<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 March 31, 1998
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 April 8, 1998, the number of shares of Common Stock outstanding at
$1.00 par value per share was 22,578,248.
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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 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 March 31, 1998 and the
cash flows and the results of operations for the three months ended March 31,
1998 and 1997. Unaudited financial statements are prepared on a basis
substantially consistent with those audited for the year ended December 31,
1997. 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, 1997.
2
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED; IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
FOR THE QUARTER ENDED MARCH 31,
-------------------------------
1998 1997
-----------------------
<S> <C> <C>
Net revenues $ 151.0 $ 159.2
Cost of goods sold (135.6) (144.9)
-----------------------
Gross earnings 15.4 14.3
Selling, general and administrative expenses (5.1) (5.0)
-----------------------
Operating earnings 10.3 9.3
Interest income 0.5 0.8
Interest expense (0.7) (2.1)
-----------------------
Earnings before income tax 10.1 8.0
Income tax (0.2) (0.2)
-----------------------
NET EARNINGS $ 9.9 $ 7.8
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Per common share - basic:
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 0.44 $ 0.38
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Per common share - diluted:
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS $ 0.43 $ 0.37
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED; IN MILLIONS)
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5.2 $ 14.2
Short-term investments 6.3 6.3
Accounts receivable, net 79.3 80.1
Current inventories, net 115.9 102.1
Other current assets 3.4 4.5
------ ------
TOTAL CURRENT ASSETS 210.1 207.2
Marketable securities 15.0 19.0
Property, plant and equipment, net 163.2 161.4
Other noncurrent assets 17.8 18.2
------ ------
TOTAL ASSETS $406.1 $405.8
------ ------
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 37.9 $ 50.1
Accrued liabilities 23.9 31.2
------ ------
TOTAL CURRENT LIABILITIES 61.8 81.3
Revolving credit facility 50.0 43.0
Postretirement benefit obligations 40.4 37.8
Other noncurrent liabilities 25.5 26.0
------ ------
TOTAL LIABILITIES 177.7 188.1
------ ------
TOTAL SHAREHOLDERS' EQUITY 228.4 217.7
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $406.1 $405.8
------ ------
------ ------
</TABLE>
See accompanying notes.
4
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
<TABLE>
FOR THE QUARTER ENDED
MARCH 31,
1998 1997
------ ------
<S> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS $ 14.2 $ 27.3
------ ------
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings 9.9 7.8
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 3.8 3.2
Accounts receivable, net 0.8 (1.1)
Current inventories (13.8) (25.6)
Accounts payable and accrued liabilities (19.5) 9.7
Other 3.4 (1.0)
------ ------
NET CASH USED BY OPERATING ACTIVITIES (15.4) (7.0)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5.4) (3.1)
Marketable securities 4.0 -
Short-term investments - 3.4
------ ------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (1.4) 0.3
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings under revolving credit agreement 7.0 6.3
Issuance of common stock 1.1 0.4
Treasury stock purchases (0.3) -
Installment note repayment - (0.3)
Acquisition of minority interest - (25.0)
------ ------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7.8 (18.6)
------ ------
Net decrease in cash and cash equivalents (9.0) (25.3)
------ ------
ENDING CASH AND CASH EQUIVALENTS $ 5.2 $ 2.0
------ ------
------ ------
</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - LONE STAR STEEL ("STEEL") REVOLVING CREDIT AGREEMENT
Steel has a revolving credit agreement under which it can borrow $100 million
reduced by borrowings and outstanding letters of credit. At March 31, 1998,
borrowings totaled $50.0 million with a remaining availability of $46.6 million.
Under the credit arrangement interest is payable under one of two rate options:
at the London Interbank Offered Rate (LIBOR) plus an index which is based on
quarterly debt ratio calculations or the institution's prime lending rate. At
March 31, 1998 the rate was 6.19% and was indexed at 0.50% over LIBOR. Steel
also pays a fee of 0.15% on the unused portion of the credit facility. The term
of the agreement is through October 2002 and it is collateralized by the assets
of Steel excluding real property.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock. The numbers of shares used to compute
basic earnings per share for the three months ended March 31, 1998 and 1997,
respectively, were 22.5 million and 20.6 million. Diluted earnings per share is
computed by dividing net income by the weighted average number of shares of
common stock and other dilutive securities. The numbers of shares used to
compute dilutive earnings per share for the three months ended March 31, 1998
and 1997 were 23.0 million and 21.1 million, respectively.
NOTE 3 - INVENTORIES
At March 31, 1998, inventories totaled $163.8 million before LIFO reserves and
were composed of finished goods, $46.2 million; work in process, $87.2 million;
and raw materials and supplies, $30.4 million. Net of LIFO reserves of $39.0
million, inventories were $124.8 million, of which $8.9 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
with original maturities of less than three months. 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 at
purchase 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 has various commitments for the purchase of raw materials, supplies,
services, and energy arising in the ordinary course of business. The majority
of these commitments are for a period of less than one year.
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 $223.1
million at December 31, 1997, a portion of which may be related to American
Federal Bank (AFB), 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 $0.2 million has been recognized for the three months ended March
31, 1998. No other provision for tax has been recognized because LST anticipates
utilizing net operating loss carryforwards in 1998 to offset taxes. If not
utilized, the net operating loss carryforwards will expire between years 2002
and 2010.
6
<PAGE>
NOTE 7 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
LST has adopted SFAS No. 130, "Reporting Comprehensive Income", as of January 1,
1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as the total of net
income and all other non-owner changes in equity. LST did not realize any
non-owner changes in equity for the three months ended March 31, 1998.
Therefore, total comprehensive income for the quarter ended March 31, 1998 is
equal to net income. However, LST has postretirement benefit obligations
including pension liabilities, for which the company has a minimum pension
liability. Adjustments to the minimum pension liability and any other
non-owner changes will be reflected in comprehensive income and cumulative
comprehensive income that will be reported in a consolidated statement of
shareholders' equity in LST's Form 10-K.
LST has adopted SFAS No. 131, "Disclosure about Segments of An Enterprise and
Related Information", as of January 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments.
SFAS No. 131 requires companies to select segments based on their internal
reporting system. LST's current segments, as reported herein, are consistent
with the company's internal reporting systems. As required by SFAS No. 131,
compliance with the respective reporting requirements will be reflected in LST's
1998 Form 10-K.
LST has adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," as of January 1, 1998. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans, however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. LST will
present revised disclosures related to its benefit plans in its Form 10-K for
the year ended December 31, 1998.
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 $151.0 million for the three months ended March 31, 1998 decreased
5% from the first quarter of 1997. Revenues comprised $98.8 million from
oilfield products and $35.4 million from specialty tubing products, representing
a decrease of 8% and increase of 8%, respectively, compared to the 1997 first
quarter, while revenues from flat rolled steel and other tubular products
decreased 13% relative to the same 1997 period, to $16.8 million.
First quarter 1998 shipments decreased 9% over the first three months of 1997 to
212,400 tons and consisted of 135,500 tons of oilfield products, 32,100 tons of
specialty tubing products and 44,800 tons of flat rolled steel and other tubular
products. Oilfield products and flat rolled steel and other tubular products
shipments decreased by 11% and 14%, respectively, while shipments of specialty
tubing products increased 6% over the same 1997 period.
7
<PAGE>
Consolidated revenues reported in the statements of earnings are as follows:
<TABLE>
($ in millions)
For the Quarter Ended
March 31,
1998 % 1997 %
----- --- ----- ---
<S> <C> <C> <C> <C>
Oilfield products revenues 98.8 66 107.1 67
Specialty tubing products revenues 35.4 23 32.8 21
Flat rolled steel and other tubular revenues 16.8 11 19.3 12
----- --- ----- ---
Consolidated net revenues 151.0 100 159.2 100
----- --- ----- ---
----- --- ----- ---
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
(in tons)
For the Quarter Ended
March 31,
1998 % 1997 %
----- --- ----- ---
<S> <C> <C> <C> <C>
Oilfield products 135,500 64 152,300 65
Specialty tubing products 32,100 15 30,200 13
Flat rolled steel and other tubular products 44,800 21 52,000 22
------- --- ------- ---
Total tons shipped 212,400 100 234,500 100
------- --- ------- ---
------- --- ------- ---
</TABLE>
Decreased oilfield products revenues resulted from reduced shipments due to
lower prevailing oil prices in the first quarter of 1998 partially offset by
slightly higher realized prices for Steel's products. Specialty tubing revenues
were up due to additional shipment volumes coupled with slightly higher prices
resulting from expanded automotive applications, increased use as hydraulic
cylinders in construction equipment, and strong demand in the overall economy.
Revenues for flat rolled steel and other tubular products were down due to
decreased shipment volumes.
Gross earnings for the three months ended March 31, 1998 were up 8% to $15.4
million from the same 1997 period. Operating earnings for the first quarter of
1998 improved 11% to $10.3 million from $9.3 million for the first quarter of
1997. Gross earnings and operating earnings were up due to higher realized
prices in LST's three business segments combined with increased shipment volumes
for specialty tubing products and lower shipment volumes for oilfield products
and flat rolled steel and other tubular products.
Net earnings from first quarter of 1998 of $9.9 million, or $.43 per diluted
share, were up 27% over the same period in 1997. Net earnings improved as gross
margins expanded to 10.2% from 9% for the 1997 first quarter. Also, interest
expense reduced to $0.7 million from $2.1 million due to conversion of LST's $50
million convertible subordinated debentures in the third quarter of 1997 and
lower interest rates on Steel's revolving credit facility.
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 March 31, 1998, LST had available cash and cash equivalents, short-term
investments, and marketable securities of $26.5 million, down from $39.5 million
at December 31, 1997, primarily due to purchases of slabs for use by Steel. LST
has no immediate cash requirements as Steel reimburses LST for those expenses
incurred for Steel's benefit under a cost sharing plan. LST has no debt.
8
<PAGE>
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 $100 million
reduced by borrowings and outstanding letters of credit. At March 31, 1998,
borrowings totaled $50.0 million with a remaining availability of $46.6 million.
Under the credit arrangement interest is payable under one of two rate options:
at the London Interbank Offered Rate (LIBOR) plus an index which is based on
quarterly debt ratio calculations or the institution's prime lending rate. At
March 31, 1998 the rate was 6.19% and was indexed at 0.50% over LIBOR. Steel
also pays a fee of 0.15% on the unused portion of the credit facility. The term
of the agreement is through October 2002 and it is collateralized by the assets
of Steel excluding real property.
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 1998.
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 15, 1998
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5
<SECURITIES> 21
<RECEIVABLES> 80
<ALLOWANCES> 1
<INVENTORY> 116
<CURRENT-ASSETS> 210
<PP&E> 348
<DEPRECIATION> 185
<TOTAL-ASSETS> 406
<CURRENT-LIABILITIES> 62
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 205
<TOTAL-LIABILITY-AND-EQUITY> 406
<SALES> 151
<TOTAL-REVENUES> 151
<CGS> 136
<TOTAL-COSTS> 141
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 10
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
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<TOTAL-REVENUES> 499 172 159 549
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<NET-INCOME> 41 10 8 25
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<EPS-DILUTED> 1.04 .48 .37 1.19
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
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<NET-INCOME> 7 7 3 10
<EPS-PRIMARY> .35 .35 .13 .47
<EPS-DILUTED> .34 .34 .13 .46
</TABLE>
