were 7 percent higher than a year ago, as Redland generated $163.3 of net sales in the second quarter of 1998. In Canada, earnings were $20.8 million, $8.8 million better than last year, primarily due to an increase in aggregate and ready-mixed concrete shipments. Net sales were 7 percent higher, excluding Redland. Redland sales were $8.9 million. Aggregate and ready- 13 14 mixed concrete shipments (excluding Redland) improved 7 percent and 1 percent as demand rose sharply in Ontario, Quebec and Alberta, more than offsetting a drop in shipments in British Columbia and the Maritime provinces. Improvements from higher volumes and higher ready-mixed concrete prices were somewhat reduced by higher material and operating costs. In the U.S., earnings (excluding Redland) were $12.2 million, $1.2 million better than a year ago mostly due to a 6 percent increase in aggregate volumes, a 3 percent increase in ready-mixed concrete volumes along with a 3 percent improvement in aggregate selling prices partially offset by higher operating costs. Excluding Redland, net sales improved 6 percent. Redland net sales were $154.4 million. Redland earnings were $27.0 million (before goodwill amortization). Gypsum contributed earnings of $4.3 million. Average mill net prices were up from last year with shipments running 3 percent better than last year. The strong demand for wallboard continued in the major markets of the Northeast and Mid-Atlantic regions. Income tax expense was $53.7 million, $15.7 million greater than 1997. The Company's effective income tax rate was 38.7 percent in 1998 and 38.8 percent in 1997. SIX MONTHS ENDED JUNE 30, 1998 The Company's net income of $45.3 million, or $0.62 per diluted common equity share compares with net income of $25.7 million, or $0.36 per share for the first six months of 1997. Historically, the Company's first quarter sales and operating results are negatively impacted by seasonal weather conditions which reduce construction activity. In addition, a substantial portion of the year's major maintenance projects are performed during this period of low plant utilization with the associated costs being charged to expense as incurred. The earnings improvement resulted from higher shipments in all main product lines (cement, aggregates and ready-mixed concrete), and a 3 percent increase in cement net reals. Additionally, gypsum wallboard operations earned $7.6 million, a 16 percent increase over 1997. These improvements were partly offset by higher cement plant costs and higher material costs in the construction materials operations. The overall impact of the Redland operations on net income was not significant for the first six months of 1998 due to the seasonal loss these operations normally incur in the first quarter. In Canada, net income was $21.4 million, $15.2 million better than 1997. U.S. net income of $23.9 million was $4.4 million higher. Net sales (excluding Redland) were $778.8 million, an 8 percent increase over $720.9 million in 1997. Redland generated net sales of $230.8 million resulting in consolidated net sales of $1,009.6 million. Cement shipments were 5 percent higher. Excluding Redland, aggregate volumes improved 11 percent and ready-mixed concrete volumes improved by 3 percent. Excluding Redland operations, Canadian net sales of $293.5 million were 6 percent above 1997 while U.S. net sales of $485.3 million improved by 10 percent. Redland generated $11.1 million of net sales in Canada and $219.7 million in the U.S. Redland contributed 13.5 million metric tonnes of aggregates and 1 million cubic meters of ready-mixed concrete. 14 15 Earnings from the Company's cement and waste management operations were $81.1 million, $17.4 million better than last year due to higher shipments and prices somewhat offset by higher plant costs. Net sales climbed 8 percent. Earnings from Canadian operations of $27.9 million were $5.5 million better than 1997. Net sales increased by 1 percent due to an increase in net reals (in Canadian dollars) and cement shipments by 3 percent and 4 percent, respectively. This increase was partially offset by a combination of product mix sold and the decrease in the value of the Canadian dollar relative to the U.S. dollar. In eastern Canada, higher shipments in Quebec were partly offset by declines in the Maritime provinces. In the west, shipments were substantially higher in Alberta due to a strong economy partly offset by lower volumes in British Columbia due to slower economic conditions. In the U.S., earnings were $53.2 million, $11.9 million higher than 1997 on an 11 percent increase in net sales. The improvement was due to a 6 percent increase in shipments and a 3 percent increase in net reals partly offset by higher plant costs. The Company's construction materials operations (excluding Redland) earned $16.2 million, $13.6 million better than 1997. Redland's earnings were $14.1 million. Net sales, excluding Redland, were 6 percent higher. In Canada, earnings were $6.2 million, $11.9 million better than 1997. Canadian net sales were 7 percent greater excluding Redland reflecting an 11 percent increase in aggregate volumes and a 5 percent increase in ready-mixed concrete volumes. Redland added 2.3 million metric tonnes of aggregate. In eastern Canada, gains in Ontario and Quebec were partly offset by a slow Maritime economy. Earnings in the west were up because of higher demand in Alberta somewhat offset by higher material and operating costs. U.S. results (excluding Redland) were $10.0 million, $1.7 million better mainly due to a 3 percent escalation in aggregate prices and lower operating costs. U.S. net sales excluding Redland were up 4 percent. Redland's U.S. net sales were $219.7 million. Excluding Redland, aggregate volumes were 12 percent higher and ready-mixed concrete volumes were 2 percent lower. In the U.S., Redland sold 11.2 million metric tonnes of aggregates and 1 million cubic meters of ready-mixed concrete. Gypsum had earnings of $7.6 million as average mill net prices were 4 percent higher and shipments were up 4 percent from 1997. Income tax expense was $28.6 million, $11.8 million greater than 1997. The Company's effective income tax rate was 38.7 percent in 1998 and 39.5 percent in 1997. TWELVE MONTHS ENDED JUNE 30, 1998 During the third quarter of 1996, the Company recorded a U.S. $13.7 million adjustment for the year 1995 based upon a 1995 agreement reached with Revenue Canada Taxation related to the pricing of certain cement sales between its operations in Canada and the U.S. The impact of this agreement was immaterial to consolidated net income. 15 16 Management's Discussion and Analysis that follows excludes the impact of this agreement. The Company's net income of $201.5 million in 1998 was $40.0 million better than the same period ended June 30, 1997. These results include Redland only for the first six months of 1998. Excluding Redland, net sales improved by 7 percent primarily due to higher product shipments and greater cement net reals, as well as higher earnings from the gypsum wallboard plants in the U.S. Excluding Redland, Canadian net sales were 6 percent higher while U.S. net sales rose 7 percent. Redland generated net sales of $230.8 million. Cement net reals increased 7 percent in Canada and 4 percent in the U.S. Cement sales volumes improved by 5 percent in Canada and 3 percent in the U.S. Excluding Redland, aggregate and ready-mixed concrete volumes in Canada grew 11 percent and 5 percent, respectively. This growth reflects improved economic activity coupled with the impact of acquisitions in western Canada. Redland contributed additional aggregate volume of 2.3 million metric tonnes. In the U.S., aggregate and ready-mixed concrete volumes were 3 percent and 1 percent lower while aggregate prices were up 3 percent and ready-mixed concrete prices were 2 percent higher. Redland added volume in the U.S. of approximately 11.2 million metric tonnes of aggregate and 1 million cubic meters of ready-mixed concrete. Selling and administrative expenses were $34.6 million higher due to acquisitions along with higher professional fees (legal, tax consulting and computer systems). Selling and administrative expenses as a percentage of net sales remained at the 1997 level of approximately 9 percent. Other expense, net was $18.1 million compared with $9.9 million in 1997. The increase primarily reflects costs related to the Redland acquisition, lower gains from the sale of non-strategic assets and increased other post-retirement benefit expenses. Income tax expense increased from $95.5 million in 1997 to $124.0 million in 1998. The effective tax rate in 1998 was 38.1 percent as compared to 37.2 percent in 1997. LIQUIDITY AND CAPITAL RESOURCES As explained in Note 1 to the Condensed Consolidated Financial Statements, the Company acquired certain Redland PLC businesses in North America (Redland) from Lafarge S.A. on June 3, 1998. Since the acquisition is accounted for similar to a pooling of interests for financial reporting purposes, the purchase price of this acquisition ($690 million) is not disclosed in the "Investing" section of the Condensed Consolidated Statements of Cash Flows. The "Financing" section reflects the amount paid to Lafarge S.A. From the perspective of the Company's North American businesses, the Redland transaction is an "acquisition", and is the largest acquisition in the Company's history. Net cash of $56.4 million was consumed by operating activities in the first six months of 1998 as compared with $3.1 million in 1997 mainly due to increased working capital (related to the Redland acquisition and increased receivables due to higher sales levels) partially offset by higher net income. In 1998, net cash provided by investing increased due to the redemption of short-term investments partially offset by higher capital expenditures and acquisitions. In 1998, cash consumed by financing activities was $8.8 million compared to net cash provided of $23.9 million in 1997. The change was primarily due to the acquisition of Redland and higher dividends. Net cash provided by operating activities for the twelve-month period ended June 30, 1998 increased over the same period in 1997 primarily due to higher net income and higher depreciation, depletion and amortization partially offset by an increase in working capital. In 1998, net cash used for investing was $54.8 million less than 1997 due to the purchase of short-term investments partially offset by an increase in capital expenditures. Net cash consumed by financing activities for 1998 was $120.1 million higher than 1997 due to the Redland acquisition, short-term borrowings and higher dividends. The Company refinanced a payable of $690 million to Lafarge S.A. related to the Redland acquisition with a short-term bridge loan of $650 million from Lafarge S.A. on June 3, 1998. Interest on the loan was at LIBOR plus 30 basis points. This loan was repaid to Lafarge S.A. on July 15, 1998. The Company financed the acquisition of Redland through the issuance of $650 million in long-term public debt on July 14, 1998. In order to hedge the risk of interest rate fluctuations, the Company entered into forward treasury lock agreements totaling a notional $640 million. Gains and losses on these 16 17 agreements have been deferred and are being amortized over the life of the debt. The debt has an effective interest rate of 6.88 percent. Capital expenditures (excluding acquisitions) are not expected to exceed $300 million in 1998, including $65 million related to the modernization of two cement plants. Committed bank lines of credit totaled $150 million under which no amounts were outstanding. OTHER FACTORS AFFECTING THE COMPANY - YEAR 2000 The Company is in the process of assessing and modifying its computer systems with regard to the Year 2000 issue. The scope of the project includes both information systems and process control. A Project Management Office, established in 1997, oversees the project, which consists of four phases: (1) inventory, risk analysis and initial compliance assessment, (2) selection of optimum solutions, (3) planning for solutions and (4) implementation. The company also has a continuous awareness campaign underway through the publication of employee newsletters and other communications. The project includes the replacement of certain equipment and modification of certain software specific to the resolution of Year 2000 issues. Estimated non-recurring spending during 1998 and 1999 totals approximately $11 million to $19 million. With the exception of the Redland acquisition (see below), phase 1 was completed in January 1998, phase 2 solutions have been proposed and phase 3 plans have been submitted to the Program Management Office. For many sites, implementation has either begun or has been completed. For the Redland operations, Phase 1 is expected to be completed in August 1998. The Company is accelerating the process in the Redland operations based on the experience gained at its other sites. The Company has also begun the process of identifying and contacting key suppliers to assess their Year 2000 readiness and to develop contingency plans where necessary. The Company believes, based on the available information, it will be able to operate its time-sensitive infrastructure through the turn of the century. The Company's expectations regarding its Year 2000 program are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from the Company's expectations. Factors that may cause such differences include but are not limited to the Company's ability to identify and remediate all affected systems and the failure of third parties on which the Company relies to remediate their respective systems. 17 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Part I, Notes to Condensed Consolidated Financial Statements, note 12 for a discussion of developments in certain legal and environmental matters. With respect to the shareholder derivative lawsuit described in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, in July 1998, the Court granted the defendants' motion to dismiss the plaintiff's complaint but also granted the plaintiff's request for leave to amend the complaint and refile it on or before August 31, 1998. The Company does not know whether or not the plaintiff will refile an amended complaint by the aforesaid deadline. With respect to environmental matters at the Company's cement plant in Alpena, Michigan, the Michigan Department of Environmental Quality ("MDEQ") has issued notices of violation for five different matters with proposed penalties of approximately $1.3 million in the aggregate. In addition to alleged violations of permit limits for emissions of hydrogen chloride gas and storm and surface water runoff (as described in the Company's Annual Report on Form 10-K for the year ended December 31, 1997), the other matters involve alleged deficiencies with respect to closure of prior on-site CKD disposal areas, alleged violations of permit limits and state regulatory requirements for fugitive dust emissions, and alleged deficiencies in record keeping as required by the Boiler and Industrial Furnaces regulations under the federal Resource Conservation and Recovery Act. The Company is engaged in discussions with MDEQ regarding the resolution of all outstanding matters in one comprehensive settlement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Part I: Note 7 to Condensed Consolidated Financial Statements for computation of net income per common equity share. (b) Reports on Form 8-K A Form 8-K was filed by the Company during the three-months ended June 30, 1998. The Form 8-K, dated June 3, 1998, was filed to discuss and present financial statements for the Redland acquisition. 18 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LAFARGE CORPORATION Date: August 14, 1998 By: /s/ Larry J. Waisanen -------------------- ----------------------- LARRY J. WAISANEN Senior Vice President and Chief Financial Officer 19 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JUN-01-1998 JUN-30-1998 118,921 58,504 444,607 0 264,880 958,052 2,426,542 1,109,824 2,810,927 446,836 759,962 0 0 781,366 503,175 2,810,927 1,009,587 1,009,587 806,439 806,439 13,861 0 18,196 73,863 (28,571) 45,292 0 0 0 45,292 .63 .62
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