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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended JUNE 30, 1995
COMMISSION FILE NUMBER: 0-14404
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
75-2085454
5501 LBJ FREEWAY, SUITE 1200
DALLAS, TEXAS 75240
214/386-3981
Indicate by a 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share
Outstanding at July 17, 1995: 20,423,810
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LONE STAR TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
------------------------------
Page
----
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Cash Flows ............................. 3
Consolidated Statements of Earnings ............................... 4
Consolidated Balance Sheets ....................................... 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ................................ 7
Results of Operations ............................................. 7
Financial Condition ............................................... 8
PART II - OTHER INFORMATION
---------------------------
Item 5. OTHER INFORMATION ................................................... 9
Item 6. REPORTS ON FORM 8-K ................................................. 9
In the opinion of management, the unaudited consolidated financial statements
include all adjustments (consisting of only normal, recurring adjustments)
necessary to present fairly the financial position as of June 30, 1995, and the
cash flows and the results of operations for the three months and six months
ended June 30, 1995 and 1994. Unaudited financial statements are prepared on a
basis consistent with those audited for the year ended December 31, 1994. The
results of operations for the interim periods presented may not be indicative of
total results for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission.
However, management believes that the disclosures contained herein are adequate
to make the information presented not misleading. The unaudited financial
statements should be read in conjunction with the audited financial statements
and accompanying notes in Lone Star Technologies, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1994.
2
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
------- ------- ------- -------
Cash flows from operating activities:
Net earnings (loss) $ 2.2 $ (2.6) $ 3.7 $ (5.2)
Minority interest in Steel 0.4 (0.6) 0.6 (1.2)
Depreciation and amortization 2.8 2.9 5.6 5.7
Accounts receivable (4.9) 6.1 3.5 2.3
Inventories 1.5 5.8 (10.8) 7.9
Accounts payable and accrued liabilities (7.7) (5.4) (3.8) (12.7)
Other assets and liabilities (4.0) (0.7) (4.2) (1.0)
----- ------ ------ ------
Total cash flows from operating activities (9.7) 5.5 (5.4) (4.2)
----- ------ ------ ------
Cash flows from investing activities:
Capital expenditures (2.6) (1.1) (6.2) (2.4)
Short-term investments (0.2) - (4.8) -
----- ------ ------ ------
Total cash flows from investing activities (2.8) (1.1) (11.0) (2.4)
----- ------ ------ ------
Cash flows from financing activities:
Net change in borrowings under revolving
credit agreement 10.3 (13.4) 10.5 (1.2)
Redemption of preferred stock - - - (51.7)
Installment note repayment (0.3) (0.2) (0.6) (0.5)
Minority interest contribution 0.2 - 0.6 -
Stock issuance 0.1 - 0.1 0.1
----- ------ ------ ------
Total cash flows from financing activities 10.3 (13.6) 10.6 (53.3)
----- ------ ------ ------
Increase (decrease) in cash and equivalents (2.2) (9.2) (5.8) (59.9)
Beginning cash and equivalents 38.2 89.7 41.8 140.4
----- ------ ------ ------
Ending cash and equivalents $36.0 $ 80.5 $ 36.0 $ 80.5
===== ====== ====== ======
See accompanying notes.
3
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; in millions, except share data)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
------- ------- -------- --------
Net revenues $101.0 $ 84.8 $ 198.0 $ 165.9
Cost of goods sold (94.1) (82.8) (185.1) (162.3)
------ ------ ------- -------
Gross earnings 6.9 2.0 12.9 3.6
Selling, general and administrative
expenses (3.7) (4.1) (7.3) (8.0)
------ ------ ------- -------
Operating earnings (loss) 3.2 (2.1) 5.6 (4.4)
Interest income 1.4 0.9 2.8 2.0
Interest expense (2.2) (2.1) (4.3) (4.1)
Other income 0.2 0.1 0.2 0.1
Minority interest in Steel (0.4) 0.6 (0.6) 1.2
------ ------ ------- -------
Earnings (loss) before income tax 2.2 (2.6) 3.7 (5.2)
Income tax - - - -
------ ------ ------- -------
Net earnings (loss) 2.2 (2.6) 3.7 (5.2)
====== ====== ======= =======
Per common share:
Net earnings (loss) 0.11 (0.13) 0.18 (0.26)
Adjustment for redemption of
Preferred stock - - - (0.10)
------ ------ ------- -------
Net earnings (loss) available
to common shareholders $ 0.11 $(0.13) $ 0.18 $ (0.36)
====== ====== ======= =======
See accompanying notes.
4
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions)
June 30, 1995 December 31, 1994
------------- -----------------
ASSETS
Current assets:
Cash and equivalents $ 36.0 $ 41.8
Short-term investments 45.8 41.0
Accounts receivable, net 51.4 54.9
Inventories, net 52.2 41.4
Other current assets 5.3 1.7
------ ------
Total current assets 190.7 180.8
Property, plant and equipment, net 131.3 130.7
Other noncurrent assets 34.2 34.2
------ ------
Total assets $356.2 $345.7
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 30.4 $ 31.2
Accrued liabilities 18.0 21.0
Current portion of long-term debt 50.8 1.2
------ ------
Total current liabilities 99.2 53.4
Long-term debt 50.9 90.6
Other noncurrent liabilities 91.2 91.8
Minority interest in Steel 15.1 13.8
------ ------
Total liabilities 256.4 249.6
------ ------
Total shareholders' equity 99.8 96.1
------ ------
Total liabilities and shareholders' equity $356.2 $345.7
====== ======
See accompanying notes.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
NOTE 1 - LONE STAR STEEL ("STEEL") LOAN AGREEMENTS
Steel, Lone Star Technologies, Inc.'s ("LST") operating subsidiary, has a
revolving credit agreement under which it can borrow the lesser of $65.0 million
or an amount based upon eligible accounts receivable and inventories which
secure the borrowings. At June 30, 1995, borrowings totaled $49.5 million on an
available borrowing base of $64.6 million. The interest rate on borrowings was
prime plus 1.75 percent which, at quarter end, was 10.75 percent. Steel also
pays a fee of 0.5 percent on the unused portion of the credit facility. The
three-year agreement, entered into in March, 1993, contains various restrictive
covenants, including requirements to maintain certain financial ratios. It will
expire within twelve months; therefore, the borrowings are classified as current
liabilities and are included in "current portion of long-term debt." Steel
intends to negotiate a new loan agreement prior to expiration of the current
agreement.
NOTE 2 - STEEL PREFERRED STOCK
In November, 1994, LST and certain minority shareholders of Steel agreed to fund
up to $23 million for a capital expenditure program. The program began in
January, 1995, and is scheduled to be completed in mid-1996. Steel issues 6
percent cumulative convertible preferred stock to its participating shareholders
as funds are advanced to finance the program. LST advanced $2.4 million in the
second quarter and $3.2 million year to date for its 89.753 percent
participation in the program. Minority shareholders advanced $0.3 million and
$0.7 million, respectively.
The Steel preferred stock issued to LST and the other participating shareholders
has a designated value equal to the amount of the funds advanced, pays quarterly
dividends on that value, and requires its mandatory redemption by Steel, unless
earlier redeemed or converted, on January 3, 2002, in cash, at the designated
value plus any unpaid dividends. Prior to redemption of the stock, dividends
may be paid in cash, although currently prohibited by the terms of the revolving
credit agreement, or in additional preferred shares. The stock is convertible
into Steel common stock prior to redemption at the rate of one share of common
stock for each $10,000 of designated value (subject to anti-dilution
provisions).
NOTE 3 - EARNINGS PER SHARE
The computation of primary earnings per share is based on the weighted average
number of shares of common stock and common stock equivalents, including
exercisable stock options assumed to be outstanding during the second quarter
and first six months of 1995 and 1994. The numbers of shares used in the share
calculations for the three months ended June 30, 1995 and 1994, respectively,
were 20.5 million and 20.4 million, and for the six months ended June 30, 1995
and 1994, were 20.5 million and 20.4 million, respectively. The effect of
potentially dilutive shares on fully diluted earnings per share was either
antidilutive or not significant for all periods.
NOTE 4 - MARKETABLE DEBT SECURITIES
LST's cash equivalents include U. S. Government debt obligations and corporate
debt obligations rated A-1/P-1 or higher with original maturities of less than
90 days. Short-term investments consist of U. S. Government debt obligations
with original maturities of up to one year. Both are classified as held-to-
maturity because LST has the intent and ability to hold them to maturity. At
June 30, 1995, LST's carrying amounts of cash equivalents and short-term
investments approximated market value. At June 30, 1995, investments in debt
securities at amortized cost consisted of $74.5 million in U. S. Government debt
obligations and $6.3 million in corporate debt obligations.
6
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NOTE 5 - INVENTORIES
At June 30, 1995, inventories totaled $106.3 million before LIFO reserves and
were composed of finished goods, $40.5 million; work in process, $37.1 million;
and, raw materials and supplies, $28.7 million. Net of LIFO reserves of $43.9
million, inventories were $62.4 million, of which $10.2 million (consisting of
supplies and spare parts) were classified as noncurrent assets.
NOTE 6 - REDEMPTION OF LST PREFERRED STOCK
In February, 1994, LST paid $51.7 million to redeem its Series A preferred stock
which was recorded on the books at $49.6 million, and to extinguish the $18.8
million in related dividend obligations. Earnings per share in the first
quarter of 1994 were adjusted downward by $0.10 to reflect the $2.1 million
difference between the amount paid and the carrying amount of the preferred
stock.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
As a steel facility, Steel's operations are subject to numerous environmental
laws. The three major areas of regulation are air quality, water quality, and
solid and hazardous waste management. The primary governmental oversight
agencies include the Texas Natural Resource Conservation Commission and the
Environmental Protection Agency. Steel has agreements with these agencies to
conduct numerous environmental studies and to develop plans to ensure continuous
compliance with applicable laws and regulations. Steel believes that costs of
maintaining compliance with environmental requirements will fall within
contemplated operating and capital expenditure plans.
NOTE 8 - INCOME TAXES
LST has federal tax net operating loss carryforwards of approximately $271
million; therefore, no provision for tax on current earnings has been
recognized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- ------- -----------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Steel serves two business segments: oilfield products and services, comprised
of casing, tubing, and line pipe, are manufactured and marketed globally to the
oil and gas drilling industry; and, industrial products consist of specialty
tubing and flat rolled steel which are provided to general industrial markets.
RESULTS OF OPERATIONS
Second quarter 1995 revenues totaled $101.0 million of which oilfield products
and services contributed $56.8 million and industrial products $44.2 million.
Overall, the 19 percent revenue improvement was attributable to an increase of
10 percent in oilfield products due to price and a 34 percent increase in
industrial products due primarily to higher volume.
Year to date, 1995 revenues of $198.0 million were 19 percent higher than the
comparable 1994 six-month period, and were comprised of oilfield products and
services revenues of $114.6 million, a 14 percent increase, and industrial
products revenues of $83.4 million, which increased 28 percent.
Operating earnings in the second quarter and first half of 1995 were $3.2
million and $5.6 million, respectively. In the corresponding 1994 periods,
operating losses were $2.1 million and $4.4 million. In 1995, second quarter
and first half net earnings of $2.2 million, or $0.11 per share, and $3.7
million, or $0.18 per share, respectively, compare to net losses of $2.6
million,
7
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or $0.13 per share, and $5.2 million, or $0.36 per share, in the same 1994
periods. No provision for income tax has been recognized due to the existence
of net operating loss carryforwards.
Interest income increased in both 1995 periods compared to last year due to
higher interest rates.
Interest expense was unchanged from the prior year as higher rates offset lower
borrowings. Minority interest in Steel reflects participation in Steel's net
earnings or losses.
FINANCIAL CONDITION
LST has no direct business operations other than Steel or significant sources of
cash other than from temporary investments or the sale of securities. Steel is
restricted from paying dividends under the terms of its revolving credit
agreement; however, LST is reimbursed by Steel for a portion of its operating
costs as provided under the terms of a cost sharing agreement.
In November, 1994, LST and certain minority shareholders of Steel agreed to fund
up to $23 million for a capital expenditure program. The program began in
January, 1995, and is scheduled to be completed in mid-1996. Steel issues 6
percent cumulative convertible preferred stock to its participating shareholders
as funds are advanced to finance the program. LST advanced $2.4 million in the
second quarter and $3.2 million year to date for its 89.753 percent
participation in the program. Minority shareholders advanced $0.3 million and
$0.7 million, respectively.
The Steel preferred stock issued to LST and the other participating shareholders
has a designated value equal to the amount of the funds advanced, pays quarterly
dividends on that value, and requires its mandatory redemption by Steel, unless
earlier redeemed or converted, on January 3, 2002, in cash, at the designated
value plus any unpaid dividends. Prior to redemption of the stock, dividends
may be paid in cash, although currently prohibited by the terms of the revolving
credit agreement, or in additional preferred shares. The stock is convertible
into Steel common stock prior to redemption at the rate of one share of common
stock for each $10,000 of designated value (subject to anti-dilution
provisions).
LST periodically purchases steel slabs which are consigned to Steel to be used
in its production of tubular products. Steel pays LST as the slabs are used or
within ninety days, whichever occurs first. This program's structure is
consistent with those previously established with third parties. In the second
quarter of 1995, LST's slab purchases amounted to approximately $20.4 million.
Intercompany transactions related to advances for the capital expenditure
program and the slab consignment program are eliminated in consolidation.
At June 30, 1995, LST had available cash and short-term investments of $81.8
million. Cash requirements for LST as a holding company include a minimal level
of general and administrative expenses and annual interest payments of $4.0
million on the outstanding $50 million convertible subordinated debentures due
2002.
Steel requires cash primarily to fund general working capital needs and capital
expenditures. Sources of funds include borrowings, cash generated by
operations, and equity financing. In the quarter ended June 30, 1995, capital
expenditures amounted to $2.6 million and depreciation amounted to $2.8 million.
For the first half of 1995, capital expenditures were $6.2 million and
depreciation was $5.6 million.
8
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Steel has a revolving credit agreement under which it can borrow the lesser of
$65.0 million or an amount based upon eligible accounts receivable and
inventories which secure the borrowings. At June 30, 1995, borrowings totaled
$49.5 million on an available borrowing base of $64.6 million. The interest
rate on borrowings was prime plus 1.75 percent which, at quarter end, was 10.75
percent. Steel also pays a fee of 0.5 percent on the unused portion of the
credit facility. The three-year agreement, entered into in March, 1993,
contains various restrictive covenants, including requirements to maintain
certain financial ratios. It will expire within twelve months; therefore, the
borrowings are classified as current liabilities and are included in "current
portion of long-term debt." Steel intends to negotiate a new loan agreement
prior to expiration of the current agreement.
As a steel facility, Steel's operations are subject to numerous environmental
laws. The three major areas of regulation are air quality, water quality, and
solid and hazardous waste management. Steel believes that costs of maintaining
compliance with environmental requirements will fall within contemplated
operating and capital expenditure plans.
Steel believes that funds generated by operations, its borrowing capacity under
the revolving credit agreement, and capital contributions from its shareholders
will provide the liquidity necessary to fund its cash requirements in 1995.
Adequate liquidity in the longer term is dependent on a recovery in the energy
sector and/or Steel's ability to obtain raw materials at lower cost which will
be necessary for Steel to achieve a meaningful improvement in profitability.
PART II. - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) Exhibits: No. 27 Financial Data Schedule
(b) Reports on Form 8-K: none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LONE STAR TECHNOLOGIES, INC.
By: /s/ Judith A. Murrell
-------------------------------------
(Judith A. Murrell)
Vice President - Corporate Relations,
Dated: July 19, 1995 Principal Accounting Officer, and Treasurer
9
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