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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 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, 1998:
Common Stock, par value $1 per share - 9,581,407 shares
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, 1998 and
1997 (Unaudited)......................................3
Consolidated Statements of Retained Earnings -
For the Three and Nine Months Ended September 30, 1998
and 1997 (Unaudited)..................................4
Consolidated Balance Sheets - September 30, 1998
(Unaudited) and December 31, 1997.....................5
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)...........................................6
Notes to Unaudited Consolidated Financial Statements.....7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........13
PART II. OTHER INFORMATION..............................19
SIGNATURES..............................................20
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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 104,010 $111,775 $259,506 $277,229
Joint venture income 2,889 3,059 5,943 6,136
Other income, net 3,494 4,553 9,199 5,618
-------- -------- -------- --------
110,393 119,387 274,648 288,983
-------- -------- -------- --------
Deductions from revenues:
Cost of sales 55,040 63,895 150,038 172,613
Selling, general and
administrative expenses 5,890 6,752 18,950 21,929
Depreciation and depletion 5,489 6,121 16,046 18,326
Interest expense 578 617 1,730 3,135
-------- -------- -------- --------
66,997 77,385 186,764 216,003
-------- -------- -------- --------
Income before income
taxes 43,396 42,002 87,884 72,980
Provision for income taxes (14,646) (14,280) (29,661) (24,813)
-------- -------- -------- --------
Net income applicable
to common stock $ 28,750 $ 27,722 $ 58,223 $ 48,167
======== ======== ======== ========
Weighted average common
shares outstanding:
Basic 10,374 10,997 10,600 10,948
======== ======== ======== ========
Diluted 13,283 13,621 13,548 13,342
======== ======== ======== ========
Earnings per common share:
Basic $ 2.77 $ 2.52 $ 5.49 $ 4.40
======== ======== ======== ========
Diluted $ 2.16 $ 2.04 $ 4.30 $ 3.61
======== ======== ======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Retained earnings, beginning
of period $ 206,854 $ 134,576 $ 178,444 $ 115,228
Net income 28,750 27,722 58,223 48,167
Dividends (507) (550) (1,570) (1,647)
--------- --------- --------- ---------
Retained earnings, end of
period $ 235,097 $ 161,748 $ 235,097 $ 161,748
========= ========= ========= =========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash including cash equivalents of $112,935
and $152,775 $ 113,107 $ 154,080
Accounts and notes receivable, net 41,601 28,217
Inventories:
Finished goods 14,314 14,850
Work in process and raw materials 7,609 6,417
Supplies and fuel 22,987 21,836
-------- --------
44,910 43,103
Deferred tax asset 3,825 3,825
Other current assets 4,402 3,751
-------- --------
Total current assets 207,845 232,976
Joint ventures 22,269 20,326
Property, plant and equipment 406,795 368,248
Less accumulated depreciation and depletion 84,583 68,993
-------- --------
322,212 299,255
Deferred tax asset 25,577 37,661
Other assets and deferred charges 8,750 8,759
-------- --------
Total assets $586,653 $598,977
======== ========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 11,469 $ 13,400
Accrued liabilities 44,062 46,417
Other current liabilities 5,916 3,565
-------- --------
Total current liabilities 61,447 63,382
Senior notes payable 50,000 50,000
Postretirement benefits other than pensions 122,268 123,728
Other liabilities 27,450 28,233
Contingencies (See Notes 7 and 8)
-------- --------
Total liabilities 261,165 265,343
-------- --------
Shareholders' Equity:
Common stock 12,351 12,092
Warrants to purchase common stock 14,250 15,554
Additional paid-in capital 178,492 174,915
Retained earnings 235,097 178,444
Treasury stock, at cost (114,702) (47,371)
-------- --------
Total shareholders' equity 325,488 333,634
Total liabilities and shareholders' -------- --------
equity $586,653 $598,977
======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
For the Nine Months
Ended September 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 58,223 $ 48,167
Adjustments to arrive at net cash
provided by operating activities:
Depreciation and depletion 16,046 18,326
Deferred income taxes 12,084 20,617
Changes in operating assets and
liabilities:
Accounts and notes receivable (13,332) (16,017)
Inventories and other current
assets (2,556) 1,042
Accounts payable and
accrued liabilities (3,795) (2,218)
Equity income, net of dividends
received (1,943) (1,386)
Gain of sale of surplus property (3,300) (3,110)
Other, net (459) 587
-------- --------
Net cash provided by operating
activities 60,968 66,008
Cash Flows from Investing Activities:
Capital expenditures (39,977) (30,026)
Proceeds from sales of assets 4,445 12,854
-------- --------
Net cash used by investing
activities (35,532) (17,172)
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 4,853 58
Purchase of warrants (2,242) -
Purchase of treasury stock (67,597) (436)
Dividends paid (1,570) (1,647)
Proceeds from exercise of options 147 4,574
-------- --------
Net cash used by financing activities (66,409) (25,451)
-------- --------
Net (decrease) increase in cash and cash
equivalents (40,973) 23,385
Cash and cash equivalents, beginning of
period 154,080 71,215
-------- --------
Cash and cash equivalents, end of period $ 113,107 $ 94,600
======== ========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal
recurring nature, necessary to present fairly the financial position of
the Company as of September 30, 1998, the results of operations for the
three and nine months ended September 30, 1998 and 1997 and the cash flows
for the nine months ended September 30, 1998 and 1997.
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, 1997. 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 1998, the Board of Directors declared $0.05
dividends per common share, which were paid on March 16, 1998, June 15, 1998,
and September 15, 1998 to shareholders of record as of March 1, 1998, June 1,
1998, and September 1, 1998. In January 1998, pursuant to an order signed by
the U.S. Bankruptcy Court, 14,572 shares of common stock and 31,033 warrants
were returned to the Company. The common stock shares have been recorded as
treasury shares and the returned warrants have been cancelled. There was no
effect on total equity of the Company as a result. During the third quarter
of 1998, the Board of Directors increased the stock repurchase program
authority by $50,000,000. In October 1998, the repurchase authority was
increased by another $25,000,000. During the nine months ended September 30,
1998, the Company purchased 1,028,095 shares of common stock for $67,597,000
and 44,405 warrants for $2,242,000 and 258,834 warrants were exercised for
$4,853,000. In October 1998, the company purchased an additional 383,600
shares of common stock for $22,423,000, leaving remaining authority to
repurchase up to $18,668,000 of the Company's common stock and warrants.
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, 1998 and 1997 was $3,734,000 and $7,261,000, respectively.
Income taxes paid during the nine months ended September 30, 1998 and 1997,
were $15,221,000 and $1,063,000, respectively.
Note 4 - Interest
Interest expense of $945,000, $2,835,000, $951,000 and $4,082,000 has been
accrued for the three and nine months ended September 30, 1998 and 1997,
respectively. Interest capitalized during the three and nine months ended
September 30, 1998 and 1997, was $367,000, $1,105,000, $334,000 and $947,000,
respectively.
Note 5 - Earnings Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128"). Previously reported earnings per
share amounts have been restated. Basic earnings per common share for the
three and nine months ended September 30, 1998 and 1997 are calculated by
dividing net income by weighted average common shares outstanding during the
period. Diluted earnings per common share for the three and nine months ended
September 30, 1998 and 1997 are calculated by dividing net income by weighted
average common shares outstanding during the period plus dilutive potential
common shares which are determined as follows:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Weighted average common
Shares 10,374,149 10,996,650 10,600,201 10,947,939
Effect of dilutive
Securities:
Warrants 2,800,832 2,522,867 2,837,662 2,269,376
Options to purchase
common stock 108,383 101,769 110,221 125,068
Adjusted weighted
average common shares 13,283,364 13,621,286 13,548,084 13,342,383
Dilutive potential common shares are calculated in accordance with the
treasury stock method which assumes that the proceeds from the exercise of
all warrants and options are used to repurchase common stock at market value.
The number of shares remaining after the proceeds are exhausted represents
the potentially dilutive effect of the securities.
Note 6 - Sale of Assets
In February and September 1998, the Company recorded gains of $1,500,000 and
$1,800,000 from the sale of surplus real estate in Massachusetts and Texas,
respectively. The gains are included in other income on the accompanying
consolidated statement of operations. Other income for the nine months ended
September 30, 1997 included a gain of $3,110,000 from the sale of surplus
real estate in Massachusetts.
Note 7 - 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 operations or could otherwise
substantially increase the capital, operating and other costs associated
with compliance. For example, recent initiatives for limitations on
carbon dioxide emissions as a result of the fear of global warming could
result in statutes or regulations which, if promulgated, could adversely
affect certain aspects of United States manufacturing, including the
cement industry.
The federal Water Pollution Control Act, commonly known as the Clean Water
Act, provides a comprehensive federal regulatory scheme governing the
discharge of pollutants to waters of the United States. This regulatory
scheme requires that permits be secured for discharges of wastewater,
including stormwater runoff associated with industrial activity, to waters
of the United States. The Company has secured or has applied for all
required permits in connection with its wastewater and stormwater
discharges.
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. The 1990
amendments to the Clean Air Act required the Company to apply for federal
operating permits for each of its cement manufacturing facilities. All of
these applications have been made. 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 has identified
maximum available control technology ("MACT") for the reduction of
emissions of air toxics from cement manufacturing facilities. In 1997, the
EPA announced 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 early 1999 and
thereafter will be implemented over a three-year period for companies that
plan to comply. 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. MACT standards for facilities burning fossil fuels were
proposed in early 1998, and these standards are currently being studied by
the Company. These rules are expected to be finalized by the EPA in early
1999. In 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. Also in 1997,
the EPA proposed new regulations to reduce nitrogen oxide emissions
substantially over the next eight years. These rules were recently
finalized by the EPA. These rules 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, in 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. These regulations will be promulgated
through a rulemaking scheduled to be completed shortly. These rules will
be implemented over a three-year period following promulgation. 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, and
the EPA and the Missouri Department of Natural Resources recently proposed
approval of this permit. The Company anticipates that the Greencastle
plant also will go through this permitting process and recently completed
a three-year recertification of its existing interim status. 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.
The Company's operations are also subject to federal and state laws and
regulations designed to protect worker health and safety. Worker
protection at the Company's cement manufacturing facilities is governed by
the federal Mine Safety and Health Act ("MSHA") and at other Company
operations is governed by the federal Occupational Safety and Health Act
("OSHA").
Note 8 - 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 late 1995, an office building in Boston, Massachusetts,
constructed in 1983 using concrete pilings produced by San-Vel Concrete
Corporation, an inactive Lone Star subsidiary ("San-Vel"), was demolished
by order of the City of Boston based upon an engineering report that the
pilings were unreliable. 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
reportedly 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 were
produced. There has been no indication that Lone Star's production of this
cement was defective.
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
$113.1 million and funds generated by operations will be adequate to
cover current working capital and capital expenditure needs.
The Company's financing agreement and the revolving credit facility
contain certain restrictive covenants which, among other things, could
have the effect of limiting the payment of dividends and the repurchase
of common stock and warrants. Approximately $65.1 million is available
at September 30, 1998 for such payments under the most restrictive of
such covenants.
Cash flows from operating activities of $61.0 million for the nine
months ended September 30, 1998 primarily reflect income from operations
and changes in working capital. The utilization of net operating loss
carryforwards and other deferred tax assets during the first nine months
reduced cash taxes otherwise payable by $12.1 million.
During the nine months ended September 30, 1998, investing
activities used $35.5 million, representing $40.0 million for capital
expenditures, offset by $3.3 million received for the sale of surplus
parcels of real estate and $1.1 million related to sales of
miscellaneous property, plant and equipment.
Net cash outflows from financing activities of $66.4 million for
the nine months ended September 30, 1998 primarily reflect the
repurchase of 1,028,095 shares of common stock during the second and
third quarters for $67.6 million, the purchase of 44,405 warrants for
$2.2 million and the payment of dividends of $1.6 million during the
first nine months of 1998. These payments were partially offset by
proceeds of $4.9 million received from the conversion of warrants.
Working capital on September 30, 1998 was $146.4 million as
compared to $169.6 million on December 31, 1997. Current assets
decreased $25.1 million primarily due to lower short-term investments,
partly offset by higher accounts and notes receivable and inventory
balances. Current liabilities decreased $1.9 million primarily due to a
decrease in accounts payable and accrued expenses.
The $12.1 million decrease in the Company's long-term deferred tax
asset is due to the utilization of a portion of the tax assets during
the first nine months of 1998. Investments in joint ventures increased
$1.9 million as the Company's share of equity earnings exceeded cash
distributions paid from Kosmos Cement Company. Net property, plant and
equipment increased $23.0 million reflecting capital expenditures,
partly offset by depreciation expense.
In February, May, and August 1998, the Company's Board of Directors
declared $0.05 per share dividends which were paid on March 16, 1998,
June 15, 1998, and September 15, 1998 to shareholders of record as of
March 1, 1998, June 1, 1998, and September 1, 1998. Total dividends
paid during the nine months ended September 30, 1998 were approximately
$1.6 million.
Other Information
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
operations or could otherwise substantially increase the capital,
operating and other costs associated with compliance (See Note 7).
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 1998 did not have a material effect on the financial
condition or cash flows of the Company.
Year 2000
The Company is in the process of conducting a company-wide
assessment of its computer systems and operations, to identify computer
hardware and software, and process control systems that are not Year
2000 compliant. The Company expects that the identification and repair
of any problems will be successfully completed during 1999. The
Company's goal is to have its remediated and replaced systems
operational by the end of the second quarter of 1999 to allow time for
testing and verification. In particular, the Company will perform tests
of its cement plants' operations during their normal maintenance
shutdowns in the first half of 1999. Expenses incurred to date have not
been material, and the Year 2000 issue has had no known effect on the
Company to date. Future costs are not expected to be material. Since
1990, the Company has been replacing and upgrading its corporate and
plant computer systems, including its maintenance tracking system, sales
order entry system, treasury system and other financial programs. The
Company has replaced all employee desktop computer systems within the
past several years. Such improvements have been made in the normal
course of business. Vendors have assured the Company that all of these
recently purchased machines and software programs are Year 2000
compliant.
The Company has initiated communications with third parties such as
critical vendors and major service suppliers, communications providers
and banks whose system failures potentially could have an impact on the
Company. No single customer accounts for more than 10% of the Company's
total sales and the Company has no executory contracts to sell cement
that extend past December 31, 1999. Accordingly the Company is not
canvassing its customers as to their Year 2000 compliance. There can be
no guarantee that third-party systems will be Year 2000 compliant.
Moreover, the potential effect of such noncompliance cannot be
quantified because of the impossibility of estimating the magnitude,
duration, or ultimate impact of noncompliance by others.
If the Company is unsuccessful in identifying or fixing all Year
2000 problems in its critical operations, or if it is affected by the
inability of suppliers or customers to continue operations due to such a
problem, the results of operations or financial condition could be
materially impacted. In the event of the failure to correct all
compliance issues related to manufacturing control systems, the plants
have the ability, in many instances, to continue operations
mechanically, rather than electronically. However, operations at a
plant would shut down if that plant's power suppliers failed to deliver
electricity due to a Year 2000 problem. Failure of other major third
parties, such as coal and gas suppliers and railroads, to correct Year
2000 problems would result in slowdown of business.
The Company anticipates developing a contingency plan that would be
designed to mitigate in part the impact on its business of certain Year
2000 problems. This plan, however, could not cover all eventualities,
such as a power outage. The Company expects this plan to be in place by
mid-1999.
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 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, the successful negotiation of labor
contracts, unforeseen operational difficulties and financial losses due
to Year 2000 computer problems, 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 $104.0 million during the third quarter
of 1998 and $259.5 million for the first nine months of 1998 were $7.8
million and $17.7 million, respectively, lower than the comparable
prior-year results. The decrease in net sales primarily reflects the
sales of the Company's New York construction aggregates and central
Illinois ready-mixed concrete operations during 1997, partly offset by
increased cement shipments and higher cement prices.
Sales of $104.0 million and $259.5 million from the Company's on-
going cement and ready-mixed concrete operations for the three and nine
months ended September 30, 1998 were $9.3 million and $20.4 million,
respectively, higher than the comparable prior-year periods. Cement
shipments for the current quarter and nine-month period were
approximately 6% and 5%, respectively, above the prior-year levels,
reflecting continued strong demand in most markets. Average net
realized selling prices for the third quarter and first nine months of
1998 were 4% higher than comparable prior-year periods.
Gross profit from the Company's on-going cement and ready-mixed
concrete operations of $43.5 million and $93.6 million for the three and
nine months ended September 30, 1998 was $5.3 million and $10.1 million,
respectively, higher than the comparable 1997 periods. This increase in
gross profit reflects higher average net realized cement selling prices,
greater cement production and higher overall cement and ready-mixed
concrete shipments for the quarter and nine months ended September 30,
1998.
The construction aggregates and ready-mixed concrete operations
sold in 1997 contributed sales of $17.1 million and gross profit of $3.7
million to the third quarter of 1997 results. The nine-month 1997
results included net sales of $38.1 million and a gross profit of $3.1
million from these operations. The fourth quarter of 1997 included sales
of $2.2 million and gross profit of $0.6 million. For the full year
1997, these operations contributed net sales of $40.3 million and gross
profit of $3.7 million.
The Company's operations are seasonal and, consequently, the
interim results are not indicative of the results to be expected for the
full year.
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 office equipment, furniture and fixtures which
are not related to the cost of sales).
Pre-tax income from joint ventures of $2.9 million and $5.9
million, respectively, during the three and nine months ended September
30, 1998 reflects the results of the Kosmos Cement Company, a
partnership in which the Company has a 25% interest. The results for
the third quarter and nine-month period of 1998 were $0.2 million lower
than both the comparable prior-year periods.
Other income of $3.5 million for the third quarter of 1998 was $1.1
million lower than the comparable prior-year period. This decrease is
primarily due to a lower gain on the sale of a surplus parcel of real
estate. The current quarter includes a gain from the sale of real
estate of $1.8 million. Last year's third quarter included a $3.1
million gain. Higher interest income on higher short-term investment
balances partly offset the lower income from the real estate sale.
Other income of $9.2 million for the nine months ended September 30,
1998 was $3.6 million higher than the comparable period in 1997,
primarily due to the higher interest income earned on higher short-term
investment balances.
Selling, general and administrative expenses of $5.9 million and
$19.0 million during the three and nine months ended September 30, 1998
were $0.9 million and $3.0 million, respectively, lower than the
comparable periods in 1997. This primarily reflects the decrease in
expense related to the Company's New York construction aggregates
operations which were sold in 1997, in addition to lower pension and
other postretirement benefit expenses.
Interest expense of $0.6 million for the third quarter of 1998 was
comparable to the third quarter of the prior year. Interest expense of
$1.7 million during the nine months ended September 30, 1998 represents
a decrease of $1.4 million from the comparable prior-year period.
Capitalized interest was $0.4 million and $1.1 million for the three and
nine months ended September 30, 1998 and $0.3 million and $0.9 million
for the comparable prior-year periods. The reduction in interest
expense for the nine-month period reflects lower debt and a lower
interest rate. The Company redeemed $78.0 million of its 10% senior
notes in March and April 1997 and issued $50.0 million of 7.31% senior
notes through a private placement agreement in April 1997.
The income tax expense of $14.6 million and $29.7 million during
the three and nine months ended September 30, 1998, reflects an increase
of $0.4 million and $4.8 million, respectively, from the prior-year
expense, reflecting higher pre-tax earnings in both periods of 1998.
Net income of $28.8 million during the third quarter of 1998 was
$1.0 million higher than the prior-year results. On a per share basis,
basic and diluted earnings for the three-month period were $2.77 and
$2.16, respectively, compared to $2.52 and $2.04, respectively, for
1997. Net income of $58.2 million during the first nine months of 1998
was $10.1 million higher than the prior-year results. On a per share
basis, basic and diluted earnings for the first nine months of 1998 were
$5.49 and $4.30, respectively, compared to $4.40 and $3.61,
respectively, for 1997. The improvement in net income for the three and
nine months ended September 30, 1998 is primarily due to higher cement
and ready-mixed concrete shipments, higher interest income earned on
higher short-term investment balances, lower interest expense on lower
outstanding debt, and a gain on the sales of surplus real estate. In
addition, the Company sold its construction aggregates and ready-mixed
concrete operations in 1997. These operations had income during the
third quarter and first nine months in 1997. The 1998 favorable results
were partly offset by the earnings of these sold operations and
increased income tax expense due to higher pre-tax earnings.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits:
27. Financial Data Schedule.
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: October 30, 1998 By: WILLIAM E. ROBERTS
William E. Roberts
Vice President, Chief
Financial Officer,
Controller and Treasurer
Date: October 30, 1998 By: JAMES W. LANGHAM
James W. Langham
Vice President, General
Counsel and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Statement of Operations and Balance Sheet and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 172
<SECURITIES> 112,935
<RECEIVABLES> 45,292
<ALLOWANCES> 3,691
<INVENTORY> 44,910
<CURRENT-ASSETS> 207,845
<PP&E> 406,795
<DEPRECIATION> 84,583
<TOTAL-ASSETS> 586,653
<CURRENT-LIABILITIES> 61,447
<BONDS> 50,000
0
0
<COMMON> 12,351
<OTHER-SE> 313,137
<TOTAL-LIABILITY-AND-EQUITY> 586,653
<SALES> 259,506
<TOTAL-REVENUES> 274,648
<CGS> 150,038
<TOTAL-COSTS> 185,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,730
<INCOME-PRETAX> 87,884
<INCOME-TAX> 29,661
<INCOME-CONTINUING> 58,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,223
<EPS-PRIMARY> 5.49
<EPS-DILUTED> 4.30
</TABLE>
