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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 SEPTEMBER 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 October 16, 1995: 20,508,200
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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 September 30, 1995, and
the cash flows and the results of operations for the three months and nine
months ended September 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)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 3.6 $ (1.3) $ 7.3 $ (6.5)
Minority interest in Steel 0.6 (0.3) 1.2 (1.5)
Depreciation and amortization 2.9 2.9 8.5 8.6
Gain on sale of assets (3.0) (1.6) (3.0) (1.6)
Accounts receivable (10.5) (2.2) (7.0) 0.1
Inventories (5.6) 6.9 (16.4) 14.8
Accounts payable and accrued liabilities 6.0 2.2 2.2 (10.5)
Other assets and liabilities - (1.3) (4.2) (2.3)
------ ------ ------ ------
Total cash flows from operating activities (6.0) 5.3 (11.4) 1.1
------ ------ ------ ------
Cash flows from investing activities:
Capital expenditures (3.1) (2.0) (9.3) (4.4)
Short-term investments 1.0 (38.0) (3.8) (38.0)
Proceeds from sale of assets 4.4 1.6 4.4 1.6
------ ------ ------ ------
Total cash flows from investing activities 2.3 (38.4) (8.7) (40.8)
------ ------ ------ ------
Cash flows from financing activities:
Net change in borrowings under revolving
credit agreement 3.0 (6.0) 13.5 (7.2)
Redemption of preferred stock - - - (51.7)
Installment note repayment (0.3) (0.3) (0.9) (0.8)
Minority interest contribution 0.1 - 0.7 0.1
Stock issuance 0.6 - 0.7 -
------ ------ ------ ------
Total cash flows from financing activities 3.4 (6.3) 14.0 (59.6)
------ ------ ------ ------
Increase (decrease) in cash and equivalents (0.3) (39.4) (6.1) (99.3)
Beginning cash and equivalents 36.0 80.5 41.8 140.4
------ ------ ------ ------
Ending cash and equivalents $ 35.7 $ 41.1 $ 35.7 $ 41.1
====== ====== ====== ======
</TABLE>
3
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; in millions, except share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 111.8 $ 89.2 $ 309.8 $ 255.1
Cost of goods sold (105.5) (87.9) (290.6) (250.2)
------- ------ ------- -------
Gross earnings 6.3 1.3 19.2 4.9
Selling, general and administrative expenses (3.6) (4.0) (10.9) (12.0)
------- ------ ------- -------
Operating earnings (loss) 2.7 (2.7) 8.3 (7.1)
Interest income 1.6 1.2 4.4 3.2
Interest expense (2.3) (2.0) (6.6) (6.1)
Other income, net 2.2 1.9 2.4 2.0
Minority interest in Steel (0.6) 0.3 (1.2) 1.5
------- ------ ------- -------
Earnings (loss) before income tax 3.6 (1.3) 7.3 (6.5)
Income tax - - - -
------- ------ ------- -------
Net earnings (loss) 3.6 (1.3) 7.3 (6.5)
======= ====== ======= =======
Per common share:
Net earnings (loss) 0.17 (0.06) 0.35 (0.32)
Adjustment for redemption of Preferred stock - - - (0.10)
------- ------ ------- -------
Net earnings (loss) available
to common shareholders $ 0.17 $(0.06) $ 0.35 $ (0.42)
======= ====== ======= =======
</TABLE>
4
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 35.7 $ 41.8
Short-term investments 44.8 41.0
Accounts receivable, net 61.9 54.9
Inventories, net 57.8 41.4
Other current assets 4.8 1.7
------ ------
Total current assets 205.0 180.8
Property, plant and equipment, net 130.1 130.7
Other noncurrent assets 34.2 34.2
------ ------
Total assets $369.3 $345.7
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $ 34.7 $ 31.2
Accrued liabilities 19.7 21.0
Current portion of long-term debt 1.3 1.2
------ ------
Total current liabilities 55.7 53.4
Long-term debt 103.1 90.6
Other noncurrent liabilities 90.8 91.8
Minority interest in Steel 15.7 13.8
------ ------
Total liabilities 265.3 249.6
------ ------
Total shareholders' equity 104.0 96.1
------ ------
Total liabilities and shareholders' equity $369.3 $345.7
====== ======
</TABLE>
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 September 30, 1995, borrowings totaled $52.5 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 agreement contains various restrictive covenants, including
requirements to maintain certain financial ratios.
The agreement was recently extended to March, 1999, and effective October 1, the
borrowing base was increased to $70.0 million and the interest rate reduced one
percentage point to prime plus 0.75 percent.
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. In September, 1995, an
additional $5 million was offered to Steel's shareholders. The two-year program
began in January, 1995. LST advanced $0.3 million in the third quarter and $5.8
million year to date.
Steel issues 6 percent cumulative convertible preferred stock to its
participating shareholders as funds are advanced. The stock 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. Through September 30, 1995, 66.7
shares of preferred stock have been issued. 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).
Intercompany transactions are eliminated in consolidation.
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 stock
options outstanding during the third quarter and first nine months of 1995 and
1994. The numbers of shares used in the share calculations for the three months
ended September 30, 1995 and 1994, respectively, were 20.7 million and 20.4
million, and for the nine months ended September 30, 1995 and 1994, were 20.6
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
September 30, 1995, LST's carrying amounts of cash equivalents and short-term
investments approximated market value. At September 30, 1995, investments in
debt securities at amortized cost consisted of $74.3 million in U. S. Government
debt obligations and $1.2 million in corporate debt obligations.
6
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NOTE 5 - INVENTORIES
At September 30, 1995, inventories totaled $111.9 million before LIFO reserves
and were composed of finished goods, $36.1 million; work in process, $47.0
million; and, raw materials and supplies, $28.8 million. Net of LIFO reserves
of $43.9 million, inventories were $68.0 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
-------------------
LST is a holding company whose operating subsidiary, 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
Third quarter 1995 revenues totaled $111.8 million with oilfield products and
services contributing $71.6 million and industrial products $40.2 million. The
25.4 percent revenue improvement was attributable to an increase of 35.3 percent
in oilfield products due primarily to higher unit volume together with a modest
uptick in sales price, and a 10.8 percent increase in industrial products due to
improved price and volume of specialty tubing products which more than offset a
decline in flat rolled shipments.
Operating earnings in the current quarter were $2.7 million compared to
operating losses of $2.7 million last year. Higher rates this year resulted in
increased interest income as well as interest expense compared to the third
quarter of 1994. Other income is created by the sale of non-strategic assets
and increased $0.3 million from 1994.
Net earnings in the 1995 third quarter were $3.6 million, or $0.17 per share,
compared to net losses of $1.3 million, or $0.06 per share, in the same 1994
period.
7
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Year to date, 1995 revenues increased 21.4 percent over the first nine months of
1994 to $309.8 million. Oilfield products and services contributed $186.2
million and industrial products $123.6 million.
Operating earnings were $8.3 million year to date, compared to operating losses
of $7.1 million last year, and net earnings were $7.3 million, or $0.35 per
share, versus net losses of $6.5 million, or $0.42 per share, in the
corresponding period of 1994.
No provision for income tax has been recognized in any of the periods presented
due to the existence of net operating loss carryforwards.
FINANCIAL CONDITION
LST has no 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. In September, 1995, an
additional $5 million was offered to Steel's shareholders. The two-year program
began in January, 1995. LST advanced $0.3 million in the third quarter and $5.8
million year to date.
Steel issues 6 percent cumulative convertible preferred stock to its
participating shareholders as funds are advanced. The stock 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. Through September 30, 1995, 66.7
shares of preferred stock have been issued. 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. At September
30, 1995, slabs owned by LST amounted to approximately $10 million.
At September 30, 1995, LST had available cash and short-term investments of
$80.5 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 and in the nine months year-
to-date ended September 30, 1995, cash provided from operations, before working
capital, amounted to $7.1 million and $17.0 million, respectively. Capital
expenditures in the third quarter and first nine months amounted to $3.1 million
and $9.3 million, respectively.
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
8
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borrowings. At September 30, 1995, borrowings totaled $52.5 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
agreement contains various restrictive covenants, including requirements to
maintain certain financial ratios.
The agreement was recently extended to March, 1999, and effective October 1, the
borrowing base was increased to $70.0 million and the interest rate reduced one
percentage point to prime plus 0.75 percent.
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 modified revolving credit agreement, and capital contributions from its
shareholders will provide the liquidity necessary to fund its cash requirements
through 1996. 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
- ------- -----------------
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,
Principal Accounting Officer, and
Dated: October 19, 1995 Treasurer
9
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 36
<SECURITIES> 45
<RECEIVABLES> 64
<ALLOWANCES> 2
<INVENTORY> 58
<CURRENT-ASSETS> 205
<PP&E> 289
<DEPRECIATION> 159
<TOTAL-ASSETS> 369
<CURRENT-LIABILITIES> 56
<BONDS> 50
<COMMON> 104
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 369
<SALES> 310
<TOTAL-REVENUES> 310
<CGS> 291
<TOTAL-COSTS> 302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 7
<INCOME-TAX> 0
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<CHANGES> 0
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<EPS-PRIMARY> 0.35
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</TABLE>
