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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 March 31, 1996
COMMISSION FILE NUMBER: 0-14404
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
5501 LBJ FREEWAY, SUITE 1200
DALLAS, TEXAS 75240
214/386-3981
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 _____.
As of April 17, 1996, the number of shares of Common Stock outstanding at
$1.00 par value was 20,535,540.
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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 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 and Liquidity. . . . . . . . . . . . 7
PART II - OTHER INFORMATION
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 March 31, 1996 and the
cash flows and the results of operations for the three months ended March 31,
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 CASH FLOWS
(UNAUDITED; IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
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1996 1995
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<S> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS $ 40.0 $ 41.8
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CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings before income tax 2.6 1.5
Minority interest in Steel 0.4 0.2
Depreciation and amortization 2.9 2.8
Accounts receivable, net 0.7 8.4
Current inventories 4.9 (12.3)
Accounts payable and accrued liabilities 1.0 3.9
Other (1.0) (0.2)
---------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11.5 4.3
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4.7) (3.6)
Short-term investments 0.6 (4.6)
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NET CASH USED BY OTHER INVESTING ACTIVITIES (4.1) (8.2)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolving credit agreement (15.0) 0.2
Issuance of common stock 0.1 -
Installment note repayment (0.3) (0.3)
Minority interest contributions for preferred stock in Steel 1.3 0.4
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (13.9) 0.3
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NET DECREASE IN CASH AND CASH EQUIVALENTS (6.5) (3.6)
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ENDING CASH AND CASH EQUIVALENTS $ 33.5 $ 38.2
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</TABLE>
See accompanying notes.
3
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED; IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED MARCH 31,
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1996 1995
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<S> <C> <C>
Net revenues $ 112.5 $ 97.0
Cost of goods sold (105.2) (91.0)
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Gross earnings 7.3 6.0
Selling, general and administrative expenses (3.5) (3.6)
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Operating earnings 3.8 2.4
Interest income 1.1 1.4
Interest expense (1.8) (2.1)
Minority interest in Steel (0.4) (0.2)
Other (0.1) 0.0
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Earnings before income tax 2.6 1.5
Income tax - -
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NET EARNINGS $ 2.6 $ 1.5
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Per common share:
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 0.13 $ 0.07
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</TABLE>
See accompanying notes.
4
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33.5 $ 40.0
Short-term investments 32.0 32.6
Accounts receivable, net 63.5 64.2
Current inventories 50.8 55.7
Other current assets 3.0 2.0
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TOTAL CURRENT ASSETS 182.8 194.5
Property, plant and equipment, net 134.6 132.8
Other noncurrent assets 30.4 30.4
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TOTAL ASSETS $347.8 $357.7
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 35.0 $ 33.0
Accrued liabilities 18.2 19.2
Current portion of long-term debt 1.3 1.3
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TOTAL CURRENT LIABILITIES 54.5 53.5
Long-term debt 80.1 95.4
Other noncurrent liabilities 94.9 94.9
Minority interest in Steel 13.4 11.7
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TOTAL LIABILITIES 242.9 255.5
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TOTAL SHAREHOLDERS' EQUITY 104.9 102.2
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $347.8 $357.7
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</TABLE>
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 March 31, 1996, borrowings totaled $30.1 million on an available
borrowing base of $72.1 million. The interest rate on borrowings was prime plus
.75 percent which, at quarter end, was 9 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 March 31, 1996
and 1995, respectively, were 20.8 million and 20.5 million. The effect of
potentially dilutive shares on fully diluted earnings per share was either
antidilutive or not significant for both periods.
NOTE 3 - INVENTORIES
At March 31, 1996, inventories totaled $92.9 million before LIFO reserves and
were composed of finished goods, $33.4 million; work in process, $35.0 million;
and, raw materials and supplies, $24.5 million. Net of LIFO reserves of $31.9
million, inventories were $61.0 million, of which $10.2 million (consisting of
supplies and spare parts) were classified as noncurrent assets.
NOTE 4 - MARKETABLE DEBT SECURITIES
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 with
original maturities of up to one year. LST's cash equivalents and short-term
investments are classified as held-to-maturity because LST has the intent and
ability to hold them to maturity. At March 31, 1996, LST's carrying amounts of
cash equivalents and short-term investments approximated market value. At March
31, 1996, investments at amortized cost consisted of $58.6 million in U. S.
Government and $6.2 million in corporate debt obligations.
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 has federal tax net operating loss carryforwards of approximately $272
million, a portion of which is related to American Federal Bank, a previous
subsidiary of LST, and is subject to regulatory audit. A provision for tax has
not been recognized because LST anticipates utilizing its net operating loss
carryforwards to offset any current taxable income.
NOTE 7 - SUBSEQUENT EVENT
Effective April 1, 1996, Steel entered into a manufacturing agreement with
Bellville Tube Corporation to convert, for sale by Steel, flat rolled steel
supplied by Steel into tubular products at Bellville's facility near Houston,
Texas. This agreement along with other previous marketing arrangements, and a
portion of Steel's capital expenditure program are intended to enhance Steel's
market penetration by increasing its product offerings.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
LST currently 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
First quarter 1996 net revenues of $112.5 million increased 16 percent from
$97.0 million in the first quarter of 1995. Oilfield products net revenues of
$76.5 million in the first quarter of 1996 were up approximately 32 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.
Industrial products net revenues declined 8 percent to $36 million.
First quarter 1996 gross earnings of $7.3 million improved approximately 22
percent over $6.0 million for the first quarter of 1995, primarily due to better
unit volume, with some price improvement in Steel's finished products which,
resulted in operating earnings of $3.8 million compared to $2.4 million in the
first quarter of 1995.
Net earnings for the first quarter of 1996 were $2.6 million, or $.13 per share,
compared to $1.5 million, or $.07 per share for the first quarter of 1995.
FINANCIAL CONDITION AND LIQUIDITY
LST has no direct business operations other than Steel or significant sources of
cash other than from short-term 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 productive 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 first
quarter of 1996, LST's slab purchases amounted to approximately $16.1 million.
Intercompany transactions related to advances for the capital expenditure
program and the slab consignment program are eliminated in consolidation.
At March 31, 1996, LST had available cash and short-term investments of $65.5
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.
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 March 31,
1996, capital expenditures and depreciation amounted to $4.7 million $2.9
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 March 31, 1996, borrowings totaled
$30.1 million on an available borrowing base of $72.1 million. The interest
rate on borrowings was prime plus .75 percent which, at quarter end, was 9
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 filing with the Securities and
Exchange Commission.
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/ Charles J. Keszler
--------------------------------
(Charles J.Keszler)
Vice President - Finance
Dated: April 17, 1996
8
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