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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, 1997
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 April 10, 1997, the number of shares of Common Stock outstanding at
$1.00 par value was 21,671,945.
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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 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, 1997 and the
cash flows and the results of operations for the three months ended March 31,
1997 and 1996. Unaudited financial statements are prepared on a basis
substantially consistent with those audited for the year ended December 31,
1996. 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, 1996.
2
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; in millions, except share data)
<TABLE>
FOR THE QUARTER ENDED MARCH 31,
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1997 1996
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<S> <C> <C>
Net revenues $ 159.2 $ 112.5
Cost of goods sold (144.9) (105.2)
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Gross earnings 14.3 7.3
Selling, general and administrative expenses (5.0) (3.5)
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Operating earnings 9.3 3.8
Interest income 0.8 1.1
Interest expense (2.1) (1.8)
Minority interest in Steel - (0.4)
Other loss - (0.1)
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Earnings from continuing operations before income tax 8.0 2.6
Income tax (0.2) -
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NET EARNINGS $ 7.8 $ 2.6
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Per common share:
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 0.37 $ 0.13
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</TABLE>
See accompanying notes. 3
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions)
March 31, December 31,
1997 1996
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2.0 $ 27.3
Short-term investments 16.7 20.1
Accounts receivable, net 81.1 80.0
Current inventories, net 102.0 76.4
Other current assets 4.0 2.8
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TOTAL CURRENT ASSETS 205.8 206.6
Marketable securities 19.8 19.8
Property, plant and equipment, net 139.8 139.9
Other noncurrent assets 36.1 29.7
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TOTAL ASSETS $ 401.5 $ 396.0
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 56.6 $ 44.8
Accrued liabilities 27.5 29.6
Current portion of long-term debt - 0.3
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TOTAL CURRENT LIABILITIES 84.1 74.7
Long-term debt 94.1 87.8
Other noncurrent liabilities 87.6 87.6
Minority interest in Steel - 17.1
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TOTAL LIABILITIES 265.8 267.2
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TOTAL SHAREHOLDERS' EQUITY 135.7 128.8
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 401.5 $ 396.0
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See accompanying notes.
4
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LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
<TABLE>
For the Quarter Ended March 31,
1997 1996
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BEGINNING CASH AND CASH EQUIVALENTS $ 27.3 $ 40.0
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings 7.8 2.6
Minority interest in Steel - 0.4
Depreciation and amortization 3.2 2.9
Accounts receivable, net (1.1) 0.7
Current inventories (25.6) 4.9
Accounts payable and accrued liabilities 9.7 1.0
Other assets and liabilities (1.0) (1.0)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (7.0) 11.5
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3.1) (4.7)
Short-term investments 3.4 0.6
Acquisition of minority interest (25.0) -
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NET CASH PROVIDED (USED) BY OTHER INVESTING ACTIVITIES (24.7) (4.1)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolving credit agreement 6.3 (15.0)
Issuance of common stock 0.4 0.1
Installment note repayment (0.3) (0.3)
Minority interest contributions for preferred stock in Steel - 1.3
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NET CASH USED BY FINANCING ACTIVITIES 6.4 (13.9)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (25.3) (6.5)
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ENDING CASH AND CASH EQUIVALENTS $ 2.0 $ 33.5
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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 $75.0 million or an
amount based upon eligible accounts receivable and inventories which secure
the borrowings. At March 31, 1997, borrowings totaled $44.1 million on an
available borrowing base of $75.0 million. The interest rate on borrowings
was prime plus .25 percent which, at quarter end, was 8.75 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, 1997 and 1996, respectively, were 21.1 million and 20.8 million.
The effect of potentially dilutive shares on fully diluted earnings per share
was either antidilutive or not significant for both periods.
LST will adopt SFAS No. 128 "Earnings per Share," effective December 15,
1997. SFAS No. 128 requires the calculation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents. As required, LST will restate the reported earnings per share.
Basic earnings per share for the three months ended March 31, 1997 and 1996,
respectively, would have been $.38 and $.13. Diluted earnings per share for
the three months ended March 31, 1997 and 1996, respectively, would have been
$.37 and $.13.
NOTE 3 - INVENTORIES
At March 31, 1997, inventories totaled $149.5 million before LIFO reserves
and were composed of finished goods, $28.1 million; work in process, $86.1
million; and raw materials and supplies, $35.3 million. Net of LIFO reserves
of $37.3 million, inventories were $112.2 million, of which $10.2 million
(consisting of supplies and spare parts) were classified as noncurrent assets.
NOTE 4 - CASH, INVESTMENTS, AND MARKETABLE SECURITIES
LST's cash equivalents include U. S. government and related agencies
obligations. Short-term investments consist of U. S. government and related
agencies obligations with maturities at purchase greater than three months and
up to one year. Marketable securities consist of U. S. government and related
agencies 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.
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 $246
million at December 31, 1996, a portion of which may be related to American
Federal Bank, a previous subsidiary of LST, and subject to an agreement with
the Federal Deposit Insurance Corporation (FDIC) whereby LST may be required
to pay the FDIC for certain tax benefits. A provision for alternative
minimum tax of $.2 million has been recognized. No other provision for tax
6
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has been recognized because LST anticipates utilizing net operating loss
carryforwards in 1997 to offset taxes. If not utilized, the net operating
loss carryforwards will expire between years 2000 and 2010.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Lone Star Technologies, Inc. (LST) is a management and holding company whose
principal operating subsidiary, Lone Star Steel Company (Steel), manufactures
and globally markets oilfield products to the oil and gas drilling industry,
specialty tubing products to automotive, fluid power, and other markets for
various mechanical applications, and flat rolled steel and other tubular
products to domestic industrial markets.
RESULTS OF OPERATIONS
First quarter 1997 net revenues totaled $159.2 million, up 41.5 percent from
the first quarter of 1996. Revenues comprised $107.1 million from oilfield
products, $32.8 million from specialty tubing products, and $19.3 million
from flat rolled steel and other tubular products representing increases of
49.6%, 22.6%, and 35.8%, respectively, from the same 1996 period.
For the first three months of 1997, shipments were up 36.2% to 234,500 tons
compared to the same period in 1996. Shipments consisted of 152,300 tons of
oilfield products, 30,200 tons of specialty tubing products, and 52,000 tons
of flat rolled steel and other tubular products reflecting improvements of
45.3%, 25.3%, and 21.2%, respectively, from the first quarter of 1996.
The improvement in oilfield products revenues resulted from higher volumes
and better pricing as onshore drilling strengthened. The increase in
specialty tubing revenues was attributable to record shipments during the
first quarter due to strong automotive markets coupled with increases in
domestic and international hydraulic cylinder markets. Revenues were up for
flat rolled steel and other tubular products from volume and price gains
resulting from the continuance of a healthy economy in the southwestern
region of the United States.
Gross earnings for the three months ended March 31, 1997 were up 96% to $14.3
million from the same 1996 period. Operating earnings for the first quarter
of 1997 improved 145% to $9.3 million from $3.8 million from the first
quarter of 1996 despite a scheduled maintenance outage for Steel's electric
arc furnaces and rolling mill that started the last week in March and
continued through the first two weeks in April which impacted operating
earnings to a small extent.
Net earnings of $7.8 million, or $0.37 per share, were up 200% over the
earnings of the first three months in 1996 of $2.6 million, or $0.13 per
share.
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.
At March 31, 1997, LST had available cash and cash equivalents, short-term
investments, and marketable securities of $38.5 million, down from $67.2
million at December 31, 1996, primarily due to the purchase by LST of all the
outstanding common stock, preferred stock, and warrants held by other
shareholders of Steel for $25.0 million in cash, making Steel a wholly owned
subsidiary of LST. 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
7
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$50.0 million convertible subordinated debentures due 2002.
Steel requires capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds include cash generated by
operations and borrowings.
Steel has a revolving credit agreement under which it can borrow the lesser
of $75.0 million or an amount based upon eligible accounts receivable and
inventories which secure the borrowings. At March 31, 1997, borrowings
totaled $44.1 million on an available borrowing base of $75.0 million. The
interest rate on borrowings was prime plus .25 percent which, at quarter end,
was 8.75 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 and its borrowing capacity
under the revolving credit agreement will provide the liquidity necessary to
fund its cash requirements in 1997.
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: April 17, 1997
8
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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<ALLOWANCES> 1
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