Document 9BdVYnRw7GQXveNJ5nOpDOjp

FILE NAME: Lone Star Industries (LS) DATE: 1978 DOC#: LSI 10 DOCUMENT DESCRIPTION: Lone Star Annual Report Annual Report 1978 Lone Star Industries, Inc. America's number one cement producer achieved a billion dollars in sales in 1978 for the first time in its history and reported record earnings. LSI(01/16/2018)_002365 About Lone Star Highlights of the Year Lone Star--the largest cement producer in the United States and the Western Hemisphere--is also a leader in the distribution of building and home improvement materials. In addition to producing portland cement, Lone Star is the building industry's largest source of ready-mixed concrete and sand-and-gravel aggregates and one of the nation's major sources of crushed stone aggregates and concrete products. The company is also a leading supplier of lumber and general building materials to contractors and do-it-your selfers in key growth markets across the United States. N et sales advance 27%to 1.1 billion dollars. N et income rises 53%to record 45.4 million dollars. Income per share climbs from $2.66 to $4.02. Return on shareholders'equity increases to 14.5%from 10.3%. Annual dividend paid on common stock increases to $1.20 from $1.10 per share. Directors announce expectation that 1979 dividend payments will total $1.40 per share and raise quarterly dividend to $.35 per share in January, 1979. Improved results reflect gains in both major lines of business. Cement & Construction Materials Group operating profits up 51%. Building Centers Group operating profits up 29%. Expansion program continues in cement, aggregates and retail Home Care Centers. LSI(01/16/2018)_002366 Financial Highlights Total Revenue (Dollars in Millions) Dollars in thousands except per share amounts Total Revenue Net Income Shareholders' Equity Depreciation & Depletion Capital Expenditures Per Common Share Primary Net Income Fully Diluted Net Income Shareholders' Equity 1978 $1,097,243 $ 45,378 $ 330,154 $ 28,143 $ 62,336 $ 4.02 $ 3.68 $ 29.24 1977 $864,905 $ 29,710 $297,205 $ 25,077 $ 41,986 Increase 27% 53% 11% 12% 48% $ 2.66 $ 2.45 $ 26.67 51% 50% 10% 78 Net Income per Common Share 74 75 76 77 78 Dividends Paid per Common Share Letter to Shareholders 2 The Cement Industry 4 Lone Star Today and Tomorrow 7 Lone Star at a Glance 16 Cement & Construction Materials Group 18 Building Centers Group 20 Financial Review 22 Quarterly Data, Ratios 29 Ten-Year Summary 30 Report of Independent Accountants 32 Statement of Significant Accounting Policies 32 Statements of Income & Retained Earnings 33 Balance Sheet 34 Statement of Changes in Financial Position 35 Notes to Financial Statements 36 Directors 42 Corporate Data 44 74 75 76 77 78 Return on Shareholders' Average Equity 74 75 76 77 78 LSI(01/16/2018)_002367 - To Our 2 Shareholders It is a pleasure to report that In 1978 your company reached a major milestone, reporting more than $1 billion In sales for the first time in its history, as well as the third consecutive year of record profit performance. The preceding Financial High lights summary tells the story net income up 53 percent and return on shareholders' equity ahead to 14.5 percent, up from 10.3 percent in 1977. Significantly, all of Lone Star's major lines of business enjoyed higher volume and improved mar gins, stemming from increased demand, improved selling prices and more efficient cost controls. Details of 1978 are reported on the following pages of this report. One, in particular, deserves spe cial comment here. Among the most gratifying achievements was the dramatic turnaround that Lone Star accomplished in Florida, where a new venture was formed to acquire the assets of bankrupt Maule Industries, Inc., in February, 1978. These diversi fied operations include Florida's largest cement plant, as well as major operations in ready-mixed concrete, precast concrete prod ucts and construction aggregates. By mid-year, the new operation was brought to a break-even point; by year end it was making a positive contribution to Lone Star earnings and is now well-posi tioned to become an important contributor to overall results in 1979. Dividend Increased We believe that the company's shareholders should benefit di rectly from Lone Star's improved performance. Thus, the cash divi dend on the company's common stock was increased from $1.10 per share in 1977 to $1.20 in 1978, marking the third straight year of higher dividends. Be cause of continuing strong per formance, the Board of Directors declared a quarterly dividend of 35 cents per share in the first quarter of 1979--a 17 percent in increase--bringing the indicated rate for 1979 to $1.40 per share. Lone Star's achievements in 1978 have renewed our commitment to do even better in 1979 and be yond. The long-term outlook for cement and its allied products is extremely attractive. We plan to strengthen our position in all mar kets and to seek new opportuni ties to build additional capacity in our cement operations. During 1978, the company inten sified its long-range planning effort. The focus of that work is to identify greater opportunities for LSI(01/16/2018)_002368 3 Lone Star in its existing busi nesses and to provide the infor mation needed to manage our operations with the greatest pos sible effectiveness. In the years ahead, Lone Star will grow in several different ways: First, we will continue to adopt new technology at existing ce ment operations to reduce fuel consumption and increase op erating efficiency. Second, we will continue to seek growth through appropriate acquisitions. Third, with an improving return on investment in cement opera tions, Lone Star will build new plants and add capacity at exist ing plants to help close the gap between the nation's demand for cement and the industry's ability to produce it. Finally, Lone Star's greatest strength is its people. Their dedi cation and effort continue to keep Lone Star the leader in its indus try. Thus, Lone Star will continue to attract and develop the best people to accomplish the growth we see ahead. The Regulatory Environment Each day we receive new evi dence that demand for cement has outstripped the U.S. cement industry's ability to produce this critically needed building mate rial. In fact, imports of foreign cement were on the rise in 1978. Nevertheless, the Federal Trade Commission, various state and federal environmental agencies, and a maze of other regulatory requirements pose serious im pediments to the necessary ex pansion of domestic cement productive capacity. As we dis cuss on the following pages, these forces cause delay and add unnecessarily to costs. Unless alleviated, these impediments can ultimately cause serious, long-term shortages harmful to the national economy, affect the balance of trade and restrict the employment potential inherent in larger-scaled operations. Outlook The outlook for the cement indus try is good, and Lone Star's position is strong. Admittedly, at this writing, there are major uncertainties in the country's economy. Among them is the extent to which recent de velopments in the Middle East will affect the nation's energy picture in coming months. Despite these uncertainties, we are confident that 1979 will be a good year for Lone Star and that it will be the company's fourth straight year of record sales and earnings. James E. Stewart Chairman, President and Chief Executive Officer March 7,1979 LSI(01/16/2018)_002369 Expanding Cement Capacity: A Critical Need For the 80's For most of 1978, Lone Star cement plants were operating at capacity and unable to keep up with increased demand. For 1979 and beyond, supplies of cement are expected to fall short of the country's growth needs. With cement shortages already having caused delays in new construc tion projects and postponements in the maintenance of existing structures, cement producers found it necessary to increase their imports of cement. In truth, America faces a critical cement shortage over the next decade. Ironically, this is the na tion's only shortage in a basic industry product where raw mate rials are in abundant local supply. Demand will continue to grow because of the nation's need for dams, housing, power plants, water-supply systems, sewage disposal systems, highways, air port modernization and expan sion and mass transit systems. For example, one-fifth of our bridges are in need of major re pair or reconstruction. As for the U.S. highway system, the presi dent of the Highway Users Foun dation for Safety and Mobility says, "Simply to maintain the status quo will be an enormous and continuing task." Cement's Capital Crunch The current shortage has had many contributing causes, in cluding a scarcity of rail cars and a concurrent increase in both residential and non-residential building. But the root cause is that in the past the industry had not been able to attract enough capi tal to modernize, expand and build new plants. A cement plant requires more investment per sales dollar than almost any other industry. The cost of a new million-ton-a-year cement plant is now estimated at between $100 million and $120 million. There is a widespread need for cement and concrete products in both governmental and privatesector projects. Yet instead of strengthening incentives for the industry to build new plants and create new jobs, government regulatory requirements often weaken these incentives. Consider, for example, the costs of providing adequate environ mental safeguards. To meet these requirements, companies now must add 25 to 30 percent to the basic cost of a cement plant. Delays, too, are costly. Getting through a regulatory logjam of 33 federal, state, district and local agencies to expand Lone Star's Santa Cruz plant in California LSI(01/16/2018)_002370 5 took three years--even longer than the time it will take to ac complish the expansion project itself. The Need to Modernize Energy also has become a major cost inflator. Fuel costs have in creased 115 percent since the onset of the energy crisis. Dealing with this cost factor, Lone Star used a new process that reduced fuel costs by a third when it nearly doubled production at its Roa noke, Virginia plant, emphasizing the top priority Lone Star, like other cement makers, has placed on fuel efficiency. While much of the industry's capital is tied up in efforts to con serve fuel and abate pollution, its plants urgently need moderniza tion. It is estimated that the industry will need over $6 billion to de velop the efficient, modern capa city to meet projected demand for cement in the 80's and 90's. This projected cost exceeds the value of all the current assets of the American cement industry. Meeting the Challenge By comparison with other basic industries, cement is highly frag mented. A total of 49 companies account for approximately $3 bil lion in sales. Lone Star, the indus try leader, accounts for less than 8 percent of this total, and the top ten producers together account for less than 50 percent. Still, cement's significance far outweighs its size, it is essential to the critically important $200 billion-per-year construction industry, and thus a key compo nent of the nation's economic well-being. Capital Needs of the Cement Industry 1976-85 (Dollars in Billions) Conversion from Wet to Dry Process $3.03 Billion (47.4%) New Capacity Additions $1.18 Billion (18.4%) Modernization of Dry Process Plants $1.10 Billion (17.2%) Replacement & Modernization $1.09 Billion (17.0%) Source: Portland Cement Association Public and Private Investment as a Percentage of G.N.P. West Germany O) T3 C (0 3 3 8 g Ja> -o o> c 4= m u2 . -CB "3 z e 3 Source: Organization of Economic Cooperation and Development (Average 1962-1977) LSI(01/16/2018)_002371 6 Western Europe Per Capita Consumption of Cement (in Pounds) p i B 1 I m IS' E1 &<0 "oO <a>0 E O) .E S oo> c/> o T3 c TJ E >. tf) 0) 0) sCL a> c 5 i -(50 3 Lone Star believes that the gov ernment and the cement industry can and must work together to ensure that cement supplies are available to satisfy the nation's ever-expanding needs. What, then, can be done to avoid a worsening crisis in cement supply? The cement industry, for its part, must continue to develop tech nology for greater fuel efficiency and accumulate capital for expansion. In the national interest, the gov ernment, for its part, should help in the following areas: Prices. By allowing a free play of market forces so that prices-- in response to demand--can rise to levels where investment in new plants and technology will yield an acceptable return. Depreciation & Depletion. By permitting depreciation allow ances on a replacement-cost basis and retaining percentage depletion allowances. Tax Credit. By increasing the investment tax credit as a spur to investment in new and efficient plant capacity. Double Taxation. By eliminat ing double taxation of profits by modifying the tax on stockhold ers' dividends or further reducing the tax on corporate profits. Capital Gains Taxes. By fur ther reducing these to promote higher productivity and growth. Heavy capital gains taxes have diverted investment from basic national needs, causing U.S. industry in general to fall behind industry in other countries. Consolidation. By interpreting anti-trust laws to recognize the highly fragmented nature of the cement industry and the need for appropriate mergers or consoli dations. This would permit opera tional efficiencies and the forma tion of capital necessary for investment in new capacity. Environmental Regulation. By streamlining and speeding the process of environmental regula tion and by permitting faster recovery of these expenditures, thus balancing environmental and economic benefits in the public interest. Source: European Cement Association LSI(01/16/2018)_002372 The look of Lone Star changes daily as its growth acceler- Lone Star 7 ates. The company knows where it's going, and has set its Today & sights high. This photo portfolio shows some of the projects Tomorrow and activities that helped push Lone Star sales over the . billion-dollar mark in 1978. Dynamic operations like these will fuel Lone Star's future growth as well. New Lone Star projects in 1978 included a ulexite processing plant in Norfolk, Virginia (left), and a "Secar" calcium-aluminate cement plant (above), also in Norfolk. Operations at Lonestar Florida Pennsuco (above top) near Miami were made profitable after Lone Star assumed management. LSI(01/16/2018)_002373 Technology is changing the cement industry. To the layman, cement plants may look pretty much alike. But more and more Lone Star plants are equipped with advanced technology to conserve energy, protect the environment, increase ca pacity, and most important, help the company reduce production costs in order to further improve margins and returns. 8 Technology in Lone Star's Roanoke plant keeps cost low and production high. An engi neer (right) monitors product quality and energy efficiency from his central control room. Raw materials (below) are converted into pellets, which will be preheated by re cycled gases to promote fuel efficiency. Lone Star's Maryneal plant (left) is being converted from natural gas to coal for lower cost operation. LSI(01/16/2018)_002374 LSI(01/16/2018)_002375 fig H LSI(01/16/2018)_002376 Part of the 42-man team of specialists (above left) that turned Lonestar Florida Pennsuco into a profitable operation in record time. Lonestar Florida products include precast wall panels (below left) and the prestressed con crete test beams (above) for the new Miami mass-transit system. View from an office build' ing at Dallas' Lone Star Park (above right), formerly a cement plant site. Testing water from a settling pond at Roanoke (below right) before it returns to a neighboring stream. 11 Hard work and commit ment to growth character ize Lone Star's management at all levels. Lone Star man agers are trained to do the job right, whether it means revitalizing a newlyacquired facility, delivering cement products on sched ule, maintaining high environmental standards, or reclaiming lands for com mercial and recreational use. LSI(01/16/2018)_002377 13 Building and rebuilding America's cities will keep future demand for Lone Star products strong. Through history, America's growing construction activity has contributed to the growth and prosperity of our country. Many of the major construction projects of this century--dams, water systems, highways, airport runways and the like--are in serious need of expansion, modernization and renewal. Barges represent one of the least expensive forms of trans portation available. Lone Star's fleet of barges extends its ability to serve customers in areas where other forms of transportation would make delivery impractical and costly. The Lone Star barges at the left are carrying aggregates down the Hudson River to the concrete suppliers and con tractors who are helping rebuild New York. Lone Star is America's largest source of sand and gravel, and one of the largest sources of crushed stone. Lone Star has more than 40 aggregates plants in eight states along the Atlantic, Pacific and Gulf Coasts with extensive reserves for the future. LSI(01/16/2018)_002378 Lone Star Building Centers serve a growing number of contractors and do-it-yourselfers in the dynamic residential housing market. In the long term, these Building Centers will grow with demand for housing and home improvement. Lone Star opens new retail Home Care Centers each year in fast-growing population centers where consumer demand is strongest. . . one more way Lone Star is planning for the future. The do-it-yourself boom has increased sales at this Lone Star Home Care Center in Cali fornia and at another 150 retail locations around the country. Retail lumber sales are an important part of total sales. LSI(01/16/2018)_002379 Lone Star Cement & Construction Materials Group At a Glance Operating Statistics 1978 Net sales Operating profit Profit margin Identifiable assets Capital expenditures Depreciation & Depletion $622.4 67.0 10.8% $493.9 52.3 24.0 Business Segment Sales Cement and related products Construction aggregates Other construetion materials $502.7 105.0 14.7 $622.4 1977 $444.8 44.3 10.0% $442.6 35.3 21.1 $358.9 75.8 10.1 $444.8 Principal States In Which Products Are Sold Plus Alaska and Hawaii, and In South America: Argentina, Brazil and Uruguay. Cement Plants Group net sales rose 39.9% over 1977. All major segments con tributed to the higher sales per formance: cement and related products up 40.1%, construction aggregates up 38.5%, and other construction materials up 45.5%. Cement consumption in the United States reached 83.3 mil lion tons, up 8% from 1977. Lone Star continued to outpace the industry, recording more than a 9% increase in shipments of cement during 1978. It also ob tained better-than-market per formance in shipments of sand, gravel and crushed stone. Group operating profits increased by 51.2%. Higher volume, better selling prices and effective cost controls were the major contrib utors to improved performance in all product lines. Lone Star's South American operations also contributed significantly to the improved performance of the group. Return on identifiable assets increased to 13.6% in 1978. Capital expenditures increased 48.2% to $52 million, marking the beginning of Lone Star's ex panded capital spending pro gram designed to assure that the company has the productive ca pacity in place to help meet the growing needs of America's construction industry. Net Sales--Cement & Construction Materials (Dollars In Millions) Operating Profits Cement and Construction Materials (Dollars In Millions) LSI(01/16/2018)_002380 Building Centers Group ^ At a Glance Net Sales Building Centers (Dollars In Millions) if 74 75 76 77 Operating Profits Building Centers (Dollars In Millions) $700 600 500 400 300 200 100 0 Group net sales increased 11.7% over 1977. Retail sales were up more than 20%, contractor/ wholesale 5.7%, and combina tion unit sales 12.1 %. The continued high level of hous ing starts and construction ex penditures, coupled with the uninterrupted growth of home maintenance and improvement expenditures by consumers were major factors influencing im proved sales performance in all segments of the business. South Florida and Minneapolis/St. Paul markets showed unusual strength. Group operating profits increased 29.5% in 1978. Each type of operation contributed to the im proved operating profit: retail up 35.5%, contractor/wholesale up 26.3% and combination units 26.4%. Capital expenditures reached $9.7 million, up 49% from the $6.5 million in 1977. Lone Star added seven new retail home care centers and one com bination unit during 1978, and plans nine new units for 1979. Longer-term plans call for eight to 10 store openings each year. Operating Statistics 1978 Net sales Operating profit Profit margin Identifiable assets Capital expenditures Depreciation & Depletion $453.5 29.0 6.4% $181.7 9.7 3.8 Business Segment Sales Retail Contractor/ wholesale Combination $131.7 180.8 141.0 $453.5 1977 $406.1 22.4 5.5% $159.9 6.5 3.6 $109.2 171.1 125.8 $406.1 States In Which Operations Are Conducted LSI(01/16/2018)_002381 Cement & Construction Materials Group Review of Operations New Construction Expenditures* (Dollars In Billions) Cement Consumption** (Millions of Tons) 74 75 76 77 78 Sources: *U.S. Department of Commerce 'Portland Cement Association Lone Star's Cement and Con struction Materials Group achieved a 51 percent increase in operating profit on a 40 percent increase in net sales. During 1978 the group estab lished all-time records for per formance in: Total net sales Total operating profit Net sales for each major busi ness segment Operating profit for each major product line Total cement production and shipments These records were set even though the year opened with two months of extremely cold weather that curtailed construction activity across much of the country. However, when weather improved in the spring, it unleashed pentup demand for construction work and materials that outstripped every forecast. By May, Lone Star was producing cement at full capacity, a condition that con tinued unabated for the remain der of the year. Lonestar Florida: Anatomy of a Turnaround Among the most dramatic ac complishments in the Cement and Construction Materials Group was the concerted and success ful effort to turn a new venture into a stable, profitable operation. Early in 1978, Lone Star assumed management of the principal operating assets of Maule Indus tries, Inc., a major Florida ce ment, aggregates and concrete producer that had been in bank ruptcy proceedings for more than a year. The receiver had long sought a buyer for the company to avoid the loss of 1,200 jobs. Before stepping in, Lone Star dispatched a team of experts in operations, marketing, finance, personnel and other key areas to make a thorough study. Lone Star pro ceeded from this point with full awareness of the difficulty of the problems, but with the firm con viction that it was the only com pany with the management breadth and depth to turn the business around. As soon as the acquisition was completed, Lone Star moved in 42 management experts from other Lone Star facilities, teamed them up with selected Maule managers and began to rebuild the business. This team: built up cement inventories to permit shutdown for major modi fications without losing sales; launched operator training programs and improved operat ing and safety techniques; installed proven Lone Star quality-control and preventivemaintenance methods; overhauled marketing, sales and pricing policies; and LSI(01/16/2018)_002382 19 ; installed new systems for man agement Information, purchasing, inventory accounting and cost control. In less than a year, aided by im proving construction activity, Lone Star brought these opera tions from a severe loss position to one of increasingly stable profitability. Other New Projects The group also initiated or com pleted a number of other projects that will improve profitability in 1979 and later years: Santa Cruz Expansion Lone Star began expanding its plant near Santa Cruz, California, in order to increase productive capacity from 395,000 tons per year to 750,000 and improve the plant's environmental and energy efficiency. Underway is a com plete revitalization of the basic plant by replacing the existing small kilns with a single, large kiln. In addition to higher overall plant efficiency and reduced energy consumption, the larger kiln will provide a higher degree of air quality control. The expanded plant is scheduled to be in opera tion in 1981. Meanwhile, con struction is being managed in such a way that it will not interrupt output from the existing facilities. Lone Star acquired major termi nals at Redwood City and Sacra mento, California, to receive and store cement from more distant sources. This will help relieve shortages in the San Francisco Bay area until the Santa Cruz expansion is completed. New Texas Plant In October, Lone Star announced plans to construct a new millionton-a-year cement plant in Georgetown, Texas, on property owned by Texas Crushed Stone, Inc., which will produce the raw material. Lone Star will purchase the plant site and raw material reserve property. The plant will employ the most modern tech nology for energy efficiency and environmental compliance. Around the Country Maryneal, Texas--A $5 million conversion of this Texas plant from natural gas to powdered coal is due for completion by early spring, 1979. Norfolk, Virginia--Lone Star Lafarge, Inc., a joint-venture company, completed construc tion of a new plant to manufacture " Secar" brand high-purity calcium-aluminate cement, a premi um-priced product with applica tions in refractories, chemical processes and other special industrial uses. Lone Star also completed a new facility in this market to receive, grind, dry and ship ulexite, which is used in the manufacture of fiberglass. Sacramento, California--In September, Lone Star officially opened its new $12 million sandand-gravel plant here. The facility can produce 1.5 million tons of aggregates per year with 30 years of reserves. Highland, Indiana--Lone Star Minerals, Inc., a joint venture with H. B. Reed & Co., Inc. of High land, Indiana, began operations in July. The new company links Lone Star's nickel slag process ing facilities with the boiler slag facilities of H. B. Reed to produce and market granules for roofing shingles and sandblasting. International Division The International Division achieved record sales and earn ings, with particularly strong results in Argentina and Uruguay. Lone Star's South American plants again marketed all the cement they could produce. Lone Star continues to study the proposed consolidation of its Brazilian interests with those of Lafarge, S.A. of France. The re sulting company would be Brazil's second-largest cement producer. Lone Star received a Brazilian government authorization in 1978 to build a new plant at Cantagalo to serve the Rio market. LSI(01/16/2018)_002383 Building Centers 20 Group Review of Operations Housing Starts (In Millions) 2.5 Expenditures for Residential Maintenance and Improvement (Dollars in Billions) $40 *=1 t j i? s f| 74 75 76 ran I 1 77 78 Source: U.S. Department of Commerce Many Records Are Established Lone Star's Building Centers Group in 1978 achieved a 29 per cent increase in operating profit on a 12 percent increase in net sales, establishing a host of new records. Profit growth--at a much faster rate than sales--reflected im proved cost controls, greater effi ciencies and an overall strength ening of management effective ness at all operating levels. Contributing to the sales gain were the continued strength of the national economy, the ex tremely high level of housing starts and the further rapid growth of spending for home improvement and remodeling. The persistent escalation of hous ing prices began to be perceived as a hedge against inflation, in stead of an impediment to buying. Homeowners also were induced to sustain the value of their invest ments through home mainte nance and improvement, adding to demand for home-building and improvement materials. Regionally, the greatest factor in the group's operating improve ment was the strong and sus tained turnaround in the South Florida economy, resulting in low vacancy rates in residential units of all types and strong recovery of residential and commercial construction. The MinneapolisSt. Paul area also showed a surge of construction activity and con tractor demand for materials. But a generally favorable economy prevailed in all of the group's major markets. Retail Sales Rise 21 Percent Retail sales to do-it-yourself homeowners from Lone Star's Home Care Centers increased 21 percent in 1978, establishing a new sales record for the seventh consecutive year since Lone Star's entry into this business in 1971. The strong retail sales growth stemmed both from higher sales in existing retail outlets and from the opening of seven new Home Care Centers during the year. The retail sales growth represented almost half of the group's 1978 sales increase, outpacing the gains at contractor and combination outlets. Retail Home Care Center opera tions also produced the largest advance In operating profits-- accounting for over a third of the group's year-to-year increase. For the first time, retail operations produced the group's largest share of both gross profits and operating profits. The contractor-and-wholesale operations of the Building Cen ters Group produced a 26 percent gain in operating profit on a 6 LSI(01/16/2018)_002384 21 percent increase in sales. Combi nation operations--which serve both contractors and retail cus tomers--yielded a 26 percent operating profit increase on a 12 percent sales increase. Those results were achieved even though distribution of building materials to contractors was hampered early in the year by poor construction weather in most regions. Later in the year, the group's operations were im peded, in the Western Region especially, as cement shortages tended to curtail general con struction activity. Eastern Region Regains Profit Leadership A resurgence of economic and construction activity in South Florida helped the group's East ern Region achieve higher net sales and sharply higher operat ing profit, marking the region as the group's most profitable in 1978. The North Central Region, pri marily in the Minneapolis-St. Paul market area, also showed strong advances in net sales and operat ing profit aided by a recovery in general construction activity. The Southwestern Region (encom passing Texas, Oklahoma and Kansas) continued a trend of gains in both sales and operating profit. Despite unfavorable weather in the first quarter and the construction slowdown re lated to the cement shortage in the fourth quarter, the Western Region posted higher operating profit on a slight decline in sales. Retail Expansion Under Way Seven additional retail Home Care Centers were opened during 1978, and three more are now scheduled for opening in the first quarter of 1979. The group in tends to keep opening stores at the rate of eight to ten each year. Retail Merchandising Standardized Substantial progress was made during the year in developing standardized merchandising features, including wall colors, aisle signs and how-to-do-it exhibits. The standardized designs have been tested and approved in new stores opened during 1978. They will be gradually integrated in redecorating and revising of existing stores on a scheduled basis. The objective is to provide more shopping convenience and product information for the doit-yourself homeowner--in pleas ant, colorful and uncluttered sur roundings. Innovations include drive-through pickup areas, miniature cut-away model homes showing installa tion methods, and an " energy center" educating the home owner on how to use insulation, temperature-control devices and other means of reducing energy consumption. Application of standardized retail ing methods, along with national purchasing programs, are part of a continuing effort to increase management coordination among the group's regional operations. Sale of California Contractor/ Wholesale Operations Lone Star reached agreement in principle in February, 1979 for the cash sale of contractor, whole sale, combination and related operations in the Los Angeles basin to Louisiana Pacific Corpo ration, a major forest products firm. Not included in the sale are the Cooper's Home Care Centers. The purchase terms agreed upon, plus outstanding accounts re ceivable, will release approxi mately $45 million of capital for Lone Star's future growth and acquisition programs. LSI(01/16/2018)_002385 Financial 22 Review Summary of Operating Results by Industry Segment The table below sets forth the contribution of each industry segment to Lone Star's consolidated net sales and operating profits. (In millions) 1978 1977 1976 1975 1974 Net Sales Cement & Construction Materials: Cement and related products: Domestic International Total Construction aggregates Other construction materials Total Lone Star Building Centers: Retail Contractor and wholesale Combination Total Other Operations $ 388.6 114.1 502.7 105.0 14.7 622.4 131.7 180.8 141.0 453.5 15.9 $270.2 88.7 358.9 75.8 10.1 444.8 109.2 171.1 125.8 406.1 10.4 $214.9 77.1 292.0 71.0 9.7 372.7 93.6 127.0 102.9 323.5 22.7 $192.0 76.9 268.9 69.8 8.6 347.3 84.8 86.1 91.4 262.3 20.0 $188.8 72.4 261.2 76.8 11.0 349.0 76.4 116.5 104.0 296.9 22.9 Total $1,091.8 $861.3 $718.9 $629.6 $668.8 Net Profits Operating Profits: Cement & Construction Materials: Cement and related products: Domestic International $ 38.8 11.8 $ 26.8 10.1 $ 22.7 14.2 $ 23.7 12.0 $ 23.6 9.8 Total Construction aggregates Other construction materials 50.6 36.9 36.9 35.7 33.4 15.8 7.4 7.8 7.9 9.5 0.6 0.0 0.0 (0.1) 0.1 Total Lone Star Building Centers: Retail Contractor and wholesale Combination 67.0 44.3 44.7 43.5 43.0 10.3 7.6 3.9 0.5 2.4 9.6 7.6 3.3 0.0 2.9 9.1 7.2 2.2 0.0 4.1 Total Other Operations 29.0 22.4 3.1 4.2 9.4 0.5 9.4 3.2 (0.2) 0.6 Total Operating Profits Plus: Joint ventures and unconsolidated subsidiary Less: Interest expense Corporate and unallocated expenses Income taxes 99.1 2.1 (19.8) (14.7) (21.3) 70.9 0.2 (19.2) (10.6) (11.6) 57.3 2.8 (14.2) (11.3) (7.4) 43.8 5.3 (15.4) (6.7) (7.7) 53.0 7.3 (15.8) (7.1) (13.1) Net Income $ 45.4 $ 29.7 $ 27.2 $ 19.3 $ 24.3 A description of the company's industry seg ments and additional information regarding identifiable assets, capital expenditures and depreciation and depletion for 1978 and 1977 appears in Note 21 of Notes to Financial State ments on page 41. Due to the significant interrelationship of the company's cement and concrete operations and the increased significance of concrete sales resulting from the establishment of Lonestar Florida, concrete and concrete products are no longer included in the other construction ma terials segment. Concrete and concrete products are now included in the cement and related products segment. This change and other re classifications have been made to conform the above segment data to current year presentation. International cement and related products results as reported above are derived from South America and represent all the company's op erations outside the United States. Intersegment sales of construction aggregates to other industry segments are not included above, are accounted for at list prices and con sist of the following (In millions): 1978, $20.4; 1977, $16.7; 1976, $13.7; 1975, $16.0; and 1974, $16.7. Corporate and unallocated expenses include corporate administrative expenses, securities income (net of related foreign currency transla tion losses) and minority interest. LSI(01/16/2018)_002386 23 CONSOLIDATED RESULTS Billion-Dollar Sales Set Record Lone Star established a new sales record as consolidated net sales rose to $1.1 billion In 1978, an Increase of $230.5 million, or 26.8% above the previous record set In 1977. The company's high level of sales for 1978 reflects record sales from both the construction materials and building materials operations. The major portion of the Increase Is attributable to the company's domestic and International cement and construction materials operations, In which sales increased 39.9%, reflecting the con tinued growth of construction activity, particularly In the West and Southwest, The results also Include $69.0 million in sales of Lonestar Florida, Inc., a new affiliate (see Note 6 on page 36). Sales of cement and related products of $502.7 million account for over 80% of the total sales of cement and construc tion materials operations and represent an increase of 40.1 % over 1977, This Increase Is primarily attributable to an increase In domestic cement sales volume resulting from a 15% Increase in construction expenditures in the U.S. as well as the implementation of neces sary price Increases. International Division sales increased by $25.4 mil lion, or 28.6%, reflecting higher cement prices, particularly In Argentina. Sales in the lumber and building materials operations rose 11.7% In 1978 as sales Increased In all types of operations, particularly retail. Retail sales estab lished a new record of $131.7 million, 20.6% above 1977, reflecting the con tinued growth in consumer home Im provement activities, particularly in Florida. Cost of Sales Reflects Increased Sales Activity Cost of sales Increased 27.5% in 1978 principally due to Increased sales and higher costs in both operating groups and the Inclusion of the operations of Lonestar Florida, Inc. In the company's Cement & Construction Materials Group, the Increase In operating costs is primarily a result of higher power, fuel, labor and maintenance costs associated with increased production. In order to Increase output to meet the substantial demand for cement, par ticularly in the West, Increased quanti ties of clinker were purchased from abroad. The gross profit percentage Improved slightly from 1977 as cement and construction materials sales rose at a greater rate than cost of sales. In the Lone Star Building Centers Group, gross margins increased slightly, de spite higher costs, due to Increased operating efficiencies and an Increased proportion of retail sales, which have a higher gross margin. SG&A Declines as a Percentage of Net Sales Selling, general and administrative expenses as a percentage of net sales declined to 14.1% in 1978 from 15.1% in 1977. These costs increased by $24.6 million, or 18.9% In 1978 from 1977, principally reflecting the effects of the Increased sales activity In both the construction and building materials operations. Higher advertis ing costs were experienced in the Building Centers group primarily due to increased promotional activities for the retail operations. Depreciation Expense Depreciation and depletion expense of $28.1 million In 1978 increased $3.1 million, or 12.2% from 1977. This increase resulted primarily from the Increase In total depreciable assets $1,000. Net Sales (Dollars in Millions) Cement & Constr. Materials Building Centers Other 750. 500. 250. 0. 74 75 76 77 78 LSI(01/16/2018)_002387 24 from $574.3 million in 1977 to $614.9 million in 1978. The International Division's depreciation and depletion expense increased $1.6 million, prin cipally as a result of depreciation charges on 1978 plant improvements. Operating Profits Near $100 Million Consolidated operating profits estab lished a new record of $99.1 million, an increase of $28.2 million, or 39.8% from 1977. Profits from the cement and construction materials operations, which account for 67.6% of consoli dated operating profits, rose $22.7 million to $67.0 million for 1978, as saies increased at a greater rate than production costs. Operating profits for cement and related products increased $13.7 million, and construc tion aggregates profits increased $8.4 million, as increased sales volumes and higher unit prices more than offset higher costs for fuel, power, labor and maintenance. Profits from the lumber and building materials operations in creased to $29.0 million in 1978 from $22.4 million in 1977, reflecting in creased profits for all types of opera tions. Retail and combination unit profits in 1978 increased $2.7 million and $1.9 million, respectively, primarily as the result of improved margins and the con tinued improvements in the company's Florida operations. Contractor and wholesale profits increased $2.0 million to $9.6 million reflecting the higher saies levels from increased construc tion activity, particularly in the Minne apolis area. Income Taxes Increase on Record Earnings Federal, foreign and other income taxes increased $9.7 million, or 83.6% from 1977 reflecting an increase in pre-tax earnings of 61.4% and a higher effective corporate tax rate. The higher rate is attributable to increased operat ing profits in international and retail and distribution operations which have a higher effective tax rate than domestic cement and construction materials operations, and the disposition of sur plus properties in 1977 which were subject to a lower effective tax rate. Record Net Income Lone Star's net income in 1978 reached a record $45.4 million, a 52.9% increase over the previous record set in 1977. The increase in earnings is attributable to increased sales and op erating profits in the company's two major operating groups, particularly in the cement and construction materials operations. This was partially offset by higher income taxes. In 1978, Lone Star earned a record $4.02 per share of common stock after deducting dividends on preferred stock, compared with $2.66 per share in 1977. Net income per share is based on 11.2 million and 11.1 million weighted average shares outstanding in 1978 and 1977, respectively. Fully diluted income per share, which assumes the conversion into common shares of ail convertible preferred shares and all convertible debentures and the exercise of all dilutive stock options, was $3.68 in 1978 and $2.45 in 1977. Capital Expenditures Climb; Major Modernization Program Started Lone Star's capital expenditures in 1978 totaled $62.3 million, $20.3 million above 1977. Capital spending for the Cement & Construction Materials Group totaled $52.3 million for the improve ment and expansion of existing plants and replacement of equipment. Major projects for 1978 included the comple tion of a sand and gravel plant in Sacra mento, California, the purchase of two terminals on the West Coast and the commencement of a major moderniza tion program at the Santa Cruz cement plant. This latter project, with an esti mated cost of $70 million, is designed to reduce energy consumption, increase environmental controls and raise plant capacity by over 350,000 tons per year to 750,000 tons annually. Capital ex- , penditures of $6.8 million by the Inter national Division were totally provided from the financial resources of the South American subsidiaries. The Lone Star Building Centers Group invested $9.7 million in new facilities in 1978, an increase of $3.2 million from 1977. Capital expansion of the group's retail and combination operations added 8 units in 1978, with 9 others expected to be completed in 1979. Capital expen ditures by these groups in each of the past five years are summarized in the following table (In millions): 1978 1977 1976 1975 1974 C&CM $ 52.3 35.3 36.1 29.9 28.4 LSBC $ 9.7 6.5 3.2 3.5 13.5 Total $182.0 $36.4 LSI(01/16/2018)_002388 Stock Prices The following table shows the quarterly high and low prices of Lone Star's common stock and preferred stock for 1978 and 1977, as reported In The Wall Street Journal. Lone Star's common shares are listed on the New York, Boston and Pacific Stock Exchanges and are open to trading on the Midwest and Philadelphia Stock Exchanges. 1978 1st 2nd 3rd 4th 1977 1st 2nd 3rd 4th Quarters Quarters Common Stock High Low $19% 21% 27% 27 $237t 23% 21 Va 19% $1774 18 19 18% $19% 1978 16% 16% Preferred Stock High Low $ 75 81 105 105 $ 90 8572 81 72 $ 74 81 821% 103 $ 8172 8572 81 69 Dividend Increased In 1978, the dividend on Lone Star common stock was raised to an effec tive annual rate of $1.20 per share as the company completed Its 44th consecu tive year of uninterrupted quarterly divi dends on common stock. Cash divi dends of $0.30 per share were paid to holders of common stock in each quarter of 1978 and $0,275 per share was paid in each quarter of 1977. The company paid cash dividends of $1.125 per share In each quarter of both years on its preferred stock. Total cash divi dends on common shares were $13.4 million In 1978 and $12.2 million In 1977. Dividends paid to preferred share holders were $232,000 in 1978 and $253,000 in 1977. The variations from 1977 reflect conversions of preferred shares and the Increase in dividends paid on common stock. In January 1979, Lone Star announced another increase in dividends, raising the quarterly cash dividend on common stock to $0.35 per share, equivalent to an annual rate of $1.40 per share. Net Income per Common Share 74 75 76 77 78 Capital Expenditures (Dollars in Millions) Cumulative Current mm WM Mm s i r I I I H I H m ra m 74 75 76 77 78 LSI(01/16/2018)_002389 26 Working Capital (Dollars in Millions) Equity per Common Share 78 Financial Position Strengthens Working capital (current assets less current liabilities) was $162.4 million at December 31, 1978, compared to $157.1 million at the end of 1977. Funds provided by operations, as shown on page 35, totaled $79.0 million in 1978 and exceeded capital expenditures and dividends. Interest expense was covered 4.4 times by 1978 earnings before interest and taxes. Long-term debt increased by $3.1 million in 1978, as normal debt repay ments were offset by increased long-term borrowings, primarily in the International Division. At year end, long-term debt accounted for a smaller percentage of total capitali zation--34.4%, as compared with 36.3% in 1977-- due to the high level of earnings for 1978. The company has $67 million available in a Revolving Credit and Term Loan Agreement with several banks plus an additional $11 million in seasonal lines of credit. At year end, there were no borrowings outstanding under these agreements. The company repurchased $2.6 million of its 478 % Sinking Fund Debentures in the open market in 1978, meeting sinking fund requirements for 1979 underthe indenture agreement. Total shareholders' equity increased 11.1% to $330.2 million at December 31, 1978. This represents an increase of $2.57 per share in common share holders' equity, to $29.24 at the end of 1978. GROUP OPERATING RESULTS Cement & Construction Materials The Cement & Construction Materials Group recorded net sales of $622.4 million in 1978, an increase of $177.6 million, or 39.9% over 1977. The results included net sales of $69.0 million from the operations of Lonestar Florida, Inc., a new subsidiary (see Note 6 on page 36). Domestic net sales rose 42.7% from 1977 as sales increased in all product lines, particularly in cement. Domestic cement sales, which ac counted for nearly half of all domestic sales, increased $56.5 million, or 30.5% from 1977, reflecting increased sales volumes and higher unit prices as strong residential and commercial building activity, particularly in the West and Southwest, has created regional cement shortages. Increased construction aggregates sales of 38.5% is attribu table to higher sales volumes resulting from increased demand particularly in the Northeast, Southeast and Pacific regions. Domestic sales of concrete and concrete products increased 72.7% from 1977 primarily as a result of the inclusion of $50.6 million of sales of concrete and concrete products from Lonestar Florida, Inc. International sales increased $25.4 million from 1977 reflecting higher cement prices, par ticularly in Argentina. LSI(01/16/2018)_002390 27 C&CM Net Sales by Product Line (In millions) 1978 Cement: Domestic International $241.5 108.1 Concrete & concrete products: Domestic International 349.6 147.1 6.0 Construction aggregates Other construction materials 153.1 105.0 14.7 $622.4 1977 $185.0 85.3 270.3 85.2 3.4 88.6 75.8 10.1 $444.8 1976 $143.4 74.5 217.9 71.5 2.6 74.1 71.0 9.7 $372.7 1975 $121.4 72.5 193.9 70.6 4.4 75.0 69.8 8.6 $347.3 1974 $116.7 69.5 186.2 72.1 2.9 75.0 76.8 11.0 $349.0 The Cement&Construction Materials Group operating profit for 1978 in creased $22.7 million to $67.0 million, primarily as a result of the higher sales level. Operating profits for cement and related products increased by $13.7 million, or 37.1 %, primarily from domestic operations where the effect of increased sales more than offset higher costs. Cement sales volumes increased as the higher level of construction activity experienced in the country resulted in cement short ages in the Southwest and Pacific areas of the country. The shortages made it necessary to increase production schedules and to allocate supplies to customers. Foreign cement and clinker were imported to help meet the demand. Labor, power, fuel and supplies costs increased as a result of the increased production levels and higher rates. Higher repairs and maintenance costs are also the result of increased production. Cement profits increased in the International Division on the higher net sales, primarily as a result of the increased cement prices in Argentina. Profits from operations in Brazil were below 1977 due to pro duction problems and higher repair costs. Construction aggregates profits more than doubled from 1977 to $15.8 million in 1978, resulting from the strong demand for construction ma terials, particularly in the Northeast, Southeast and Pacific regions. Lone Star Building Centers Net sales in the Building Centers Group increased $47.4 million, or 11.7% from 1977, as sales increased in all types of operations. Retail sales of $131.7 million represent an increase of $22.5 million or 20.6% from 1977 and established a new sales record for the seventh consecutive year. The increase, which represents 47.5% of the total sales increase in the Group, is attributable to the continued gains in consumer home improvement activities, particularly in Florida, and the opening of 7 new Home Care Net Sales--Cement & Construction Materials Cement & Related Products Constr. Aggregates Other (Dollars in Millions) 74 75 76 77 78 Net Sales Building Centers Retail Combination Contractor and Wholesale (Dollars in Millions) I I74 75 LSI(01 /16/2018)_002391 28 Centers in 1978. Combination unit sales and contractor and wholesale sales increased 12.1% and 5.7%, respectively, primarily as a result of the 2.0 million new housing starts in 1978. Increased construction activity was particularly strong In Florida and the Minneapolis area. Combination unit sales and contractor and wholesale sales In Southern California were below 1977 sales levels due to severe weather conditions in the first quarter of 1978 and cement shortages experienced later in the year which affected lumber sales for residential building. The Building Centers Group operating profit increased by $6.6 million, or 29.5% above 1977, reflecting increases in all types of operations. Retail operating profits of $10.3 million in 1978 increased 35.5% from 1977 as a result of improved margins and the continued Improvement in the com pany's Florida operations. An Increase in contractor and wholesale profits of 26.3% Is primarily attributable to the favorable effects of new housing starts, particularly in the Minneapolis area. Combination unit profits increased $1.9 million, or 26.4%, reflecting the increased sales level, particularly in Florida, and improved margins. Other Operations In 1978, the company's Other Opera tions recorded net sales of $15.9 million and operating profits of $3.1 million, primarily as a result of strong sales of developed properties in Hawaii. Comparison of 1977 and 1976 Results Net sales rose in 1977 to $861.3 million, an increase of $142.4 million, or 19.8% above 1976. The year's sales performance resulted primarily from increased activity in the construction and building materials markets. The major portion of the increase occurred in the lumber and building materials operations, where a continued increase in demand resulted in higher sales in all types of operations. Contractor and wholesale sales and combination unit sales increased from 1976 by 34.7% and 22.3%, respectively, reflecting higher demand, principally in the West and Southwest, resulting from the nearly 2 million housing starts in 1977. Retail sales increased 16.7% from 1976, primarily from increased con sumer home improvement activities. Sales in the company's domestic and international cement and construction materials' operations rose 19.3% in 1977, primarily as a result of Increased cement sales volumes and higher net realized prices, plus the inclusion of the operations of the Roanoke cement plant received as a result of the term ination of the Citadel joint venture In 1977. Cost of sales increased by 21.2% in 1977 from 1976, primarily from higher net sales and higher costs. The gross margin rate for both operating groups fell slightly as costs for power, fuel, labor and maintenance rose at a slightly higher rate than sales. Interest expense increased $5.1 million from 1976, principally reflecting $2.9 million of interest related to debt assumed from the Citadel joint venture and additional borrowings during the year. Consolidated operating profits of $70.9 million were $13.6 million above 1976 as a result of strong sales gains in all types of operations in the company's lumber and building materials opera tions, where profits Increased from $9.4 million In 1976 to $22.4 million in 1977. Operating profits from the cement and construction materials operations were $0.4 million below 1976 as Increased profits from domestic operations were offset by lower Income from the International operations. International operating profits de creased as a result of lower profits in Brazil, where lower cement shipments more than offset the increased profits in Argentina that resulted from higher cement prices and shipments. Total income taxes increased in 1977 to $11.6 million from $7.4 million in 1976 as a result of higher pre-tax earnings in 1977 and a higher effective tax rate. The higher effective tax rate is primarily attributable to increased operating profits from the lumber and building materials operations, which have a higher effective tax rate than the cement and construction materials operations. Net income of $29.7 million was 9.2% higher than 1976. This Increase reflects the increased profit contribution made by the company's lumber and building materials operations, partially offset by a lower contribution to net Income from the company's international operations and by higher income taxes. LSI(01/16/2018)_002392 29 Quarterly Financial Data (Unaudited) (Dollars in millions except per share amounts) Quarter First Second Third Fourth 1978 Net Sales 1977 % Increase $ 191.7 304.8 299.6 295.7 $1,091.8 $175.7 220.0 224.6 241.0 $861.3 9.1% 38.5 33.4 22.7 26.8% Gross Profit* 1978 1977 Amount % Amount % $ 38.4 68.3 67.7 65.3 $239.7 20.0% 22.4 22.6 22.1 22.0% $ 34.6 50.3 52.1 54.1 $191.1 19.7% 22.9 23.2 22.4 22.2% Net Income Net Income Per Share 1978 1977 Primary Fully Diluted** 1978 1977 1978 1977 Quarter First Second Third Fourth $ 0.3 16.0 16.5 12.6 $ 0.2 10.4 11.2 7.9 $0.02 1.42 1.47 1.11 $0.01 0.93 1.01 0.71 $0.02 1.29 1.33 1.02 $0.01 0.85 0.92 0.65 $45.4 $29.7 $4.02 $2.66 $3.68 $2.45 ` Includes annual depreciation of $23.9 and $20.9 In 1978 and 1977, respectively. " Fully diluted earnings per share for the year does not equal the sum of the four quarters as a result of the anti-dilutive effect from preferred stock, convertible debentures and stock options in the first quarter. Financial Ratios and Statistics (Dollars in thousands except per share amounts) 1978 1977 invested capital: Long-term debt Minority interest Shareholders' equity $178,195 9,467 330,154 $175,105 9,546 297,205 $517,816 $481,856 Working capital Current assets to current liabilities Long-term debt to invested capital Income to average invested capital* Return on shareholders' average equity Net income to net sales Equity per common share Percentage of earnings returned to shareholders Number of employees at year-end $162,366 2.3 34.4% 10.4% 14.5% 4.2% $ 29.24 30.1% 13,800 $157,086 2.6 36.3% 8.1% 10.3% 3.4% $ 26.67 41.9% 13,000 Income represents net Income, minority interest and interest expense net of income taxes. 1976 $125,813 9,371 279,892 $415,076 $134,712 2.3 30.3% 8.3% 10.0% 3.8% $ 25.16 42.7% 12,300 1975 $165,000 7,523 264,282 $436,805 $122,758 2.4 37.8% 6.1% 7.4% 3.1% $ 23.76 58.8% 12,900 1974 $168,793 6,436 256,325 $431,554 $126,293 2.5 39.1% 7.6% 9.7% 3.6% $ 23.47 46.7% 13,300 LSI(01/16/2018)_002393 Lone Star Industries, Inc. Ten-Year 30 and Consolidated Subsidiaries Summary of Operations Dollars in thousands except per share amounts Revenue Net sales Other income--net Deductions from revenue: Cost of sales Selling, general & administrative expense Depreciation and depletion Interest Income before Income taxes and extraordinary charge Provisions for income taxes Income before extraordinary charge Extraordinary charge, net of taxes Net income Provision for preferred dividends Net income applicable to common stock Retained earnings at beginning of year*2> Net Income Cash dividends paid Common shares Preferred shares Retained earnings at end of year Notes (Dollars In thousands): (1) Income per common share Is based on the weighted average number of shares outstanding in each year after allowing for preferred dividends. Fully diluted Income per common share assumes that preferred stock and convertible debentures had been converted and dilutive stock options had been exercised at the beginning of each year. (2) Retained earnings at the beginning of 1978 have been restated to include $938 of retained earnings of Mineral Aggregates, Inc. acquired in 1978 and accounted for as a pooling of interests. Prior years' results have not been restated as the effect on those years is not significant. Per common share*1) Income before extraordinary charge Extraordinary charge Net income per common share Per common share assuming full dilution*1) Income before extraordinary charge Extraordinary charge Net income per common share Weighted average common shares outstanding Dividends paid per common share 1978 $1,091,815 5,428 1,097,243 828,174 154,481 28,143 19,767 1,030,565 66,678 21,300 45,378 -- 45,378 232 $ 45,146 $ 230,408 45,378 13,409 232 13,641 $ 262,145 $4.02 -- $4.02 1977 f 'f $861,324 3,581 864,905 649,349 129,916 25,077 19,253 823,595 r 41,310 j 11,600 j 29,710 f -- 29,710 f 253 I $ 29,457 j $212,215 f 29,710 ! 12,202 j 253 12,455 f $229,470 f ( $2.66 -- 1 $2.66 $3.68 -- $3.68 11,231,892 $1.20 $2.45 -- . $2.45 ^ 11,090,728 ' $1.10 " LSI(01/16/2018)_002394 31 1976 $718,948 5,174 724,122 535,973 115,849 23,521 14,151 689,494 34,628 7,400 27,228 -- 27,228 275 $ 26,953 $196,608 27,228 11,346 275 11,621 $212,215 $2.44 $2.44 $2.25 -- $2.25 11,067,511 $1,025 1975 $629,550 12,254 641,804 471,187 105,603 22,568 15,443 614,801 27,003 7,689 19,314 -- 19,314 416 $ 18,898 $188,648 19,314 10,938 416 11,354 $196,608 $1.74 $1.74 $1.62 -- $1.62 10,889,022 $1.00 1974 1973 $668,831 11,635 680,466 501,917 103,987 21,372 15,770 643,046 37,420 13,100 24,320 -- 24,320 560 $ 23,760 $175,689 24,320 10,801 560 11,361 $188,648 $693,256 3,333 696,589 517,748 101,021 21,476 12,984 653,229 43,360 16,717 26,643 -- 26,643 586 $ 26,057 $160,421 26,643 10,789 586 11,375 $175,689 $2.20 $2.20 $2.42 $2.42 $2.02 -- $2.02 10,799,561 $1.00 $2.20 -- $2.20 10,785,212 $1.00 1972 $485,996 3,808 489,804 358,101 65,901 20,338 10,255 454,595 35,209 11,714 23,495 -- 23,495 636 $ 22,859 $148,498 23,495 10,936 636 11,572 $160,421 $2.10 $2.10 $1.92 $1.92 10,875,064 $1.00 1971 $382,580 3,414 385,994 272,960 55,920 18,585 7,396 354,861 31,133 9,229 21,904 2,500 19,404 750 $ 18,654 $140,272 19,404 10,428 750 11,178 $148,498 $1.99 .23 $1.76 $1.81 .20 $1.61 10,598,765 $1.00 1970 $344,583 1,968 346,551 241,519 53,738 17,443 7,812 320,512 26,039 8,114 17,925 -- 17,925 909 $ 17,016 $132,438 17,925 9,182 909 10,091 $140,272 $1.65 $1.65 $1.51 -- $1.51 10,328,238 $1.00 1969 $284,321 2,136 286,457 198,956 41,093 16,030 6,668 262,747 23,710 5,231 18,479 -- 18,479 993 $ 17,486 $123,501 18,479 8,549 993 9,542 $132,438 $1.72 $1.72 $1.56 -- $1.56 10,190,805 $1.00 LSI(01/16/2018)_002395 Report of Statement of 32 Independent Significant Accountants Accounting Policies To the Board of Directors and Share holders of Lone Star Industries, Inc.: We have examined the consolidated balance sheets of Lone Star Industries, Inc. and Consolidated Subsidiaries as of December 31,1978 and 1977 and the related consolidated statements of income and retained earnings and changes in financial position for the years then ended. Our examinations were made in accordance with gen erally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We did not examine the financial statements of the foreign subsidiaries, which financial statements reflect total assets and revenues of 12% and 10%, respec tively, of the related consolidated totals for both 1978 and 1977. These financial statements were examined by other public accountants whose reports thereon have been furnished to us. Our opinion expressed herein, insofar as it relates to the amounts included for foreign subsidiaries, is based solely upon such reports. In ouropinion, based upon ourexamina- tions and the reports of other public accountants, the aforementioned finan cial statements present fairly the con solidated financial position of Lone Star Industries, Inc. and Consolidated Sub sidiaries as of December 31,1978 and 1977, and the consolidated results of their operations and changes in their financial position for the years then ended, in conformity with generally ac cepted accounting principles applied orna consistent basis. /; C ^ . / i' COOPlRS & LYBRAND Three Landmark Square Stamford, Connecticut 06901 February 5,1979 Consolidation--The financial state ments include all subsidiaries and joint ventures. Joint ventures and a domestic finance subsidiary are included on the equity method. Marketable Securities are stated at the lower of cost or market. Inventories are stated at the lower of cost or market. The company deter mines the lower of cost or market for retail merchandise inventories utilizing the retail method. Cost is generally de termined for manufacturing inventories on an average basis and for other merchandise inventories, principally lumber, on a first-in, first-out basis. Real Estate Activities--Income from residential sales is recognized when homes are completed, title passes and the purchase price is received. Income from commercial real estate develop ment is recognized when the contract is signed, a substantial down payment is received and other income recogni tion criteria are satisfied. Costs at tendant to land under development are capitalized as part of the project. Property, Plant and Equipment is carried at cost and depreciated over the estimated useful lives of the assets on the straight-line method. Significant expenditures which extend the useful lives of existing assets are capitalized. Maintenance and repair costs are charged to current earnings. Cost de pletion is calculated on the units of production method. The cost of assets and the related accumulated deprecia tion are removed from the accounts when such assets are disposed of and any gains or losses are reflected in current earnings. Income Taxes--Deferred federal in come taxes are provided for timing dif ferences between financial and taxable income. Provision is made for appro priate taxes on the unremitted earnings of joint ventures and foreign subsidi aries which are not considered to be permanently invested or restricted. Investment tax credits are recognized on the " flow-through" method. Pension Plans--The company and cer tain of its subsidiaries have various pension plans, the cost of which is computed on the basis of actuarial methods with costs for service prior to the establishment or amendment of the plans amortized over twenty-five or thirty years. The company's policy is to fund pension cost accrued. Income Per Common Share--Primary income per common share is based on the weighted average number of shares outstanding in each year after provid ing for preferred dividends. Fully diluted income per common share assumes that preferred stock and convertible debentures had been converted and dilutive stock options had been exer cised at the beginning of each year. Foreign Exchange--The company translates cash, receivables and liabili ties at year-end exchange rates and other accounts at historical rates of ex change. Income and expense items are translated at average rates of ex change prevailing during the year, except that inventories charged to cost of sales, and depreciation and deple tion are translated at historical rates of exchange. Capitalized Interest--The company capitalizes interest on indebtedness identifiable with capital projects under construction and interest attendant to real estate underdevelopment. Such interest is subsequently amortized over the life of the projects when they be come operational or is charged to expenses when real estate is sold. LSI(01/16/2018)_002396 Lone Star Industries, Inc. Consolidated Statements 33 and Consolidated Subsidiaries of Income and Retained Earnings For the years ended December 31, in thousands except per share amounts Consolidated Income Net Income Per Common Share Consolidated Retained Earnings 1978 1977 Revenue: Net sales Other income--net Deductions from revenue: Cost of sales Selling, general and administrative expense Depreciation and depletion Interest Income before income taxes Provisions for income taxes Net income $1,091,815 5,428 1,097,243 828,174 154,481 28,143 19,767 1,030,565 66,678 21,300 $ 45,378 $861,324 3,581 864,905 649,349 129,916 25,077 19,253 823,595 41,310 11,600 $ 29,710 Primary Fully diluted $ 4.02 $ 3.68 $ 2.66 $ 2.45 Retained earnings at beginning of year: As previously reported Pooling of interests As restated Net income for the year Cash dividends: Common stock (1978, $1.20; 1977, $1.10) Preferred stock ($4.50) Retained earnings at end of year $ 229,470 938 230,408 45,378 13,409 232 $ 262,145 $212,215 -- 212,215 29,710 12,202 253 $229,470 The accompanying Statement of Significant Accounting Policies and Notes to Financial Statements are integral parts of the Financial Statements. LSI(01/16/2018)_002397 Lone Star Industries, Inc. Consolidated 34 and Consolidated Subsidiaries Balance Sheets December 31, in thousands Assets Liabilities and Shareholders' Equity Shareholders' Equity Current Assets Cash Marketable securities Notes and accounts receivable--net Inventories Other current assets Total current assets 1978 $ 4,954 18,459 106,168 158,607 4,011 292,199 1977 $ 12,049 9,946 80,427 148,055 4,665 255,142 Real estate for development and sale Property, plant and equipment Less, allowances for depreciation and depletion 20,515 694,474 302,716 18,438 646,798 285,336 Joint ventures and unconsolidated subsidiary Other assets and deferred charges 391,758 11,976 21,810 $738,258 361,462 6,839 25,657 $667,538 Current Liabilities Accounts payable Notes payable to banks Accrued expenses Federal and other Income taxes Other current liabilities Total current liabilities Long-term debt Deferred income taxes Production payment Other liabilities Minority interest Preferred stock (involuntary liquidating value, 1978, $4,682) Common stock Capital surplus Retained earnings Less, treasury stock Total shareholders' equity $ 61,848 1,614 35,392 21,792 9,187 129,833 178,195 52,384 37,000 1,225 9,467 408,104 1,054 11,765 66,542 262,145 341,506 11,352 330,154 $738,258 $ 41,331 3,489 27,912 18,573 6,751 98,056 175,105 45,414 41,000 1,212 9,546 370,333 1,248 11,730 68,864 229,470 311,312 14,107 297,205 $667,538 The accompanying Statement of Significant Accounting Policies and Notes to Financial Statements are integral parts of the Financial Statements. LSI(01/16/2018)_002398 Lone Star Industries, Inc. Consolidated 35 and Consolidated Subsidiaries Statements of Changes in Financial Position For the years ended December 31, in thousands Funds Provided By Funds Used For Changes in Working Capital Current operations: Net income Items not requiring working capital: Depreciation and depletion Deferred income taxes Equity in joint ventures and unconsolidated subsidiary Other, net Funds provided by operations Long-term debt Dispositions of property, plant and equipment Debt assumed from Citadel joint venture Termination of Citadel joint venture 1978 $45,378 28,143 7,893 (2,084) (372) 78,958 3,386 3,897 -- -- 86,241 1977 $ 29,710 25,077 5,205 (41) 660 60,611 14,318 7,083 35,290 24,829 142,131 Capital expenditures Payments of dividends Production payment Property, plant and equipment received from Citadel joint venture Other, net Increase in working capital 62,336 13,641 4,000 -- 984 80,961 $ 5,280 41,986 12,455 4,000 62,554 (1,238) 119,757 $ 22,374 Increase (Decrease) in current assets: Cash and marketable securities Notes and accounts receivable--net Inventories Other current assets Decrease (Increase) in current liabilities: Accounts payable and accrued expenses Notes payable to banks Federal and other income taxes Other current liabilities Increase in working capital $ 1,418 25,741 10,552 (654) 37,057 (27,997) 1,875 (3,219) (2,436) (31,777) $ 5,280 $ (2,498) 7,425 12,043 1,429 18,399 (1,480) 5,277 326 (148) 3,975 $ 22,374 The accompanying Statement of Significant Accounting Policies and Notes to Financial Statements are integral parts of the Financial Statements. LSI(01/16/2018)_002399 Notes to 36 Financial Statements 1. Inventories Inventories consist of the following (In thousands): Finished goods Work in process and raw materials Supplies and fuel 1978 $108,666 11,766 38,175 $158,607 1977 $ 98,617 10,077 39,361 $148,055 2. Property, Plant and Equipment Property, plant and equipment consists of the following (In thousands): Land Buildings and equipment Construction in progress Automobiles and trucks Other 1978 $ 57,599 554,011 21,992 45,629 15,243 $694,474 1977 $ 51,978 517,761 20,540 40,202 16,317 $646,798 3. Foreign Subsidiaries The financial statements Include the following with respect to foreign subsidiaries (Argentina, Brazil and Uruguay) (In thousands): Current assets Property, plant and equipment (net) Other assets Current liabilities Long-term debt and other liabilities Minority interest Net assets Net sales Pre-tax income Contribution to net income 1978 $ 43,407 42,079 5,818 (14,923) (6,579) (9,363) $ 60,439 $114,069 $ 12,460 $ 6,276 1977 $ 33,623 39,901 6,565 (13,773) (1,762) (9,452) $ 55,102 $ 88,717 $ 8,541 $ 4,470 Local laws limit the amount of accumulated earnings of these subsidiaries available for remittance to the parent company in the form of dividends. At December 31, 1978, subject to local government approval, approximately $10,700,000 of accumulated earnings was available for distribution, of which the company intends to permanently reinvest $2,400,000. 4. Acquisitions In June 1978, the company acquired Mineral Aggregates, Inc., a producer of roofing granules and abrasives in Tampa, Florida, for 120,000 shares of Lone Star common stock. The acquisition has been accounted for as a pooling of Interests. Prior periods have not been restated since the effect is not significant. 5. Joint Ventures and Unconsolidated Subsidiary The company's investment in and advances to joint ventures and an unconsolidated subsidiary are as follows (In thousands): Joint ventures Domestic finance subsidiary 1978 $ 9,195 2,781 $11,976 1977 $4,522 2,317 $6,839 The company and General Electric Credit Corporation formed a joint venture, now called Lonestar Florida Pennsuco, Inc., to purchase and operate the principal operating assets of Maule Industries, Inc. See Note 6 for additional Information concerning this venture. In July 1978, the company and the shareholders of H. B. Reed & Co., Inc. formed a joint venture, Lone Star Minerals, Inc., for the manufacture and marketing of slag roofing granules and abrasive blasting grit. The company contributed 100% of the stock of Mineral Aggregates, Inc. and the assets of a nickel slag facility In Riddle, Oregon for a 50% interest in the joint venture. Reed's shareholders contributed 100% of their common stock for a 50% interest in the joint venture and $5,000,000 in subordinated debentures of Lone Star Minerals, Inc. 6. Florida Cement and Related Operations The company and General Electric Credit Corporation formed a joint venture, Lonestar Florida Pennsuco, Inc. (originally Lone Star Florida, Inc.), which is being accounted for on the equity basis. The company acquired all of the outstanding common stock for $1,250,000 and General Electric Credit acquired all of the preferred stock for $750,000, with each class of stock having equal voting rights. On February 3,1978, Pennsuco purchased the principal operating assets of Maule Industries, Inc., a cement, aggregates and concrete producer in Florida. Pennsuco also assumed certain liabilities from Maule, principally mortgages and liens, and borrowed an additional $16,400,000 from General Electric Credit. LSI(01/16/2018)_002400 37 Total indebtedness to General Electric Credit of $42,929,000 as of December 31, 1978 is payable in annual installments through 1988 and is collateralized by certain assets of Pennsuco. During the term of the indebtedness, the company may be required to advance to Pennsuco up to $18,000,000 or, if lower, the amount of the then-outstanding indebted ness, for the purpose of maintaining the net worth of Pennsuco at $2,000,000 or to cure any default under the indebted ness. As of December 31, 1978, the company had made advances to Pennsuco of $8,358,000. The company also formed a wholly-owned subsidiary, Lonestar Florida, Inc., to purchase and resell all the production of the joint venture effective as of February 4,1978. Purchases from the joint venture are set by contractual formulas at prices which approximate market price discounted for certain of Lonestar Florida's selling costs. Lonestar Florida sales of $68,953,000 are included in the company's consolidated net sales. As of December 31,1978, Lonestar Florida had accounts payable to Pennsuco of $11,052,000 for pro duction purchased. Summarized financial information relating to Pennsuco as of December 31, 1978 and for the period then ended is as follows (In thousands): Current assets Property, plant and equipment (net) Receivable from Lonestar (net) Other assets Current liabilities Long-term debt Other liabilities Net worth Net sales Net income Less: Preferred dividend Equity in Pennsuco net income $12,109 43,673 2,694 734 (10,120) (44,954) (793) $ 3,343 $68,472 $ 1,384 (41) $ 1,343 7. Capitalized Interest Interest capitalized for 1978 and 1977 was $998,000 and $1,258,000, respectively. If capitalized interest had been ex pensed by the company as accrued, reported net Income would have been reduced by $464,000 in 1978 and $611,000 in 1977. 8. Notes Payable to Banks The company has a Revolving Credit and Term Loan Agree ment with no borrowings outstanding at December 31,1978 or 1977. The agreement permits the company to borrow up to $67,000,000 through June 1, 1980 at a specified bank's prime rate of interest plus a Vz % per annum commitment fee payable on the average daily unused amount. At maturity the company can convert any or all borrowings under this agreement to a term loan, repayable over a four-year period. The company had other domestic short-term borrowings of $750,000 and $1,000,000 outstanding at December 31, 1978 and 1977, respectively, at the prime rate of interest. The company maintains compensating balances with various banks at an average of ten to twenty percent of credit lines, or the equivalent, depending upon usage and measured over an extended period of time. The company's short-term foreign borrowings were $864,000 and $2,489,000 at December 31,1978 and 1977, respectively. These borrowings were at various terms. The maximum aggregate notes payable to banks at any month-end were $46,200,000 and $48,700,000 for 1978 and 1977, respectively; the average borrowings were $18,000,000 and $32,800,000 for 1978 and 1977, respectively; and the daily weighted average interest rate on aggregate borrow ings was 14.3% and 11.4% for 1978 and 1977, respectively (11.6% and 7.5% on domestic borrowings). 9. Long-term Debt Long-term debt consists of the following (In thousands): 4%% Sinking Fund Debentures, due 1990 51/s% Convertible Subordinated Debentures, due 1993 8% Sinking Fund Debentures, due 1997 81/2% Promissory Notes, due 1981-1984 101/4% Pollution Control and Industrial Development Rev enue Bonds, due 1980-1992 Various Notes, due through 2008 1978 1977 $ 26,433 28,288 50,000 20,000 $ 28,990 28,288 50,000 20,000 28,500 24,974 $178,195 28,500 19,327 $175,105 LSI(01/16/2018)_002401 38 Sinking fund requirements to and including 1979 under the 4% % debenture agreement have been met by purchases in the open market. Sinking fund requirements for the 8% debentures begin in 1983. The 5Vs % Convertible Subordinated Debentures are con vertible into common stock of the company at the rate of 38.462 shares of common stock for each one thousand dol lars in principal amount of debentures. The indenture calls for sinking fund requirements to commence in 1979. The indentures relating to the debentures and certain of the notes and related agreements restrict the amount of payment of cash dividends, stock repurchases and certain other activities. The amount of retained earnings free of these restrictions at December 31, 1978 was approximately $59,400,000. 10. Production Payment In 1976, the company sold a portion of future production from limestone quarries located adjacent to two of its cement plants. The proceeds have been deferred and are being re flected in income through 1988, together with related costs and expenses, as the minerals are produced and sold. The company expects to remit $4,000,000 of proceeds within one year and, accordingly, this amount is classified as a cur rent liability. An amount equivalent to interest is payable by the company partially at the rate of 10% and partially at a rate that fluctuates based on a specified bank's prime lending rate. 11. Capital Stock and Capital Surplus Authorized: 2,000,000 shares Preferred Stock--par value $1.00 per share (Stated value $22.50 per share) 20,000,000 shares Common Stock--par value $1.00 per share Transactions in capital stock and capital surplus accounts are as follows (Dollars in thousands): Balance, December 31, 1976 Conversion of preferred stock Exercise of stock options Balance, December 31,1977 Conversion of preferred stock Pooling of interests Exercise of stock options Balance, December 31,1978 Preferred Shares Stated Value 60,401 (4,945) -- $1,359 (111) -- 55,456 (8,638) . -- -- $1,248 (194) -- -- 46,818 $1,054 Common Shares Par Value 11,710,619 19,780 -- 11,730,399 34,552 -- -- $11,711 19 -- $11,730 35 -- -- 11,764,951 $11,765 Capital Surplus $68,805 92 (33) $68,864 159 (2,451) (30) $66,542 Treasury Common Shares Cost 638,006 -- (4,094) 633,912 -- (120,000) (3,825) $14,198 -- (91) $14,107 -- (2,670) (85) 510,087 $11,352 Each share of $4.50 Cumulative Preferred Stock is convertible into four shares of common stock. Such stock is redeemable at the option of the company, or entitled upon involuntary liquidation, at $100 per share or a total of $4,682,000 which is $3,628,000 in excess of the total stated value. The company has reserved 1,936,456 shares of its authorized but unissued common stock for possible future issuance in connection with conversions of preferred stock (187,272 shares) and debentures (1,088,013 shares) and the exercise of stock options (661,171 shares). LSI(01/16/2018)_002402 39 12. Stock Options At December 31, 1978, under all stock option plans, options were outstanding to purchase 251,395 shares (144,349 exercisable) of the company's common stock at $14,25 to $24.50 per share (market value at dates of grant). During 1978, options for 60,816 shares were granted and options for 9,094 shares expired or were cancelled and options to pur chase 3,825 shares were exercised at $14.25 per share. At December 31, 1978, options to purchase 409,776 shares were available for grant. 13. Leases Rental expense in 1978 and 1977 was approximately $10,600,000 and $9,800,000, respectively. Minimum rental commitments under all noncancellable leases principally pertaining to land, buildings and equipment are as follows (In thousands): 1979, $6,166; 1980, $5,634; 1981, $4,958; 1982, $3,825; 1983, $3,389; after 1983, $17,054. Certain leases include options for renewal or purchase of leased property. 14. Other Income--Net Other Income--net, consists of the following (In thousands): Securities income (includes foreign) Foreign exchange losses Income from joint ventures and unconsolidated subsidiary Gains on sales of assets Minority Interest Other 1978 $6,277 (4,569) 2,084 1,191 36 409 $5,428 1977 $4,289 (2,382) 202 1,291 (606) 787 $3,581 15. Pension Plans Pension expense connected with the company's plans for 1978 and 1977 was approximately $7,500,000 and $5,500,000, respectively. The higher pension expense In 1978 resulted from increased participation and from amendments to several of the plans, which increased the level of benefits provided. The actuarially computed value of vested benefits for certain plans at 1979 valuation dates exceeded the total of the pen sion funds and accrued contributions by approximately $20,900,000. 16. Income Taxes Provisions for income taxes consist of the following (In thousands): Federal: Current Deferred: Excess of tax over book depreciation Investment tax credits Subsidiary separate return net operating loss carryforward Other Total federal Foreign State and local 1978 $ 7,831 1977 $ 3,066 5,378 1,008 1,329 178 15,724 4,376 1,200 $21,300 4,117 1,110 -- (22) 8,271 2,979 350 $11,600 In 1978, $923,000 has been reclassified in the balance sheet from deferred income taxes payable to current income taxes payable as a result of prior year tax filings. The company has investment tax credit carryforwards for federal Income tax purposes of $3,100,000, which expire at various dates through 1985. These carryforwards have been recognized for finan cial statement purposes. A subsidiary has net operating loss carryforwards and invest ment tax credit carryforwards for federal Income tax pur poses from separate return taxable periods of approximately $7,500,000 and $6,200,000, respectively, which expire at various dates from 1981 to 1984 and are available for applica tion against future taxable income of the subsidiary. This subsidiary's net operating loss carryforwards and $3,900,000 of the investment tax credit carryforwards have been pre viously recognized for financial statement purposes. The company intends to reinvest a portion of the undistributed earnings of Its foreign subsidiaries. Accordingly, no for eign withholding or U.S. taxes were provided on $2,400,000 of unremltted earnings available for distribution at December 31, 1978. LSI(01/16/2018)_002403 40 The following is a reconciliation of Income taxes computed at the U.S. statutory rate to the provisions for Income taxes (In thousands): Taxes computed at 48% of income before income taxes Decreases resulting from: Percentage depletion Investment tax credits Real estate transactions Other, net 1978 $32,005 4,800 5,600 61 244 $21,300 1977 $19,829 2,900 2,500 1,697 1,132 $11,600 17. Quarterly Financial Data (Unaudited) Summarized quarterly financial data for 1978 and 1977 appears on page 29 of this report. 18. Current Replacement Cost Information (Unaudited) Estimated current replacement cost Information for Inventories and productive capacity as of December 31,1978 and 1977, and the related effect on cost of sales and depreciation expense for the year are disclosed in the company's annual report on Form 10-K to be filed with the Securities and Exchange Commission. The estimated current replacement costs of these assets and related expenses are generally higher than the comparable historical cost amounts shown in the financial statements. This Is due in part to the impact of inflation. However, the company pursues a policy of Increasing its sales prices, where feasible, as production costs increase in order to maintain its profit margins. The company has no present intention of replacing Its pro ductive capacity on a complete and one-time basis, as Is assumed In the calculation of the current replacement cost Information. However, any such replacement incorporating the latest available technological advances would necessarily be accompanied by certain operating-cost savings. 19. Litigation Beginning in late 1976, a series of substantially similar class actions was brought against the Portland Cement Associa tion and approximately forty-five cement producers, most of whom were or are members of the Portland Cement Asso ciation, including the company, which are now pending in the United States District Court for the District of Arizona. During 1978, substantially similar class actions have been filed by the states of Missouri, Nebraska, Utah, New Mexico and Montana in various Federal District Courts of those states. All of the actions allege that a nationwide combination and conspiracy existed In violation of the antitrust laws to fix, maintain and stabilize cement prices from on or before 1958 to the dates of commencement of the various actions. None of the actions alleges a specific amount of damages, but they seek, among other relief, money damages equal to treble the damages allegedly sustained by the plaintiffs. The actions have not progressed beyond a preliminary stage. Management denies that It has entered into any such alleged combination or conspiracy, believes that the alleged viola tions are without foundation and Intends to vigorously contest all of the actions to the full extent permitted by law. Conse quently, while the outcome of this litigation cannot be predicted with certainty, management believes it should not have a material adverse effect on the company's financial position. 20. Subsequent Event On February 20, 1979, the company announced that it reached an agreement in principle to sell certain assets of its building materials distribution centers to Louisiana Pacific Corporation. Lone Star will receive $10 million for the fixed assets of 16 contractor and combination contractor/ retail yards in the Los Angeles area as well as a roof truss manufacturing complex and cargo handling and distribu tion facilities near the Los Angeles harbor. Lone Star will also receive approximately $22 million, which represents current book value of inventories at these locations. The agreement is subject to approval by the board of directors of each company. The operation of these assets accounted for net sales of $135,691,000 for 1978 and $142,099,000 for 1977. The company does not expect this transaction to have a significant impact on 1979 earnings. LSI(01/16/2018)_002404 41 21. Industry Segments and Geographic Areas Sales and operating profits for the company's industry segments and geographic areas for the years ended December 31, 1978 and 1977 appear on page 22 of this report. Additional industry segment information regarding identifiable assets, capital expenditures and depreciation and depletion consists of the following (In thousands): Cement and related products Construction aggregates Other construction materials Lumber and building materials: Retail Contractor and wholesale Combination Other Total segments Jointventures and unconsolidated subsidiary Corporate and unallocated items Total Identifiable Assets 1978 1977 $371,979 116,767 5,110 $333,358 104,376 4,852 57,888 63,674 60,115 28,534 704,067 47,543 56,714 55,669 27,620 630,132 11,976 22,215 $738,258 6,839 30,567 $667,538 Capital Expenditures 1978 1977 $33,297 16,779 2,262 $20,459 14,705 154 5,233 2,170 2,310 152 62,203 2,612 773 3,094 100 41,897 -- 133 $62,336 -- 89 $41,986 Depreciation & Depletion 1978 1977 $16,141 7,652 167 $13,573 7,253 322 1,426 1,058 1,296 299 28,039 -- 104 $28,143 1,312 1,012 1,250 248 24,970 -- 107 $25,077 Lone Star's principal operations are in the field of construc tion and building materials as shown in the above table. The cement and related products segment includes the produc tion and distribution of Portland, masonry and other types of cement and the manufacture and distribution of ready-mixed concrete and concrete products. The construction aggregates segment includes the mining, processing and distribution of sand, gravel and crushed stone. The retail lumber and building materials segment includes the marketing of build ing materials and home-improvement products directly to the consumer through Home Care Centers. The contractor and wholesale lumber and building materials segment in cludes the distribution of lumber and building materials to building contractors and to other distributors. The combina tion lumber and building materials segment includes the distribution and marketing of these products to both con tractors and retail consumers at a single location. Other segments include primarily the company's real estate operations. Identifiable assets are those assets that are used in the com pany's industry segments. Corporate and unallocated assets consist primarily of cash, marketable securities (including foreign), and other assets not identified with a segment. Identifiable assets include $80,127,000 for 1978 and $70,799,000 for 1977 with respect to the company's South American operations. Due to the significant interrelationship of the company's cement and concrete operations and the increased significance of concrete sales resulting from the establishment of Lonestar Florida, concrete and concrete products are no longer included in the other construction materials segment. Concrete and concrete products are now included in the cement and related products segment. This change and other reclassifications have been made to con form the above segment data to current year presentation. LSI(01/16/2018)_002405 Directors 42 Dwayne 0. Andreas Chairman of the Board and Chief Executive, ArcherDaniels-Midland Company ADM is an agricultural products processing and milling company which ranks well up in Fortune Magazine's list of the 500 largest industrial corporations. In tne decade 1965-1975, it ranked No. 2 in total returns to stockholders and No. 13 in growth rate. Throughout this pe riod, Mr. Andreas was a senior executive of the company, becoming Chief Executive in 1970 and Chairman of the Board in 1972. He is a director of Dart Industries, Inc., Los Angeles, California and White Motor Corporation, Eastlake, Ohio. Mr. Andreas is a trustee of the American Freedom From Hunger Foundation and the U.S. Naval Academy Foundation and a director of the Foreign Policy Association. Rex D. Cross Chairman of the Board and Chief Executive Officer of Pomeroy, Inc. Pomeroy is a producer of prefabricated build ing components and hardware for the con struction and home building industries, headquartered in Stamford, Connecticut. Mr. Cross joined Pomeroy in 1957 as Executive Vice President, becoming President and Chief Executive Officer in 1960 and Chairman of the Board in 1965. He is a Director of Ames Iron Works, Oswego, N.Y., and Fitzgibbons Boiler Co. Inc., New York, N.Y. He was educated at the Gulf Coast Military Academy and Tulane University. Pomeroy's builders hardware group products are manufactured in the United States, Canada, England, Australia and Brazil. Stephen Galle Executive Vice President of Bangor Punta Corporation Mr. Galle joined Bangor Punta in 1961, became Vice Pres ident in 1964, Senior Vice President and Chief Financial Officer in 1968 and assumed his present position early in 1978. Educated at the Pazmany Peter University of Budapest in both law and public accounting, he was associated with the chemical industry of Hungary until he emigrated to the U.S. in 1956. He is a Director of Bangor Punta, Piper Aircraft Corporation and Producers Cotton Oil Company. Allen E. Puckett Chairman and Chief Executive Officer of Hughes Aircraft Company Dr. Puckett was pre viously President of Hughes and has held a number of senior management positions in the Weapons Sys tems and Aerospace groups since joining the company in 1949. A member of the National Academy of Engineer ing and the National Academy of Sciences, he is the author of numerous works on high-speed aerodynamics. A graduate of Harvard University with a Ph.D. from the California Institute of Tech nology, Dr. Puckett has served as Chairman of the NASA Research Advisory Committee on Control, Guidance and Navigation, as Vice Chair man of the Defense Science Board, and as President of the American Institute of Aeronau tics and Astronautics. Willard F. Rockwell, Jr. Chairman of the Executive Committee of Rockwell Interna tional Corporation Mr. Rockwell, who served as Chairman of the Board of Rockwell International from 1967 until 1979, had served as President and Chief Executive Officer of various predecessor companies for more than 30 years. A registered professional engineer, he was graduated from Penn State University and served seven years on its Board of Trustees. Currently a Trustee of the University of Southern California and the Carnegie Institute of Pitts burgh, he is a Director of several large compa nies including El Paso Company, Kearney & Trecker Corporation, Mellon National Corpora tion and Mellon Bank, N.A. He is the recipient of many civic awards and honorary degrees, and is a Trustee of The Conference Board and Chair man of the Executive Committee of the Tax Foundation. John P. Schroeder Retired Vice Chair man, J. P. Morgan & Co., Incorporated, and Morgan Guaranty Trust Co. of New York A graduate of Phillips Exeter Academy and Yale University, Mr. Schroeder joined J. P. Morgan & Co., incor porated in 1945, be coming Vice President in 1953 and Executive Vice President in charge of the National Banking Division in 1971. He became Vice Chairman and a Director of both the bank and J. P. Morgan & Co. in 1976, and retired at the end of 1978. Mr. Schroeder is also a Director of Phelps Dodge Corporation, Johns-Manville Corporation and Gould, Inc., as well as a member of the Direc tors' Advisory Council of J. P. Morgan and Morgan Guaranty. LSI(01/16/2018)_002406 43 Frank Gard Jameson Chairman of the Board of Glenair Inc. Mr. Jameson has been closely associated with space programs for the past twenty years, founding and managing a number of companies In the fields of missile elec tronics and electronic equipment. Glenair Is a West Coast manufac turer of electronic cables and connectors. In recent years, he has served as President of Tele dyne Ryan Aeronautical Company, Vice President of Douglas Aircraft and Senior Corporate Vice President of Rockwell International. He holds two Navy Distinguished Public Service Awards and currently serves as Chairman of the Board of Directors of the Freedoms Foundation at Valley Forge. He was educated at Webb Preparatory School, the U.S. Naval Academy, the California Institute of Technology and Stanford University, from which he received a B.S. degree. Sheldon Kaplan Partner in the Min neapolis law firm of Maslon, Kaplan, Edelman, Borman, Brand & McNulty A native of Minnea polis, Mr. Kaplan Is a B.A. graduate of the University of Minnesota (Phi Beta Kappa), and has his LL.B. from Columbia University Law School, where he served as editor and decisions editor of the Columbia Law Review. Admitted to the New York bar In 1940, he is currently a member of the Hennepin County and the Minnesota State Bar Associations. Mr. Kaplan served as a Captain In U.S. Army Ordnance during World War II, becoming Chief of the Legal Division, Cleveland Ordnance District, in 1946, before leaving the service and joining his present firm. His other Board memberships currently include the Bangor Punta Corporation, the Piper Aircraft Corporation and the Minnesota Vikings Football Team. Joseph V. McKee, Jr. Chairman, National Union Electric Corporation In 1949, Mr. McKee joined National Union Radio Corp., which changed its name in 1954 to National Union Electric--the same year he became Vice President, Treas urer and a Director. He became Executive Vice President in 1966 and assumed his present post In September 1977. National Union ranks In Fortune's second 500 In sales and well up in the first 500 for return on equity and growth In earnings. A graduate of Princeton University with a law degree from Columbia University, he Is a Direc tor of St. Joe Minerals Corporation and A. B. Electrolux, Stockholm, Sweden, and a Trustee of the Woods Hole Oceanographic Institution and The Greenwich Hospital. James E. Stewart Chairman, President and Chief Executive Officer, Lone Star Industries, Inc. Mr. Stewart became a Director and Chairman of the Executive Com mittee of Lone Star In 1971. Elected Chair man of the Board in 1973, he became President and Chief Executive Officer in 1978. Mr. Stewart Is a Director of Piper Aircraft, Vice Chairman of the Board and Chairman of the Executive Committee of Bangor Punta Corpora tion. Included among other activities, he serves as a Director of the Bishop Whipple Schools In Faribault, Minn. David W. Wallace Chairman, President and Chief Executive Officer, Bangor Punta Corporation Mr. Wallace joined Bangor Punta In 1967 as President and Chief Operating Officer. He began his career with White & Case In New York and is a member of the Bar of New York State and the Bar of the United States Supreme Court. In 1954, he joined the Alleghany Corp. where he subsequently became Executive Vice President, a Director and a member of the Executive Committee, followed by a similar position with United Brands. He holds a B.S. degree in engineering from Yale University and a Doctor of Jurisprudence degree from Harvard Law School. In addition to several directorships, he Is Vice President and Trustee of the Robert R. Young Charitable Foundation and a member of Lloyd's of London. Executive Committee James E. Stewart (Chairman) Sheldon Kaplan Joseph V. McKee, Jr. David W. Wallace Audit Committee David W. Wallace (Chairman) Frank G. Jameson Joseph V. McKee, Jr. Compensation and Stock Option Committee Joseph V. McKee, Jr. (Chairman) Sheldon Kaplan Willard E. Rockwell, Jr. David W. Wallace LSI(01/16/2018)_002407 44 Cement Plants Domestic: California: Santa Cruz Florida: Miami Indiana: Greencastle Kansas: Bonner Springs Louisiana: New Orleans Pennsylvania: Nazareth Texas: Houston Maryneal Virginia: Roanoke Washington: Seattle International: Argentina: Parana (Entre Rios Province) Sierras Bayas (Buenos Aires Province) Brazil: Aratu (Salvador, Bahia) Guaxindiba (State of Rio de Janeiro) Uruguay: Sayago (Montevideo) Cement & Construction Materials Group Group Headquarters 411 West Putnam Ave Greenwich, Connecticut 06830 Regional Offices: Central Region 2511 East 46th Street Indianapolis, Indiana 46205 Northeast Region 162 Old Mill Road West Nyack, New York 10994 Pacific Region 2800 Campus Drive San Mateo, California 94403 Southeast Region 977 Norfolk Square Norfolk, Virginia 23502 Southwest Region 8383 Stemmons Freeway Dallas, Texas 75247 Lone Star Florida, Inc. 6451 North Federal Highway Fort Lauderdale, Florida 33308 Lone Star Lafarge, Inc. 18 Koger Executive Center Norfolk, Virginia 23502 Building Centers Group Group Headquarters 3350 Central Avenue N.W. Minneapolis, Minnesota 55418 Regional Offices: Eastern Region 8405 Northwest 53rd Street Miami, Florida 33166 North Central Region 2745 South Lexington Avenue St. Paul, Minnesota 55121 Southwestern Region 600 Lake Air Drive Waco, Texas 76703 Western Region 2041 Rosecrans Avenue El Segundo, California 90245 Other Operations Lone Star Hawaii, Inc. Pacific Trade Center 190 S. King Street Honolulu, Hawaii 96813 Lone Star Minerals, Inc. 8149-C Kennedy Avenue Highland, Indiana 46322 Lone Star Mining & Exploration Co., Ltd. 2 Bloor Street West Toronto, Ontario M4W 3E2 Lone Star Properties, Inc. 411 West Putnam Avenue Greenwich, Connecticut 06830 LSI(01/16/2018)_002408 Lone Star Industries, Inc. One Greenwich Plaza Greenwich, Connecticut 06830 Telephone: (203) 661-3100 Officers James E Stewart Chairman, President and Chief Executive Officer Robert W. Hutton Vice Chairman of the Corporation John H. Davies Senior Vice President; President of the Cement & Construction Materials Group Kenneth N. Kermes Senior Vice President and Chief Financial Officer F. Eugene Purcell Senior Vice President--Public Affairs Alfred M. Sperry Senior Vice President--Administration Gordon A. Fox Vice PresidentFinancial Planning Conrad J. Gordon Vice President and Controller Herbert B. Greene Vice President, General Counsel and Secretary James M. Grogan Vice President; President of the Building Centers Group James E. Rosecrans Vice PresidentEmployee Relations Peter F. Sherwood Treasurer Auditors Coopers & Lybrand Price Waterhouse & Company (for International Division) Transfer Agent and Registrar for Common and Preferred Stock The Chase Manhattan Bank N.A., New York Annual Meeting The Annual Meeting of Shareholders will be held at 10:00 a.m. on Thursday, May 3,1979, at the Washington Plaza Hotel in Seattle, Washington. Stock Listings Lone Star common shares are listed on the New York Stock Exchange (symbol LCE), Boston Stock Exchange and Pacific Stock Exchange and are open to trading on the Midwest and Philadel phia Stock Exchanges. Certificates rep resenting Lone Star shares are traded on the Amsterdam Stock Exchange. 10-K Report A copy of the company's annual report on Form 10-K required to be filed with the Securities and Exchange Commis sion is available without charge upon request to the Senior Vice President Administration at the address above. LSI(01/16/2018)_002409 Lone Star Industries, Inc. One Greenwich Plaza Greenwich, Connecticut 06830 LSI(01/16/2018)_002410