<PAGE>
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, 2000
COMMISSION FILE NUMBER: 1-12881
LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
15660 N. DALLAS PARKWAY, SUITE 500
DALLAS, TEXAS 75248
972/770-6401
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 (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
As of October 30, 2000, the number of shares of Common Stock outstanding at
$1.00 par value per share was 23,648,760.
<PAGE>
LONE STAR TECHNOLOGIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Income..................................3
Consolidated Balance Sheets........................................4
Consolidated Statements of Cash Flows..............................5
Notes to Consolidated Financial Statements.........................6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION..................................................10
Results of Operations.............................................11
Financial Condition and Liquidity.................................12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............13
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................13
</TABLE>
2
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 167.5 $ 99.5 $ 474.9 $ 240.4
Cost of goods sold (144.9) (92.6) (412.4) (236.2)
-----------------------------------------------
Gross profit 22.6 6.9 62.5 4.2
Selling, general and administrative expenses (8.5) (3.9) (25.9) (11.3)
-----------------------------------------------
Operating income (loss) 14.1 3.0 36.6 (7.1)
Interest income 0.5 0.5 1.4 1.3
Interest expense (3.7) (1.4) (10.6) (3.3)
Other income (expense) 0.2 (0.1) 0.4 (0.3)
-----------------------------------------------
Income (loss) from continuing operations before income tax 11.1 2.0 27.8 (9.4)
Income tax (0.7) - (1.5) -
-----------------------------------------------
NET INCOME (LOSS) $ 10.4 $ 2.0 $ 26.3 $ (9.4)
==================================================================================================================
PER COMMON SHARE - BASIC:
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 0.44 $ 0.09 $ 1.12 $ (0.42)
==================================================================================================================
PER COMMON SHARE - DILUTED:
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 0.43 $ 0.09 $ 1.08 $ (0.42)
==================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 23.6 22.6 23.5 22.5
Diluted 24.4 22.9 24.3 22.5
</TABLE>
See accompanying notes.
3
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
---------------------------------
2000 1999
--------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20.3 $ 22.2
Short-term investments 1.2 1.2
Accounts receivable, net 91.2 56.1
Current inventories, net 118.0 88.9
Other current assets 6.7 3.7
--------------------------------
TOTAL CURRENT ASSETS 237.4 172.1
Marketable securities 13.4 15.4
Property, plant, and equipment, net 177.6 149.5
Goodwill, net 53.3 -
Other noncurrent assets 15.3 14.1
--------------------------------
TOTAL ASSETS $ 497.0 $ 351.1
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Current installments on long-term debt $ 8.0 $ 2.0
Accounts payable 61.9 57.0
Accrued liabilities 35.1 26.2
--------------------------------
TOTAL CURRENT LIABILITIES 105.0 85.2
--------------------------------
Term loan 34.0 7.0
Revolving credit facility 77.3 21.0
Postretirement benefit obligations 20.2 26.1
Other noncurrent liabilities 15.3 15.9
--------------------------------
TOTAL LIABILITIES 251.8 155.2
--------------------------------
Commitments and Contingencies (See Note 8) - -
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value
(authorized: 10,000,000 shares, issued: none) - -
Common stock, $1 par value
(authorized: 80,000,000 shares, issued: 23,822,101)
23,061,864, respectively) 23.8 23.1
Capital surplus 221.8 209.9
Accumulated other comprehensive loss (1.6) (1.4)
Accumulated earnings (deficit) 5.3 (21.0)
Treasury stock (191,741 and 462,991 common shares, respectively) (4.1) (14.7)
--------------------------------
TOTAL SHAREHOLDERS' EQUITY 245.2 195.9
--------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 497.0 $ 351.1
==================================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING CASH AND CASH EQUIVALENTS $ 16.5 $ 20.7 $ 22.2 $ 20.9
=================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 10.4 2.0 26.3 (9.4)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 5.4 4.2 15.9 12.5
Accounts receivable, net 1.0 (14.8) (19.6) (20.4)
Current inventories, net 3.2 (5.1) (18.4) 6.3
Accounts payable and accrued liabilities 0.2 19.8 3.8 26.3
Other (4.4) (0.4) (9.0) (0.5)
-----------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 15.8 5.7 (1.0) 14.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7.4) (1.2) (15.7) (4.2)
Short-term investments - (0.1) - 1.9
Marketable securities 2.0 (4.4) 2.0 (6.4)
Proceeds from sale of property 0.8 - 0.8 -
Cash received (paid) for acquisition of Fintube and Bellville 1.4 - (80.3) -
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3.2) (5.7) (93.2) (8.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - - - 10.0
Initial borrowings under new revolving credit facility - - 6.8 34.0
Net borrowings (payments) under revolving credit facility (7.7) (3.2) 49.5 (10.2)
Net payments under old revolving credit facility - - - (44.0)
Issuance of term note - - 39.0 -
Term note repayment (2.0) (0.5) (6.0) (0.5)
Issuance of common stock 0.9 - 3.0 0.7
-----------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (8.8) (3.7) 92.3 (10.0)
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 3.8 (3.7) (1.9) (3.9)
-----------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 20.3 $ 17.0 $ 20.3 $ 17.0
=================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTION:
ISSUANCE OF COMMON STOCK FOR ACQUISITION $ - - 20.0 -
</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1
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, 2000 and
the cash flows and the results of operations for the three months and nine
months ended September 30, 2000 and 1999. Unaudited financial statements are
prepared on a basis substantially consistent with those audited for the year
ended December 31, 1999. Lone Star Technologies, Inc. ("Lone Star") acquired the
assets of Fintube Limited Partnership ("FLP") and Bellville Tube Corporation
("Bellville"), respectively. The accompanying consolidated financial statements
include the operations of Fintube Technologies, Inc. ("Fintube") for the
three-months and nine-months ended September 30, 2000 and the operations of
Bellville for the three-months and six months ended September 30, 2000. 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's Annual Report on Form
10-K as amended for the year ended December 31, 1999.
NOTE 2 - ACQUISITIONS
On January 3, 2000, Lone Star through Fintube, a wholly owned subsidiary of Lone
Star, purchased substantially all of the assets of FLP for a base purchase price
of $82 million plus a $2.5 million adjustment for working capital and
approximately $1.5 million in acquisition related expenses (the "Fintube
Acquisition"). The Fintube Acquisition was effective as of January 1, 2000. The
working capital adjustment was estimated at the closing and was reduced on an
actual, post-closing basis by $0.7 million in July 2000. The consideration for
the Fintube Acquisition was determined following a competitive bidding process
in arm's-length negotiations between Lone Star and FLP. The acquired business
involves the design and production of finned tubes and other products used in a
variety of heat recovery applications. Lone Star is operating and using the
assets acquired in the Fintube Acquisition in substantially the same manner as
they were used by FLP prior to the Fintube Acquisition. Lone Star and Fintube
utilized three different sources of financing to pay the purchase price. Lone
Star used $20 million of cash that it received from Lone Star Steel Company
("Steel"), a wholly owned subsidiary of Lone Star, in connection with Steel's
repayment of a $20 million subordinated loan from Lone Star. Steel borrowed the
$20 million that it repaid to Lone Star under Steel's $90 million revolving line
of credit with the CIT Group/Business Credit, Inc., acting on its own behalf and
as agent for other banks. Additionally, Lone Star issued approximately $20
million of Lone Star common stock directly to the limited partners or other
beneficial owners of FLP. Finally, Fintube entered into a new Credit Agreement
with Bank of America, acting on its own behalf and as agent for other banks, in
connection with the Fintube Acquisition and borrowed (i) approximately $7
million under the revolving credit facility and (ii) $39 million under the term
loan facility.
The Fintube Acquisition has been accounted for under the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based upon fair value at the date of the
Fintube Acquisition. The excess purchase price over the fair values of the
tangible net assets acquired was approximately $49.4 million, has been recorded
as goodwill and is being amortized on a straight-line basis over 30 years. In
the event that facts and circumstances indicate that the goodwill may be
impaired, an evaluation of recoverability will be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset
will be compared to the asset's carrying amount to determine if an adjustment is
required.
The net purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current Assets................ $26,573
Net property & equipment...... 17,963
Other Assets.................. 675
Goodwill & other intangibles.. 49,449
Liabilities Assumed........... 9,799
Net purchase price... $84,861
</TABLE>
6
<PAGE>
The allocation of the purchase price is preliminary and subject to adjustment
pending the outcome of an assessment of the intangible assets acquired and the
terms of the working capital purchase price adjustment.
On April 1, 2000 Lone Star through Bellville Acquisition, Inc., a wholly owned
subsidiary of Lone Star, purchased substantially all of the assets of Bellville
for a base purchase price of $14.8 million less a $0.2 million adjustment for
working capital (the "Bellville Acquisition"). The working capital adjustment
was estimated at the closing and was further adjusted by an additional $0.1
million on an actual, post-closing basis in July 2000. The consideration for the
Bellville Acquisition was determined through arm's length negotiations between
Lone Star and Bellville. Lone Star financed the Bellville Acquisition through
cash held by Lone Star and $5 million of borrowings. In connection with these
borrowings, Steel borrowed $5 million under its present credit facility to repay
the remaining $5 million of its subordinated loan to Lone Star. Lone Star
guaranteed an additional $5 million of Steel's credit facility, pledged the
stock of Bellville as collateral for such guaranty, and used the loan repayment
to fund a portion of the Bellville purchase price. The cash paid for the
Bellville Acquisition was wired to Bellville on March 31, 2000; however, the
purchase was not effective until April 1, 2000.
The Bellville Acquisition by Lone Star has been accounted for under the purchase
method of accounting, and accordingly, the purchase price has been allocated to
the assets acquired and the liabilities assumed based upon fair value at the
date of the Bellville Acquisition. The excess purchase price over the fair
values of the tangible net assets acquired was approximately $7.2 million, has
been recorded as goodwill and is being amortized on a straight-line basis over
30 years. In the event that facts and circumstances indicate that the goodwill
may be impaired, an evaluation of recoverability will be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset will be compared to the asset's carrying amount to determine if
an adjustment is required.
The net purchase price was allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net property & equipment...... $ 7,625
Goodwill & other intangibles.. 7,227
Liabilities assumed........... 301
Net purchase price... $14,551
</TABLE>
The allocation of the purchase price is preliminary and subject to adjustment
pending the outcome of an assessment of the intangible assets acquired and the
terms of the working capital purchase price adjustment.
The unaudited pro forma results below assume the acquisitions occurred at the
beginning of the periods presented (in millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales $ 167.5 $ 114.0 $ 475.1 $ 302.5
Net income (loss) 10.4 7.3 26.8 0.4
Basic income (loss) per share 0.44 0.32 1.14 0.02
Diluted Income (loss) per share 0.43 0.32 1.10 0.02
</TABLE>
The above pro forma results include adjustments to give effect to amortization
of goodwill, interest expense and other purchase price adjustments. The pro
forma results are not necessarily indicative of the operating results that would
have occurred had the acquisitions been consummated as of the beginning of the
periods presented, nor are they necessarily indicative of future operating
results. Lone Star has not yet determined the final allocation of the purchase
price and, accordingly, the amounts shown may differ from the amounts ultimately
determined; however, that allocation is not expected to differ materially from
the preliminary allocation.
7
<PAGE>
NOTE 3 - BUSINESS SEGMENTS DATA
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------- -----------------------------
OILFIELD PRODUCTS (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues $ 94.9 $ 51.3 $ 257.8 $ 118.5
Operating earnings (loss) 9.3 - 20.0 (8.6)
Identifiable assets 219.0 152.2 219.0 152.2
Capital expenditures 2.3 0.7 6.6 1.8
Depreciation and amortization 2.8 2.3 7.9 6.6
SPECIALTY TUBING
Net revenues $ 54.6 $ 32.0 $ 167.9 $ 88.4
Operating earnings 5.3 5.0 16.9 7.6
Identifiable assets 219.1 130.3 219.1 130.3
Capital expenditures 4.6 0.5 8.3 2.4
Depreciation and amortization 2.4 1.5 7.4 5.1
FLAT ROLLED STEEL AND OTHER PRODUCTS
Net revenues $ 18.0 $ 16.2 $ 49.2 $ 33.5
Operating earnings (loss) (0.5) (1.2) (0.3) (4.0)
Identifiable assets 20.6 21.9 20.6 21.9
Capital expenditures 0.5 - 0.8 -
Depreciation and amortization 0.2 0.4 0.6 0.8
CORPORATE AND OTHER NON-SEGMENTS
Operating earnings (loss) $ - $ (0.8) $ - $ (2.1)
Identifiable assets 38.3 38.2 38.3 38.2
CONSOLIDATED TOTALS
Net revenues $ 167.5 $ 99.5 $ 474.9 $ 240.4
Operating earnings (loss) 14.1 3.0 36.6 (7.1)
Identifiable assets 497.0 342.6 497.0 342.6
Capital expenditures 7.4 1.2 15.7 4.2
Depreciation and amortization 5.4 4.2 15.9 12.5
</TABLE>
NOTE 4 - DEBT
On March 16, 1999, Steel refinanced the $100.0 million revolving credit facility
that it had in place at year-end 1998 with a $90.0 million revolving line of
credit and a three-year $10.0 million term loan. Under the new revolving credit
facility, Steel can borrow an amount based on a percentage of eligible accounts
receivable and inventories, reduced by outstanding letters of credit. At
September 30, 2000, borrowings totaled $76.9 million including $7.5 million on
the term loan with a remaining availability of $20.2 million. At Steel's option,
the interest rate is the prime lending rate plus 1.0% or the LIBOR plus 3.0%.
Steel pays a 0.375% per annum fee on the unused portion of the credit facility.
The term loan is repayable in quarterly installments of $0.5 million, together
with interest at the prime lending rate plus 1.5% or the LIBOR plus 3.5%.
Steel's assets other than real estate secure these loans. In connection with the
Fintube Acquisition on January 3, 2000, and the Bellville Acquisition effective
April 1, 2000 (see Note 2), Steel borrowed $25 million under its present credit
facility to repay its $25 million subordinated loan to Lone Star, Lone Star
guaranteed $25 million of Steel's credit facility and Lone Star used the loan
repayment to fund a portion of the purchase price payable in the Fintube
Acquisition and the Bellville Acquisition.
8
<PAGE>
On October 25, 2000, the revolving credit agreement was amended to increase
Steel's borrowing base up to $120.0 million based on a percentage of eligible
accounts receivable and inventories, reduced by outstanding letters of credit.
On January 3, 2000, Lone Star's new subsidiary, Fintube, entered into a new
senior credit facility providing a $20 million revolving line of credit and a
$39 million term loan used to pay part of the cash portion of the purchase price
in the Fintube Acquisition. Under the revolving line of credit, Fintube can
borrow an amount based on a percentage of eligible accounts receivable and
eligible inventory, reduced by outstanding letters of credit. At Fintube's
option, the interest rate is the prime lending rate plus 1.0% or the LIBOR plus
2.5%. Fintube pays a 0.50% rate on the unused portion of the credit facility.
The interest rate on $17.8 million of the term loan is fixed by a rate swap
agreement at 7.20% and on the remainder of the term loan is the same as the
revolving credit facility. The term loan is repayable in quarterly installments
of $1.5 million through December 31, 2002 and of $1.75 million thereafter
through December 31, 2005. As of September 30, 2000, borrowings by Fintube
totaled approximately $42.4 million, including the term loan, with a remaining
availability, based on eligible accounts receivable and inventory on such date,
of approximately $10.8 million.
NOTE 5 - 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 September 30, 2000 and 1999,
respectively, were 23.6 million and 22.5 million, and nine months ended
September 30, 2000 and 1999, were 23.5 million and 22.5 million, respectively.
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 diluted earnings per share for the three
months and the nine months ended September 30, 2000, respectively, were 24.4
million and 24.3 million - dilutive securities respectively equivalent to 0.8
million and 0.8 million shares of common stock were outstanding during the three
months and the nine months ended September 30, 2000. Dilutive securities were
not included in the computation of diluted earnings per share for September 30,
1999. Lone Star had losses in that period and the effect of including the
dilutive securities would have been anti-dilutive to earnings per share.
NOTE 6 - CASH, INVESTMENTS, AND MARKETABLE SECURITIES
Lone Star's cash equivalents include highly liquid investments in a fund
consisting of 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. Lone Star'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 Lone
Star has the intent and ability to hold them to maturity.
NOTE 7 - INVENTORIES
At September 30, 2000, inventories totaled $154.4 million before LIFO and other
reserves and were composed of: finished goods, $28.7 million; work in process,
$60.8 million; and raw materials and supplies, $64.9 million. Net of LIFO and
other reserves of $30.2 million, inventories were $124.2 million, of which $6.2
million (consisting of supplies and spare parts) were classified as noncurrent
assets.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Steel and Fintube have various commitments for the purchase of raw materials,
certain tubular goods, 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, Fintube's, and Bellville's operations are subject to foreign, federal,
state, provincial and local environmental laws and regulations concerning, among
other things, waste materials, wastewater disposal and air emissions. Lone Star
believes that its subsidiaries are currently in material compliance with all
applicable environmental laws and regulations.
NOTE 9 - INCOME TAXES
Lone Star had federal tax net operating loss carryforwards of approximately
$261.6 million at December 31, 1999, a portion of which may be related to
American Federal Bank (AFB), a previous subsidiary of Lone Star, and subject to
an agreement with the Federal Deposit Insurance Corporation (FDIC) whereby Lone
Star may be required to pay the FDIC for certain tax benefits. Provisions for
alternative minimum taxes of $0.7 million and $1.5 million, respectively, were
recognized for the three months and the nine months ended September 30, 2000.
Because of the
9
<PAGE>
net losses for the nine months ended September 30, 1999, no provision for taxes
was recognized for that period. If not utilized, the net operating loss
carryforwards will expire between years 2003 and 2014.
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the periods ended September 30, 2000 and
September 30, 1999 was:
<TABLE>
<CAPTION>
(In millions)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net income (loss).................... $ 10.4 $ 2.0 $ 26.3 $ (9.4)
Employee benefit plan stock grant.... - - - -
--------- --------- --------- ----------
Comprehensive income (loss).......... $ 10.4 $ 2.0 $ 26.3 $ (9.4)
</TABLE>
NOTE 11 - NEW ACCOUNTING PRONOUNCEMENT
The SEC recently issued Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. The Company is
currently evaluating the impact of this pronouncement, and does not believe its
application will have a material effect on the financial statements.
In September 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (Statement) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
Statement 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." Statement No. 133 requires companies to record derivatives
on the balance sheet as assets for liabilities measured at fair value.
Accounting for gains or losses resulting from changes in the values of those
derivatives is dependent on the use of the derivative and whether it qualifies
for hedge accounting. Statement 138 amends Statement 133 to clarify the
appropriate accounting for certain hedging transactions. The Statements are
effective for the year beginning January 1, 2001, with earlier adoption
encouraged. The Company is currently evaluating the impact of this pronouncement
and because of our minimal use of derivatives, we do not anticipate the adoption
of the new Statements will have a significant effect on our earnings.
The Company will adopt EITF 00-10, "Accounting for Shipping and Handling Fees
and Costs". EITF 00-10 requires that a seller of goods should classify in the
income statement amounts billed to a customer for shipping and handling as
revenue and should classify in the income statement costs incurred for shipping
and handling as an expense. One of Lone Star's subsidiaries, Steel, has reported
shipping charges billed to customers as revenue, net of the actual costs
incurred. Prospectively Steel will report the actual costs incurred to ship its
products, as a component of cost of sales, consistent with Lone Star's other
subsidiaries. This change will have no effect on the Company's gross profit
margins. The effects of EITF 00-10 on the Company's reported revenues and cost
of sales were not material as of September 30, 2000. Prospectively, prior period
amounts will be reclassified to conform with the new presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Lone Star is the leading United States manufacturer of welded "oil country
tubular goods," which are steel tubular products used in the completion of and
production from oil and natural gas wells. Lone Star is also a major
manufacturer of line pipe, which is used in the transportation of oil and gas.
In addition, Lone Star is a leading manufacturer of specialty tubing products
used in automotive, construction, agricultural and industrial applications. Lone
Star also manufactures flat rolled steel and other products for domestic
industrial markets. In January 2000, Lone Star augmented its specialty tubing
products by acquiring the assets of Fintube Limited Partnership, the largest
specialty tubing manufacturer of heat recovery finned tubes, which are primarily
used in combined-cycle power generation plants.
Although oil prices have increased and the active rig count has substantially
increased, the oil and gas markets are volatile and uncertainty exists regarding
the future levels of oil and gas prices and related drilling activity.
Therefore, no assurance can be given regarding the extent of future demand for
Lone Star's oilfield products.
10
<PAGE>
RESULTS OF OPERATIONS
Revenues of $167.5 million for the three months ended September 30, 2000
increased 68% from the third quarter of 1999. Revenues comprised $94.9 million
from oilfield products, $54.6 million from specialty tubing products, and $18.0
million from flat rolled steel and other products, representing increases of
85%, 71%, and 11%, respectively.
Revenues for the first nine months of 2000 were $474.9 million, a 98% increase
from the same 1999 period. Oilfield, specialty tubing, and flat rolled steel and
other tubular products revenues increased 118%, 90%, and 47% respectively.
Third quarter 2000 shipments increased to 221,500 tons or by 25% when compared
to the same period in 1999 and were comprised of 131,300 tons of oilfield
products, 43,600 tons of specialty tubing products and 46,600 tons of flat
rolled steel and other products. Oilfield products and specialty tubing products
shipments increased by 39% and 36%, respectively. Flat Rolled steel and other
product shipments decreased by 8%.
Consolidated revenues reported in the statements of income are as follows:
<TABLE>
<CAPTION>
($ in millions) ($ in millions)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
2000 % 1999 % 2000 % 1999 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products 94.9 57 51.3 52 257.8 54 118.5 49
Specialty tubing products 54.6 32 32.0 32 167.9 35 88.4 37
Flat rolled steel and other products 18.0 11 16.2 16 49.2 11 33.5 14
-------- ----- ------- ----- ------- ----- -------- -----
Total net revenues 167.5 100 99.5 100 474.9 100 240.4 100
======== ===== ======= ===== ======= ===== ======== =====
</TABLE>
Shipments of products by segment are as follows:
<TABLE>
<CAPTION>
(in tons) (in tons)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER SEPTEMBER
2000 % 1999 % 2000 % 1999 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Oilfield products 131,300 59 94,700 53 371,000 58 223,900 54
Specialty tubing products 43,600 20 32,100 18 139,700 22 84,800 20
Flat rolled steel and other products 46,600 21 50,500 29 130,100 20 107,600 26
----------- ----- ---------- ----- --------- ----- ---------- -----
Total shipments 221,500 100 177,300 100 640,800 100 416,300 100
=========== ===== ========== ===== ========= ===== ========== =====
</TABLE>
Increased revenues for the third quarter of 2000 were due to
higher prices in all business segments. Oilfield revenues advanced on additional
shipment volumes and higher prices as the average number of active rigs
increased 54% to 982 at the end of the third quarter from the same period in
1999. Revenues from specialty tubing and flat rolled steel and other products
were higher reflecting the addition of Fintube sales to these business segments.
The gross profit for the three months and nine months ended September 30, 2000
was $22.6 million and $62.5 million, respectively, compared to $6.9 million and
$4.2 million, respectively, for the same 1999 period. The operating income for
the three months and nine months ended September 30, 2000 was $14.1 and $36.6
million, respectively, compared to $3.0 million operating income and $7.1
million operating loss for the three months and nine months ended September 30,
1999, respectively. The gross profit and operating income benefited from
Fintube's and Bellville's higher margin contributions, higher prices for all
products and increased shipment volumes for oilfield and flat rolled steel and
other products.
The Company will adopt EITF 00-10, "Accounting for Shipping and Handling Fees
and Costs". EITF 00-10 requires that a seller of goods should classify in the
income statement amounts billed to a customer for shipping and handling as
revenue and should classify in the income statement costs incurred for shipping
and handling as an expense. One of Lone Star's subsidiaries, Steel, has reported
shipping charges billed to customers as revenue, net of the actual costs
incurred. Prospectively Steel will report the actual costs incurred to ship its
products, as a component of cost of sales, consistent with Lone Star's other
subsidiaries. This change will have no effect on the Company's gross profit
margins. The effects of EITF 00-10 on the Company's reported revenues and cost
of sales
11
<PAGE>
were not material as of September 30, 2000. Prospectively, prior period amounts
will be reclassified to conform with the new presentation.
Selling, general, and administrative expenses were $8.5 million and $25.9
million for the three months and nine months ended September 30, 2000, compared
to $3.9 million and $11.3 million for the same 1999 periods. The increases were
due to the acquisitions of Fintube and Bellville.
Net income in the third quarter of 2000 was $10.4 million, or $0.43 per diluted
share, compared to $2.0 million, or $0.09 per diluted share, which included $1.8
million, or $0.08 per diluted share, from the settlement of lawsuits against
graphite electrode manufacturers, in the three months ended September 30, 1999,
and for the nine months ended September 30, 2000 was $26.3 million, or $1.08 per
diluted share, compared to a net loss of $9.4, or $0.42 per diluted share, in
the same 1999 period.
FINANCIAL CONDITION AND LIQUIDITY
Lone Star has no direct business operations other than Steel, Fintube, and
Bellville or significant sources of cash other than from investments or the sale
of securities. Lone Star is reimbursed by Steel for most of its operating costs
as provided by its cost-sharing agreement with Steel. Under Steel's new
revolving credit agreement, Lone Star's operating costs and Steel's portion of
Lone Star's consolidated taxes are the only funds that can be distributed to
Lone Star. Fintube pays Lone Star an annual overhead fee of $1.0 million, which
is the maximum amount permitted under Fintube's credit facility. Bellville's
payments to Lone Star are not restricted and Bellville pays Lone Star an annual
overhead fee of $0.2 million.
At September 30, 2000, Lone Star had available cash and cash equivalents,
short-term investments, and marketable securities of $34.9 million, compared to
$38.8 million at December 31, 1999. Lone Star has no immediate cash requirements
as Steel, Fintube, and Bellville reimburse Lone Star for their overhead as
described in the preceding paragraph.
Steel and Fintube require capital primarily to fund general working capital
needs and capital expenditures. Principal sources of funds include cash
generated by operations, borrowings under Steel's and Fintube's revolving credit
facilities and from Lone Star. Bellville requires capital primarily to fund
several working capital needs and capital expenditures. Principal sources of
funds include cash generated by operations and from Lone Star.
On March 16, 1999, Steel refinanced the $100.0 million revolving credit facility
that it had in place at year-end 1998 with a $90.0 million revolving line of
credit and a three-year $10.0 million term loan. Under the new revolving credit
facility, Steel can borrow an amount based on a percentage of eligible accounts
receivable and inventories, reduced by outstanding letters of credit. At
September 30, 2000, borrowings totaled $76.9 million including 7.5 million on
the term loan with a remaining availability of $20.2 million. At Steel's option,
the interest rate is the prime lending rate plus 1.0% or the LIBOR plus 3.0%.
Steel pays a 0.375% per annum fee on the unused portion of the credit facility.
The term loan is repayable in quarterly installments of $0.5 million, together
with interest at the prime lending rate plus 1.5% or the LIBOR plus 3.5%.
Steel's assets other than real estate secure these loans. In connection with
Lone Star's purchase of assets from Fintube Limited Partnership on January 3,
2000, and Bellville Tube Corporation on March 31, 2000 (see Note 2) Steel
borrowed $25 million under its present credit facility to repay its $25 million
subordinated loan to Lone Star, Lone Star guaranteed $25 million of Steel's
credit facility and Lone Star used the loan repayment to fund a portion of the
purchase price payable in the Fintube and Bellville Acquisitions.
On October 25, 2000, the revolving credit agreement was amended to increase
Steel's borrowing base up to $120.0 million based on a percentage of eligible
accounts receivable and inventories, reduced by outstanding letters of credit.
On January 3, 2000, Lone Star's Fintube subsidiary entered into a new senior
credit facility providing a $20 million revolving line of credit and a $39
million term loan used to pay part of the cash portion of the purchase price in
its acquisition of substantially all of the assets of Fintube Limited
Partnership. Under the revolving line of credit, Fintube can borrow an amount
based on a percentage of eligible accounts receivable and eligible inventory,
reduced by outstanding letters of credit. At Fintube's option, the interest rate
is the prime lending rate plus 1.0% or the LIBOR plus 2.5%. Fintube pays a 0.50%
rate on the unused portion of the credit facility. The interest rate on $17.8
million of the term loan is fixed by a rate swap agreement at 7.20% and on the
remainder of the term loan is the
12
<PAGE>
same as the revolving credit facility. The term loan is repayable in quarterly
installments of $1.5 million through December 31, 2002 and $1.75 million
thereafter through December 31, 2005.
As of September 30, 2000, borrowings by Fintube totaled approximately $42.4
million, including the term loan, with a remaining availability, based on
eligible accounts receivable and inventory on such date, of approximately $10.8
million.
Steel periodically purchases steel slabs under consignment arrangements for use
in its production process and thereby affords Steel somewhat longer payment
periods for this raw material. Steel makes the payment as the slabs are used
plus interest on unpaid amounts. At the end of the third quarter 2000, $19.8
million was included in the accounts payable.
Lone Star'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, Fintube, and Bellville believe that these
environmental expenditures will continue to fall within their respective
contemplated operating and capital plans.
Steel and Fintube believe that funds generated by operations and borrowing
capacity under their revolving credit facilities will provide the liquidity
necessary to fund cash requirements for the remainder of 2000. Bellville
believes that funds generated by operations will provide the liquidity necessary
to fund cash requirements for the remainder of 2000. Bellville expects to have
adequate working capital from the fees it charges Steel for processing
inventory.
Lone Star completed its identification, assessment and remediation of the year
2000 compliance issue ("Y2K") in December 1999. To date, Lone Star has not
experienced any material Y2K failures and to the best of its knowledge neither
have any of its significant customers or service providers. However, there can
be no assurance that in the future issues related to Y2K will not have a
material adverse effect on Lone Star's financial condition or that of its
significant customers or service providers.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Lone Star and its subsidiaries do not invest in commodities or foreign
currencies. Lone Star's investments in cash equivalents, short-term investments
and marketable securities, the weighted average maturity of which is less than
one year, are held to maturity. Therefore, interest rate risk is not considered
to be material.
Although Lone Star's subsidiaries' long-term debt is subject to interest rate
risk, any gains or losses from hedging activities on such debt have not been
material to date. Foreign sales are made mostly from Lone Star's foreign sales
subsidiaries in the local countries and are not typically denominated in that
currency. Any gains or losses from currency translation have not been material
and Lone Star does not participate in hedging foreign currency exposure.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.38 Amendment agreement dated September 29, 2000 to Financing
Agreement dated March 12, 1999 between Steel and The CIT
Group/Business Credit, Inc. 27 Financial Data Schedule
(b) Reports on Form 8-K: A Current Report on Form 8-K dated July 11, 2000
was filed reporting the filing of a registration statement under the
Securities Act of 1933. A Current Report on Form 8-K dated July 18,
13
<PAGE>
2000 was filed reporting Lone Star's results of operations for the
second quarter of 2000. A Current Report on Form 8-K dated July 28,
2000 was filed reporting expansion of manufacturing capacity of Fintube
Technologies. A Current Report on Form 8-K dated August 4, 2000 was
filed reporting Lone Star's cancellation of its common stock offering.
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: November 8, 2000
