FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-06124
LONE STAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE No. 13-0982660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 First Stamford Place, P. O. Box 120014, Stamford, CT 06912-
0014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-969-8600
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
The number of shares outstanding of each of the registrant's
classes of common stock as of October 29, 1997:
Common Stock, par value $1 per share - 11,007,388 shares
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations - For the
Three and Nine Months Ended September 30, 1997 and
1996 (Unaudited)......................................3
Consolidated Statements of Retained Earnings -
For the Three and Nine Months Ended September 30, 1997
and 1996 (Unaudited)..................................4
Consolidated Balance Sheets - September 30, 1997
(Unaudited) and December 31, 1996.....................5
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 1997 and 1996
(Unaudited)...........................................6
Notes to Unaudited Consolidated Financial Statements.....7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........14
PART II. OTHER INFORMATION..............................20
SIGNATURES..............................................21
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Per Share Amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Net sales $111,775 $118,349 $277,229 $273,643
Joint venture income 3,059 2,967 6,136 5,444
Other income, net 4,553 701 5,618 2,924
-------- -------- -------- --------
119,387 122,017 288,983 282,011
-------- -------- -------- --------
Deductions from revenues:
Cost of sales 63,895 69,388 172,613 178,966
Selling, general and
administrative expenses 6,752 6,606 21,929 20,866
Depreciation and depletion 6,121 6,088 18,326 17,822
Interest expense 617 1,664 3,135 5,210
-------- -------- -------- --------
77,385 83,746 216,003 222,864
-------- -------- -------- --------
Income before income
taxes 42,002 38,271 72,980 59,147
Provision for income taxes (14,280) (12,925) (24,813) (19,814)
-------- -------- -------- --------
Net income applicable
to common stock $ 27,722 $ 25,346 $ 48,167 $ 39,333
======== ======== ======== ========
Weighted average common
shares outstanding 10,997 11,369 10,948 11,424
======== ======== ======== ========
Primary income per common
share $2.04 $1.86 $3.61 $2.91
======== ======== ======== ========
Fully diluted income
per common share $2.02 $1.86 $3.52 $2.90
======== ======== ======== ========
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Unaudited)
(In Thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Retained earnings, beginning
of period $ 134,576 $ 76,157 $ 115,228 $ 63,315
Net income 27,722 25,346 48,167 39,333
Dividends (550) (568) (1,647) (1,713)
--------- --------- --------- ---------
Retained earnings, end of
period $ 161,748 $ 100,935 $ 161,748 $ 100,935
========= ========= ========= =========
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash including cash equivalents of $92,372
and $69,768 $ 94,600 $ 71,215
Accounts and notes receivable, net 49,948 33,336
Inventories:
Finished goods 17,472 24,913
Work in process and raw materials 6,494 5,347
Supplies and fuel 24,191 23,609
-------- --------
48,157 53,869
Deferred tax asset 3,611 3,611
Other current assets 5,500 3,183
-------- --------
Total current assets 201,816 165,214
Joint ventures 20,891 19,505
Property, plant and equipment 399,718 383,974
Less accumulated depreciation and depletion 74,476 60,992
-------- --------
325,242 322,982
Deferred tax asset 29,090 47,365
Other assets and deferred charges 9,661 7,085
-------- --------
Total assets $586,700 $562,151
======== ========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 13,374 $ 12,562
Accrued liabilities 39,858 44,238
Senior notes payable - 28,000
Other current liabilities 6,572 3,436
-------- --------
Total current liabilities 59,804 88,236
Senior notes payable 50,000 50,000
Postretirement benefits other than pensions 131,393 132,219
Other liabilities 28,136 27,414
Contingencies (Notes 10 and 11)
-------- --------
Total liabilities 269,333 297,869
-------- --------
Shareholders' Equity:
Common stock 12,090 12,087
Warrants to purchase common stock 15,562 15,574
Additional paid-in capital 161,729 163,664
Retained earnings 161,748 115,228
Treasury stock, at cost (33,762) (42,271)
-------- --------
Total shareholders' equity 317,367 264,282
Total liabilities and shareholders' -------- --------
equity $586,700 $562,151
======== ========
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Nine Months
Ended September 30,
1997 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 48,167 $ 39,333
Adjustments to arrive at net cash
provided by operating activities:
Depreciation and depletion 18,326 17,822
Deferred income taxes 20,617 19,814
Changes in operating assets and
liabilities:
Accounts and notes receivable (16,017) (16,986)
Inventories and other current
assets 1,042 5,984
Accounts payable and
accrued liabilities (2,218) (6,761)
Equity income, net of dividends
received (1,386) 556
Pension funding less than (in
excess of) expense 823 (13,345)
Gain on sale of a surplus property (3,110) -
Other, net (236) 169
-------- --------
Net cash provided by operating
activities 66,008 46,586
Cash Flows from Investing Activities:
Capital expenditures (30,026) (29,765)
Proceeds from sale of assets 12,854 81
Other, net - 32
-------- --------
Net cash used by investing
activities (17,172) (29,652)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term
senior notes 50,000 -
Redemption of long-term senior notes (78,000) -
Proceeds from exercise of warrants 58 86
Purchase of treasury stock (436) (8,191)
Dividends paid (1,647) (1,713)
Proceeds from exercise of options 4,574 1,143
-------- --------
Net cash used by financing activities (25,451) (8,675)
-------- --------
Net increase in cash and cash
equivalents 23,385 8,259
Cash and cash equivalents, beginning of
period 71,215 50,049
-------- --------
Cash and cash equivalents, end of period $ 94,600 $ 58,308
======== ========
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
</TABLE>
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position of the Company as of September 30, 1997, and the
results of operations for the three and nine months ended September 30,
1997 and 1996, and the cash flows for the nine months ended September 30,
1997 and 1996.
The year-end consolidated balance sheet was derived from the Company's
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles. The financial
statements contained herein should be read in conjunction with the
financial statements and related notes in the Company's annual report on
Form 10-K for the year ended December 31, 1996. The Company's operations
are seasonal and, consequently, interim results are not indicative of the
results to be expected for a full year.
Note 2 - Common Stock
In February, May and August 1997, the Board of Directors declared a $0.05
dividend per common share, which was paid on March 14, 1997, June 16, 1997
and September 15, 1997 to shareholders of record as of March 1, 1997, June 1,
1997 and September 1, 1997. During the nine months ended September 30, 1997,
290,000 employee stock options were exercised for a total of $4,574,000. In
May 1997, the Board of Directors authorized the Company to purchase up to
$25,000,000 of the Company's common stock and warrants. During the third
quarter of 1997, the Company purchased 8,800 shares for $436,000.
Note 3 - Supplemental Disclosures of Cash Flow Information
Cash equivalents include the Company's marketable securities which are
comprised of short-term, highly liquid investments with original maturities
of three months or less. Interest paid during the nine months ended
September 30, 1997 and 1996 was $7,261,000 and $7,899,000, respectively.
Income taxes paid during the nine months ended September 30, 1997 and 1996,
were $1,063,000 and $293,000, respectively.
Note 4 - Interest
Interest expense of $951,000, $4,082,000, $1,982,000 and $5,948,000 has been
accrued for the three and nine months ended September 30, 1997 and 1996,
respectively. Interest capitalized during the three and nine months ended
September 30, 1997 and 1996, was $334,000, $947,000, $318,000 and $738,000,
respectively.
Note 5 - Earnings Per Share
Due to the Company having outstanding common stock equivalents in excess of
20% of the number of shares of outstanding common stock, primary and fully
diluted earnings per share of the Company are calculated using the modified
treasury stock method in accordance with Accounting Principles Board Opinion
No. 15, "Earnings per Share", except when primary and fully diluted earnings
per share are anti-dilutive. Primary earnings per share for the three months
ended September 30, 1997 and 1996 were calculated based on adjusted weighted
average shares outstanding of 13,621,286 and 13,708,843, and net income of
$27,722,000 and $25,566,000, respectively. Primary earnings per share for
the nine months ended September 30, 1997 and 1996 were calculated based on
adjusted weighted average shares outstanding of 13,342,383 and 13,787,591 and
net income of $48,167,000 and $40,102,000, respectively.
Note 6 - Recent Pronouncements
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). This statement establishes new standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company expects the impact of the adoption of this
statement to increase previously reported annual, third quarter and nine-
month period EPS amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. This statement is effective for periods beginning after December
15, 1997. The Company does not expect adoption of the statement to have a
material effect on the presentation of its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", ("SFAS No. 131") which changes the way
public companies report information about segments. SFAS No. 131, which is
based on the management approach to segment reporting, includes requirements
to report selected segment information quarterly, and entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenues. This statement is
effective for financial statements for periods beginning after December 15,
1997. Management has not yet evaluated the effects of this change on the
Company's financial statements.
Note 7 - Sale of Assets
In March 1997, the Company sold its central Illinois ready-mixed and other
concrete operations, including inventories, for about $10,500,000 which
approximated book value. The total proceeds included a note receivable for
$1,650,000.
In October 1997, the Company sold its New York construction aggregates
operations, including working capital, for proceeds of about $43,000,000,
which approximated book value. The construction aggregates operations sold
contributed $17,061,000 and $36,287,000 to consolidated sales, and $3,656,000
and $3,434,000 to consolidated gross profit of the Company for the three and
nine months ended September 30, 1997, respectively. These sold operations
contributed $16,630,000 and $33,255,000 to consolidated sales, and $3,703,000
and $3,851,000 to consolidated gross profit of the Company for the three and
nine months ended September 30, 1996, respectively.
In September 1997, the Company received $3,110,000 from the sale of a parcel
of surplus real estate in Massachusetts. The gain on the sale is included in
other income on the consolidated statement of operations.
Note 8 - Senior Notes Payable
In March 1997, the Company redeemed $28,000,000 of its 10% senior notes and
called for the early redemption of the remaining $50,000,000 in the second
quarter of 1997. In March 1997, the Company issued $50,000,000 of 7.31%
senior notes due 2007. On April 21, 1997, the remaining $50,000,000 of the
10% senior notes were redeemed at par plus accrued interest of $1,125,000.
Note 9 - Credit Agreement
In June 1997, the Company entered into a new $100,000,000 unsecured revolving
credit facility, replacing the $35,000,000 secured revolving credit facility
the Company canceled in March 1997.
Note 10 - Environmental Matters
The Company is subject to extensive, stringent and complex federal, state
and local laws, regulations and ordinances pertaining to the quality and
the protection of the environment and human health and safety, requiring
the Company to devote substantial time and resources in an effort to
maintain continued compliance. Many of the laws and regulations apply to
the Company's former activities, properties and facilities as well as its
current operations. There can be no assurances that judicial or
administrative proceedings, seeking penalties or injunctive relief, will
not be brought against the Company for alleged non-compliance with
applicable environmental laws and regulations relating to matters as to
which the Company is currently unaware. For instance, if releases of
hazardous substances are discovered to have occurred at facilities
currently or previously owned or operated by the Company, or at facilities
to which the Company has sent waste materials, the Company may be subject
to liability for the investigation and remediation of such sites. In
addition, changes to such regulations or the enactment of new regulations
in the future could require the Company to undertake capital improvement
projects or to cease or curtail certain current operations or could
otherwise substantially increase the capital, operating and other costs
associated with compliance. For example, certain world leaders are
currently discussing limitations on carbon dioxide emissions as a result
of the fear among certain scientists of "global warming". These
limitations will be the focus of an international meeting in December 1997
in Japan. Depending on their form when promulgated, such limitations, if
any are ultimately imposed, could adversely affect certain aspects of
United States manufacturing, including the cement industry.
The Clean Air Act was amended in 1990 to provide for a uniform federal
regulatory scheme governing the control of air pollutant emissions and
permit requirements. In addition, certain states in which the Company
operates have enacted laws and regulations governing the emission of air
pollutants and requiring permits for sources of air pollutants. As a
result of the 1990 amendments to the Clean Air Act, the Company is
required to apply for federal operating permits for each of its cement
manufacturing facilities at various dates through 1999. As part of the
permitting process, the Company may be required to install equipment to
monitor emissions of air pollutants from its facilities. In addition, the
Clean Air Act amendments require the United States Environmental
Protection Agency ("EPA") to develop regulations directed at reducing
emissions of toxic air pollutants from a variety of industrial sources,
including the portland cement manufacturing industry. As part of this
process, the EPA will identify maximum available control technology
("MACT") for the reduction of emissions of air toxics from cement
manufacturing facilities. On April 27, 1997, the EPA announced new
proposed MACT standards for those cement manufacturing facilities (like
Lone Star's Greencastle and Cape Girardeau plants) that burn hazardous
waste fuels ("HWF"). The proposed standards are extremely lengthy and
complex and have been commented on by concerned parties. They are
anticipated by the Company to be effective in late 1998 and thereafter
will be implemented over a three-year period. Depending on their final
terms when effective, they could have the effect of limiting or
eliminating the use of HWF at one or both facilities. The Company
anticipates that standards for facilities burning fossil fuels will be
initially proposed in late 1997. In August 1997, the EPA promulgated
under the Clean Air Act new standards for small particulate matter and
ozone emissions, and related testing will be carried out over the next
several years. Depending on the result of this testing, additional
regulatory burdens could be imposed on the cement industry by states not
in compliance with the regulations. On October 10, 1997, the EPA proposed
new regulations to reduce nitrogen oxide emissions substantially over the
next eight years. This proposal would affect 22 states including three in
which the Company has cement plants: Indiana, Illinois and Missouri.
Depending on state implementation, this emissions reduction could
adversely affect the cement industry in these states.
The Resource Conservation and Recovery Act ("RCRA") establishes a
cradle-to-grave regulatory scheme governing the generation, treatment,
storage, handling, transportation and disposal of solid wastes. Solid
wastes which are classified as hazardous wastes pursuant to RCRA, as well
as facilities that treat, store or dispose of such hazardous wastes, are
subject to stringent regulatory requirements. Generally, wastes produced
by the Company's operations are not classified as hazardous wastes and are
subject to less stringent federal and state regulatory requirements.
Cement kiln dust ("CKD"), a by-product of cement manufacturing, is
currently exempted from regulation as a hazardous waste pursuant to the
Bevill Amendment to RCRA. However, on January 31, 1995, the EPA issued a
regulatory determination regarding the need for regulatory controls on the
management, handling and disposal of CKD. Generally, the EPA regulatory
determination provides that the EPA intends to draft and promulgate
regulations imposing controls on the management, handling and disposal of
CKD that will be based largely on selected components of the existing RCRA
hazardous waste regulatory program, tailored to address the specific
regulatory concerns posed by CKD. The EPA regulatory determination
further provides that new CKD regulations will be designed both to be
protective of the environment and to minimize the burden on cement
manufacturers. While it is not possible to predict at this time precisely
what new regulatory controls on the management, handling and disposal of
CKD or what increased costs (or range of costs) would be incurred by the
Company to comply with these requirements, the EPA announced in 1996 that
regulations will be promulgated through a rulemaking scheduled to be
completed in late 1997, and that, thereafter, these rules would become
effective in 1998 and thereafter will be implemented over a three-year
period. The types of controls being considered by the EPA include
fugitive dust emission controls, restrictions for landfills located in
sensitive areas, groundwater monitoring, standards for liners and caps,
metals limits and corrective action for currently active units.
In 1995, the State of Indiana made a determination that the CKD stored at
the Company's Greencastle plant is a Type I waste and requested that the
Company apply for a formal permit for an on-site landfill for the CKD.
The Company understands that similar notices were sent to other cement
manufacturers in the State of Indiana. The Company is protesting this
determination through legal channels and has received a stay to allow it
to demonstrate that current management practices pose no threat to the
environment. The Company believes that the State's determination
ultimately will be reversed or the Company will receive the needed permit
or other adequate relief, such as an agreed order requiring certain
additional waste management procedures that are less stringent than those
generally required for Type I wastes. If the Company is not successful in
this regard, however, like other Indiana cement producers, the Greencastle
plant could incur substantially increased operating and capital costs.
The Cape Girardeau, Missouri and Greencastle, Indiana plants, which are
the Company's two cement manufacturing facilities using HWF as a cost
saving energy source, are subject to strict federal, state and local
requirements governing hazardous waste treatment, storage and disposal
facilities, including those contained in the federal Boiler and Industrial
Furnace Regulations promulgated under RCRA (the "BIF Rules"). These
facilities qualified for and operate under interim status pursuant to RCRA
and the BIF Rules. While Lone Star believes that it is currently in
compliance with the extensive and complex technical requirements of the
BIF Rules, there can be no assurances that the Company will be able to
maintain compliance with the BIF Rules or that changes to such rules or
their interpretation by the relevant agencies or courts might not make it
more difficult or cost-prohibitive to continue to burn HWF.
The Company is currently engaged in the process of securing the permit
required under RCRA and the BIF Rules for the Cape Girardeau plant. The
Company anticipates that the Greencastle plant also will go through this
permitting process or a three-year recertification of its existing interim
status in 1998. These permits are a requirement to enable Lone Star to
continue the use of HWF at those facilities. The permitting process is
lengthy and complex, involving the submission of extensive technical data.
There can be no assurances that the Company will be successful in securing
a final RCRA permit for either or both of its HWF facilities. In
addition, if received, the permits could contain terms and conditions with
which the Company cannot comply or could require the Company to install
and operate costly control technology equipment.
The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund"), as well as many comparable state
statutes, creates a joint and several liability scheme for the
investigation and remediation of facilities where releases of hazardous
substances are found to have occurred. Liability may be imposed upon
current owners and operators of the facility, upon owners and operators of
the facility at the time of the release and upon generators and
transporters of hazardous substances released at the facility. While, as
noted above, wastes produced by the Company generally are not classified
as hazardous wastes, many of the raw materials, by-products and wastes
currently and previously produced, used or disposed of by the Company or
its predecessors contain chemical elements or components that have been
designated as hazardous substances or which otherwise may cause
environmental contamination. Hazardous substances are or have been used
or produced by the Company in connection with its cement manufacturing
operations (e.g. grinding compounds, refractory bricks), quarrying
operations (e.g. blasting materials), equipment operation and maintenance
(e.g. lubricants, solvents, grinding aids, cleaning aids, used oils), and
hazardous waste fuel burning operations. Past operations of the Company
have resulted in releases of hazardous substances at sites currently or
formerly owned by the Company and certain of its subsidiaries or where
waste materials generated by the Company have been disposed. CKD and
other materials were placed in depleted quarries and other locations for
many years. The Company has been named by the EPA as a potentially
responsible party for the investigation and remediation of several
Superfund sites. Available factual information indicates that the
Company's disposal of waste at these Superfund sites (other than sites
that have been remediated or as to which the Company has entered into
settlement agreements with the EPA) was small or non-existent, and the
Company may have certain defenses arising out of its reorganization. The
Company is also reviewing certain of its inactive properties to determine
if any remedial action may be required at these sites.
Note 11 - Litigation
From time to time the Company is named as a defendant in lawsuits
asserting product liability for which the Company maintains insurance
coverage. In this regard, the Company is one of many defendants,
including several cement manufacturers, named in two product liability
lawsuits in southern Texas that allege that cement is an unreasonably
dangerous product that has injured a large number of plaintiffs. The
Company believes this type of litigation is totally without merit and is
contesting the lawsuits vigorously. The Company has also been named in a
lawsuit asserting that it has successor liability for certain defunct
subsidiaries which allegedly manufactured faulty prestressed "double tees"
resulting in property damage to a retail store (and consequent loss of
business) in south Florida during Hurricane Andrew in 1992. The Company
is contesting this lawsuit vigorously. In another matter, in late 1995,
an office building in Boston, Massachusetts, constructed in 1983 using
concrete pilings produced by San-Vel Concrete Corporation ("San-Vel"), an
inactive Lone Star subsidiary was demolished by order of the City of
Boston based upon an engineering report by the owner's consultants that
the pilings were unreliable. In March 1997, the owner of the demolished
building brought suit against San-Vel and the Company alleging, among
other things, that San-Vel was negligent in producing, and that it
breached representations relating to, the pilings. At the request of the
City of Boston, San-Vel has provided a list of the approximate twenty-five
other buildings built in that City between 1980 and 1990 using San-Vel
pilings. The City has inspected these buildings visually, without noting
any apparent piling failure. Certain engineering studies also have been
conducted, and those limited results that have been made available to the
Company do not indicate any additional failures. The Company believes
that San-Vel used cement produced by Lone Star at one of its formerly
owned cement plants to mix the concrete from which pilings in certain of
these buildings (including the demolished building), were produced. There
has been no indication that Lone Star's production of this cement was
defective. The Company plans to contest this lawsuit vigorously, and
believes that it has good defenses to the lawsuit. All of the foregoing
matters are in preliminary stages, and no assurances as to their ultimate
outcome can be given. These matters are being defended by the Company's
insurers.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Financial Condition
The Company believes that cash and marketable securities on hand
of $94.6 million and funds generated by operations will be adequate to
cover current working capital and capital expenditure needs.
In March 1997, the Company sold its two ready-mixed and other
concrete operations in Illinois for about $10.5 million, which
approximated book value.
On March 12, 1997, the Company redeemed $28.0 million of its
$78.0 million of 10% senior notes. The notes were paid from cash on
hand. In addition, the Company entered into a long-term private
placement agreement for $50.0 million of 7.31% senior notes due 2007.
On April 21, 1997, the Company redeemed the balance of the 10% senior
notes at par plus accrued interest of approximately $1.1 million.
In March 1997, the Company canceled its $35.0 million secured
revolving credit agreement and during the second quarter, entered into
a new $100.0 million unsecured revolving credit facility which will
allow the Company to borrow funds at lower interest rates and increase
the Company's ability to repurchase common stock and warrants.
The Board of Directors has authorized the Company to purchase up
to $25.0 million of the Company's common stock and warrants in open
market or privately negotiated transactions. During the third quarter
of 1997, the Company repurchased $0.4 million of common stock.
In October 1997, the Company sold its New York construction
aggregates operations for approximately $43 million, which
approximated book value. The proceeds from the sale will be invested
in the Company's cement operations. The Company has announced capital
projects totaling approximately $60 million. The Company intends to
spend $12.5 million to increase production capacity at its Cape
Girardeau, Missouri cement plant by 100,000 tons to 1.3 million tons.
The Company will spend $16.5 million to double the size of its New
Orleans distribution system by adding 50,000 tons of new capacity and
installing a state-of-the-art ship and barge unloading system to
handle foreign and domestic portland cement. The Company also plans
to increase the production capacity at its New Orleans slag cement
facility from 225,000 tons to 600,000 tons, to enlarge its Memphis,
Tennessee distribution terminal for slag cement and to build new slag
cement terminals in Atlanta, Georgia and Northern Florida at a cost of
$18 million. In addition, the Company's 25% owned joint venture,
Kosmos Cement, recently announced the planned expansion of its
Louisville, Kentucky cement plant at a cost of $50 million. The
project will add 500,000 tons of production capacity to the plant's
current capacity of 875,000 tons.
Cash generated by operating activities of $66.0 million for the
nine months ended September 30, 1997 primarily reflect income from
operations, partly offset by increases in working capital.
During the nine months ended September 30, 1997, the Company
used $17.2 million for investing activities, primarily consisting of
capital expenditures of $30.0 million, partially offset by $8.9
million cash proceeds received for the sale of the Company's two
ready-mixed and other concrete operations in Illinois and $3.1 million
received for the sale of a parcel of surplus real estate in
Massachusetts.
Net cash outflows from financing activities of $25.5 million for
the nine months ended September 30, 1997 primarily reflect the
redemption of $78.0 million of 10% senior notes and dividends paid,
partially offset by the proceeds from the private placement of $50
million of 7.31% long-term senior notes and $4.6 million from the
exercise of employee stock options.
Working capital on September 30, 1997 was $142.0 million as
compared to $77.0 million on December 31, 1996. Current assets of
$201.8 million represents a $36.6 million increase primarily due to
higher marketable securities and accounts receivables balances, offset
by a decrease in inventories. Current liabilities decreased $28.4
million primarily reflecting the redemption of $28.0 million of the
10% senior notes during the first quarter of 1997.
The $18.3 million decrease in the Company's deferred tax asset
is due to utilization of the tax assets related to the income tax
provision for the nine months of 1997, partly offset by the tax
benefit recognized related to the exercise of employee stock options.
The investment in joint ventures at September 30, 1997 was $1.4
million higher than the year-end balance as the Company's share of
equity earnings exceeded cash distributions paid by Kosmos Cement
Company. Net property, plant and equipment was $2.3 million higher
than the year-end balance, reflecting capital expenditures offset by
depreciation and the sale of the Company's two ready-mixed and other
concrete operations in Illinois.
In February, May and August 1997, the Company's Board of
Directors declared a $0.05 per share dividend which was paid on March
14, June 16 and September 15, 1997 to shareholders on record as of
March 1, June 1 and September 1, 1997. Total dividends paid during
the three and nine months ended September 30, 1997 were approximately
$0.6 million and $1.6 million, respectively.
The Company is subject to extensive, stringent and complex
federal, state and local laws, regulations and ordinances
pertaining to the quality and the protection of the environment and
human health and safety, requiring the Company to devote
substantial time and resources in an effort to maintain continued
compliance. Many of the laws and regulations apply to the
Company's former activities, properties and facilities as well as
its current operations. Changes to such regulations or the
enactment of new regulations in the future could require the
Company to undertake capital improvement projects or to cease or
curtail certain current operations or could otherwise substantially
increase the capital, operating and other costs associated with
compliance. Moreover, there can be no assurances that judicial or
administrative proceedings, seeking penalties or injunctive relief,
will not be brought against the Company for alleged non-compliance
with applicable environmental laws and regulations relating to
matters as to which the Company is currently unaware. In addition,
if releases of hazardous substances are discovered to have occurred
at facilities currently or previously owned or operated by the
Company, or at facilities to which the Company has sent waste
materials, the Company may be subject to liability for the
investigation and remediation of such sites (See Note 10).
The Company believes that it has adequately provided for costs
related to its ongoing obligations with respect to known environmental
liabilities. Expenditures for environmental liabilities during the
first nine months of 1997 did not have a material effect on the
financial condition or cash flows of the Company.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Form 10-Q contain
forward-looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are based on
current expectations, estimates and projections concerning the general
state of the economy and the industry and market conditions in certain
geographic locations in which the Company operates. Words such as
"expects", "anticipates", "intends", "plans", "believes", "estimates",
and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict.
Therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in such forward-looking statements. The
Company undertakes no obligation to update publicly any forward-
looking statements as a result of new information, future events or
other factors.
The Company'S business is cyclical and seasonal, the effects of
which cannot be accurately predicted. Risks and uncertainties include
changes in general economic conditions (such as changes in interest
rates), changes in economic conditions specific to any one or more of
the Company's markets (such as the strength of local real estate
markets and the availability of public funds for construction),
adverse weather, unexpected operational difficulties, changes in
governmental and public policy including increased environmental
regulation, the outcome of pending and future litigation, and the
continued availability of financing in the amounts, at the times, and
on the terms required to support the Company's future business. Other
risks and uncertainties could also affect the outcome of the forward-
looking statements.
Results of Operations
Consolidated net sales of $111.8 million for the third quarter
of 1997 and $277.2 million for the first nine months of 1997 were $6.6
million lower and $3.6 million higher, respectively, than the
comparable prior-year periods.
Cement and ready-mixed concrete operations sales of $94.7
million for the third quarter of 1997 and $239.1 million for the first
nine months were $0.7 million and $14.2 million, respectively, greater
than the comparable prior-year period results. This increase is due
to 5% higher average net realized cement selling prices in both
periods of 1997, partially offset by a 4% decrease in cement shipments
during the third quarter. This decrease in shipments is attributable
to lower cement product availability, reflecting the high level of
cement shipments experienced during the first half of 1997, and to
lower shipments from the Memphis, Tennessee operations. These results
exclude sales of $1.9 million for the three months ended March 31,
1997 and $7.7 million and $15.5 million for the three and nine months
ended September 30, 1996, respectively from the Company's central
Illinois ready-mixed and other concrete operations which were sold in
March 1997.
The strong sales experienced in the first nine months of 1997
has reduced cement inventory to a level that is approximately 120,000
tons below the inventory level at the end of the third quarter of
1996. This lower level of inventory may result in lower shipments
during the fourth quarter of 1997 as compared to 1996.
Sales of construction aggregates of $17.1 million for the third
quarter of 1997 were $0.4 million higher than the 1996 period. Sales
of $36.3 million for the first nine months were $3.0 million higher
than the prior-year period results. This is primarily attributable to
an increase in overall construction aggregate shipments for the 1997
nine-month period. The construction aggregates operations were sold
in October, 1997.
The Company's operations are seasonal and, consequently, the
interim results are not indicative of the results to be expected for
the full year.
Gross profit from the cement and ready-mixed concrete operations
was $38.2 million and $83.5 million for the three and nine months
ended September 30, 1997 as compared to gross profit of $37.5 million
and $71.0 million respectively, for the comparable prior-year periods.
The increase in gross profit reflects higher average net realized
cement selling prices and higher overall cement shipments and lower
shipments from the Memphis, Tennessee operations for the nine months
ended September 30, 1997. These results exclude a loss of the gross
profit level of $0.3 million for the three months ended March 31, 1997
and gross profit of $1.8 million and $2.3 million for the three and
nine months ended September 30, 1996, respectively from the Company's
central Illinois ready-mixed and other concrete operations which were
sold during the first quarter of 1997.
Construction aggregates operations had a gross profit of $3.7
million for the quarter ended September 30, 1997 which was comparable
to the prior-year period. Gross profit for the first nine months of
1997 was $3.4 million which was $0.4 million lower than 1996. These
results primarily reflect lower average selling prices due to customer
and product mix and higher distribution costs.
Included in the calculation of gross profit are sales less cost
of sales including depreciation related to cost of sales (which
excludes depreciation related to depreciation on office equipment,
furniture and fixtures which are not related to the cost of sales).
Pre-tax income from joint ventures of $3.1 million and $6.1
million, respectively, during the three and nine months ended
September 30, 1997 reflects the results of the Kosmos Cement Company,
a partnership in which the Company has a 25% interest. The results
for the three and nine months ended September 30, 1997 were $0.1
million and $0.7 million, respectively, higher than the comparable
prior-year periods primarily reflecting higher average net realized
selling prices and shipments.
Other income of $4.6 million and $5.6 million, during the three
and nine months ended September 30, 1997 increased $3.9 million and
$2.7 million, respectively, over the comparable prior-year periods.
The increase is due primarily to a gain on the sale of a parcel of
surplus real estate in Massachusetts of $3.1 million as well as higher
interest income earned on higher marketable securities balances in
each of the first three quarters of 1997. The increase for the nine-
month period was partly offset by state and local tax refunds
including interest, related to prior years, included in other income
in 1996.
Selling, general and administrative expenses of $6.8 million and
$21.9 million during the three and nine months ended September 30,
1997 represent an increase of $0.1 million and $1.1 million over the
comparable prior-year periods expense. This increase primarily
reflects higher selling and administrative expenses related to the
Company's cement operations, partly offset by lower pension expense
and lower other postretirement benefit expenses for retirees.
Interest expense of $0.6 million and $3.1 million, during the
three and nine months ended September 30, 1997 represents a decrease
of $1.0 million and $2.1 million, respectively, over the comparable
prior-year periods. Capitalized interest was $0.3 million and $0.9
million for three and nine-month periods of 1997 and $0.3 million and
$0.7 million in the comparable prior-year periods. The decrease in
interest expense is primarily attributable to lower debt, lower
interest rates and higher capitalized interest in 1997.
The income tax expense of $14.3 million and $24.8 million during
the three and nine months ended September 30, 1997, an increase of
$1.4 million and $5.0 million, respectively, from the comparable
prior-year periods, primarily reflects higher pre-tax earnings in 1997
as compared to the prior-year periods.
Net income of $27.7 million, or $2.04 per share, during the
third quarter of 1997 was $2.4 million, or $0.18 per share, higher
than the comparable prior-year period results. Net income of $48.2
million, or $3.61 per share, during the first nine months of 1997 was
$8.8 million, or $0.70 per share, higher than the comparable prior-
year period results. The improvement for both periods is primarily
due to improved results in the cement product line due to continued
strong demand for cement. Also contributing to the favorable increase
in net income for both periods of 1997 over the prior-year results was
a gain on the sale of a parcel of surplus property in the third
quarter of 1997, higher joint venture income and lower interest
expense partly offset by increased selling, general and administrative
expenses and increased income tax expense due to higher pre-tax
earnings.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits:
11. Statement Re Computation of Per Share Earnings.
12. Statement Re Computation of Ratio of Earnings to
Fixed Charges.
27. Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, Lone Star Industries, Inc. has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
LONE STAR INDUSTRIES, INC.
Date: November 11, 1997 By: WILLIAM E. ROBERTS
William E. Roberts
Vice President, Chief
Financial Officer,
Controller and Treasurer
Date: November 11, 1997 By: JAMES W. LANGHAM
James W. Langham
Vice President
EXHIBIT 11
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
Computation of Earnings Per Common Share (Unaudited)
(In Thousands Except Per Share Amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
PER SHARE OF COMMON STOCK - PRIMARY
Net income $ 27,722 $ 25,346 $ 48,167 $ 39,333
Net interest expense
reduction (1) - 220 - 769
-------- -------- -------- --------
Net income applicable to
common stock $ 27,722 $ 25,566 $ 48,167 $ 40,102
======== ======== ======== ========
Weighted average shares
outstanding during period 10,997 11,369 10,948 11,424
Stock options and warrants (1) 2,624 2,340 2,394 2,364
-------- -------- -------- --------
Weighted average shares
outstanding during period 13,621 13,709 13,342 13,788
======== ======== ======== ========
Net income per common share $ 2.04 $ 1.86 $ 3.61 $ 2.91
======== ======== ======== ========
PER SHARE OF COMMON STOCK ASSUMING
FULL DILUTION
Net income $ 27,722 $ 25,346 $ 48,167 $ 39,333
Net interest expense
reduction (1) - 198 - 611
--------- --------- -------- -------
Net income applicable to
common stock $ 27,722 $ 25,544 $ 48,167 $ 39,944
======== ======== ======== ========
Weighted average shares
outstanding during period 10,997 11,369 10,948 11,424
Stock options and
warrants (1) 2,710 2,340 2,746 2,364
-------- -------- -------- ---------
Fully diluted
shares outstanding 13,707 13,709 13,694 13,788
======== ======= ======= =======
Net income per common share
assuming full dilution $ 2.02 $ 1.86 $ 3.52 $ 2.90
======== ======== ======== =======
(1) Due to the fact that the Company's aggregate number of common stock
equivalents is in excess of 20% of its outstanding common stock, primary
and fully diluted earnings per share has been calculated in accordance
with the modified treasury stock method.
</TABLE>
Exhibit 12
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
Statement Re Computation of Ratio of Earnings to Fixed Charges (Unaudited)
(Dollar amounts in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Earnings Available:
Income before provision
for income taxes $ 42,002 $ 38,271 $ 72,980 $ 59,147
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies (309) - (1,386) -
Capitalized interest (334) (318) (947) (738)
-------- -------- -------- --------
41,359 37,953 70,647 58,409
-------- -------- -------- --------
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt
discount and expenses 951 1,982 4,082 5,948
Portion of rent expense
representative of an
interest factor 368 294 934 813
-------- -------- -------- --------
Total Fixed Charges 1,319 2,276 5,016 6,761
-------- -------- -------- --------
Total Earnings Available $ 42,678 $ 40,229 $ 75,663 $ 65,170
======== ======== ======== ========
Ratio of Earnings to Fixed Charges 32.36 17.68 15.08 9.64
======== ======== ======== ========
Earnings Deficiency (for
coverage ratios less
than one to one) $ - $ - $ - $ -
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,228
<SECURITIES> 92,372
<RECEIVABLES> 54,423
<ALLOWANCES> 4,475
<INVENTORY> 48,157
<CURRENT-ASSETS> 201,816
<PP&E> 399,718
<DEPRECIATION> 74,476
<TOTAL-ASSETS> 586,700
<CURRENT-LIABILITIES> 59,804
<BONDS> 50,000
0
0
<COMMON> 12,090
<OTHER-SE> 305,277
<TOTAL-LIABILITY-AND-EQUITY> 586,700
<SALES> 277,229
<TOTAL-REVENUES> 288,983
<CGS> 172,613
<TOTAL-COSTS> 212,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,135
<INCOME-PRETAX> 72,980
<INCOME-TAX> 24,813
<INCOME-CONTINUING> 48,167
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,167
<EPS-PRIMARY> 3.61
<EPS-DILUTED> 3.52
</TABLE>
