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, 2000
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.)
10401 N. Meridian Street, Suite 400, Indianapolis, IN 46290
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 317-706-3300
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
The number of shares outstanding of each of the registrant's classes of common
stock as of September 30, 2000:
Common Stock, par value $.01 per share - 18,334,427 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, 2000 and
1999 (Unaudited)......................................3
Consolidated Statements of Retained Earnings -
For the Three and Nine Months Ended September 30, 2000
and 1999 (Unaudited)..................................4
Consolidated Balance Sheets - September 30, 2000
(Unaudited) and December 31, 1999.....................5
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 2000 and 1999
(Unaudited)...........................................6
Notes to Unaudited Consolidated Financial Statements.....7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.......................................19
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)
Successor Company Predecessor Company
<S> <C> <C> <C> <C>
For the For the For the For the
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 2000 1999 1999
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Revenues:
Net sales $111,507 $286,465 $112,875 $281,604
Joint venture income 1,559 3,566 2,944 6,454
Marketable securities received
from insurance company 7,200 7,200 - -
Other income, net 777 2,876 3,025 6,476
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
121,043 300,107 118,844 294,534
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Deductions from revenues:
Cost of sales 67,481 178,852 61,747 161,909
Selling, general and administrative
expenses 6,754 20,669 5,589 18,720
Depreciation and depletion 10,510 30,034 6,193 18,227
Interest expense, net 18,966 51,149 291 1,560
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
103,711 280,704 73,820 200,416
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Income before income taxes 17,332 19,403 45,024 94,118
Provision for income taxes (5,895) (6,565) (15,196) (31,765)
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Net income applicable to common stock $11,437 $12,838 $29,828 $62,353
=================== =================== =================== ===================
=================== =================== =================== ===================
Weighted average common shares outstanding:
Basic 18,340 18,340 19,331 19,687
=================== =================== =================== ===================
=================== =================== =================== ===================
Diluted 18,434 18,455 23,891 24,210
=================== =================== =================== ===================
=================== =================== =================== ===================
Earnings per common share:
Basic $0.62 $0.70 $1.54 $3.17
=================== =================== =================== ===================
=================== =================== =================== ===================
Diluted $0.62 $0.70 $1.25 $2.58
=================== =================== =================== ===================
=================== =================== =================== ===================
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Unaudited)
(In Thousands)
Successor Company Predecessor Company
<S> <C> <C> <C> <C>
For the For the For the For the
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
---------------- ------------------ ----------------- -----------------
2000 2000 1999 1999
---------------- ------------------ ----------------- -----------------
Retained earnings, beginning $ 13,466 $ 12,065 $ 283,200 $ 252,671
of period
Net income ................... 11,437 12,838 29,828 62,353
Dividends .................... -- -- (964) (2,960)
--------- --------- --------- ---------
--------- --------- --------- ---------
Retained earnings, end of period $ 24,903 $ 24,903 $ 312,064 $ 312,064
========= ========= ========= =========
========= ========= ========= =========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
Successor Company
September 30, December 31,
2000 1999
------------------ -------------------
(Unaudited)
<S> <C> <C>
Assets:
Current assets:
Cash including cash equivalents of $10,794 and $594 $10,926 $787
Accounts and notes receivable, net 46,684 32,866
Inventories:
Finished goods 21,018 17,768
Work in process and raw materials 12,088 10,021
Supplies and fuel 28,707 26,374
------------------ -------------------
61,813 54,163
Other current assets 9,723 2,491
------------------ -------------------
Total current assets 129,146 90,307
Joint venture 73,682 62,616
Property, plant and equipment 1,818,501 1,761,734
Less accumulated depreciation and depletion 40,226 10,193
------------------ -------------------
1,778,275 1,751,541
Receivable from parent company 30,015 59,340
Other assets and deferred charges 53,111 47,264
------------------ -------------------
Total assets $2,064,229 $2,011,068
================== ===================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $13,431 $23,796
Accrued liabilities 76,613 59,693
Short-term bank loans - 419,450
Income taxes payable 8,386 2,101
------------------ -------------------
Total current liabilities 98,430 505,040
Long-term debt 930,550 490,550
Postretirement benefits other than pensions 91,753 90,919
Deferred taxes 542,926 542,926
Payable to affiliated companies 42,063 36,079
Other liabilities 33,604 33,489
Contingencies (See Notes 8 and 9)
------------------ -------------------
Total liabilities 1,739,326 1,699,003
------------------ -------------------
Shareholders' Equity:
Common stock 183 183
Additional paid-in capital 299,817 299,817
Retained earnings 24,903 12,065
------------------ -------------------
Total shareholders' equity 324,903 312,065
------------------ -------------------
Total liabilities and shareholders' equity $2,064,229 $2,011,068
================== ===================
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
5
<PAGE>
<TABLE>
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<S> <C> <C>
Successor Predecessor
Company Company
For the Nine For the Nine
Months Ended Months Ended
September 30, September 30,
2000 1999
--------------- ----------------
Cash Flows from Operating Activities:
Net income ......................................... $ 12,838 $ 62,353
Adjustments to arrive at net cash (used) provided by
operating activities:
Depreciation and depletion ..................... 30,034 18,227
Deferred income taxes .......................... -- 12,941
Changes in operating assets and liabilities:
Accounts and notes receivable ................ (13,558) (13,214)
Inventories and other current assets ......... (14,683) (1,050)
Accounts payable and accrued liabilities ..... 19,836 (3,899)
Joint venture income, net of dividends received (2,566) (1,454)
Other, net ..................................... 1,044 (4,078)
--------- ---------
Net cash provided by operating activities .......... 32,945 69,826
Cash Flows from Investing Activities:
Capital expenditures ............................... (61,323) (49,305)
Advances to joint venture .......................... (8,500) (5,250)
Proceeds from sales of assets ...................... 112 370
--------- --------
Net cash used by investing activities .............. (69,711) (54,185)
Cash Flows from Financing Activities:
Proceeds from long-term debt ....................... 500,000 --
Repayment of long-term debt ........................ (60,000) --
Proceeds from short-term debt ...................... 20,000 --
Repayment of short-term debt ....................... (439,450) --
Debt issuance costs ................................ (4,228) --
Net repayment of intercompany advances ............. 33,753 --
Proceeds from exercise of warrants ................. 91 4,344
Purchase of warrants and common stock .............. (3,261) (1,486)
Purchase of treasury stock ......................... -- (38,178)
Dividends paid ..................................... -- (2,960)
Proceeds from exercise of options .................. -- 23
--------- ---------
Net cash provided (used) by financing activities ... 46,905 (38,257)
--------- ---------
Net increase (decrease) in cash and cash equivalents 10,139 (22,616)
Cash and cash equivalents, beginning of period ..... 787 120,161
--------- ---------
Cash and cash equivalents, end of period ........... $ 10,926 $ 97,545
========= =========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
6
<PAGE>
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, 2000, and the results of operations for the three and nine months
ended September 30, 2000 and 1999 and the cash flows for the nine months ended
September 30, 2000 and 1999.
In September 1999, the Company entered into a merger agreement with Level
Acquisition Corp., an indirect, wholly-owned subsidiary of Dyckerhoff AG
("Dyckerhoff"). This agreement provided for the acquisition of the Company by
Dyckerhoff and was completed in October 1999. Under the agreement, Dyckerhoff
completed an all-cash tender offer for the Company's outstanding common stock at
a price of $50 per share and outstanding warrants at a price of $81.25 per
warrant. The total purchase price was approximately $1,200,000,000, including
debt assumed.
The acquisition was accounted for as a purchase transaction in accordance with
Accounting Principles Board Opinion No. 16. Accordingly, the Company's
consolidated financial statements for periods prior to October 1, 1999, are not
comparable to consolidated financial statements presented on or subsequent to
October 1, 1999. A black line has been drawn on the accompanying consolidated
financial statements to distinguish between the successor and predecessor
companies.
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 consolidated financial statements contained
herein should be read in conjunction with the consolidated financial statements
and related notes in the Company's annual report on Form 10-K for the year ended
December 31, 1999. 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 and Warrants
During the first nine months of 2000, the Company purchased 33,386 warrants for
$2,713,000 and 9,134 shares of common stock for $457,000.
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, 2000
and 1999 was $35,441,000 and $3,781,000, respectively. Income taxes paid during
the nine months ended September 30, 2000 and 1999 were $241,000 and $15,598,000,
respectively.
7
<PAGE>
Note 4 - Interest
Interest cost of $20,507,000, $55,339,000, $945,000 and $2,835,000 has been
accrued during the three and nine months ended September 30, 2000 and 1999
respectively. Interest capitalized during the three and nine months ended
September 30, 2000 and 1999 was $1,541,000 and $4,190,000, $654,000 and
$1,275,000, respectively.
Note 5 - Earnings Per Share
Basic earnings per common share for the three and nine months ended September
30, 2000 and 1999 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, 2000 and 1999 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,
2000 1999 2000 1999
---------- ---------- ---------- -------
Weighted average common
Shares 18,339,604 19,331,790 18,340,182 19,687,260
Effect of dilutive
Securities:
Warrants 94,255 4,333,239 115,180 4,303,977
Options to purchase
Common stock - 226,129 - 218,990
--------- ---------- ---------- ----------
Adjusted weighted
Average common shares 18,433,859 23,891,158 18,455,362 24,210,227
========== ========== ========== ==========
The effect of dilutive securities is 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 - Debt
During the first quarter of 2000, the Company borrowed $20,000,000 under a
variable-rate term loan credit facility with banks.
In June 2000, the Company completed two debt offerings consisting of
$350,000,000 9.25% bonds due in 2010 and $150,000,000 8.85% bonds due in 2005.
The Company incurred approximately $4,200,000 in costs related to the issuance
of this debt. These costs are being amortized over the life of the bonds.
Interest payments on these bonds are due semi-annually. The Company utilized the
proceeds of these debt offerings to repay $499,450,000 of its variable-rate term
loan facility, including $439,450,000, which was due in August 2000.
8
<PAGE>
At September 30, 2000, total outstanding debt was $930,550,000 consisting of the
$500,000,000 in fixed-rate bonds and $110,000,000 under its variable-rate term
loan facility. The term loan facility is payable in installments from 2001
through 2004. In addition, the Company has EUR 300,000,000 5.875% bearer bonds
due in November 2004. In order to avoid foreign currency risk, the Company has
entered into cross currency swap agreements fixing the Euro debt in the amount
of $320,550,000, with an average U.S. dollar interest rate of 7.84%.
In April 2000, the Company entered into a $30,000,000 unsecured revolving credit
agreement. Advances under this agreement bear interest at a rate which, at the
Company's option, is either fixed at a Eurodollar rate or other agreed upon rate
or a floating prime rate. A fee of 0.125% is charged on the unused portion of
the credit line. The agreement expires in March of 2001. The Company also
entered into a $20,000,000 uncommitted line of credit facility. Advances under
this agreement bear interest at a rate, which, at the Company's option is either
fixed at a Euro dollar rate, or other agreed upon rate or a floating prime rate.
At September 30, 2000 the company had no outstanding balances on the revolving
credit agreement or the line of credit facility. The Company's existing
$100,000,000 unsecured revolving credit facility was cancelled.
Note 7 - Marketable Securities Received from Insurance Company
As a policyholder in an insurance company, the Company was awarded shares of
stock resulting from the insurance company's conversion from a mutual company to
a stock company.
Note 8 - Environmental Regulation
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 worldwide initiatives for limitations on carbon dioxide emissions could
result in the promulgation of statutes or regulations that would adversely
affect certain aspects of United States manufacturing, including the cement
industry.
9
<PAGE>
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 provides 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 Company is required 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 United States Environmental Protection Agency ("EPA") is required
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 announced maximum
available control technology ("MACT") standards for cement manufacturing
facilities (like Lone Star's Greencastle and Cape Girardeau plants) that burn
hazardous waste fuels ("HWF") and other MACT standards for facilities burning
fossil fuels. These MACT standards will be implemented over a three-year period.
The Company currently anticipates that it will be able to achieve these MACT
standards. The EPA has also 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. The EPA has promulgated new
regulations to reduce nitrogen oxide emissions substantially over the next eight
years. These rules, if implemented, 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. However, the EPA has proposed regulations
imposing controls on the management, handling and disposal of cement kiln dust
("CKD"), a by-product of cement manufacturing and is currently reviewing
comments on the proposal. The EPA's decision to go forward or withdraw the rule
is expected in the next 18 months. The types of controls 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.
The Cape Girardeau, Missouri and Greencastle, Indiana plants, which are the
Company's two cement manufacturing facilities using HWF as a cost-
10
<PAGE>
saving energysource, 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"). The Company has secured the permit
required under RCRA and the BIF Rules for the Cape Girardeau plant. The
Greencastle plant also will go through this permitting process and has completed
a three-year recertification of its existing interim status, which
recertification is anticipated in December 2000. The Greencastle permit is a
requirement to enable Lone Star to continue the use of HWF at the plant. The
permitting process is lengthy and complex, involving the submission of extensive
technical data, and there can be no assurances that the plant will be successful
in securing its final RCRA permit. In addition, if received, the permit could
contain terms and conditions with which the Company cannot comply or could
require the Company to install and operate costly control technology equipment.
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 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, although it
does not currently contemplate that future costs relating to such sites will be
material.
The Company's operations are 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").
11
<PAGE>
Note 9 - Legal Proceedings
From time to time, the Company is named as a defendant in lawsuits asserting,
among other things, products liability. The Company maintains such liability
insurance coverage for its operations as it deems reasonable. The Company does
not expect the effect of such matters to have a material adverse effect on the
financial condition of the Company.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Condition
In September 1999, the Company entered into a merger agreement with Level
Acquisition Corp., an indirect, wholly-owned subsidiary of Dyckerhoff AG
("Dyckerhoff"). This agreement provided for the acquisition of the Company by
Dyckerhoff and was completed in October 1999.
As of October 1, 1999, in accordance with Accounting Principles Board Opinion
No. 16, "Business Combinations", the Company recorded the acquisition by
Dyckerhoff as a purchase and the Company recorded its assets and liabilities at
fair value as of October 1, 1999. Accordingly, the Company's consolidated
financial statements for the periods prior to October 1, 1999 are not comparable
to consolidated financial statements presented on or subsequent to October 1,
1999. A black line has been drawn on the accompanying consolidated financial
statements to distinguish between the successor and predecessor companies.
During the first quarter of 2000, the Company borrowed $20.0 million under a
variable-rate term loan credit facility with banks. In June 2000, the Company
completed two debt offerings consisting of $350.0 million 9.25% bonds due in
2010 and $150.0 million 8.85% bonds due in 2005. The Company utilized the
proceeds of these offerings to repay $499.5 million of its variable-rate term
loan credit facility, including $439.5 million which was due in August 2000. At
September 30, 2000, total debt was $930.6 million consisting of the $500.0
million in fixed-rate bonds and $110.0 million under its variable-rate term loan
facility agreement. The term loan facility is payable in installments from 2001
through 2004. In addition, the Company has EUR 300.0 million 5.875% bearer bonds
due in November 2004. In order to avoid foreign currency risk, the Company has
entered into cross currency swap agreements fixing the Euro debt in the amount
of $320.6 million, with an average U.S. dollar interest rate of 7.84% for five
years. The Company believes that funds generated by operations and repayment of
funds advanced by the Company to Dyckerhoff AG will be adequate to cover current
working capital and capital expenditure needs.
Cash provided by operating activities of $32.9 million for the nine months ended
September 30, 2000 primarily reflects net income, adjusted to add back
depreciation and depletion, partly offset by changes in working capital.
During the nine months ended September 30, 2000, investing activities used $69.7
million, primarily representing $61.3 million for capital expenditures and $8.5
million in advances to
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<PAGE>
Kosmos Cement Company, a partnership in which the Company
owns a 25% interest.
Net cash inflows from financing activities of $46.9 million for the nine months
ended September 30, 2000 primarily reflect proceeds of $500.0 million from the
issuance of bonds, $20.0 million from additional borrowings under the
variable-rate term loan credit facility and $33.8 million of net receipts from
the parent and affiliates. These cash receipts were partially offset by cash
outlays of $499.5 million for the repayment of a portion of the variable-rate
term loan credit facility, $4.2 million for debt issuance costs related to the
$500.0 million bond offerings and $3.2 million paid for the purchase of warrants
and common stock.
At September 30, 2000, net working capital was $30.7 million. At December 31,
1999, current liabilities exceeded current assets by $414.7 million. Current
assets increased $38.8 million primarily due to higher short-term investments,
accounts receivable, marketable securities and inventory balances. Current
liabilities decreased $406.6 million primarily due to the refinancing of
short-term bank loans and a decrease in accounts payable.
Investments in joint ventures increased $11.1 million due to $8.5 million in
additional advances to Kosmos Cement Company and the Company's share of Kosmos'
equity earnings net of dividends received. Net property, plant and equipment
increased $26.7 million reflecting capital expenditures, partly offset by
depreciation and depletion expense.
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 8).
14
<PAGE>
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 third quarter and first
nine months of 2000 did not have a material effect on the financial condition,
results of operations or cash flows of the Company.
Year 2000
In 1999, the Company conducted a company-wide assessment of its computer systems
and operations to identify computer hardware, software and process control
systems that were not year 2000 compliant. Expenses have not been material, and
the Year 2000 issue has had no known effect on the Company to date. The Company
will continue to monitor its systems, suppliers and customers for any
unanticipated issues that have not yet manifested. Future costs are not expected
to be material.
Market Risk
The Company is exposed to various market risks, including foreign currency risk,
interest rate risk and credit risk. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign exchange rates
and interest rates, and changes in economic conditions. In order to manage and
reduce the impact of adverse market changes, the Company has entered into
certain derivative agreements. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The Company
regularly monitors its foreign currency, credit risk and interest rate
exposures.
Foreign exchange risk
The Company is exposed to foreign exchange rate risk associated with its
outstanding Eurobonds. At September 30, 2000, the value of the Euro against the
U.S. dollar was favorable to the Company. However, a 10% appreciation or 10%
depreciation of the U.S. dollar against the Euro could represent a material
impact on fair value, earnings or cash flows. In order to eliminate this foreign
exchange risk, the Company entered into cross currency swap agreements during
1999. At September 30, 2000, the Company held cross currency swap contracts of
EUR 300.0 million effectively fixing the Euro debt in the amount of $320.6
million with an average fixed interest rate of 7.84%.
Credit risk
The Company attempts to reduce its exposure to credit risk associated with
counter-parties by entering into derivative contracts with only major financial
institutions. At September
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30, 2000 the Company had no credit risk related to
these contracts as the value of the dollar against the Euro resulted in a
favorable position. However, the depreciation of the U.S. dollar against the
Euro in the future may have an unfavorable impact on earnings and cash flows in
the event of non-performance by the counter-party.
Interest rate risk
Interest rate changes would result in gains or losses in the fair value of debt
and other financing instruments held by the Company. Generally, the fair market
value of fixed interest rate debt will increase as the interest rates fall and
decrease as the interest rates rise. The estimated fair value of the Company's
$350.0 million and $150.0 million bonds at September 30, 2000 approximates the
carrying value due to their recent issue. The estimated fair value of the
Company's total Euro debt at September 30, 2000 would decrease approximately EUR
12.3 million or $10.8 million with a one percent increase in interest rates at
September 30, 2000. A one percent decrease in prevailing interest rates would
result in an increase in fair value of EUR 13.0 million, or $11.4 million. The
changes are based on currency rates at September 30, 2000. Fair values are based
on quoted market prices of similar issues of publicly traded debt.
During the first quarter of 2000, the Company entered into certain interest rate
hedging transactions. Due to the issuance of fixed-rate bonds in June 2000 these
derivative contracts were closed at fair market value. The net gain realized on
these instruments will be amortized over the life of the fixed-rate bonds.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes new
accounting and reporting standards for derivative financial instruments and for
hedging activities. The statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company does not expect adoption
of this statement to have a material effect on the Company's financial
statements.
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
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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 including difficulties relating
to the construction and installation of improvements to property, plant and
equipment, 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
As of October 1, 1999, the Company was acquired by Dyckerhoff and the
transaction was accounted for as a purchase. Operating results for the third
quarter and the first nine months of 2000 are comparable to the prior-year
period with the exception of certain purchase accounting adjustments. These
purchase accounting adjustments, which primarily relate to depreciation and
depletion expense and pension and postretirement benefits other than pension
expense, are addressed in the following discussion.
Consolidated net sales of $111.5 million and $286.5 million, respectively,
during the three and nine months ended September 30, 2000 were $1.4 million
lower and $4.9 million higher, respectively, than the comparable prior-year
results. Cement sales for the first nine months of 2000 were higher due to a 1%
increase in cement shipments and a 1% increase in net realized selling prices as
compared to the prior year. The increase in shipments is attributable to
continued strong demand for cement in the
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Company's major markets. For the third quarter, net realized selling prices and
shipments approximated 1999 levels.
Gross profit from the Company's cement and ready-mixed concrete operations of
$33.5 million and $77.6 million for the three and nine months ended September
30, 2000 were $11.5 million and $24.1 million, respectively, lower than the
comparable 1999 periods. The purchase accounting adjustments reduced gross
profit by $3.3 million and $9.1 million for the three and nine months ended
September 30, 2000, respectively. These adjustments primarily relate to
increased depreciation and depletion expense associated with the write-up of
fixed assets on October 1, 1999. Gross profit was also affected by higher
production costs due to the extended shutdown in the second and third quarters
of 2000 in connection with the plant expansion project at the Greencastle plant.
Included in the calculation of gross profit are sales less cost of sales
including depreciation and depletion related to cost of sales (which excludes
depreciation on office equipment, furniture and fixtures which are not related
to the cost of sales).
The Company's operations are seasonal and, consequently, the interim results are
not indicative of the results to be expected for the full year.
Pre-tax income from joint ventures of $1.6 million and $3.6 million during the
three and nine months ended September 30, 2000 reflects the results of the
Kosmos Cement Company, a partnership in which the Company has a 25% interest.
The results for the three months and nine months ended September 30, 2000 were
$1.4 million and $2.9 million, respectively, lower than the prior-year periods.
The decrease in joint venture income reflects lower operating margins during the
second and third quarters of 2000. This decrease was primarily due to
expansion-related outages at the Kosmos Cement Company's Louisville, Kentucky
plant.
Income from marketable securities received from insurance company for the three
and nine months ended September 30, 2000 includes the fair market value of
shares received as a policyholder in connection with the conversion of an
insurance company from a mutual company to a stock company.
Other income of $0.8 million and $2.9 million during the three and nine months
ended September 30, 2000 decreased $2.2 million and $3.6 million, respectively,
from the comparable 1999 periods. The decrease is due in part to lower interest
income earned on lower average short-term investment balances during both
periods. In addition, last year's results included $1.4 million for a bond
assessment rebate on a parcel of real estate.
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Selling, general and administrative expenses of $6.8 million and $20.7 million
during the three and nine months ended September 30, 2000 was $1.2 million and
$1.9 million higher than the comparable periods in 1999, primarily from higher
pension and other postretirement benefit expenses resulting from purchase
accounting adjustments.
Interest expense of $19.0 million and $51.2 million during the three and nine
months ended September 30, 2000 was $18.7 million and $49.6 million,
respectively higher than the prior-year periods. Capitalized interest was $1.5
million and $4.2 million, respectively, for the three and nine months ended
September 30, 2000 and $0.7 million and $1.3 million for the comparable
prior-year periods. The increase in interest expense is primarily due to higher
debt levels during the three and nine months ended September 30, 2000 compared
to 1999.
Income tax expense of $5.9 million and $6.6 million during the three and nine
months ended September 30, 2000, was $9.3 million and $25.2 million,
respectively, lower than the prior year due to lower pretax earnings.
Net income of $11.4 million during the third quarter of 2000 was $18.4 million
lower than the prior-year results. This decrease is due to higher interest
expense reflecting higher debt levels, purchase accounting adjustments primarily
consisting of higher depreciation and depletion expense, higher production
costs, lower other income, and lower joint venture income. These items were
partly offset by marketable securities received from insurance company and lower
income tax expense.
Net income of $12.8 million for the nine months ended September 30, 2000 was
$49.5 million lower than the prior-year results. This decrease is primarily due
to higher interest expense reflecting higher debt levels, purchase accounting
adjustments primarily consisting of higher depreciation and depletion expense,
higher production and repair and maintenance costs, lower other income and lower
joint venture income. These items were partially offset by higher cement sales,
marketable securities received from insurance company and lower income tax
expense.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 15 for disclosures about market risk.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits:
27 Financial Data Schedule.
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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 13, 2000 By: JOHN L. QUINLAN
--------------------
John L. Quinlan
Senior Vice President Finance
and Chief Financial Officer
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