<PAGE>
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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, 1997
COMMISSION FILE NUMBER: 1-12881
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 .
--- ---
As of October 10, 1997, the number of shares of Common Stock outstanding at
$1.00 par value per share was 22,930,498.
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<PAGE>
LONE STAR TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
----
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. . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . 9
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, 1997 and
the cash flows and the results of operations for the three months and nine
months ended September 30, 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. Certain reclassifications of prior period amounts have been made to
conform with the current period. 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 For the Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 167.4 $ 143.0 $ 498.9 $ 397.4
Cost of goods sold (150.7) (130.1) (451.6) (364.0)
----------------------------------------------
Gross earnings 16.7 12.9 47.3 33.4
Selling, general and administrative expenses (4.9) (4.2) (14.5) (11.9)
----------------------------------------------
Operating earnings 11.8 8.7 32.8 21.5
Interest income 0.7 1.2 2.3 3.4
Interest expense (1.5) (1.6) (5.8) (5.0)
Minority interest in Steel - (0.9) - (2.5)
Other income (loss) - 0.2 0.3 (0.1)
----------------------------------------------
Earnings from continuing operations before income tax 11.0 7.6 29.6 17.3
Income tax (0.3) (0.4) (0.8) (0.4)
----------------------------------------------
Net earnings from continuing operations 10.7 7.2 28.8 16.9
Gain from discontinued operations 12.4 - 12.4 -
----------------------------------------------
NET EARNINGS $ 23.1 $ 7.2 $ 41.2 $ 16.9
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- ---------------------------------------------------------------------------------------------------------
Per common share:
Net earnings from continuing operations 0.48 0.34 1.33 0.81
Gain from discontinued operations 0.56 - 0.58 -
----------------------------------------------
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 1.04 $ 0.34 $ 1.91 $ 0.81
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</TABLE>
See accompanying notes.
3
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions)
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25.6 $ 27.3
Short-term investments 8.6 20.1
Accounts receivable, net 81.9 80.0
Current inventories, net 72.8 76.4
Other current assets 5.6 2.8
----------------------------
TOTAL CURRENT ASSETS 194.5 206.6
Marketable securities 18.0 19.8
Property, plant and equipment, net 147.4 139.9
Other noncurrent assets 19.7 29.7
----------------------------
TOTAL ASSETS $ 379.6 $ 396.0
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- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 33.3 $ 44.8
Accrued liabilities 28.0 29.6
Current portion of long-term debt - 0.3
----------------------------
TOTAL CURRENT LIABILITIES 61.3 74.7
Long-term debt 32.3 87.8
Other noncurrent liabilities 65.7 87.6
Minority interest in Steel - 17.1
----------------------------
TOTAL LIABILITIES 159.3 267.2
----------------------------
TOTAL SHAREHOLDERS' EQUITY 220.3 128.8
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 379.6 $ 396.0
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See accompanying notes. 4
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
<TABLE>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Beginning cash and cash equivalents $ 9.2 $ 10.1 $ 27.3 $ 40.0
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing operations 10.7 7.2 28.8 16.9
Minority interest in Steel - 0.9 - 2.5
Depreciation and amortization 4.0 3.0 10.4 8.8
Gain on sale of assets - (0.1) - (0.7)
Accounts receivable, net 5.7 5.7 (1.9) (6.0)
Current inventories 11.9 (22.7) 3.6 (15.0)
Accounts payable and accrued liabilities (8.2) - (13.1) 14.9
Other assets and liabilities (4.0) (3.0) (9.4) (4.7)
----------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 20.1 (9.0) 18.4 16.7
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6.5) (3.5) (17.2) (13.0)
Proceeds from the sale of property - 0.1 - 1.5
Short-term investments (1.6) 13.1 11.5 (2.8)
Marketable securities (1.2) (4.0) 1.8 (20.8)
Proceeds from sale of discontinued operations 12.4 - 12.4 -
Other - (0.2) - (0.7)
----------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 3.1 5.5 8.5 (35.8)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolving credit agreement (8.1) (5.6) (5.5) (21.0)
Issuance of common stock 1.3 0.5 2.2 0.9
Installment note repayment - (0.3) (0.3) (0.9)
Acquisition of minority interest - - (25.0) -
Minority interest contributions for preferred stock
in Steel - - - 1.3
----------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (6.8) (5.4) (28.6) (19.7)
----------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16.4 (8.9) (1.7) (38.8)
- ---------------------------------------------------------------------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $25.6 $ 1.2 $ 25.6 $ 1.2
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SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash items:
Conversion of subordinated debentures for common stock $50.0 $ - $ 50.0 $ -
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</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - LONE STAR STEEL ("STEEL") REVOLVING CREDIT AGREEMENT
Steel, a subsidiary of Lone Star Technologies, Inc. (LST), had a revolving
credit agreement under which it could borrow the lesser of $75 million or an
amount based upon eligible accounts receivable and inventories, reduced by
outstanding letters of credit. At September 30, 1997, borrowings totaled $32.3
million on an available borrowing base of $74.6 million. The interest rate on
borrowings was prime plus .25% or LIBOR plus 2.75% at Steel's option. The
average interest rate during the third quarter was approximately 8.75%. Steel
also paid a fee of .5% on the unused portion of the credit facility. The
agreement was terminated and a new credit arrangement was entered into on
October 2, 1997. See Note 8 - Subsequent Event.
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, 1997 and 1996, respectively, were 22.3 million and 21 million, and
the nine months ended September 30, 1997 and 1996, were 21.6 million and 20.9
million, respectively. The effect of potentially dilutive shares on fully
diluted earnings per share was either antidilutive or not significant for all
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 September 30, 1997 and 1996, respectively, would have been
$1.08 and $.35, and the nine months ended September 30, 1997 and 1996,
respectively, would have been $1.97 and $.82. Diluted earnings per share for
the three months and nine months ended September 30, 1997 and 1996 would have
been the same as net earnings available to common shareholders as reported on
the consolidated statement of earnings.
NOTE 3 - INVENTORIES
At September 30, 1997, inventories totaled $120.8 million before LIFO reserves
and were composed of finished goods, $29.2 million; work in process, $59.5
million; and raw materials and supplies, $32.1 million. Net of LIFO reserves of
$38.6 million, inventories were $82.2 million, of which $9.4 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 (AFB), a previous subsidiary of LST, and subject to an agreement
with the
6
<PAGE>
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 $.3 million has been recognized for the three months ended September
30, 1997 and $.8 million for the nine months ended September 30, 1997. No
other provision for tax 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.
NOTE 7 - CONVERSION OF SUBORDINATED DEBENTURES
On August 27, 1997, LST's $50 million 8% Subordinated Debentures due 2002 were
converted into 2,060,403 shares of common stock.
NOTE 8 - SUBSEQUENT EVENT
On October 2, 1997, Steel entered into a $100 million five-year secured
revolving credit agreement replacing its $75 million secured revolving credit
arrangement. The interest rate is variable depending on certain financial
ratios of Steel. The initial interest rate under the new credit facility is
LIBOR plus .625% which at October 2, 1997 was 6.285%. Steel also pays a fee
of .175% on the unused portion of the credit facility. The agreement
contains various restrictive covenants including requirements to maintain
minimum tangible net worth and working capital levels and meet other
financial ratios. Steel incurred a prepayment penalty of $1.1 million on
termination of its old revolving credit agreement which will be expensed in
the fourth quarter.
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 consisting of casing, tubing and line
pipe 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
Revenues of $167.4 million for the three months ended September 30, 1997
increased 17% from the third quarter of 1996. Revenues comprised $118.9
million from oilfield product and $30.7 million from specialty tubing products,
representing increases of 23.2% and 7.7%, respectively, while revenues from flat
rolled steel and other tubular products remained steady at $17.8 million.
Net revenues for the first nine months of 1997 of $498.9 million were 25.5%
better than the same period in 1996. Oilfield products, specialty tubing
products and flat rolled steel and other tubular products increased 31.3%,
16.5%, and 9.8%, respectively.
Third quarter 1997 shipments improved 11.3% over the 1996 third quarter to
241,600 tons and consisted of 164,800 tons of oilfield products, 28,700 tons of
specialty tubing products and 48,100 tons of flat rolled steel and other tubular
products. Oilfield products and specialty tubing products increased 17.9% and
8.7%, respectively, with a slight decline in flat rolled steel and other tubular
products.
Shipments for the nine months ended September 30, 1997 increased 18.6% over the
same 1996 period. Oilfield products, specialty tubing products and flat rolled
steel, and other tubular products increased 24.7%, 17.7%, and 2.6%,
respectively.
7
<PAGE>
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
($ in millions)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1997 % 1996 % 1997 % 1996 %
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products revenues 118.9 71 96.5 67 348.3 70 265.3 67
Specialty tubing products revenues 30.7 18 28.5 20 95.9 19 82.3 21
Flat rolled steel and other tubular
revenues 17.8 11 18.0 13 54.7 11 49.8 12
----- --- ----- --- ----- --- ----- ---
Consolidated net revenues 167.4 100 143.0 100 498.9 100 397.4 100
----- --- ----- --- ----- --- ----- ---
----- --- ----- --- ----- --- ----- ---
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
(in tons)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
1997 % 1996 % 1997 % 1996 %
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products 164,800 68 139,800 64 487,900 67 391,400 64
Specialty tubing products 28,700 12 26,400 12 89,000 12 75,600 12
Flat rolled steel and other tubular
products 48,100 20 50,900 24 148,500 21 144,800 24
------- --- ------- --- ------- --- ------- ---
Total tons shipped 241,600 100 217,100 100 725,400 100 611,800 100
------- --- ------- --- ------- --- ------- ---
------- --- ------- --- ------- --- ------- ---
</TABLE>
Increased oilfield products revenues resulted from both volume and price
improvements due to higher levels of domestic drilling. Specialty tubing
revenues were up due to additional volume from Steel's expanded specialty tubing
finishing facilities. Revenues for flat rolled steel and other tubular products
were stable due to Steel having used more flat rolled steel in the manufacture
of its tubular products coupled with small realized price improvements.
Gross earnings for the three months ended September 30, 1997 were up 29.4% to
$16.7 million from the same 1996 period. Operating earnings for the third
quarter of 1997 improved 35.6% to $11.8 million from $8.7 million for the third
quarter of 1996. Gross earnings and operating earnings for the nine months
ended September 30, 1997 improved 41.6% and 52.6%, respectively, over the same
periods in 1996 due to volume and price improvements.
Net earnings from continuing operations for the third quarter of 1997 of $10.7
million, or $.48 per share, were up 48.6% over the same period in 1996. Net
earnings from continuing operations for the nine months ended September 30, 1997
of $28.8 million, or $1.33 per share, increased 64.2% over the same 1996 period.
Gain from discontinued operations of $12.4 million was related to receipt of
escrowed proceeds from the prior sale of AFB.
On August 27, 1997, LST's $50 million 8% Subordinated Debentures due 2002 were
converted into 2,060,403 shares of common stock.
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 may pay
dividends to LST provided it meets certain covenants of its revolving credit
facility. LST is reimbursed by Steel for its operating costs as provided by its
cost-sharing agreement with Steel.
At September 30, 1997, LST had available cash and cash equivalents, short-term
investments, and marketable securities of $52.2 million, up from $33 million at
June 30, 1997, primarily due to receipt of $12.4 million related to the previous
sale of AFB and repayment by Steel for slab purchases made by LST. LST has no
immediate cash requirements as Steel
8
<PAGE>
reimburses LST for those expenses incurred for Steel's benefit under a cost
sharing plan.
LST has no debt. On August 27, 1997, LST's $50 million 8% Subordinated
Debentures due 2002 were converted into 2,060,403 shares of common stock.
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 entered into a five-year revolving credit agreement on October 2, 1997
under which it can borrow $100 million. The initial interest rate on borrowings
is LIBOR plus .625% which at October 2, 1997 was 6.285%. Steel also pays a fee
of .175% on the unused portion of the credit facility. The agreement contains
various restrictive covenants including requirements to maintain minimum
tangible net worth and working capital levels and meet other financial ratios.
Steel used $38.2 million of its credit facility to pay off its previous credit
arrangement, which included a $1.1 million prepayment penalty that will be
expensed in the fourth quarter.
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 for the remainder of 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 28, 1997, the registrant announced that it was calling for redemption on
August 28, 1997 the entire $50 million principal amount of its 8% Convertible
Subordinated Debentures due 2002 at a redemption price of 100% of the principal
amount. The Debentures were convertible into the registrant's Common Stock at a
conversion price of $24.25 per share. On August 28, 1997, the holders of
$49,965,000 of the Debentures surrendered them for conversion into 2,060,403
shares of Common Stock. The issuance of those shares to those Debenture holders
was exempt from registration under the Securities Act of 1933 pursuant to
Section 3(a)(9) of the Act. The shares of Common Stock issued upon the
conversion of the Debentures were exchanged by the registrant with its existing
security holders exclusively and no commission or other remuneration was paid or
given directly or indirectly for soliciting that exchange.
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
9
<PAGE>
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 15, 1997
10
<TABLE> <S> <C>
<PAGE>
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<NAME> LONE STAR TECHNOLOGIES
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