<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 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.
<TABLE>
<CAPTION>
Outstanding as of
Class July 31, 1998
----------------------------------- -----------------
<S> <C>
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
==========
</TABLE>
<TABLE>
<S> <C>
Number of pages contained in this report 19
--
Total sequentially numbered pages 19
--
Exhibit index on page 18
--
</TABLE>
1
<PAGE> 2
LAFARGE CORPORATION AND SUBSIDIARIES
FORM 10-Q - FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PAGE
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
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
</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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------ -------------------------------------
1998 1997 1998 1997
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
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
================ =============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30
------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
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
================ ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
LAFARGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30 JUNE 30 DECEMBER 31
1998 1997 1997
(UNAUDITED) (UNAUDITED) (AUDITED)
------------- ------------ --------------
<S> <C> <C> <C>
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
============= ============= ==============
</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>
SIX MONTHS TWELVE MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
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
============ ============= =========== ===========
</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 SIX MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30
------------------------------ ----------------------------- ----------------------------
1998 1997 1998 1997 1998 1997
------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
============= ============= ============ ============= ============ ============
</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, 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
<PAGE> 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):
<TABLE>
<CAPTION>
June 30 June 30 December 31
1998 1997 1997
------------- -------------- -------------
<S> <C> <C> <C>
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
============= ============== =============
</TABLE>
5. Cash paid during the period for interest and taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months Twelve Months
Ended June 30 Ended June 30
------------------------- ----------------------------
1998 1997 1998 1997
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Interest $ 12,497 $ 10,866 $ 21,851 $ 26,360
Income Taxes (net of refunds) $ 53,579 $ 32,823 $ 113,801 $ 80,850
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
----------------------------- ------------------------------ ------------------------------
1998 1997 1998 1997 1998 1997
------------- ------------ ------------- ------------- ------------- -------------
BASIC CALCULATION
<S> <C> <C> <C> <C> <C> <C>
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
============= ============ ============= ============= ============= =============
</TABLE>
9
<PAGE> 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):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------------- ------------------------- ---------------------------
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
============ ============ ============ =========== ============= ============
</TABLE>
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:
<TABLE>
<CAPTION>
Maturity Date Amount
------------- ------
<S> <C>
July 2005 $ 250,000,000
July 2008 $ 200,000,000
July 2013 $ 200,000,000
</TABLE>
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
<PAGE> 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
<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. 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
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