<PAGE> 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 SEPTEMBER 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.
<TABLE>
<CAPTION>
Outstanding as of
Class October 30, 1998
----------------------------------- ----------------
<S> <C> <C>
Common Stock of Lafarge Corporation
($1 par value) 67,083,688
Exchangeable Preference Shares of
Lafarge Canada Inc.
(no par value) 5,170,632
Total Common Equity Interests 72,254,320
==========
</TABLE>
Number of pages contained in this report 21
Total sequentially numbered pages 21
Exhibit index on page 20
1
<PAGE> 2
LAFARGE CORPORATION AND SUBSIDIARIES
FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
a) Condensed Consolidated Statements
of Income - Three-Month and Nine-Month
Periods Ended September 30, 1998 and 1997 3
b) Condensed Consolidated Balance Sheets -
September 30, 1998, September 30, 1997, and
and December 31, 1997 4
c) Condensed Consolidated Statements of
Cash Flows - Nine-Month Periods Ended
September 30, 1998 and 1997 5
d) Condensed Consolidated Geographic Information -
Three-Month and Nine-Month Periods
Ended September 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 20
Item 6(a). Exhibits 20
Item 6(b). Reports on Form 8-K 20
SIGNATURE 21
</TABLE>
2
<PAGE> 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
NET SALES $ 810,239 $ 612,265 $ 1,819,826 $ 1,333,210
----------------- ----------------- ----------------- -----------------
COSTS AND EXPENSES
Cost of goods sold 542,893 409,863 1,349,332 998,957
Selling and administrative 53,609 39,738 160,462 117,860
Goodwill amortization 4,800 933 12,819 2,810
Other expense (income), net (760) 2,484 5,081 5,610
----------------- ----------------- ----------------- -----------------
Total income from operations 209,698 159,247 292,132 207,973
Interest expense 14,280 5,013 32,476 16,003
Interest income (6,290) (2,562) (15,915) (7,356)
----------------- ----------------- ----------------- -----------------
PRE-TAX INCOME 201,708 156,796 275,571 199,326
Income tax expense (77,964) (59,785) (106,535) (76,572)
----------------- ----------------- ----------------- -----------------
NET INCOME $ 123,744 $ 97,011 $ 169,036 $ 122,754
================= ================= ================= =================
NET INCOME PER COMMON
EQUITY SHARE-BASIC $ 1.71 $ 1.36 $ 2.35 $ 1.73
================= ================= ================= =================
NET INCOME PER COMMON EQUITY
SHARE-DILUTED $ 1.70 $ 1.35 $ 2.33 $ 1.72
================= ================= ================= =================
DIVIDENDS PER COMMON EQUITY SHARE $ .12 $ .10 $ .36 $ .30
================= ================= ================= =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
LAFARGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
1998 1997 1997
(UNAUDITED) (UNAUDITED) (AUDITED)
-------------------- -------------------- --------------------
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents $ 166,280 $ 123,846 $ 174,163
Short-term investments 60,224 86,308 155,368
Receivables, net 515,075 398,636 327,612
Inventories 243,933 196,545 233,972
Other current assets 59,874 30,851 58,331
-------------------- -------------------- --------------------
Total current assets 1,045,386 836,186 949,446
Property, plant and equipment,
(less accumulated depreciation and depletion of
$1,121,513, $1,076,369 and $1,067,927) 1,311,565 884,260 1,290,182
Excess of cost over net assets of
businesses acquired, net 331,710 28,821 335,487
Other assets 211,108 177,647 199,736
-------------------- -------------------- --------------------
TOTAL ASSETS $ 2,899,769 $ 1,926,914 $ 2,774,851
==================== ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 372,048 $ 248,789 $ 321,450
Income taxes payable 58,908 44,282 35,364
Short-term borrowings and current portion
of long-term debt 35,816 36,802 29,770
Short-term borrowings from related party --- 20,000 ---
Payable to Lafarge S.A. 28,299 --- 690,000
-------------------- -------------------- --------------------
Total current liabilities 495,071 349,873 1,076,584
Long-term debt 753,714 137,953 135,243
Deferred income tax 103,824 54,131 111,969
Other postretirement benefits 150,007 127,278 147,647
Other long-term liabilities 59,897 28,190 47,720
-------------------- -------------------- --------------------
Total liabilities 1,562,513 697,425 1,519,163
-------------------- -------------------- --------------------
Common equity interests
Common shares 67,084 64,948 65,268
Exchangeable shares 37,229 47,041 45,259
Additional paid-in-capital 650,169 643,910 649,082
Retained earnings 736,457 542,862 593,438
Cumulative foreign currency translation adjustments (153,683) (69,272) (97,359)
-------------------- -------------------- --------------------
Total shareholders' equity 1,337,256 1,229,489 1,255,688
-------------------- -------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 2,899,769 $ 1,926,914 $ 2,774,851
==================== ==================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
LAFARGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30
-----------------------------------------------
1998 1997
-------------------- --------------------
CASH FLOWS FROM OPERATIONS
<S> <C> <C>
Net Income $ 169,036 $ 122,754
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation, depletion and amortization 115,983 80,063
Provision for doubtful accounts 2,096 2,037
(Gain) loss on sale of assets (2,506) (3,694)
Other postretirement benefits 3,610 2,543
Other non-cash charges and credits, net 9,273 8,370
Changes in working capital (142,044) (60,483)
-------------------- --------------------
Net cash provided by operations 155,448 151,590
-------------------- --------------------
CASH FLOWS FROM INVESTING
Capital expenditures (152,170) (96,622)
Acquisitions (37,922) (4,675)
Short-term investments 95,144 6,188
Proceeds from property, plant and
equipment dispositions 17,757 12,630
Other 28,442 (540)
-------------------- --------------------
Net cash used for investing (48,749) (83,019)
-------------------- --------------------
CASH FLOWS FROM FINANCING
Payment to Lafarge S.A. (690,000) ---
Net increase (decrease) in long-term
borrowings (includes current portion) 621,378 (61,993)
Issuance of equity securities 10,517 17,420
Dividends, net of reinvestments (23,343) (15,295)
Financing Costs and Other (11,998) ---
-------------------- --------------------
Net cash consumed by financing (93,446) (59,868)
-------------------- --------------------
Effect of exchange rate changes (21,136) (1,704)
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (7,883) 6,999
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF THE PERIOD 174,163 116,847
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD $ 166,280 $ 123,846
==================== ====================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
LAFARGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED GEOGRAPHIC INFORMATION
(UNAUDITED AND IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------- -------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
NET SALES
<S> <C> <C> <C> <C>
Canada $ 255,294 $ 273,294 $ 559,857 $ 551,338
United States 554,945 338,971 1,259,969 781,872
---------------- ---------------- ---------------- ----------------
TOTAL NET SALES $ 810,239 $ 612,265 $ 1,819,826 $ 1,333,210
================ ================ ================ ================
INCOME FROM OPERATIONS
Canada $ 83,957 $ 81,193 $ 110,072 $ 89,123
United States 125,741 78,054 182,060 118,850
---------------- ---------------- ---------------- ----------------
TOTAL INCOME FROM
OPERATIONS 209,698 159,247 292,132 207,973
Interest expense, net (7,990) (2,451) (16,561) (8,647)
---------------- ---------------- ---------------- ----------------
PRE-TAX INCOME $ 201,708 $ 156,796 $ 275,571 $ 199,326
================ ================ ================ ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 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. 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 September 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 financed in June 1998 with an
interest-bearing short-term note to Lafarge S.A. This note was refinanced
in July 1998 with long-term public debt. A working capital adjustment of
$28.3 million was finalized in September 1998 to account for the working
capital changes between the time Redland was acquired by Lafarge S.A. and
the date the Company acquired Redland from Lafarge S.A. This working
capital adjustment was accrued at September 30, 1998, with a charge to
additional paid-in capital, and was paid in October 1998. The 1998
condensed consolidated financial statements include the combined operating
results of both Redland and the Company for all nine months.
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, Canada.
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).
7
<PAGE> 8
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 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. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all
adjustments 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. 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/A 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 September 30, 1998 and 1997,
and at December 31, 1997, inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30 September 30 December 31
1998 1997 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Finished products $ 126,147 $ 87,008 $ 123,774
Work in process 12,025 10,899 8,483
Raw materials and fuel 59,998 54,067 55,341
Maintenance and operating
supplies 45,763 44,571 46,374
------------------- ------------------- -------------------
Total inventories $ 243,933 $ 196,545 $ 233,972
=================== =================== ===================
</TABLE>
5. Cash paid during the period for interest and taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months
Ended September 30
----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Interest $ 24,521 $ 12,273
Income Taxes (net of refunds) 96,133 50,570
</TABLE>
8
<PAGE> 9
6. Earnings per share for the three months and nine months ended September
30, 1998 and 1997 includes the following components (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- -------- -----------
BASIC CALCULATION
<S> <C> <C> <C> <C>
Net income $ 23,744 $ 97,011 $169,036 $122,754
========= ========= ======== ========
Weighted average number
of common equity shares 72,229 71,448 72,004 70,950
========= ========= ======== ========
Basic net income per
common equity share $ 1.71 $ 1.36 $ 2.35 $ 1.73
========= ========= ======== ========
DILUTED CALCULATION
Net income $ 23,744 $ 97,011 $169,036 $122,754
========= ========= ======== ========
Weighted average number of
common equity shares
outstanding 72,229 71,448 72,004 70,950
Net effect of dilutive stock
options based on the treasury
stock method 487 595 626 559
--------- --------- -------- --------
Weighted average number of
common equity shares
assuming full conversion of all
potentially dilutive securities 72,716 72,043 72,630 71,509
========= ========= ======== ========
Diluted net income per common
equity share $ 1.70 $ 1.35 $ 2.33 $ 1.72
========= ========= ======== ========
</TABLE>
7. 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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ----------------------------------
1998 1997 1998 1997
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 123,744 $ 97,011 $ 169,036 $ 122,754
Foreign currency
translation adjustments (35,471) (151) (56,324) (5,930)
--------------- --------------- ---------------- ---------------
Comprehensive income $ 88,273 $ 96,860 $ 112,712 $ 116,824
=============== =============== ================ ===============
</TABLE>
9
<PAGE> 10
8. As discussed in Note 1, the Company financed 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 refinanced 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 average effective
interest rate of 6.88 percent and is due as follows:
<TABLE>
<CAPTION>
Maturity Date Amount
------------- ------
<S> <C> <C>
July 2005 $ 250,000,000
July 2008 $ 200,000,000
July 2013 $ 200,000,000
</TABLE>
9. 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.
Statement 133 cannot be applied retroactively and must be applied to
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.
10. On October 16, 1998 the Company acquired a cement plant from Holnam, Inc.
in Seattle, Washington together with related assets, including a limestone
quarry on Texada Island, British Columbia and two cement terminals. The
purchase price represents less than 5 percent of the Company's net
property, plant and equipment. In order to satisfy antitrust concerns
raised by Canada's Bureau of Competition (the "Bureau") regarding the
Canadian portion of the acquisition, LCI has agreed in a consent order
signed with the Bureau to sell, lease or otherwise divest of its interest
in the cement terminal it acquired from Holnam in Canada.
10
<PAGE> 11
11. As discussed in the Company's Form 8-K/A, 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 fourth 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.
11
<PAGE> 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. for $690 million, subject to adjustments
for changes in working capital between December 31, 1997 (the time Redland was
acquired by Lafarge S.A.) and June 3, 1998 (the date the Company acquired
Redland). The working capital adjustments were determined in September 1998 and
the Company accrued $28.3 million for settlement in the fourth quarter. Since
the Company acquired Redland from its parent, the acquisition was 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 September 30, 1998 and December 31, 1997 include a
combination of the accounts of Redland and the Company retroactive to the date
of the 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 September 30, 1998 and
September 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 September 30, 1997 to September 30, 1998. The foreign currency
translation impact on Canadian net sales, after translation to U.S. dollars, was
a reduction of $20.9 million for the three-months ended September 30, 1998 and
$35.5 million for the nine-months ended September 30, 1998. The foreign currency
translation impact on Canadian net income, after translation to U.S. dollars
during consolidation, was $3.8 million for the three-months ended September 30,
1998 and $4.9 million for the nine-months ended September 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 price changes reflect the change in
local currency.
12
<PAGE> 13
THREE MONTHS ENDED SEPTEMBER 30, 1998
The Company's net income was $123.7 million in 1998 compared with $97.0 million
for the same period in 1997. Net income per diluted common equity share was
$1.70 compared with $ 1.35. The earnings increase was due mainly to improved
operating results in all of the Company's major product lines, including the
Redland construction materials businesses acquired from Lafarge S.A. The former
Redland businesses had operating profit of $41.1 million (before goodwill
amortization). Canadian net income of $55.5 million was $5.1 million better than
1997. In the U.S., net income of $68.2 million was $21.6 million better.
Excluding $194.7 million of net sales generated by Redland, the Company's net
sales of $615.5 million were 1 percent higher than $612.3 million reached in
1997. Excluding Redland's sales in Canada of $6.6 million, Canadian net sales
were 7 percent lower. The drop is attributed to the transfer of Ontario Concrete
Pipe operations to a new joint venture accounted for by the equity method, the
decrease in the value of the Canadian dollar relative to the U.S. dollar and
lower cement volumes in Western Canada which were partially offset by higher
cement prices. In Canada, the former Redland operations sold 1.4 million metric
tonnes of aggregate. Excluding Redland sales of $188.1 million, U.S. net sales
increased by 8 percent over 1997. The areas of improvement include higher cement
prices and volumes, higher ready-mixed concrete shipments, and higher gypsum
selling prices and volumes. In the U.S. the former Redland operations sold 8.2
million metric tonnes of aggregate and 637,000 cubic meters of ready-mixed
concrete.
Third quarter operating profit from the Company's cement and waste management
operations was $126.5 million, $7.7 million better than last year. The
improvement resulted from a 3 percent increase in net reals (delivered price per
ton to customer less freight) and an improvement in shipments. Net sales were 4
percent higher. Operating profit from Canadian cement operations was $46.4
million, $2.4 million better than 1997. Net sales in Canada were down by 14
percent due to the impact of the lower Canadian dollar, 6 percent lower
shipments as a result of a weaker economy in British Columbia and a reduction in
sales to drilling operations in Western Canada. Clinker capacity utilization at
the Canadian plants increased to 102.2 percent in 1998 from 93.2 percent in
1997, primarily due to excellent kiln performance and additional kiln usage at
two Eastern Canadian cement plants to supply the greater demand in the U.S. In
the U.S., earnings of $80.1 million were $5.3 million better than 1997. Higher
cement prices and volumes drove the improvement as net sales rose 9 percent.
Clinker capacity utilization at U.S. plants was at or near capacity in both 1998
and 1997.
Excluding Redland, earnings from the Company's construction materials operations
were $53.2 million, $2.7 million (5%) better than 1997. The improvement was
primarily due to higher selling prices in the U.S and Canada. These improvements
were obscured at the net sales level due to the impact on Canadian sales of the
decrease in the value of the Canadian dollar relative to the U.S. dollar and the
transfer of the Ontario Concrete Pipe operations to a new joint venture
accounted for by the equity method. As a result, net
13
<PAGE> 14
sales (excluding Redland) were 5 percent lower than 1997. In Canada, earnings
were $40.2 million, $1.0 million better than last year, due to higher selling
prices primarily in ready-mixed concrete. Net sales, impacted by the lower
Canadian dollar and the absence of Ontario Concrete Pipe sales, were 4 percent
lower, excluding Redland. Redland net sales in Canada were $6.6 million,
generating earnings of $2.0 million. In the U.S., earnings (excluding Redland)
were $13.0 million, $1.7 million better than 1997 due to higher aggregate
volumes (5 percent) and higher ready-mixed concrete and aggregate selling prices
offset by lower ready-mixed concrete volumes (3 percent) due to a series of
tropical storms in Louisiana in September and higher operating costs. Excluding
Redland, net sales improved 3 percent. Redland net sales were $188.1 million and
earnings in the U.S. were $39.1 million (before goodwill amortization).
Earnings from the Company's gypsum operations were $5.7 million, $2.1 million
better than 1997. Gypsum shipments were up 3 percent and mill nets (selling
price less freight) were up 6 percent from last year. The strong demand for
wallboard continued in the major markets of the Northeast and Mid-Atlantic
regions.
Income tax expense was $78.0 million, $18.2 million higher than 1997. The
Company's effective tax rate was 38.7 percent in 1998 compared to 38.1 percent
in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company's net income of $169.0 million, or $2.33 per diluted common equity
share compares with net income of $122.8 million, or $1.72 per diluted common
equity share for the first nine months of 1997. The earnings improvement is
attributed to the Redland businesses acquired from Lafarge S.A., higher
shipments in all main product lines (cement, aggregates, ready-mixed concrete
and gypsum), a 3 percent increase in cement net reals and a 6 percent increase
in gypsum mill nets. These improvements were partly offset by higher cement
plant costs and higher materials and operating costs in the construction
materials operations. In Canada, net income was $76.9 million, $20.3 million
better than 1997. U.S. net income of $92.1 million was $26.0 million higher. The
Redland operations accounted for approximately one-third of the $.61 improvement
in diluted earnings per share for the first nine months of 1998 reflecting a
contribution of $56.9 million (before goodwill amortization and financing
costs).
Net sales (excluding Redland) were $1,394.3 million, up 5 percent over $1,333.2
million in 1997. Redland generated net sales of $425.5 million resulting in
consolidated net sales of $1,819.8 million. Cement shipments were 3 percent
higher. Excluding Redland, aggregate volumes improved 5 percent and ready-mixed
concrete volumes improved 1 percent. Excluding Redland operations, Canadian net
sales of $542.2 million were 2 percent below 1997 while U.S. net sales of $852.1
million improved by 9 percent. Redland generated $17.7 million of net sales in
Canada and $407.9 million in the U.S. Redland contributed 23.0 million metric
tonnes of aggregates and 1.6 million cubic meters of ready-mixed concrete during
the first nine months of 1998.
14
<PAGE> 15
Earnings from the Company's cement and waste management operations were $207.6
million, $25.1 million better than last year due to higher cement shipments and
prices. Net sales climbed 6 percent. Earnings from Canadian operations of $74.3
million were $7.9 million better than 1997. Net sales in the Canadian operations
decreased by 7% entirely due to the decrease in the value of the Canadian dollar
relative to the U.S. dollar. The earnings improvement was the result of higher
net reals, higher shipments in Ontario, Quebec and Alberta and lower plant
maintenance costs which were substantially offset by the impact of the Canadian
exchange rate. In the U.S., earnings were $133.3 million, $17.2 million better
than 1997 on an 11 percent increase in net sales. The improvement was due to a 5
percent increase in shipments and a 3 percent increase in net reals partially
offset by a 2 percent increase in plant costs.
The Company's construction material operations (excluding Redland) earned $67.8
million, $14.7 million better than 1997. Net sales, excluding Redland, were 1
percent higher. In Canada, earnings were $46.5 million, $13.1 million better
than 1997. This 41 percent improvement resulted from price increases in
ready-mixed concrete and aggregates in the Prairie Provinces, higher ready-mixed
concrete volumes in Alberta, Ontario and Quebec and improved pipe and precast
sales in Alberta. None of these improvements are demonstrated at the net sales
level (excluding Redland) due to the decrease in the value of the Canadian
dollar relative to the U.S. dollar and the transfer of the Ontario Concrete Pipe
operations to a new joint venture accounted for by the equity method. Redland
added 3.7 million metric tonnes of aggregates. U.S. results (excluding Redland)
were $21.3 million, $1.6 million better due to higher selling prices of
aggregate and ready-mixed concrete and higher aggregate volumes offset by lower
ready-mixed concrete volumes and higher material costs. U.S. net sales
(excluding Redland) were up 4 percent to $166.7 million. In the U.S., Redland
sold 19.3 million metric tonnes of aggregate and 1.6 million cubic meters of
ready-mixed concrete.
Gypsum earnings were $13.4 million, $3.2 million better than 1997. The
improvement resulted from higher gypsum shipments of 3 percent due to a strong
Mid-Atlantic demand and a 6 percent increase in mill nets.
Income tax expense was $106.5 million, $30.0 million greater than 1997. The
Company's effective tax rate was 38.7 percent as compared to 38.4 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 was 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.
15
<PAGE> 16
Net cash of $155.4 million was provided by operating activities in the first
nine months of 1998 as compared to $151.6 million in 1997. The increase was due
to higher earnings from operations and higher depreciation, depletion and
amortization mostly offset by increases in working capital (related to the
Redland acquisition and increased receivables due to higher sales). In 1998,
net cash used for investing decreased from 1997 as the higher capital
expenditures and acquisitions were more than offset by the redemption of
short-term investments and proceeds from disposals. In 1998, cash consumed by
financing activities was $93.4 million as compared to $59.9 million in 1997.
The most significant change was the acquisition of Redland.
The Company financed 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 refinanced
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 the 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.
Capital expenditures (excluding acquisitions) are not expected to exceed $235
million in 1998, including $63 million related to the modernization of two
cement plants. Committed lines of credit totaled $150 million under which no
amounts were outstanding.
OTHER FACTORS AFFECTING THE COMPANY - YEAR 2000
The year 2000 issue is a result of many computer systems having been written
using two digits rather than four to specify the year. Computer systems using
the "two-digit" format may experience problems handling date sensitive
calculations beyond the year 1999. This could cause many computer systems to
fail or to produce inaccurate results or calculations. Similar to other
companies who use business application information technology and embedded
technology systems such as micro-controllers, the Company is affected by the
year 2000 issue. As a consequence, the Company instituted a North America-wide
Year 2000 Compliance Program to identify and correct problems related to the
two-digit date field. The objective of the program is to ensure no loss of
revenues, no unplanned downtime, no adverse impact to the business and to
sustain commercial and technical credibility with shareholders, suppliers,
customers, employees and stakeholders.
The Securities and Exchange Commission has issued interpretative guidance
entitled "Disclosure of Year 2000 Issues and Consequences by Public Companies,
Investment Advisors, Investment Companies, and Municipal Securities Issuers",
effective August 4, 1998 (the "Interpretation"). The Company is providing this
disclosure to supplement and update the information contained in its 1997 Annual
Report included in Form 8-K/A in accordance with this interpretation.
16
<PAGE> 17
Due to the nature of year 2000 problems nearly all disclosures, excepting simple
statements of historical facts, contain forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. These forward looking statements are based on management's
best judgements and current expectations and are subject to various factors,
uncertainties and risks which may cause actual results to be materially
different from such statements.
In the first half of 1997, the Company defined, planned and organized a formal
Year 2000 Compliance Program and established a Program Management Office staffed
with full time professionals dedicated to the resolution of Year 2000 issues.
Each major operating location has a designated "Point of Contact" who is
responsible for the development and implementation of the location's Year 2000
strategy.
The Program addresses all essential phases, activities and tasks that the
Company must undertake for the successful execution of its Year 2000 Compliance
Program. The Program comprises four main stages (with distinct but complementary
objectives): (1) Inventory and Assessment, (2) Optimum Scenario Definition, (3)
Transition Plan Definition and (4) Implementation. Stages one, two and three
have largely been completed, and stage four is underway. The Company expects to
complete the implementation stage by the third quarter of 1999.
STATE OF READINESS
As of September 30, 1998, the Year 2000 Compliance Program is on target to
successfully resolve all critical issues before the end of 1999.
In-house developed business application software has been reviewed. Software
that requires changes has been identified and is in the process of being
revised. Certain systems, including the cement financial systems (accounts
payable, general ledger and fixed assets) and the Western US Construction
Materials Region's financial systems, are not Year 2000 compliant. These are in
the process of being replaced by purchased software applications or upgraded to
Year 2000 compliant systems. Completion is expected by September 30, 1999.
Non-IT systems consist of all applications developed or acquired by the Company
that are in the field of embedded technology systems. These may include process
control equipment, instrumentation and other field systems. Approximately
one-half of embedded technology systems were identified as compliant during the
first stage of the Program. Of the remainder, one-tenth have already been made
compliant, approximately one-third are scheduled for compliance by the end of
1998 and the rest are scheduled for remediation during the first nine months of
1999.
17
<PAGE> 18
Operating locations have identified their most critical suppliers to whom
letters are being sent requesting information in the year 2000 compliance
programs and their state of readiness. Based on the responses, evaluations will
be performed and followed by the development of contingency plans, as necessary.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Year 2000 Compliance Program is currently expected to result in estimated
non-recurring expenditures of approximately $15.0 to $18.0 million. As of
September 30, 1998, the Company has incurred approximately $4.0 million ($2.0
million capital and $2.0 million expense) for the remediation or replacement of
the business application systems and the embedded technology systems. Of the
expenditures remaining approximately 75% will be capitalized. Internal resource
requirements are estimated at 45,000 hours, of which approximately 20,000 hours
have been incurred through September 30, 1998. There have been no significant
postponements of other computer system projects due to the Year 2000 efforts.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain business activities or operations.
Such failures could materially and adversely affect the company's results of
operations, liquidity and financial condition. At this time, the Company is
unable to determine if the consequences of Year 2000 failures will have a
material impact on the Company's results of operations, liquidity or financial
condition. This is substantially the result of the general uncertainty of the
Year 2000 problem, and the uncertain impact on third-party suppliers.
The dates on which the Company believes the year 2000 projects will be completed
are based on the best estimates of management, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third-party modification plans and other factors. However,
there can be no guarantee that these estimates will be achieved or that there
will not be a delay in, or increased costs associated with, the implementation
of the year 2000 projects.
The Year 2000 Compliance Program is expected to significantly reduce the
Company's level of uncertainty about Year 2000 problem and, in particular, about
the Year 2000 compliance and readiness of its third party suppliers. The Company
believes that, with completion of the projects as scheduled, the possibility of
significant interruptions of normal operations should be reduced and that it
would be able to operate its date-sensitive business applications and embedded
technology systems through the turn of the century. At the present time, the
Company anticipates that its computer systems will be year 2000 compliant in all
material respects. There can be no assurance, however, of complete compliance.
18
<PAGE> 19
CONTINGENCY PLANS
The Company's Year 2000 strategies include the development of contingency plans.
Contingency plans are currently being developed with an estimated completion
date of March 31, 1999. The planning effort will include critical areas of the
Company such as information processing and reporting, operations, customer
interfaces, vendor relationships and personnel. The contingency plans will also
include trigger dates (the date on which the contingency plan will replace the
original action plan if a milestone is not met) for each non-compliant system.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The shareholder derivative lawsuit described in the Company's 1997 annual report
included in Form 8-K/A discussed in Item 6 below has been reinstituted. The
plaintiff filed its amended complaint within the court ordered period for
refiling on August 30, 1998. The Company and the directors have filed a motion
to dismiss this action and it is anticipated that a hearing in this matter will
be scheduled for November 1998. The Company and its directors believe that the
lawsuit is without merit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Part I: Note 6 to Condensed Consolidated Financial Statements for
computation of net income per common equity share.
(b) Reports on Form 8-K
A Form 8-K/A was filed by the Company on October 2, 1998. The Form
8-K/A, dated June 3, 1998, was filed to discuss and present Lafarge
Corporation's financial statements updated for the Redland acquisition.
20
<PAGE> 21
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: November 12, 1998 By: /s/ Larry J. Waisanen
------------------------ -----------------------
LARRY J. WAISANEN
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 166,280
<SECURITIES> 60,224
<RECEIVABLES> 515,075
<ALLOWANCES> 0
<INVENTORY> 243,933
<CURRENT-ASSETS> 1,045,386
<PP&E> 2,433,078
<DEPRECIATION> 1,121,513
<TOTAL-ASSETS> 2,899,769
<CURRENT-LIABILITIES> 495,071
<BONDS> 753,714
0
0
<COMMON> 754,482
<OTHER-SE> 582,774
<TOTAL-LIABILITY-AND-EQUITY> 2,899,769
<SALES> 1,819,826
<TOTAL-REVENUES> 1,819,826
<CGS> 1,349,332
<TOTAL-COSTS> 1,349,332
<OTHER-EXPENSES> 17,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,476
<INCOME-PRETAX> 275,571
<INCOME-TAX> (106,535)
<INCOME-CONTINUING> 169,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,036
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.33
</TABLE>
