<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, 1999
--------------------------------------------
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 001-08584
----------------------------------------------------
LAFARGE CORPORATION
- ---------------------------------------------------------------------------
(Exact name of Registrant 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
- ---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares of common stock, par value $1.00 per share, of Lafarge
Corporation (the "Common Stock") outstanding as of the latest practicable date,
July 30, 1999, was 68,194,598. In addition, as of such date, there were
outstanding 4,465,189 Exchangeable Preference Shares, no par value per
share, of Lafarge Canada Inc. that are exchangeable at any time into Common
Stock on a one-for-one basis, entitle their holders to dividend and other rights
economically equivalent to those of the Common Stock, and through a voting
trust, vote at meetings of stockholders of the Registrant.
<PAGE> 2
LAFARGE CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements
of Income (unaudited) - Three-Month, Six-Month and
Twelve-Month Periods Ended June 30, 1999 and 1998 1
Condensed Consolidated Balance Sheets -
June 30, 1999 (unaudited), June 30, 1998 (unaudited) and
December 31, 1998 2
Condensed Consolidated Statements of
Cash Flows (unaudited) - Six-Month and
Twelve-Month Periods Ended June 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 24
INDEX TO EXHIBITS 25
</TABLE>
(i)
<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
------------------------------- -------------------------------------
1999 1998 1999 1998
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 720,214 $ 674,811 $ 1,089,995 $ 1,009,587
-------------- -------------- ---------------- ----------------
COSTS AND EXPENSES
Cost of goods sold 505,147 473,032 855,227 806,439
Selling and administrative 59,685 53,171 111,108 106,853
Amortization of goodwill 4,406 4,272 8,833 8,020
Other (income) expense, net (5,560) 823 (5,207) 5,841
-------------- -------------- ---------------- ----------------
Earnings from operations 156,536 143,513 120,034 82,434
Interest expense 16,654 10,569 30,912 18,196
Interest income (3,646) (5,794) (7,217) (9,625)
-------------- -------------- ---------------- ----------------
EARNINGS BEFORE INCOME TAXES 143,528 138,738 96,339 73,863
Income tax expense (54,919) (53,692) (36,782) (28,571)
-------------- -------------- ---------------- ----------------
NET INCOME $ 88,609 $ 85,046 $ 59,557 $ 45,292
============== ============== ================ ================
NET INCOME PER COMMON
EQUITY SHARE-BASIC $ 1.22 $ 1.18 $ .82 $ .63
============== ============== ================ ================
NET INCOME PER COMMON EQUITY
SHARE-DILUTED $ 1.22 $ 1.17 $ .82 $ .62
============== ============== ================ ================
DIVIDENDS PER COMMON EQUITY SHARE $ .15 $ .12 $ .30 $ .24
============== ============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
JUNE 30
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
NET SALES $ 2,528,613 $ 2,094,993
---------------- ---------------
COSTS AND EXPENSES
Cost of goods sold 1,847,774 1,552,551
Selling and administrative 221,084 189,694
Amortization of goodwill 18,399 9,891
Other (income) expense, net (3,291) 8,251
---------------- ---------------
Earnings from operations 444,647 334,606
Interest expense 60,368 27,155
Interest income (18,021) (18,116)
---------------- ---------------
EARNINGS BEFORE INCOME TAXES 402,300 325,567
Income tax expense (152,535) (124,042)
---------------- ---------------
NET INCOME $ 249,765 $ 201,525
================ ===============
NET INCOME PER COMMON
EQUITY SHARE-BASIC $ 3.45 $ 2.81
================ ===============
NET INCOME PER COMMON EQUITY
SHARE-DILUTED $ 3.43 $ 2.79
================ ===============
DIVIDENDS PER COMMON EQUITY SHARE $ .57 $ .46
================ ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
LAFARGE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30 JUNE 30 DECEMBER 31
1999 1998 1998
(UNAUDITED) (UNAUDITED) (AUDITED)
----------------- ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 173,506 $ 118,921 $ 271,138
Short-term investments 6,789 58,504 17,070
Receivables, net 497,746 444,607 335,229
Inventories 300,277 264,880 247,944
Other current assets 80,218 71,140 66,510
----------------- ----------------- -----------------
Total current assets 1,058,536 958,052 937,891
Property, plant and equipment, (less accumulated
depreciation and depletion of $1,225,258, $1,109,824
and $1,148,918) 1,520,303 1,316,718 1,400,753
Excess of cost over net assets of businesses acquired, net 353,933 335,547 353,548
Other assets 208,969 200,610 212,605
----------------- ----------------- -----------------
TOTAL ASSETS $ 3,141,741 $ 2,810,927 $ 2,904,797
================= ================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 374,443 $ 323,395 $ 353,736
Short-term borrowings and current portion of long-term debt 160,903 94,590 44,560
Income taxes payable 40,798 28,851 16,681
----------------- ----------------- -----------------
Total current liabilities 576,144 446,836 414,977
Bridge loan from Lafarge S.A. -- 650,000 --
Long-term debt 743,616 109,962 751,151
Deferred income tax 112,095 102,875 110,398
Other post-retirement benefits 153,525 149,926 150,064
Other long-term liabilities 62,146 66,787 63,033
----------------- ----------------- -----------------
Total liabilities 1,647,526 1,526,386 1,489,623
----------------- ----------------- -----------------
Common equity
Common stock ($1.00 par value; authorized 110.1 million
shares; issued 68.1, 66.9 and 67.4 million shares,
respectively) 68,125 66,921 67,370
Exchangeable preference shares (no par or stated value;
authorized 24.3 million shares; issued 4.5, 5.3 and 4.9 million
shares, respectively) 32,800 37,814 35,814
Additional paid-in-capital 683,205 676,631 672,555
Retained earnings 829,783 621,387 792,058
Accumulated other comprehensive income (loss) (119,698) (118,212) (152,623)
----------------- ----------------- -----------------
Total shareholders' equity 1,494,215 1,284,541 1,415,174
----------------- ----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,141,741 $ 2,810,927 $ 2,904,797
================= ================= =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<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
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATIONS
Net income $ 59,557 $ 45,292 $ 249,765 $ 201,525
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Depreciation, depletion and amortization 81,134 78,041 159,875 129,936
Provision for bad debts 1,562 1,325 3,632 2,223
Gain on sale of assets (4,734) (2,195) (5,503) (4,412)
Other post-retirement benefits 2,758 2,772 3,629 3,607
Other noncash charges and credits, net (7,378) (2,587) (1,051) 1,609
Net change in working capital (172,533) (179,012) (17,492) (51,795)
------------ ------------ ------------- ------------
Net cash provided by (used in) operations (39,634) (56,364) 392,855 282,693
------------ ------------ ------------- ------------
CASH FLOWS FROM INVESTING
Capital expenditures (137,026) (102,455) (258,924) (153,826)
Acquisitions (49,554) (36,325) (112,509) (40,875)
Redemptions (purchases) of short-term investments 10,281 96,864 51,715 (10,498)
Proceeds from property, plant and equipment
dispositions 11,727 11,789 22,848 19,795
Other 3,983 47,162 (43,720) 56,054
------------ ------------ ------------- ------------
Net cash provided by (used for) investing (160,589) 17,035 (340,590) (129,350)
------------ ------------ ------------- ------------
CASH FLOWS FROM FINANCING
Repayment of Lafarge S.A. payable -- (690,000) -- (690,000)
Bridge loan from Lafarge S.A. -- 650,000 -- 650,000
Net increase (decrease) in short-term and
long-term borrowings (includes current portion) 105,560 36,795 46,323 (82,810)
Issuance of equity securities, net 1,247 9,992 4,012 22,362
Dividends, net of reinvestments (14,688) (15,560) (32,272) (29,671)
Financing costs and other -- -- (12,818) --
------------ ------------ ------------- ------------
Net cash provided by (used in) financing 92,119 (8,773) 5,245 (130,119)
------------ ------------ ------------- ------------
Effect of exchange rate changes 10,472 (7,140) (2,925) (17,207)
------------ ------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (97,632) (55,242) 54,585 6,017
------------ ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT
THE BEGINNING OF THE PERIOD 271,138 174,163 118,921 112,904
------------ ------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT
THE END OF THE PERIOD $ 173,506 $ 118,921 $ 173,506 $ 118,921
============ ============ ============= ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 6
LAFARGE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Lafarge Corporation, together with its subsidiaries ("Lafarge" or the
"Company"), is North America's largest diversified supplier of aggregates,
concrete and concrete products, cement and cementitious materials, gypsum
wallboard and other construction materials used for residential,
commercial, institutional and public works construction. The Company's
core businesses are organized into three operating segments: the Cement
Group; the Construction Materials Group; and Lafarge Gypsum. See note 8
herein, for information regarding the Company's operating segments and
products.
Lafarge has more than 700 operations doing business in most states and
throughout Canada, where it operates through its major operating
subsidiary, Lafarge Canada Inc. ("LCI"). The Company's primary U.S.
markets are in the northeast, midsouth, midwest, northcentral, mountain
and northwest areas. Lafarge S.A., a French corporation, and certain of
its affiliates ("Lafarge S.A.") own a majority of the voting securities of
Lafarge, including the Company's outstanding common stock, par value $1.00
per share (the "Common Stock") and LCI's Exchangeable Preference Shares
(the "Exchangeable Shares").
On June 3, 1998, the Company acquired certain Redland PLC businesses in
North America ("Redland") from Lafarge S.A. for $690 million. Redland
produces and sells aggregates, ready-mixed concrete and asphalt and
performs paving and related contracting services. Redland operated
primarily in the U.S. and owned two quarry operations in Ontario, Canada.
Lafarge S.A. acquired Redland PLC in December 1997. Since the Company
acquired Redland from its majority stockholder, the acquisition was
accounted for similar to a pooling of interests for financial reporting
purposes. Accordingly, as of December 31, 1997, 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 $690
million purchase price paid by the Company. The Company's condensed
consolidated balance sheets as of June 30, 1999, December 31, 1998 and
June 30, 1998 include the balance sheets of Redland. The condensed
consolidated statements of income and cash flows include Redland from
January 1, 1998.
2. The condensed consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. As a result, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. 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 included in
the Company's 1998 Annual Report on Form 10-K.
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 year or any other interim
period.
4
<PAGE> 7
4. Inventories are valued at the lower of cost or market. The majority of the
Company's 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, 1999 and 1998,
and at December 31, 1998, inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
June 30
---------------------------- December 31
1999 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Finished products $ 162,966 $ 140,256 $ 129,838
Work in process 22,884 23,788 10,878
Raw materials and fuel 61,826 55,153 55,760
Maintenance and operating supplies 52,601 45,683 51,468
------------ ------------ ------------
Total inventories $ 300,277 $ 264,880 $ 247,944
============ ============ ============
</TABLE>
5. Cash paid during the period for interest and income taxes, is as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Twelve Months
Ended June 30 Ended June 30
------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest $ 30,438 $ 12,497 $ 63,722 $ 21,851
Income taxes (net of refunds) $24,520(a) $ 53,579 $123,886(a) $ 113,801
</TABLE>
(a) Includes a refund of $23.4 million from the Internal Revenue Service.
6. Earnings per share for the three, six and twelve months ended June 30,
1999 and 1998 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
------------------------ ---------------------------- --------------------------
1999 1998 1999 1998 1999 1998
----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC CALCULATION
-----------------
Net income $ 88,609 $ 85,046 $ 59,557 $ 45,292 $ 249,765 $ 201,525
=========== =========== ============ =========== =========== ===========
Weighted average number of
common equity shares 72,459 72,039 72,406 71,887 72,328 71,718
=========== =========== ============ =========== =========== ===========
Basic net income per common
equity share $ 1.22 $ 1.18 $ 0.82 $ 0.63 $ 3.45 $ 2.81
=========== =========== ============ =========== =========== ===========
DILUTED CALCULATION
-------------------
Net income assuming dilution $ 88,609 $ 85,046 $ 59,557 $ 45,292 $ 249,765 $ 201,525
=========== =========== ============ =========== =========== ===========
Weighted average number of
common equity shares 72,459 72,039 72,406 71,887 72,328 71,718
Net effect of dilutive stock
options based on the treasury
stock method 419 661 424 627 448 588
----------- ----------- ------------ ----------- ----------- -----------
Weighted average number of
common equity shares
assuming full conversion of
all potentially dilutive
securities 72,878 72,700 72,830 72,514 72,776 72,306
=========== =========== ============ =========== =========== ===========
Diluted net income per common
equity share $ 1.22 $ 1.17 $ 0.82 $ 0.62 $ 3.43 $ 2.79
=========== =========== ============ =========== =========== ===========
</TABLE>
Basic earnings per common equity share were computed by dividing net
income by the weighted average number of shares of Common Stock
outstanding during the period. Diluted earnings per
5
<PAGE> 8
common equity share assumed conversion of stock options, to the extent
such conversion is dilutive.
7. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), requires that an enterprise
display comprehensive income which for the Company is the total of net
income 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
----------------------------- --------------------------- -----------------------------
1999 1998 1999 1998 1999 1998
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 88,609 $ 85,046 $ 59,557 $ 45,292 $ 249,765 $ 201,525
Foreign currency
translation adjustment 20,978 (27,300) 32,925 (20,853) (1,486) (49,091)
----------------------------- ------------ ------------ -----------------------------
Comprehensive income $ 109,587 $ 57,746 $ 92,482 $ 24,439 $ 248,279 $ 152,434
============================= ============ ============ =============================
</TABLE>
8. Lafarge adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports issued to shareholders. It
also established standards for related disclosures about products and
geographic areas.
Lafarge's three reportable operating segments, which represent separately
managed strategic business units that have different capital requirements
and marketing strategies, are the Construction Materials Group, the Cement
Group and Lafarge Gypsum. The basis of segmentation is consistent with the
Company's December 31, 1998, year-end financial statements.
Lafarge evaluates operating performance based on profit or loss from
operations before the following items: other post-retirement benefit
expense for retirees, goodwill amortization related to the Redland
acquisition, income tax expense, interest and foreign exchange gains and
losses.
6
<PAGE> 9
Lafarge accounts for intersegment sales and transfers at market prices.
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues. Operating segment information consists of
the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
---------------------- -------------------------- --------------------------
1999 1998 1999 1998 1999 1998
--------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Construction Materials
Revenues from external customers $ 384.3 $ 371.5 $ 572.0 $ 539.2 $ 1,372.9 $ 1,032.8
Intersegment revenues 0.2 0.4 2.0 1.3 3.0 1.5
Cement
Revenues from external customers 296.7 279.3 447.5 422.4 1,030.9 966.5
Intersegment revenues 34.6 33.7 52.7 49.8 120.8 117.1
Gypsum
Revenues from external customers 39.2 24.0 70.5 48.0 124.9 95.7
Eliminations (34.8) (34.1) (54.7) (51.1) (123.9) (118.6)
--------- --------- ----------- ----------- ----------- -----------
Total net sales $ 720.2 $ 674.8 $ 1,090.0 $ 1,009.6 $ 2,528.6 $ 2,095.0
========= ========= =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
---------------------- -------------------------- --------------------------
1999 1998 1999 1998 1999 1998
--------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Earnings from operations:
Construction Materials (a) $ 62.5 $ 60.0 $ 40.1 $ 30.3 $ 181.1 $ 107.7
Cement (a) 98.7 99.3 91.0 81.1 298.6 276.1
Gypsum (a) 11.6 4.3 20.1 7.6 32.5 14.2
Corporate and other (16.3) (20.1) (31.2) (36.6) (67.6) (63.4)
--------- --------- ----------- ----------- ----------- -----------
Earnings before interest and
income tax expense 156.5 143.5 120.0 82.4 444.6 334.6
Interest expense, net (13.0) (4.8) (23.7) (8.5) (42.3) (9.0)
--------- --------- ----------- ----------- ----------- -----------
Earnings before income tax expense $ 143.5 $ 138.7 $ 96.3 $ 73.9 $ 402.3 $ 325.6
========= ========= =========== =========== =========== ===========
</TABLE>
(a) Excludes other post-retirement benefit expense for retirees, goodwill
amortization related to the Redland acquisition, income tax expense,
interest and foreign exchange gains and losses.
Condensed consolidated geographic information consists of the following (in
millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------------- ------------------------- -------------------------
1999 1998 1999 1998 1999 1998
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
United States $ 506.3 $ 471.1 $ 778.1 $ 705.0 $1,773.3 $1,299.0
Canada 213.9 203.7 311.9 304.6 755.3 796.0
----------- ------------ ----------- ----------- ----------- -----------
Total $ 720.2 $ 674.8 $1,090.0 $1,009.6 $2,528.6 $2,095.0
=========== ============ =========== =========== =========== ===========
Earnings from Operations
United States $ 108.1 $ 91.1 $ 95.2 $ 56.3 $ 298.4 $ 186.2
Canada 48.4 52.4 24.8 26.1 146.2 148.4
----------- ------------ ----------- ----------- ----------- -----------
Total 156.5 143.5 120.0 82.4 444.6 334.6
Interest expense, net (13.0) (4.8) (23.7) (8.5) (42.3) (9.0)
----------- ------------ ----------- ----------- ----------- -----------
Earnings Before Income Tax Expense $ 143.5 $ 138.7 $ 96.3 $ 73.9 $ 402.3 $ 325.6
=========== ============ =========== =========== =========== ===========
</TABLE>
7
<PAGE> 10
Assets by operating segment consist of the following (in millions):
<TABLE>
<CAPTION>
June 30
--------------------------------- December 31
1999 1998 1998
--------------- ---------------- ---------------
<S> <C> <C> <C>
Assets:
Construction Materials $ 1,235.5 $ 1,192.1 $ 1,095.3
Cement 1,067.2 898.7 956.4
Gypsum 89.3 68.7 70.6
Corporate, Redland goodwill and other 749.7 651.4 782.5
--------------- ---------------- ---------------
Total assets $ 3,141.7 $ 2,810.9 $ 2,904.8
=============== ================ ===============
</TABLE>
9. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The Company must
adopt this statement no later than January 1, 2001. SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a
company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company is reviewing SFAS
No. 133 and does not currently expect it to materially impact its
financial condition or results of operations.
10. In January 1999, the Company completed the acquisition of a gypsum
wallboard plant located in Newfoundland, Canada.
In late January 1999, the Company announced plans to construct a $90
million state-of-the-art gypsum wallboard plant in northern Kentucky, just
outside of Cincinnati. Scheduled to begin operations in the first half of
2000, this facility will have the capacity to produce up to 900 million
square feet of wallboard a year, which would make it the largest single
production line in the U.S.
On March 30, 1999, the Company completed the acquisition of Corn
Construction Co., an aggregates and asphalt paving business in New Mexico
and Southern Colorado.
11. The Company self-insures for workers' compensation, automobile and general
liability claims up to a maximum per claim. The undiscounted estimated
liability is accrued based on a determination by an outside actuary. This
determination is impacted by assumptions made and actual experience.
In 1992, the Company's Canadian subsidiary, LCI, along with the Bertrand &
Frere Construction Company Limited and others, became a defendant in
lawsuits instituted in the Ontario (Canada) Court (General Division)
arising from claims brought by building owners, the Ontario New Home
Warranty Program and other plaintiffs regarding alleged defective concrete,
fly ash and cement used in defective footings, foundations and floors. The
damages claimed total more than Canadian $65 million. The amount of LCI's
liability, if any, in these lawsuits is uncertain. LCI has denied
liability and is contesting the lawsuits vigorously. LCI has also
introduced claims against some of its primary and excess insurers for
defense costs and indemnity, if any. The lawsuits were joined and the
hearing was completed in December 1998. The matter was taken under
advisement by the presiding judge and a decision is expected before
December 31, 1999. LCI believes that it has insurance coverage that will
respond to defense expenses and liability, if any, in the lawsuits.
8
<PAGE> 11
Currently, the Company is involved in two remediations at two different
sites under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, which together are referred to as Superfund.
At one site where the Company had been named a potentially responsible
party ("PRP"), the remedial activities are complete, long-term maintenance
and monitoring are under way, and partial contribution has been obtained
from financially viable parties, including the Company. The United States
Environmental Protection Agency ("EPA") has indicated it plans to delist
this site from the National Priority List in 1999. At the other site, also
on the National Priority List, some of the PRPs named by the EPA have
initiated a third-party action against some 47 other parties including the
Company. The Company also has been named a PRP at this site. The suit
alleges that in 1969 a predecessor company of the Company sold equipment
containing hazardous substances that may now be present at the site. It
appears that the largest disposer of hazardous substances at this site is
the U.S. Department of Defense and numerous other large disposers of
hazardous substances are associated with this site. Management believes
that neither matter is material to the financial condition, results of
operations or liquidity of the Company.
When the Company determines that it is probable that a liability for
environmental matters or other legal actions has been incurred and the
amount of the loss is reasonably estimable, an estimate of the required
remediation costs is recorded as a liability in the financial statements.
As of June 30, 1999, the liabilities recorded for environmental obligations
are not material to the financial statements of the Company. Although the
Company believes its environmental accruals are adequate, environmental
costs may be incurred that exceed the amounts provided at June 30, 1999.
However, management has concluded that the possibility of material
liability in excess of the amounts reported in the June 30, 1999 Condensed
Consolidated Balance Sheet is remote.
In the ordinary course of business, the Company is involved in certain
other legal actions and claims, including proceedings under laws and
regulations relating to environmental and other matters. Because such
matters are subject to many uncertainties and the outcomes are not
predictable with assurance, the total amount of these legal actions and
claims cannot be determined with certainty. Management believes that all
legal and environmental matters will be resolved without material adverse
impact to the Company's financial condition, results of operations or
liquidity.
9
<PAGE> 12
LAFARGE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Lafarge Corporation, together with its subsidiaries ("Lafarge" or the
"Company"), is North America's largest diversified supplier of construction
materials. The Company's core businesses are organized into three operating
segments:
The Cement Group - produces and distributes portland and specialty cements,
cementitious materials, and processes fuel-quality waste and alternative
raw materials for use in cement kilns.
The Construction Materials Group - produces and distributes construction
aggregates, ready-mixed concrete, other concrete products and asphalt, and
constructs and paves roads.
Lafarge Gypsum - produces and distributes gypsum wallboard and related
products.
Lafarge's broad range of products is complemented by its geographic diversity.
Unlike many of its competitors, Lafarge has 700 operations doing business in
most states in the U.S. and throughout Canada, where it operates through its
major operating subsidiary, Lafarge Canada Inc.
Historically, the Company incurs a loss in the first quarter because in many of
the Company's operating regions, sales and operating results are negatively
impacted by winter 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. However, the first quarter results may be
offset by increases in construction activity in subsequent quarters. Due to
seasonal, weather-related conditions, earnings of any one quarter should not be
considered as indicative of results to be expected for a full year or any other
interim period.
The Company acquired certain North American construction materials operations of
Redland PLC ("Redland") effective December 31, 1997 for accounting purposes. The
consolidated statements of income and cash flows include the results of Redland
from January 1, 1998. Since the acquisition was not financed until June 1998,
financing costs were not incurred during the second quarter of 1998.
10
<PAGE> 13
THREE MONTHS ENDED JUNE 30, 1999
During the three months ended June 30, 1999, the Company had net income of $88.6
million, or $1.22 per common diluted equity share. This compares with net income
of $85.0 million, or $1.17 per common diluted equity share, for the second
quarter of 1998. The increase in net interest expense of $8.2 million in 1999,
compared with the second quarter of 1998, is due to debt incurred to finance the
Redland acquisition. Operating results improved in most of the Company's main
product lines (ready-mixed concrete, aggregates and gypsum wallboard) reflecting
higher sales volumes and prices. The Company's Canadian operations reported net
income of $31.4 million, or $4.4 million lower than 1998, whereas the U.S. net
income was $57.2 million, $8.0 million better than 1998.
The Company's net sales increased 6.7 percent to $720.2 million, up from $674.8
million in 1998. Canadian net sales were $213.9 million, up 5.0 percent, while
U.S. net sales increased 7.5 percent to $506.3 million. A very wet spring in
Colorado, the Pacific Northwest and parts of Western Canada lowered shipments in
most principal product categories in those markets. Prices trended upward in all
main product lines of cement, ready-mixed concrete, aggregates and gypsum
wallboard. Cement shipments increased 4.7 percent while gypsum wallboard volumes
rose 32.4 percent. Aggregates and ready-mixed concrete shipments were relatively
flat. Poor weather in the second quarter is not expected to impact full year
results since backlogs are strong.
The Cement Group
The second quarter earnings from the Company's cement and waste-derived fuel
processing operations were $98.7 million, $0.6 million lower than last year. A
decline in shipments in Western Canada, due to the continued weakening of the
economy in British Columbia and lower oilfield drilling activity in the Prairie
Provinces, was offset by higher shipments in Eastern Canada and in the U.S. Net
sales increased 5.7 percent reflecting both increased sales volumes and improved
pricing in both countries. Canadian earnings, excluding the exchange rate
fluctuation, were $30.4 million, $2.7 million lower than 1998 as a 1.4 percent
increase in shipments and a 2.8 percent increase in the delivered price per ton
to customers net of freight costs ("net realization") were offset by increased
costs due to the startup of the newly modernized Richmond, British Columbia
cement plant and the deferral of annual maintenance at the Bath, Ontario cement
plant from the first quarter to the second quarter. U.S. income increased $3.3
million to $68.3 million in the quarter. Increased cement shipments of 5.6
percent, of which 3.6 percent was due to the acquisition of the Seattle,
Washington cement plant on October 16, 1998, and increased net realization of
1.7 percent were partially offset by higher spending due to the acquisition of
the Seattle, Washington plant. Clinker production volumes increased 1.5 percent
primarily due to the acquisition of the Seattle, Washington plant, which
increased production volumes by 3.7 percent and due to increased production
volumes at most other cement plants. These increases were partially offset by
the change in the timing of the annual maintenance at Bath which decreased
volumes by 4.4 percent. Work continues on projects to increase the efficiency of
the production and distribution network
11
<PAGE> 14
including the completion during the quarter of a new cement distribution
terminal in south Chicago.
The Construction Materials Group
The Company's construction materials operations earned $62.5 million, $2.5
million better than the second quarter of 1998. Net sales of $384.6 million,
were 3.4 percent higher than 1998, reflecting an increase in ready-mixed
concrete shipments and higher average selling prices of both ready-mixed
concrete and aggregates due to price increases and favorable product and
geographic mix. Shipments steadily improved during the quarter with June 1999
ready-mixed concrete shipments 12.6 percent ahead of June 1998 and June
shipments of aggregates 3.0 percent ahead. The 1999 outlook for ready-mix and
aggregates demand is positive. In Canada, income of $26.1 million was $3.0
million higher than last year, excluding exchange rate fluctuations. Net sales
in Canada were 3.7 percent higher than 1998 due to a combination of higher
average concrete and aggregates selling prices and an improvement in ready-mixed
concrete sales volumes which were 8.7 percent higher than 1998. Increased
project work in the Maritime Provinces and stronger demand in northeastern
Ontario, Quebec and Alberta were partially offset by weaker conditions in
British Columbia and the Prairie Provinces. Aggregates volume in Canada
increased by 0.8 percent to 10.5 million short tons as higher volumes in Quebec,
the Maritime Provinces and northeast Ontario were offset by lower shipments (7.4
percent) in Western Canada. In the U.S., second quarter operating earnings of
$36.6 million were up slightly from 1998. Net sales were up 3.2 percent as a
result of higher average prices in both ready-mixed concrete and aggregates.
Ready-mixed concrete volumes decreased 5.7 percent largely due to one of the
wettest springs in history in Colorado but were partially offset by increased
activity in Maryland and Wisconsin. The wet weather in the Western U.S.
decreased aggregates volumes 5.0 percent to 11.3 million short tons. During the
quarter, two former Redland quarries (acquired from Lafarge S.A. in June 1998)
were upgraded and improvements were also made to recently acquired aggregates
and paving businesses in New Mexico.
Lafarge Gypsum
Operating profit from the Company's gypsum wallboard operations was $11.6
million, $7.3 million better than 1998 primarily due to higher shipments and
prices. The U.S. market is still distributing wallboard to customers on a strict
allocation basis. Net selling price to customers net of freight was 22.6 higher
and shipments were 32.4 percent higher, which boosted net sales by 62.9 percent.
Shipments of gypsum wallboard increased 11.9 percent as a result of higher
production and strong demand in the U.S., 18.2 percent as a result of the
inclusion of Canadian operations acquired in January 1999 and 2.3 percent as a
result of wallboard imports from Europe. Final permits were obtained and site
work began on the 900 million square foot wallboard plant to be built in Silver
Grove, Kentucky.
For the quarters ended June 30, 1999 and 1998, the Company recorded an income
tax expense of $54.9 million and $53.7 million as a result of the earnings from
its Canadian
12
<PAGE> 15
and U.S. operations. The Company's effective income tax rate was 38.3 percent in
1999 and 38.7 percent in 1998.
SIX MONTHS ENDED JUNE 30, 1999
The Company's net income of $59.6 million, or $0.82 per diluted common equity
share compares with net income of $45.3 million or $0.62 per share for the first
six months of 1998. In Canada, net income was $18.9 million, $2.5 million lower
than 1998. U.S. net income of $40.7 million was $16.8 million or 70.3 percent
higher than 1998.
Net sales were $1.1 billion, an 8.0 percent increase over net sales in 1998.
Cement shipments were 4.8 percent higher than 1998. Aggregates volumes decreased
1.8 percent, ready-mixed concrete volumes improved 3.8 percent and gypsum
volumes improved 23.2 percent. Canadian net sales of $311.9 million were 2.4
percent above 1998 while U.S. net sales of $778.1 million improved by 10.4
percent.
The Cement Group
Earnings from the Company's cement and waste-derived fuel processing operations
were $91.0 million, $9.9 million better than last year due to increased
shipments and higher net realized prices partly offset by increased maintenance
and repair costs. Overall net sales from cement and waste-derived fuel
processing improved by 5.8 percent. Earnings from Canadian operations of $25.7
million were $1.2 million lower than 1998, excluding exchange rate fluctuations.
Canadian net sales decreased by 4.9 percent. Overall Canadian cement shipments
were down 2.5 percent; however, Western Canada cement shipments decreased 13.4
percent due to weak conditions in British Columbia, a reduction in oilwell
drilling activity and poor weather in certain markets during the second quarter.
In the U.S., earnings were $65.3 million, $12.1 million or 22.7 percent higher
than 1998 with a 9.7 percent increase in net sales, of which 3.5 percent was due
to the acquisition of the Seattle, Washington plant on October 16, 1998. This
improvement was due to an increase in shipments of 7.0 percent, of which 4.1
percent was due to the acquisition of the Seattle, Washington plant, and an
increase in net realized prices of 2.9 percent. Overall clinker production
increased 343 tons or 6.7 percent due to increased production at the Woodstock,
Ontario plant (1.4 percent) and the acquisition of the Seattle, Washington plant
(3.5 percent).
The Construction Materials Group
The Company's construction materials operations earned $40.1 million, $9.8
million better than 1998. Net sales improved 6.2 percent. In Canada, earnings
were $11.3 million, $2.6 million better than 1998, excluding exchange rate
fluctuations. Canadian net sales were 3.5 percent greater, reflecting flat
aggregates volumes and a 6.6 percent increase in ready-mixed concrete volumes.
Aggregates selling prices increased 4.3 percent from the prior year and
ready-mixed concrete selling prices increased 3.6 percent. U.S. earnings were
$28.8 million, $7.6 million better than 1998. U.S. net sales were up
13
<PAGE> 16
8.1 percent. Aggregates volumes decreased by 3.1 percent and ready-mixed
concrete volumes increased 1.2 percent. Aggregates selling prices increased 3.7
percent from the prior year and ready-mixed concrete selling prices increased
4.1 percent.
Lafarge Gypsum
The Company's gypsum operations earned $20.1 million, $12.5 million higher than
1998, due to increased volumes of 8.2 percent which resulted from higher demand,
the acquisition of the Cornerbrook, Newfoundland plant which increased volumes
13.9 percent, and a 1.1 percent increase in sales of imported wallboard. Net
selling price to customers net of freight was 14.5 percent higher which along
with the increase in shipments increased net sales by 46.7 percent.
Income tax expense was $36.8 million, $8.2 million greater than 1998. The
Company's effective income tax rate was 38.2 percent in 1999 and 38.7 percent in
1998.
TWELVE MONTHS ENDED JUNE 30, 1999
The Company reported net income of $249.8 million in 1999, a $48.3 million
increase compared with $201.5 million for the twelve months ended June 30, 1998.
Operating profits were $444.6 million, a $110.0 million improvement over the
$334.6 million earned in 1998. Net sales of $2.5 billion increased 20.7 percent
from $2.1 billion in 1998 primarily due to the inclusion of Redland operations
which were consolidated beginning January 1, 1998, along with increased product
shipments and improved cement, gypsum and ready-mixed concrete selling prices.
Canadian net sales decreased 5.1 percent while U.S. net sales increased 36.5
percent. If Redland operations were included for all twelve months in the
comparative period ended June 30, 1998, net income, operating profit and net
sales would have been approximately $226.9 million, $387.5 million and $2.4
billion, respectively.
The Cement Group
Earnings from the Company's cement and waste-derived fuel processing operations
were $298.6 million, $22.5 million or 8.1 percent better than last year.
Earnings from U.S. operations of $198.3 million were $17.5 million or 9.7
percent better than 1998. In the U.S., cement net realization and shipments
increased 3.5 percent and 7.4 percent, respectively. Earnings from Canadian
operations of $110.6 million were $16.3 million higher than 1998, excluding
exchange rate fluctuations. Net realization in Canada increased 3.4 percent
while sales volumes decreased 3.9 percent.
The Construction Materials Group
The Company's construction materials operations earned $181.1 million, $73.4
million better than the $107.7 million earned in 1998. In Canada, earnings were
$80.8 million, $11.7 million better than 1998, excluding exchange rate
fluctuations. Ready-mixed concrete volumes in Canada increased 1.2 percent while
aggregates volumes increased
14
<PAGE> 17
13.5 percent in part due to the inclusion of Redland. Canadian ready-mixed
concrete selling prices were 3.0 percent higher while aggregates prices were 7.5
percent higher. In the U.S., including the significant impact of the Redland
acquisition, earnings were $106.6 million, $68.1 million better than 1998. U.S.
ready-mixed concrete volumes increased 102.0 percent while selling prices
improved 8.5 percent. Aggregates volumes were up 193.4 percent and selling
prices improved 16.8 percent.
Lafarge Gypsum
Earnings from the Company's gypsum operations were $32.5 million, $18.3 million
better than 1998 due to increased volumes of 13.4 percent from increased demand,
the acquisition of the Cornerbrook, Newfoundland wallboard plant and imported
wallboard. Net selling price to customers less freight increased 12.6 percent.
Selling and administrative expenses of the Company were $31.4 million higher
primarily due to acquisitions, combined with higher legal and other professional
fees. Selling and administrative expenses as a percentage of sales decreased to
8.7 percent from 9.1 percent in the prior year. The Company's effective income
tax rate was 37.9 percent in 1999 and 38.1 percent in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a syndicated, committed revolving credit facility totaling
$300.0 million extending through December 8, 2003. At June 30, 1999, no amounts
were outstanding. The Company is required to pay annual commitment fees of 0.1
percent of the total amount of the facilities. Borrowings made under the
revolving credit facilities will bear interest at variable rates based on a
bank's prime lending rate or the applicable federal funds rate and are subject
to certain conditions.
Net cash of $39.6 million was used by operating activities in the first six
months of 1999 compared with net cash used of $56.4 million in the same period
in 1998. Net cash used for investing activities in the six-month period of 1999
was $177.6 million higher than the same period last year mainly due to higher
capital expenditures which resulted from increased spending on plant
modernizations underway in Richmond, British Columbia and Kansas City, Missouri.
In the first six months of 1999, net cash provided by financing activities was
$92.1 million compared with net cash used of $8.8 million in the same period in
1998 due to an increase in short-term borrowings. The increased financing
activity was related to acquisitions and capital improvements made by the
Company in the first six months of the year.
During the first six months of 1999, the most significant uses of cash were
capital expenditures of $137.0 million, acquisitions of $49.6 million, $39.6
million used by operations including seasonal changes in working capital and
dividends paid of $14.7 million. This compares with capital expenditures of
$102.5 million, acquisitions of $36.3 million and dividends paid of $15.6
million during the first six months of 1998. The
15
<PAGE> 18
most significant sources of funds were short-term borrowings of $105.6 million
and proceeds on sale of property, plant and equipment of $11.7 million.
Net cash provided by operating activities for the twelve-months ended June 30,
1999, increased by $110.2 million to $392.9 million over the same period in 1998
due to higher net income and higher non-cash charges, particularly depreciation.
Increased depreciation and amortization charges are primarily related to
increased depreciable assets and goodwill associated with the Redland
acquisition and capital expenditures on plant and equipment. Compared with the
twelve-months ended June 30, 1998, net cash used for investing activities in the
same period in 1999 increased by $211.2 million to $340.6 million due to
increased capital spending and acquisitions.
Capital expenditures (including acquisitions already completed) are expected to
be approximately $485.1 million in 1999.
The Company is exposed to foreign currency exchange rate risk inherent in its
Canadian revenues, expenses, assets and liabilities denominated in Canadian
dollars, as well as interest rate risk inherent in the Company's debt. The
Company primarily uses fixed-rate debt instruments to reduce the risk of
exposure to changes in interest rates and uses forward treasury lock agreements
to hedge interest rate change on anticipated debt issuances. There have been no
significant changes in expected maturity dates and average interest rates since
the December 31, 1998 year end.
OTHER FACTORS AFFECTING THE COMPANY - YEAR 2000
Overview
Year 2000 computer issues may affect the Company's business application software
and supporting computer infrastructure ("IT Systems") and embedded technology
systems such as process control equipment, instrumentation and other field
systems ("Non-IT Systems"). The Year 2000 computer problem originated from
programmers writing software code that used two digits instead of four to
represent the year. Computer systems using the "two-digit" format may experience
problems handling date-sensitive calculations beyond the year 1999. This
inability to recognize or properly treat the Year 2000 could cause computer
systems and embedded technology to produce inaccurate results or to fail, and
could result in an interruption in, or a failure of, certain business activities
or operations.
In addition, the Year 2000 is a leap year, which may further exacerbate
incorrect calculations, functions or system failures. At this time, it is
difficult to predict the effects such disruptions could have and the liabilities
that any company may face as a result of these failures. Moreover, companies
must not only consider their own products and computer systems, but also the
Year 2000 readiness of any third parties, including principal customers, key
vendors and suppliers, utilities, banks and similar service providers.
16
<PAGE> 19
Potential operating disruptions of the Company caused by Year 2000 computer
issues may be mitigated because:
- none of the Company's products - cement, concrete, aggregates and
gypsum wallboard - contain date-sensitive technology;
- typically, in December and January, construction activities utilizing
the Company's products slow down, and may even cease, due to winter
weather;
- the Company, in anticipation of the winter seasonality typical of its
operations, traditionally builds its inventories to supply winter and
early spring demands for the Company's products;
- the Company's quarries (gypsum, limestone and other minerals) supply
many of the raw materials to produce the Company's products;
- except for utilities, banks and similar services providers, the
Company is not significantly dependent on any single third-party
supplier or vendor;
- the Company has no significant single customer.
However, even with these possible mitigating factors, and although the Company
believes it has an effective plan to address Year 2000 issues, certain Year 2000
issues are beyond the Company's control. Because these issues concern, for
example, the Year 2000 readiness of third parties, including utilities, banks
and similar service providers, the Company is unable to determine the likelihood
of a material impact on its financial condition, results of operations or
liquidity. However, the Company's Year 2000 compliance program (the "Year 2000
Program") is expected to significantly reduce the Company's level of uncertainty
about Year 2000 issues, including Year 2000 readiness of third parties. The
Company believes that after completion of the Year 2000 projects as scheduled,
the possibility of significant interruptions of its normal operations should be
reduced.
State of Readiness
In the first half of 1997, the Company organized and implemented its Year 2000
Program, which includes a program management office staffed with full time
professionals dedicated to the resolution of Year 2000 issues. The objective of
the Year 2000 Program is to avoid loss of revenues, unplanned downtime or other
adverse impacts on the Company's business. Each of the Company's major operating
locations has a designated point of contact who is responsible for the
development and implementation of that operating location's Year 2000 strategy.
The Year 2000 Program addresses the essential phases, activities and tasks that
the Company must undertake for the successful execution of its Year 2000
Program. The Company has identified four phases to describe its process of
achieving Year 2000 readiness: (1) inventory and assessment, (2) optimum
scenario definition, (3) transition plan definition and (4) implementation.
17
<PAGE> 20
The Company has completed the first three phases and determined the potential
impact of the Year 2000 on its IT Systems and Non-IT Systems. The transition
plan developed in the third phase includes the replacement of certain equipment
and modification of certain software to recognize the turn of the century. Phase
four, the implementation phase, is ongoing.
The Company's IT Systems that were not Year 2000 ready are in the process of
being replaced by software applications or upgraded to Year 2000 ready systems.
The IT Systems implementation phase is expected to be completed by September 30,
1999. As of June 30, 1999, approximately 75 percent of the Company's IT Systems
are Year 2000 ready. Of the remaining 25 percent of the IT Systems that are not
Year 2000 ready, 20 percent are considered critical. "Critical," as applied to
IT and Non-IT Systems, means systems that are critical to maintaining operations
or the failure of which would result in significant costs or disruptions or
shutdowns of operations.
As of June 30, 1999, approximately 80 percent of the Company's Non-IT Systems
are Year 2000 ready. Of the remaining 20 percent of the Company's Non-IT Systems
that are not Year 2000 ready, 30 percent are considered critical.
Other computer system projects have not been significantly postponed due to the
Year 2000 Program. 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. 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 Program.
Third Parties
The Company's operating locations have identified their principal suppliers and
vendors to whom letters have been sent requesting information on their Year 2000
readiness programs and their state of readiness. As of June 30, 1999,
approximately 70 percent of the Company's principal suppliers and vendors
identified have provided a written response. The operating locations analyze the
responses received to those letters, and review the 30 percent from whom no
response was received, and evaluate the risks and develop follow-up plans and/or
alternatives and/or contingency plans as necessary.
Costs to Address Year 2000 Issues
The Year 2000 Program is expected to result in estimated non-recurring spending
of approximately $18.0 million to $21.0 million. As of June 30, 1999, the
Company has incurred approximately $13.3 million ($8.0 million capital and $5.3
million expense) for upgrading or replacing its IT and Non-IT Systems. Of the
expenditures remaining, approximately 70 percent will be capitalized. Internal
resource requirements are estimated at 53,000 hours of which approximately
44,000 hours have been incurred through June 30, 1999. The Company believes,
with appropriate system replacement or modification, it will be able to operate
its time-sensitive IT Systems and Non-IT Systems through the turn
18
<PAGE> 21
of the century. However, certain Year 2000 issues are beyond the Company's
control including the Year 2000 readiness of third parties.
Quality Assurance Review
The Company's Year 2000 strategies include the audit of Year 2000 readiness of
its major operating locations. This Quality Assurance Review includes the
Company's 15 cement plants, 3 gypsum plants and a sampling of construction
materials plant sites. The Quality Assurance Review has already been performed
at 6 cement plants, 1 gypsum plant and 12 construction materials plant sites.
Findings have been documented and discussed with local management and corrective
actions are being implemented, when applicable.
Contingency Plans
A Year 2000 risk management methodology has already been implemented in all the
Company's operating locations. For most operating locations, risks have been
identified, assessed for probability and impact, and prioritized. For most
operating locations, drafts of the contingency plans were submitted for review
by March 31, 1999. Mitigation actions are currently being implemented and, when
necessary and justified, contingency plans are currently being developed and
validated with an estimated completion date of August 31, 1999.
Risks of the Company's Year 2000 Issues
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 of Year 2000 readiness of third
parties.
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 Program is expected to significantly reduce the Company's level of
uncertainty about Year 2000 issues, including the Year 2000 compliance and
readiness of third parties. 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 ready in all material respects. There can be
no assurance, however, of complete compliance.
19
<PAGE> 22
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
Statements made in this Quarterly Report on Form 10-Q that are not historical
facts are forward-looking statements made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements are not guarantees of future performance
and involve risks, uncertainties and assumptions ("Factors") which are difficult
to predict. Some of the Factors that could cause actual results to differ
materially from those expressed in the forward-looking statements include, but
are not limited to: the cyclical nature of the Company's business; national and
regional economic conditions in the U.S. and Canada; Canadian currency
fluctuations; the outcome and impact of the Year 2000, including Year 2000
readiness of third parties; seasonality; the levels of construction spending in
major markets; supply/demand structure of the industry; competition from new or
existing competitors; unfavorable weather conditions during peak construction
periods; changes in and implementation of environmental and other governmental
regulations; and other Factors disclosed in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission. In general, the Company
is subject to the risks and uncertainties of the construction industry and of
doing business in the U.S. and Canada. The forward-looking statements are made
as of this date, and the Company undertakes no obligation to update them,
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is contained in "Liquidity and Capital
Resources" in Management's Discussion and Analysis of Financial Condition and
Results of Operations reported in Item 2 of Part I of this Quarterly Report on
Form 10-Q and is incorporated herein by reference.
20
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information presented in Note 11 of the "Notes to Condensed Consolidated
Financial Statements" is incorporated herein by reference, pursuant to Rule
12b-23.
On March 18, 1998, a shareholder derivative lawsuit, Harbor Finance Partners v.
Collomb et al., was filed in the Circuit Court for Montgomery County, Maryland.
The lawsuit, filed against all of the directors of Lafarge Corporation (the
"Company"), alleges that they committed breach of fiduciary duty, corporate
waste, and gross negligence in connection with the Company's purchase of a
number of construction materials businesses in North America from Lafarge S.A.,
its majority stockholder (the "Redland Transaction"). Lafarge S.A. took control
of these businesses in late 1997, when it acquired the British construction
materials firm Redland PLC.
The Redland Transaction was proposed to the Company in late 1997. The Company's
Board of Directors appointed a special committee of independent directors to
evaluate the Redland Transaction. The special committee conducted extensive due
diligence and retained independent professionals to assist with its evaluation,
including an investment banking firm which advised the committee regarding the
fairness of the price and terms of the proposed Redland Transaction. Based on
its due diligence and the opinions of its specially-retained advisers, the
special committee recommended the Redland Transaction for approval by the full
Board of Directors of the Company. On March 16, 1998, the full Board, consisting
of a majority of independent directors, approved the Redland Transaction. The
Redland Transaction was publicly announced on March 17, 1998.
After the initial complaint was filed on March 18, 1998, the directors filed a
motion to dismiss on May 19, 1998, which was granted on July 20, 1998. With the
court's permission, the plaintiff filed an amended complaint on August 28, 1998.
The directors filed a motion to dismiss the amended complaint on September 10,
1998. That motion was argued on February 22, 1999. On April 27, 1999, the court
ruled that the suit could proceed notwithstanding the plaintiff's failure to
make a demand on the Company's Board of Directors prior to bringing the lawsuit.
On May 7, 1999, the directors appealed this decision to the Maryland Court of
Special Appeals. On June 8, 1999, the court dismissed the appeal. In a series of
strategic amendments by interlineation of the amended complaint, filed on May
28, June 9, and July 16, 1999, respectively, two individual shareholders joined
this litigation and the original plaintiff, Harbor Finance Partners, deleted
itself from the case. The case in the Circuit Court for Montgomery County,
Maryland, is now captioned Werbowsky et al. v. Collomb et al. The plaintiffs are
seeking an unspecified amount of money damages for the alleged breach of
fiduciary duty, corporate waste and gross negligence in connection with the
alleged overpayment by the Company for the businesses it acquired in the Redland
Transaction. Discovery on the merits of this matter continues in full progress
under a scheduling order that has a completion date of October 15, 1999. As yet
no trial date has been set. The Company has been advised by its directors that
the lawsuit against them, which challenges their conduct in evaluating and
approving the Redland Transaction, is without merit. The directors have been
vigorously contesting the lawsuit.
As previously reported in the Registrant's Form 10-Q for the quarterly period
ended June 30, 1998, the Michigan Department of Environmental Quality ("MDEQ")
had issued notices to the Company's
21
<PAGE> 24
cement plant in Alpena, Michigan for: alleged violations of permit limits for
emissions of hydrogen chloride gas; alleged violations of storm and surface
water runoff; alleged deficiencies with respect to closure of prior on-site
cement kiln dust ("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 of 1976.
On December 1, 1998, the Company reached an administrative settlement for
$134,655 with the MDEQ for alleged violations of storm and surface water runoff
and received an order from the MDEQ affirming the settlement. On February 14,
1999, the MDEQ and the Company settled outstanding stipulated penalties for
$90,000 in connection with the alleged violations of CKD disposal, and
deficiencies in record keeping. Currently, the Company is engaged in discussions
with the MDEQ to resolve the alleged violations of hydrogen chloride gas and
fugitive dust emissions. The Company expects that if the MDEQ assesses a penalty
for the remaining alleged violations that the total penalty assessed for the
remaining alleged violations will exceed $100,000 but will not have a material
adverse effect on the financial condition, results of operations, or liquidity
of the Company.
ITEM 5. OTHER INFORMATION
On May 26, 1999, the Company made the following executive officer appointments
in its cement operations that will become effective September 1, 1999:
Peter H. Cooke, 50, was appointed Executive Vice President-Cement of Lafarge
Corporation with responsibility for cement strategy and performance. Cooke
previously served as Executive Vice President of Lafarge Corporation,
responsible for Canadian cement operations from March 1, 1996 to August 31,
1999. Prior to that, he served as Senior Vice President and President of the
Company's Eastern Cement Region from July 1990 to February 1996.
Michael J. Balchunas, 51, became Senior Vice President and President of
Cement-U.S. Balchunas previously served as Senior Vice President of Lafarge
Corporation, and President of the Company's western Canada cement operations
from July 1, 1996 to August 31, 1999. From March 1992 to July 1996, he was
President of Systech Environmental Corporation, a wholly-owned subsidiary of the
Company. Prior to that, he served as Vice President of Operations of the
Company's Great Lakes Region from July 1990 to March 1992.
Jean-Marc Lechene, 41, was appointed Senior Vice President of Lafarge
Corporation and President of Cement-Canada, following the consolidation of the
Company's cement operations in Canada into one region with its main office in
Montreal, Quebec. Lechene previously served as Management Director of cement and
concrete operations in China for the Lafarge Group from March 1996 to August 31,
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibit is filed as part of this Form 10-Q
and is incorporated herein by reference.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
22
<PAGE> 25
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the
quarter ended June 30, 1999.
23
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LAFARGE CORPORATION
Date: August _____, 1999 By: /s/ Larry J. Waisanen
----------------------
LARRY J. WAISANEN
Executive Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
24
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999, OF LAFARGE CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 173,506
<SECURITIES> 6,789
<RECEIVABLES> 497,746
<ALLOWANCES> 0
<INVENTORY> 300,277
<CURRENT-ASSETS> 1,058,536
<PP&E> 2,745,561
<DEPRECIATION> 1,225,258
<TOTAL-ASSETS> 3,141,741
<CURRENT-LIABILITIES> 576,144
<BONDS> 743,616
0
0
<COMMON> 784,130
<OTHER-SE> 710,085
<TOTAL-LIABILITY-AND-EQUITY> 3,141,741
<SALES> 1,089,995
<TOTAL-REVENUES> 1,089,995
<CGS> 855,227
<TOTAL-COSTS> 855,227
<OTHER-EXPENSES> 3,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,912
<INCOME-PRETAX> 96,339
<INCOME-TAX> (36,872)
<INCOME-CONTINUING> 59,557
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,557
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.82
</TABLE>
