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 June 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.)
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
The number of shares outstanding of each of the registrant's classes
of common stock as of July 31, 2000:
Common Stock, par value $.01 per share - 18,339,259 shares
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations - For the
Three and Six Months Ended June 30, 2000 and
1999 (Unaudited)......................................3
Consolidated Statements of Retained Earnings -
For the Three and Six Months Ended June 30, 2000
and 1999 (Unaudited)..................................4
Consolidated Balance Sheets - June 30, 2000
(Unaudited) and December 31, 1999.....................5
Consolidated Statements of Cash Flows - For the
Six Months Ended June 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
PART II. OTHER INFORMATION.......................................20
SIGNATURES.........................................................21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Successor Company | Predecessor Company
|
For the For the | For the For the
Three Six | Three Six
Months Months | Months Months
Ended Ended | Ended Ended
June 30, June 30, | June 30, June 30,
2000 2000 | 1999 1999
<S> <C> <C> <C> <C> <C>
Revenues: |
|
Net sales $103,323 $ 174,958 | $102,066 $168,729
Joint venture income 1,058 2,007 | 2,668 3,510
Other income, net 987 2,099 | 1,196 3,451
-------- -------- | -------- --------
105,368 179,064 | 105,930 175,690
-------- -------- | -------- --------
Deductions from revenues: |
Cost of sales 66,035 111,371 | 58,529 100,162
Selling, general and |
administrative expenses 6,924 13,915 | 6,344 13,131
Depreciation and depletion 10,053 19,524 | 5,981 12,034
Interest expense 16,900 32,183 | 542 1,269
-------- -------- | -------- --------
99,912 176,993 | 71,396 126,596
-------- -------- | -------- --------
Income before income |
taxes 5,456 2,071 | 34,534 49,094
Provision for income taxes (1,766) (670) | (11,655) (16,569)
-------- -------- | -------- --------
Net income applicable |
to common stock $ 3,690 $ 1,401 | $ 22,879 $ 32,525
======== ======== | ======== ========
Weighted average common |
shares outstanding: |
Basic 18,342 18,340 | 19,563 19,865
======== ======== | ======== ========
Diluted 18,457 18,466 | 24,013 24,353
======== ======== | ======== ========
Earnings per common share: |
Basic $ 0.20 $ 0.08 | $ 1.17 $ 1.64
======== ======== | ======== ========
Diluted $ 0.20 $ 0.08 | $ 0.95 $ 1.34
======== ======== | ======== ========
</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>
Successor Company | Predecessor Company
For the For the | For the For the
Three Six | Three Six
Months Months | Months Months
Ended Ended | Ended Ended
June 30, June 30, | June 30, June 30,
2000 2000 | 1999 1999
<S> <C> <C> <C>
Retained earnings, beginning |
of period $9,776 $12,065 | $261,302 $252,671
Net income 3,690 1,401 | 22,879 32,525
Dividends - - | (981) (1,996)
--------- ---------| --------- ---------
Retained earnings, end of |
period $13,466 $13,466 | $283,200 $283,200
========= =========| ========= =========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
LONE STAR INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Successor Company
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C> <C>
Assets:
Current assets:
Cash including cash equivalents of $6,402
and $594 $ 8,354 $ 787
Accounts and notes receivable, net 46,293 32,866
Inventories:
Finished goods 23,763 17,768
Work in process and raw materials 14,226 10,021
Supplies and fuel 26,096 26,374
-------- --------
64,085 54,163
Other current assets 2,810 2,491
-------- --------
Total current assets 121,542 90,307
Joint venture 71,373 62,616
Property, plant and equipment 1,808,619 1,761,734
Less accumulated depreciation and depletion 29,716 10,193
-------- --------
1,778,903 1,751,541
Receivable from Parent Company 6,001 59,340
Other assets and deferred charges 52,167 47,264
-------- --------
Total assets $2,029,986 $2,011,068
========== ==========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 13,559 $ 23,796
Accrued liabilities 60,541 59,693
Short-term bank loans - 419,450
Income taxes payable 2,523 2,101
-------- --------
Total current liabilities 76,623 505,040
Long-term debt 930,550 490,550
Postretirement benefits other than pensions 91,475 90,919
Deferred taxes 542,926 542,926
Payable to affiliated companies 40,997 36,079
Other liabilities 33,949 33,489
Contingencies (See notes 7 and 8)
-------- --------
Total liabilities 1,716,520 1,699,003
Shareholders' Equity:
Common stock 183 183
Additional paid-in capital 299,817 299,817
Retained earnings 13,466 12,065
-------- --------
Total shareholders' equity 313,466 312,065
Total liabilities and shareholders' ---------- -----------
equity $2,029,986 $ 2,011,068
========== ===========
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of the Financial Statements.
LONE STAR INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Successor Company| Predecessor Company
For the Six | For the Six
Months Ended | Months Ended
June 30, 2000 | June 30, 1999
|
<S> <C> <C>
Cash Flow from Operating Activities: |
Net income $ 1,401 | $ 32,525
Adjustments to arrive at net cash |
(used) provided by operating activities: |
Depreciation and depletion 19,524 | 12,034
Deferred income taxes - | 6,750
Changes in operating assets and |
liabilities: |
Accounts and notes receivable (13,170) | (13,349)
Inventories and other current |
assets (10,042) | (4,611)
Accounts payable and |
accrued liabilities (2,586) | (5,263)
Joint venture income, net of dividends |
received (1,007) | (1,260)
Other, net 780 | (2,442)
-------- | --------
Net cash (used) provided by operating |
activities (5,100) | 24,384
|
Cash Flows from Investing Activities: |
|
Capital expenditures (51,440) | (30,379)
Advances to joint venture (7,750) | (4,000)
Proceeds from sales of assets 111 | 222
-------- | --------
Net cash used by investing |
activities (59,079) | (34,157)
|
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 cost (4,204) | -
Net repayment of intercompany advances 57,249 | -
Proceeds from exercise of warrants 86 | 3,014
Purchase of warrants and common stock (1,935) | (1,260)
Purchase of treasury stock - | (31,762)
Dividends paid - | (1,996)
Proceeds from exercise of options - | 23
-------- | --------
Net cash provided (used) by financing 71,746 | (31,981)
activities -------- | --------
Net increase (decrease) in cash and cash |
equivalents 7,567 | (41,754)
|
Cash and cash equivalents, beginning of period 787 | 120,161
-------- | --------
Cash and cash equivalents, end of period $ 8,354 | $ 78,407
======== | ========
</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 June 30, 2000, and the results of operations for the
three and six months ended June 30, 2000 and 1999 and the cash flows for
the six months ended June 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 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, 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 six months of 2000, the Company purchased 23,242 warrants
for $1,889,000 and 924 shares of common stock for $46,000.
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 six months ended June 30,
2000 and 1999 was $33,427,000 and $1,859,000, respectively. Income taxes paid
during the six months ended June 30, 2000 and 1999 were $228,000 and
$7,057,000, respectively.
Note 4 - Interest
Interest expense of $18,262,000, $34,832,000, $945,000 and $1,890,000 has
been accrued during the three and six months ended June 30, 2000 and 1999.
Interest capitalized during the three and six months ended June 30, 2000 and
1999 was $1,362,000 and $2,649,000, $403,000 and $621,000, respectively.
Note 5 - Earnings Per Share
Basic earnings per common share for the three and six months ended June 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 six months ended June 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
Ended June 30,
-----------------------
2000 1999
---------- ------------
Weighted average common shares 18,342,410 19,563,056
Effect of dilutive securities:
Warrants 114,410 4,233,532
Options to purchase common stock - 216,645
Adjusted weighted ---------- ----------
average common shares 18,456,820 24,013,233
========== ==========
For the Six Months
Ended June 30,
--------------------------
2000 1999
Weighted average common shares 18,340,471 19,864,995
Effect of dilutive securities:
Warrants 125,642 4,272,535
Options to purchase common stock - 215,344
---------- ----------
Adjusted weighted
average common shares 18,466,113 24,352,874
========== ==========
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 - Debt
During the first quarter of 2000, the Company borrowed an additional
$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 will be 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.
At June 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% for five years.
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. The Company's existing $100,000,000
unsecured revolving credit facility was cancelled.
Note 7 - 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.
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 recently proposed regulations imposing controls on
the management, handling and disposal of cement kiln dust ("CKD"), a by-
product of cement manufacturing. These rules are currently being reviewed
by the Company and are expected to be implemented over a three-year period
following promulgation. 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-
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"). 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 will be required again
after the Company's expansion of the Greencastle plant later this year.
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").
Note 8 - 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.
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 an
additional $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 June 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 used from operating activities of $5.1 million for the
six months ended June 30, 2000 primarily reflects changes in
working capital, partly offset by net income.
During the six months ended June 30, 2000, investing
activities used $59.1 million, primarily representing $51.4
million for capital expenditures and a $7.8 million advance to
Kosmos Cement Company, a partnership in which the Company owns a
25% interest.
Net cash inflows from financing activities of $71.7 million
for the six months ended June 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 $57.2 million received from the parent for repayment
of advances. 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
$1.9 million paid for the purchase of warrants and common stock.
At June 30, 2000, net working capital was $44.9 million. At
December 31, 1999, current liabilities exceeded current assets by
$414.7 million. Current assets increased $31.2 million primarily
due to higher short-term investments, accounts receivable and
inventory balances. Current liabilities decreased $428.4 million
due to the refinancing of short-term bank loans and a decrease in
accounts payable.
Investments in joint ventures increased $8.8 million due to a
$7.8 million advance to Kosmos Cement Company and the Company's
share of Kosmos' equity earnings net of dividends received. Net
property, plant and equipment increased $27.4 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 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 second quarter and first six months of 2000
did not have a material effect on the financial condition 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 June 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 June 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% for five years.
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 June 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 June 30, 2000
approximates the carrying value due to their recent issue. The
estimated fair value of the Company's total Euro debt at June 30,
2000 would decrease approximately EUR 12.3 million or $11.7
million with a one percent increase in interest rates at June 30,
2000. A one percent decrease in prevailing interest rates would
result in an increase in fair value of EUR 13.0 million, or $12.3
million. The changes are based on currency rates at June 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
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 second quarter and the first six 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, pension and postretirement benefits other than pension
expense, are addressed in the following discussion.
Consolidated, net sales of $103.3 million and $175.0 million,
respectively, during the three and six months ended June 30, 2000
were $1.3 million and $6.2 million, respectively, higher than the
comparable prior-year results. Cement sales for the first six
months of 2000 were higher due to a 2% 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
Company's major markets. For the second quarter, net realized
selling prices increased approximately 1% compared to the prior-
year period and shipments approximated 1999 levels.
Gross profit from the Company's cement and ready-mixed
concrete operations of $27.3 million and $44.1 million for the
three and six months ended June 30, 2000 were $10.4 million and
$12.6 million, respectively, lower than the comparable 1999
periods. The purchase accounting adjustments reduced gross profit
by $3.1 million and $5.8 million for the three and six months
ended June 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 quarter 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 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 $1.1 million and $2.0
million during the three and six months ended June 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 six months ended June 30, 2000 were $1.6 million
and $1.5 million, respectively, lower than the prior-year period.
The decrease in joint venture income reflects lower operating
margins during the second quarter of 2000. This decrease was
primarily due to expansion-related outages at the Kosmos Cement
Company's Louisville, Kentucky plant.
Other income of $1.0 million and $2.1 million during the
three and six months ended June 30, 2000 decreased $0.2 million
and $1.4 million, respectively, from the comparable 1999 periods.
The decrease is due in part to lower interest income earned on
lower short-term investment balances during both periods. In
addition, last year's results included $0.4 million of income from
litigation settlements.
Selling, general and administrative expenses of $6.9 million
and $13.9 million during the three and six months ended June 30,
2000 was $0.6 million and $0.8 million, respectively, higher than
the comparable periods in 1999, primarily reflecting purchase
accounting adjustments related to higher pension and other
postretirement benefit expenses.
Interest expense of $16.9 million and $32.2 million during
the three and six months ended June 30, 2000 was $16.4 million and
$30.9 million, respectively higher than the prior-year period
expense. Capitalized interest was $1.4 million and $2.6 million,
respectively, for the three and six months ended June 30, 2000 and
$0.4 million and $0.6 million for the comparable prior-year
periods. The increase in interest expense is due to higher debt
levels during the three and six months ended June 30, 2000
compared to 1999.
Income tax expense of $1.8 million and $0.7 million during
the three and six months ended June 30, 2000, was $9.9 million and
$15.9 million, respectively, lower than the prior year due to
lower pretax earnings.
Net income of $3.7 million during the second quarter of 2000
was $19.2 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 higher cement sales and lower income tax expense.
Net income of $1.4 million for the six months ended June 30,
2000 was $31.1 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 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of Exhibits:
4.1 $350 Million Note offered under Rule 144A, dated June 5, 2000.
4.2 $350 Million Note offered under Regulation S, dated June 5,
2000.
10.1 $350 Million Fiscal and Paying Agency Agreement.
27 Financial Data Schedule.
The Company agrees to furnish to the Commission, upon request, any
instrument with respect to its $150 million offering of 8.85% notes
due 2005 (which offering has not been registered) and further notes
that the total amount of securities authorized in the offering does
not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis.
SIGNATURE
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: August 11, 2000 By: /s/ JOHN L. QUINLAN
John L. Quinlan
Senior Vice President Finance
and Chief Financial Officer
