LONE STAR TECHNOLOGIES INC - 10-Q Quarterly Report

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UNITED STATES
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 quarterly period ended June 30, 2003

COMMISSION FILE NUMBER: 1-12881

LONE STAR TECHNOLOGIES, INC.
(A DELAWARE CORPORATION)
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 75-2085454

15660 N. Dallas Parkway, Suite 500
Dallas, Texas 75248
(972) 770-6401

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

As of July 8, 2003, the number of shares of Common Stock outstanding at $1.00 par value per share was 28,455,358.

LONE STAR TECHNOLOGIES, INC.

INDEX

PART I—FINANCIAL INFORMATION


ITEM 1.		CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
		Condensed Consolidated Statements of Operations
		Condensed Consolidated Balance Sheets
		Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements
ITEM 2.		MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
		Results of Operations
		Financial Condition and Liquidity
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.		CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6.		EXHIBITS AND REPORTS ON FORM 8-K

LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; $ and shares in millions, except per share data)

		For the Quarter Ended June 30,						For the Six Months Ended June 30,
		2003			2002			2003			2002
Net revenues		$	141.3		$	150.1		$	269.4		$	273.3
Cost of goods sold			137.9			141.2			261.7			259.4

	Gross profit		3.4			8.9			7.7			13.9
Selling, general and administrative expenses			10.5			9.3			20.4			18.6

	Operating loss		(7.1	)		(0.4	)		(12.7	)		(4.7	)
Interest income			0.3			0.7			0.7			1.2
Interest expense			(3.5	)		(3.2	)		(6.8	)		(6.4	)
Other income			1.2			0.7			2.2			1.1
Other expense			(0.1	)		(0.1	)		(0.4	)		(0.1	)

	Loss before income tax		(9.2	)		(2.3	)		(17.0	)		(8.9	)
Income tax benefit (expense)			—			(0.1	)		(0.1	)		0.6

	Net loss	$	(9.2	)	$	(2.4	)	$	(17.1	)	$	(8.3	)

Per common share—basic:
	Net loss available to common shareholders	$	(0.32	)	$	(0.08	)	$	(0.60	)	$	(0.31	)
Per common share—diluted:
	Net loss available to common shareholders	$	(0.32	)	$	(0.08	)	$	(0.60	)	$	(0.31	)
Weighted average shares outstanding:
	Basic		28.4			27.6			28.4			26.4
	Diluted		28.4			27.6			28.4			26.4

See Notes to Condensed Consolidated Financial Statements.

LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; $ in millions, except share data)

			June 30, 2003			December 31, 2002
ASSETS
Current Assets:
	Cash and cash equivalents		$	42.5		$	120.5
	Accounts receivable, less allowances of $2.0 and $1.6, respectively			80.6			60.2
	Inventories			130.0			148.5
	Other current assets			14.5			12.6

		Total current assets		267.6			341.8
Property, plant and equipment, net				224.3			204.4
Goodwill				59.4			55.1
Other noncurrent assets				42.9			11.6

		Total assets	$	594.2		$	612.9

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
	Accounts payable		$	28.0		$	37.5
	Accrued liabilities			26.6			22.4

		Total current liabilities		54.6			59.9
Senior subordinated debt				150.0			150.0
Other noncurrent liabilities				92.1			90.4

		Total liabilities		296.7			300.3
Contingencies (See Note 11)
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: 28,628,598 and 28,539,014, respectively)			28.6			28.5
	Capital surplus			354.3			352.7
	Accumulated other comprehensive loss			(30.8	)		(32.1	)
	Accumulated deficit			(52.3	)		(35.2	)
	Treasury stock, at cost (173,240 and 105,844 common shares, respectively)			(2.3	)		(1.3	)

		Total shareholders' equity		297.5			312.6

		Total liabilities and shareholders' equity	$	594.2		$	612.9

See Notes to Condensed Consolidated Financial Statements.

LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; $ in millions)

			For the Quarter Ended June 30,						For the Six Months Ended June 30,
			2003			2002			2003			2002
Cash flows from operating activities:
	Net loss		$	(9.2	)	$	(2.4	)	$	(17.1	)	$	(8.3	)
	Adjustments to reconcile net loss to net cash used in operating activities, net of acquired companies:
		Depreciation and amortization		6.2			5.3			12.2			10.7
		Gain on sale of property, plant and equipment		—			—			(0.4	)		—
		Non-cash charge for stock compensation		0.5			0.4			0.5			0.7
		Accounts receivable		(10.8	)		(19.8	)		(16.8	)		(19.2	)
		Inventories		7.9			3.6			18.8			7.0
		Accounts payable and accrued liabilities		(16.5	)		12.8			(6.4	)		2.5
		Other assets/liabilities		(34.2	)		(1.7	)		(31.4	)		(0.5	)

		Net cash used in operating activities		(56.1	)		(1.8	)		(40.6	)		(7.1	)
Cash flows from investing activities:
	Capital expenditures			(2.5	)		(2.5	)		(5.3	)		(5.9	)
	Proceeds from sale of property, plant and equipment			—			—			0.4			—
	Cash paid for acquistions, net of cash received			(33.9	)		—			(33.9	)		—

		Net cash used in investing activities		(36.4	)		(2.5	)		(38.8	)		(5.9	)
Cash flows from financing activities:
	Proceeds from exercise of options			0.7			—			1.0			—
	Net proceeds from equity offering			—			82.8			—			82.8
	Purchase of treasury stock			—			—			(0.8	)		—

		Net cash provided by financing activities		0.7			82.8			0.2			82.8
Effect of foreign exchange rate changes on cash				0.4			—			1.2			—

Net increase (decrease) in cash and cash equivalents				(91.4	)		78.5			(78.0	)		69.8
Cash and cash equivalents, beginning of period				133.9			97.8			120.5			106.5

Cash and cash equivalents, end of period			$	42.5		$	176.3		$	42.5		$	176.3

See Notes to Condensed Consolidated Financial Statements.

LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1—BASIS OF PRESENTATION

In the opinion of management, the unaudited condensed consolidated financial statements for Lone Star Technologies, Inc. and its consolidated subsidiaries ("Lone Star" or the "Company") include all adjustments (consisting of normal, recurring adjustments) necessary to present fairly the financial position as of June 30, 2003 and the cash flows and the results of operations for the three- and six-month periods ended June 30, 2003 and 2002. Unaudited financial statements are prepared on a basis substantially consistent with those audited for the year ended December 31, 2002. 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 accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations promulgated by the United States 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 presentation. 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/A for the year ended December 31, 2002. In these Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in millions of dollars and shares, respectively, except per share amounts and unless otherwise noted.

On May 1, 2003, Lone Star acquired substantially all of the assets of Delta Tubular Processing ("Delta"), a leading provider of high-quality customized oil country tubular processing services, for approximately $14.0 million in cash.

On June 2, 2003, Lone Star acquired certain assets of Frank's Tubular International (since renamed Delta Tubular International, or "Delta International"), a leading provider of high-quality threading and inspection services to the oil country tubular goods market, for approximately $18.9 million in cash.

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," Lone Star has included in its results of operations the results of Delta and Delta International from their respective dates of acquisition.

Lone Star uses estimates and assumptions required for preparation of the financial statements. The estimates are primarily based on historical experience and business knowledge and are revised as circumstances change. However, actual results could differ from the estimates.

NOTE 2—INVENTORY

The components of inventory at June 30, 2003 and December 31, 2002 were as follows:

		June 30, 2003			December 31, 2002
Raw materials		$	36.8		$	52.5
Work-in-process			59.5			48.5
Finished goods			50.6			63.2
Materials, supplies and other			23.4			24.1

Total inventories before LIFO valuation reserve			170.3			188.3
Reserve to reduce inventories to LIFO value			(36.8	)		(35.8	)

Total inventories			133.5			152.5
Amount included in other noncurrent assets			(3.5	)		(4.0	)

	Inventories, current	$	130.0		$	148.5

NOTE 3—EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. The numbers of shares used to compute basic earnings per share for the three months ended June 30, 2003 and 2002, were 28.4 million and 27.6 million, respectively and for the six months ended June 30, 2003 and 2002, were 28.4 million and 26.4 million, respectively. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding and other dilutive securities. Lone Star had a net loss for the three- and six-month periods ended June 30, 2003 and 2002 and the effect of including dilutive securities in earnings per share would have been anti-dilutive. At June 30, 2003 and 2002, options to purchase 0.3 million common shares were excluded from the calculation of diluted earnings per share.

NOTE 4—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill identified with Lone Star's oilfield segment resulted from the acquisitions of Lone Star Steel ("Steel"), Bellville Tube Company, L.P. ("Bellville"), Delta and Delta International. Goodwill identified with Lone Star's specialty tubing segment resulted from the acquisition of Fintube Technologies, Inc. ("Fintube"). Goodwill is tested for impairment annually. Other intangible assets that are subject to amortization are amortized on a straight-line basis over their respective estimated weighted average useful lives of four to ten years. The components of purchased amortizable intangible assets associated with completed acquisitions at June 30, 2003 and December 31, 2002 as are follows:

	June 30, 2003					December 31, 2002
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Non-compete agreements	$	1.3	$	(0.5	)	$	0.9	$	(0.5	)
License agreements		0.6		(0.6	)		0.6		(0.5	)
Other		0.5		(0.2	)		0.3		(0.2	)

	$	2.4	$	(1.3	)	$	1.8	$	(1.2	)

Amortization expense related to purchased intangible assets was $0.1 million for each of the three- and six-month periods ended June 30, 2003 and $0.1 million for the six-month period ended June 30, 2002.

Estimated future amortization expense related to purchased intangible assets at June 30, 2003 is as follows:

Fiscal year:
2003 (Remaining 6 months)		$	0.2
2004			0.3
2005			0.2
2006			0.1
2007			0.1
Thereafter			0.2

	Total	$	1.1

Goodwill allocated to Lone Star's reportable segments as of December 31, 2002 and changes in the carrying amount of goodwill for the six-month period ended June 30, 2003 are as follows:

	Oilfield		Specialty Tubing		Total
Balance at December 31, 2002	$	9.2	$	45.9	$	55.1
Goodwill acquired during the period		4.3		—		4.3

Balance at June 30, 2003	$	13.5	$	45.9	$	59.4

NOTE 5—RESTRICTED CASH

At June 30, 2003, Lone Star had restricted cash of $32 million included in "Other noncurrent assets" related to a cash deposit that collateralizes a bond for a breach of contract judgment on appeal. See Note 11—Contingencies.

NOTE 6—PRODUCT WARRANTIES

Lone Star's products are used in applications which are subject to inherent risks including well failures, performance deficiencies, line pipe leaks, personal injury, property damage, environmental contamination or loss of production. The Company warrants its products to meet certain specifications. Actual or claimed deficiencies from these specifications may give rise to claims and the Company maintains a reserve for asserted and unasserted warranty claims. The warranty claim exposure is evaluated using historical claim trends and information available on specifically known claims. The Company also maintains product and excess liability insurance subject to certain deductibles that limit the exposure to these claims. The Company considers the extent of insurance coverage in its estimate of the reserve. Typically, this reserve is not subject to significant fluctuations from period-to-period. However, the incurrence of an unusual amount of claims could alter the Company's exposure and the

related reserve. The following table identifies changes in warranty reserves from December 31, 2002 to June 30, 2003:

Balance at December 31, 2002		$	2.1
	Add: accruals for warranties during the period		0.8
	Accruals related to pre-existing warranties and changes in estimates		0.3
	Deduct: settlements made during the period		(0.8	)

Balance at June 30, 2003		$	2.4

NOTE 7—TREASURY SHARES

Beginning in October 2002, the Company's Board of Directors authorized the open-market purchase of Lone Star's common stock from time to time for a total investment not to exceed $10.0 million. Since the inception of the stock buy-back program, a total of 160,600 shares have been repurchased as treasury shares. The 173,240 treasury shares held as of June 30, 2003 and 105,844 shares held as of December 31, 2002 are reported at their acquired cost.

NOTE 8—STOCK-BASED COMPENSATION PLANS

The Company applies the intrinsic value method provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for grants of options to Company directors, officers and employees under the Company's various stock-based compensation plans. No stock-based employee compensation cost was reflected in net earnings related to incentive and nonqualified stock options, as all option grants under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, $0.5 million of compensation expense was recognized related to restricted stock grants for the three-and six-month periods ended June 30, 2003 and $0.4 million and $0.7 million for the three-and six-month periods ended June 30, 2002, respectively.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation," in accounting for the plans.

		For the Quarter Ended June 30,						For the Six Months Ended June 30,
		2003			2002			2003			2002
Net loss as reported		$	(9.2	)	$	(2.4	)	$	(17.1	)	$	(8.3	)
	Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		0.5			0.4			0.5			0.7
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2.2	)		(2.0	)		(3.9	)		(3.9	)

	Pro forma net loss	$	(10.9	)	$	(4.0	)	$	(20.5	)	$	(11.5	)

Basic and diluted earnings (loss) per share
	as reported	$	(0.32	)	$	(0.08	)	$	(0.60	)	$	(0.31	)
	pro forma	$	(0.38	)	$	(0.14	)	$	(0.72	)	$	(0.44	)

NOTE 9—BUSINESS SEGMENTS DATA

The following table presents segment information. The "Corporate/Other" column includes corporate related items and other insignificant nonsegments:

		Oilfield			Specialty Tubing			Flat Rolled Steel and Other Tubular Goods			Corporate/ Other			Total
Quarter ended June 30, 2003
	Revenues	$	98.0		$	32.1		$	11.2		$	—		$	141.3
	Segment operating income (loss)		(1.1	)		(3.4	)		(0.6	)		(2.0	)		(7.1	)
	Depreciation and amortization		3.9			2.1			0.2			—			6.2
	Total assets		311.3			180.8			17.8			84.3			594.2
	Capital expenditures		1.8			0.7			—			—			2.5
Quarter ended June 30, 2002
	Revenues	$	92.9		$	44.2		$	13.0		$	—		$	150.1
	Segment operating income (loss)		3.1			(1.2	)		(1.1	)		(1.2	)		(0.4	)
	Depreciation and amortization		2.4			2.2			0.7			—			5.3
	Total assets		233.0			219.5			19.4			185.9			657.8
	Capital expenditures		1.5			1.0			—			—			2.5

		Oilfield			Specialty Tubing			Flat Rolled Steel and Other Tubular Goods			Corporate/ Other			Total
Six months ended June 30, 2003
	Revenues	$	178.5		$	66.6		$	24.3		$	—		$	269.4
	Segment operating income (loss)		(2.2	)		(6.4	)		(0.2	)		(3.9	)		(12.7	)
	Depreciation and amortization		7.3			4.4			0.5			—			12.2
	Total assets		311.3