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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, 1996
COMMISSION FILE NUMBER: 0-14404
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
5501 LBJ FREEWAY, SUITE 1200
DALLAS, TEXAS 75240
972/386-3981
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
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As of October 15, 1996, the number of shares of Common Stock outstanding at
$1.00 par value per share was 20,625,835.
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LONE STAR TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Earnings . . . . . . . . . . . . . . 3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . 7
Results of Operations . . . . . . . . . . . . . . . . . . . . . 7
Financial Condition and Liquidity . . . . . . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . 8
Item 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 6. REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 8
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, 1996 and
the cash flows and the results of operations for the three months and nine
months ended September 30, 1996 and 1995. Unaudited financial statements are
prepared on a basis substantially consistent with those audited for the year
ended December 31, 1995. 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,
1995.
2
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED; IN MILLIONS, EXCEPT SHARE DATA)
FOR THE
FOR THE QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1996 1995 1996 1995
------- ------- ------- --------
Net revenues $ 143.0 $ 111.8 $ 397.4 $ 309.8
Cost of goods sold (130.1) (105.5) (364.0) (290.6)
------- ------- ------- -------
Gross earnings 12.9 6.3 33.4 19.2
Selling, general and
administrative expenses (4.2) (3.6) (11.9) (10.9)
------- ------- ------- -------
Operating earnings 8.7 2.7 21.5 8.3
Interest income 1.2 1.6 3.4 4.4
Interest expense (1.6) (2.3) (5.0) (6.6)
Minority interest in Steel (0.9) (0.6) (2.5) (1.2)
Other income 0.2 2.2 (0.1) 2.4
------- ------- ------- -------
Earnings before income tax 7.6 3.6 17.3 7.3
Income tax (0.4) - (0.4) -
------- ------- ------- -------
NET EARNINGS $ 7.2 $ 3.6 $ 16.9 $ 7.3
------- ------- ------- -------
------- ------- ------- -------
Per common share:
NET EARNINGS AVAILABLE TO
COMMON SHAREHOLDERS $ 0.34 $ 0.17 $ 0.81 $ 0.35
------- ------- ------- -------
------- ------- ------- -------
See accompanying notes.
3
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1996 1995
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1.2 $ 40.0
Short-term investments 35.4 32.6
Accounts receivable, net 70.2 64.2
Current inventories 70.7 55.7
Other current assets 5.0 2.0
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TOTAL CURRENT ASSETS 182.5 194.5
Property, plant and equipment, net 136.3 132.8
Marketable securities 20.8 -
Other noncurrent assets 30.4 30.4
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TOTAL ASSETS $370.0 $357.7
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 43.9 $ 33.0
Accrued liabilities 23.2 19.2
Current portion of long-term debt 0.7 1.3
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TOTAL CURRENT LIABILITIES 67.8 53.5
Long-term debt 74.1 95.4
Other noncurrent liabilities 92.7 94.9
Minority interest in Steel 15.7 11.7
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TOTAL LIABILITIES 250.3 255.5
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TOTAL SHAREHOLDERS' EQUITY 119.7 102.2
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $370.0 $357.7
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See accompanying notes.
4
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
FOR THE FOR THE
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1996 1995 1996 1995
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BEGINNING CASH AND CASH EQUIVALENTS $ 10.1 $ 36.0 $ 40.0 $ 41.8
------ ------ ------ ------
------ ------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings 7.2 3.6 16.9 7.3
Minority interest in Steel 0.9 0.6 2.5 1.2
Depreciation and amortization 3.0 2.9 8.8 8.5
Gain on Sale of Assets (0.1) (3.0) (0.7) (3.0)
Accounts receivable, net 5.7 (10.5) (6.0) (7.0)
Current inventories (22.7) (5.6) (15.0) (16.4)
Accounts payable and accrued
liabilities - 6.0 14.9 2.2
Other assets and liabilities (3.0) - (4.7) (4.2)
------ ------ ------ ------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (9.0) (6.0) 16.7 (11.4)
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3.5) (3.1) (13.0) (9.3)
Proceeds from the sale of property 0.1 4.4 1.5 4.4
Short-term investments and
marketable securities 9.1 1.0 (23.6) (3.8)
Other (0.2) - (0.7) -
------ ------ ------ ------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 5.5 2.3 (35.8) (8.7)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under
revolving credit agreement (5.6) 3.0 (21.0) 13.5
Issuance of common stock 0.5 0.6 0.9 0.7
Installment note repayment (0.3) (0.3) (0.9) (0.9)
Minority interest contributions
for preferred stock in Steel - 0.1 1.3 0.7
------ ------ ------ ------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (5.4) 3.4 (19.7) 14.0
------ ------ ------ ------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (8.9) (0.3) (38.8) (6.1)
------ ------ ------ ------
ENDING CASH AND CASH EQUIVALENTS $ 1.2 $ 35.7 $ 1.2 $ 35.7
------ ------ ------ ------
------ ------ ------ ------
See accompanying notes.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - LONE STAR STEEL ("STEEL") REVOLVING CREDIT AGREEMENT
Steel, a subsidiary of Lone Star Technologies, Inc. (LST), has a revolving
credit agreement under which it can borrow the lesser of $72.5 million or an
amount based upon eligible accounts receivable and inventories which secure
the borrowings. At September 30, 1996, borrowings totaled $24.1 million on an
available borrowing base of $72.5 million. The interest rate on borrowings
was prime plus .75 percent which, at quarter end, was 9.0 percent. Steel also
pays a fee of 0.5 percent on the unused portion of the credit facility. The
agreement, which extends to March 1999, contains various restrictive
covenants including requirements to maintain minimum net worth levels and
meet other financial ratios.
NOTE 2 - 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. The
numbers of shares used in the share calculations for the three months ended
September 30, 1996 and 1995, respectively, were 21.0 million and 20.7
million, and for the nine months ended September 30, 1996 and 1995, were 20.9
million and 20.6 million, respectively. The effect of potentially dilutive
shares on fully diluted earnings per share was either antidilutive or not
significant for all periods.
NOTE 3 - INVENTORIES
At September 30, 1996, inventories totaled $118.1 million before LIFO
reserves and were composed of finished goods, $24.8 million; work in
process, $63.4 million; and, raw materials and supplies, $29.9 million. Net
of LIFO reserves of $37.2 million, inventories were $80.9 million, of which
$10.2 million (consisting of supplies and spare parts) were classified as
noncurrent assets.
NOTE 4 - CASH AND INVESTMENTS
LST's cash equivalents include U.S. Government and corporate debt
obligations rated A-1, P-1 or higher with original maturities of less than
three months. Short-term investments consist of U.S. Government debt
obligations and corporate debt instruments with maturities at purchase
greater than three months and up to one year. Marketable securities consist
of U.S. Government debt obligations with maturities greater than one year
and up to two years. LST's total cash equivalents, short-term investments
and marketable securities, the weighted average maturity of which is less
than one year, are classified as held-to-maturity because LST has the intent
and ability to hold them to maturity. At September 30, 1996, LST's cash
equivalents, short-term investments and marketable securities, which had a
carrying amount that approximated market value, consisted of $56.4 million
in U.S. Government and $1.0 million in corporate debt obligations at
amortized cost.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
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 is engaged
in various ongoing environmental studies, monitoring programs, and capital
projects. Steel believes that its environmental expenditures will continue
to fall within its contemplated operating and capital plans.
NOTE 6 - INCOME TAXES
LST had federal tax net operating loss carryforwards of approximately $272
million at December 31, 1995, a portion of which is related to American
Federal Bank, a previous subsidiary of LST, and is subject to regulatory
audit. A provision for alternative minimum tax of $.4 million has been
recognized. No other provision for tax has been recognized because LST
anticipates utilizing its net operating loss carryforwards.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LST has one principal operating subsidiary, Steel, that serves two business
segments: oilfield products and services, comprised of casing, tubing, and
line pipe, that are manufactured and marketed globally to the oil and gas
drilling industry; and, industrial products that consist of specialty tubing
and flat rolled steel that are provided to general industrial markets.
RESULTS OF OPERATIONS
Third quarter 1996 net revenues of $143.0 million increased 27.9 percent from
$111.8 million in the third quarter of 1995. Oilfield products net revenues
of $102.4 million in the third quarter of 1996 were up approximately 43
percent compared to the same period a year-ago, primarily due to enhanced
drilling in the Gulf of Mexico and a reduction of imported oilfield tubular
goods. Revenues from industrial products in third quarter of 1996 of $40.6
million were approximately the same as the third quarter of 1995, primarily
due to flat demand from steel service centers.
Third quarter 1996 gross earnings of $12.9 million improved approximately 105
percent over $6.3 million for the third quarter of 1995, primarily due to
better unit volume, with some price improvement in Steel's finished products,
which in turn resulted in operating earnings of $8.7 million compared to $2.7
million in the third quarter of 1995.
Net earnings for the third quarter of 1996 were $7.2 million, or $.34 per
share, compared to $3.6 million, or $.17 per share for the third quarter of
1995.
FINANCIAL CONDITION AND LIQUIDITY
LST has no direct business operations other than Steel or significant sources
of cash other than from investments or the sale of securities. Steel is
restricted from paying cash dividends under terms of its revolving credit
agreement; however, LST is reimbursed by Steel for a portion of its operating
costs as provided by its cost-sharing agreement with Steel.
Steel has embarked on a capital expenditure program for the years 1995
through 1997 that is designed to increase the productive capacity for
specialty tubing and make other improvements that will lower operating costs
and improve the quality and precision of Steel's production process. As part
of Steel's overall capital outlays, LST and certain minority shareholders of
Steel have funded $23 million for the capital expenditure program. In
addition, the shareholders have agreed to an additional funding of up to $5
million. Steel issues 6 percent cumulative convertible preferred stock to
its participating shareholders as funds are advanced to finance the program.
The Steel preferred stock to be issued to LST and the other participating
shareholders has a designated value equal to the amount of the funds advanced
and pays quarterly dividends at the rate of 6 percent per year. The
preferred stock is required to be redeemed 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, which is permitted. To date,
quarterly dividends have been paid in additional preferred shares. These
preferred shares are 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 antidilution 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
third quarter of 1996, LST's slab purchases amounted to approximately $26.3
million.
At September 30, 1996, LST had available cash, short-term investments and
marketable securities of $57.4 million, down from $72.6 million at December
31, 1995, primarily due to the consigned slab purchase program discussed in
the preceding paragraph. 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.
7
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Steel requires capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds include cash generated by
operations, equity financing and borrowings. In the quarter ended September
30, 1996, capital expenditures and depreciation amounted to $3.5 million and
$3.0 million, respectively.
Steel has a revolving credit agreement under which it can borrow the lesser
of $72.5 million or an amount based upon eligible accounts receivable and
inventories which secure the borrowings. At September 30, 1996, borrowings
totaled $24.1 million on an available borrowing base of $72.5 million. The
interest rate on borrowings was prime plus .75 percent which, at quarter end,
was 9.0 percent. Steel also pays a fee of 0.5 percent on the unused portion
of the credit facility. The agreement which extends to March 1999, contains
various restrictive covenants, including requirements to maintain minimum net
worth levels and meet other financial ratios.
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 its environmental
expenditures will continue to fall within its contemplated operating and
capital 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 1996.
The matters discussed or incorporated by reference in this report on Form
10-Q that are forward-looking statements involve risks and uncertainties
including, but not limited to, economic conditions, product demand, the
regulatory and trade environment, and other risks indicated in other filings
with the Securities and Exchange Commission.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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/ Charles J. Keszler
-----------------------------------
(Charles J. Keszler)
Vice President - Finance
Dated: October 16, 1996
8
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