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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2004
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title
of each class
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Name
of each exchange
on which registered
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Common Stock,
par value $1.00
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New York Stock
Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by 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. Yesý. Noo.
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). Yesý. Noo.
The aggregate market value of common stock on June 30, 2004 held by
nonaffiliates of the registrant was approximately $790.9 million, based on the
closing price of the common stock on the New York Stock Exchange.
As of February 8, 2005, the number of shares of common stock
outstanding was 29,289,655.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant’s
Proxy Statement for its 2005 Annual Meeting of Shareholders are incorporated by
reference into Part III hereof.
PART I
ITEM 1. BUSINESS
GENERAL
Lone Star Technologies,
Inc., a Delaware corporation, is:
• a
leading domestic manufacturer and marketer of premium welded “oil country
tubular goods”, or “OCTG”, which are steel tubular products used in the
completion of and production from oil and natural gas wells;
• a
major manufacturer and marketer of line pipe, which is used in the gathering
and transmission of oil and natural gas;
• a
leading supplier of premium thermal treating, end finishing, inspection, and
logistics services to the oilfield industry;
• one
of the largest domestic manufacturers of high quality couplings used to connect
individual sections of oilfield casing and tubing;
• a
leading manufacturer of specialty tubing products used in industrial,
automotive, construction, agricultural, and heat recovery technology
applications; and
• a
marketer of oil country tubular goods and line pipe produced by other companies
through exclusive marketing arrangements.
Lone Star began producing
and marketing oil country tubular goods and other tubular products over 50
years ago, and the holding company was incorporated in 1986. As used in this report, the terms “we,” “us”,
“our” and “Lone Star” refer to Lone Star Technologies, Inc. and its
subsidiaries and affiliates unless the context indicates otherwise.
Lone Star’s operating
companies include Lone Star Steel Company (“Steel”), a manufacturer of oilfield
tubulars, specialty tubing products, and flat-rolled steel, and Fintube
Technologies, Inc. (“Fintube”), a manufacturer of specialty tubulars used in
heat recovery technology applications.
In October 2003 we created a new business unit, Star Energy Group, to
enhance our ability to provide OCTG customers with a full spectrum of pipe
finishing, inspection, and logistics services.
Star Energy Group integrated the sales and marketing functions and
production assets of four companies we acquired between 2000 and 2003:
• Wheeling
Machine Products, Inc. and Wheeling Machine Products of Texas, Inc.
(collectively, “Wheeling”), one of the largest domestic suppliers of couplings
used to connect individual sections of oilfield casing and tubing;
• Delta
Tubular Processing (“DTP”), a leading provider of thermal treating and
end-finishing services for oilfield production tubing;
• Frank’s
Tubular International (since renamed Delta Tubular International, or “DTI”), a
leading provider of high-quality threading, inspection, and storage services to
the OCTG market; and
• Bellville
Tube Company, L.P. (“Bellville”), an OCTG manufacturer.
RISK FACTORS
In addition to important factors described elsewhere in this report,
Lone Star cautions current and potential investors that the following risk
factors, among others, sometimes have affected, and in the future could affect,
Lone Star’s actual results and could cause such results during fiscal 2005, and
beyond, to differ materially from those expressed in any forward-looking
statements made by or on behalf of Lone Star.
If any of the following risks actually occurs, our business, financial
condition or results of operations could be materially adversely affected and
you may lose all of your investment.
The volatility of oil and gas markets affects demand for our
principal products, and downturns in these markets could cause our revenues to
decrease. Proceeds from the
sale of casing, tubing, line pipe, couplings and OCTG finishing services to the
oil and gas industry constitute the majority of our revenues. Downturns in the oil and gas markets and
general economic conditions could cause demand for our principal products and
services to decrease, which would adversely affect our revenues and results of
operations.
3
Demand for our oilfield products and services depends primarily upon
the number of oil and natural gas wells being drilled, completed and re-worked
at any given time and the depth and drilling conditions of these wells. The level of these activities depends
primarily on expectations as to future prices for natural gas and oil. Natural gas and oil prices are subject to
significant fluctuations in response to relatively minor changes in supply,
market uncertainty and a variety of additional factors that are beyond our
control. These factors include:
• worldwide and
domestic supplies of and demand for oil and natural gas;
• domestic and
foreign natural gas and oil production;
• political
instability or armed conflict in oil and gas producing regions;
• the price and
amounts of imports of oil and gas casing, tubing and line pipe;
• the availability
of alternative fuels;
• the availability
of pipeline capacity;
• weather conditions;
• domestic and
foreign governmental regulations, especially trade laws and taxes; and
• the overall
economic environment, including the demand for electricity.
We expect natural gas and oil prices and the domestic rig count to
continue to be volatile in the future. A
downturn in the oil and gas market could decrease demand for our products and
services and cause our revenues to decrease.
Our precision mechanical tubulars and other businesses are
sensitive to economic downturns, which could cause our revenues to decrease.
We manufacture and sell high quality steel tubing in the
form of precision mechanical tubulars used by our customers in the manufacture
of products such as automotive stabilizers, hydraulic cylinders and
cranes. The demand for these products
and, in turn, for our precision mechanical tubulars, is dependent on the
general economy, the automotive and construction industries, product inventory
levels and other factors affecting domestic goods activity. If we are not able to adequately predict
demand and if our precision mechanical tubulars inventories (or the inventories
of other precision tubular manufacturers) become excessive, there could be a
material adverse effect on price levels, the quantity of precision mechanical
tubulars sold by us and our revenues.
The competition for raw materials we use in
our business and the volatility of our raw material costs could reduce our
profits and constrain our operations, which would reduce our revenues.
Purchased steel represents the largest portion of our cost
of goods sold. Our raw material costs in
2004 relating to purchased steel increased dramatically over the prior
year. The price and availability of steel
slabs, coils, scrap and wire rod that we use in our manufacturing processes are
highly competitive and cyclical. The
following factors, most of which are beyond our control, affect the price of
steel:
• supply and demand
factors;
• freight costs and
transportation availability;
• inventory levels
of brokers and distributors;
• the price and
availability of imported steel pipe and tubing;
• trade duties and
taxes; and
• labor disputes.
Changes in steel prices can affect the pricing levels of our
products. We seek to maintain our profit
margin by attempting to increase the price of our products in response to an
increase in steel costs and by sourcing steel from our flat rolled steel
division, but we do not always succeed in passing these price increases through
to our customers. As a result, we
typically have a limited ability to recover increases in steel costs. While we endeavor to maintain flexibility in
procurement of steel for our specialty tubular products, any failure to obtain
sufficient steel slabs and coils would constrain our operations.
In the welded oil and gas casing and tubing and line pipe market, we
compete against manufacturers that may be able to purchase or produce
semi-finished steel, hot rolled coils or scrap at a lower cost than we
can. Our Lone Star Steel subsidiary
satisfies its raw material requirements and those of our Bellville subsidiary
by purchasing semi-finished steel, using purchased and internally generated
scrap to make hot rolled coils in its melt shop and hot strip mill and
purchasing coils. Our Wheeling
subsidiary typically purchases its coupling stock from domestic seamless
oilfield tubular manufacturers. Our
Fintube subsidiary must also compete with manufacturers that may be able to
purchase or produce coils more cost-effectively than we can. We may not be able to satisfy our subsidiaries’
raw material requirements as cost-effectively as our competitors, which may
lead to reduced sales.
4
Excessive inventory levels of oilfield products could reduce
demand for our products and adversely affect our sales.
Industry-wide inventory levels of tubular goods for the oil
and gas industry can vary significantly from period to period depending on
industry cycles. These changes can have
a direct adverse effect on the demand for new production of oilfield products
when customers draw from existing inventory rather than purchase new
products. As a result, our oilfield
products sales and results of operations may vary significantly from period to
period. Excessive inventories could have
a material adverse effect on price levels and the quantity of oil and gas
casing, tubing, line pipe and couplings sold by us. In addition, any excess domestic capacity may
not necessarily be substantially absorbed during periods of increased domestic
drilling activity since foreign producers of oilfield products may increase
their exports to the United States market.
Easing of United States government import trade restrictions
could increase foreign competition in our industry and decrease our sales and
our profits, particularly in the case of oil and gas casing and tubing and line
pipe. The domestic steel industry
historically has faced significant competition from foreign steel
producers. The level of imports of OCTG,
which has varied significantly over time, affects the domestic market for these
goods. High levels of imports reduce the
volume sold by domestic producers and tend to suppress selling prices, both of
which have an adverse impact on our business.
The level of imports of oil and gas casing and tubing and line pipe is
affected by numerous factors, including:
• overall world
demand for oil and gas casing and tubing and line pipe;
• domestic and
foreign inventory levels of casing, tubing and line pipe;
• the purchasing
pattern of distributors and end users;
• domestic and
foreign trade policy; and
• the relative
value of the United States dollar.
Many foreign steel producers are owned, controlled or subsidized by
their governments and their decisions with respect to production and sales may
be influenced more by political and economic policy considerations than by
prevailing market conditions. Actions
motivated by these factors could increase competition and cause our sales to
decrease.
Anti-dumping and countervailing duty orders applicable to our industry
are limited to specific countries, are largely under appeal and may be revoked
as a result of periodic “sunset reviews.”
In addition, an individual exporter may obtain revocation as to itself
under specific circumstances. In June
2000 the United States government completed sunset reviews of orders covering
Canada and Taiwan and revoked both orders.
While the United States government completed sunset reviews of orders
covering Argentina, Italy, Japan, Korea and Mexico in June 2001 and kept those
orders in place, the orders remain subject to future sunset reviews beginning
in 2006, and to annual reviews by the Department of Commerce. The affirmative sunset review determinations
have been appealed to the Court of International Trade, and Argentina has appealed
to the World Trade Organization. If
those orders are revoked in full or in part or the duty rates are lowered, we
could be exposed to increased competition from imports that could decrease our
sales and profits.
In March 2004, the domestic line pipe industry filed anti-dumping cases
against imports of line pipe from China, Korea, and Mexico. Despite mixed preliminary dumping findings by
the Department of Commerce in October 2004, high margins against China and
Mexico and low or de minimis margins
against Korea, the industry withdrew the petitions in February 2005 based on
the significant profitability improvements in the industry in 2004. However, the withdrawal of the petitions may
lead to higher import levels, which could negatively impact our line pipe
shipments levels and prices. Such
increased competition could decrease our sales and profits and have a material
adverse effect on our business, operating results or financial condition.
The United States’ or any other government’s future actions regarding
import duties or other trade restrictions on imports of oil and gas casing,
tubing products, line pipe or other steel products could reduce our sales of such
products.
5
Difficulties in integrating potential acquisitions could
adversely affect our business, operating results and financial condition.
We regularly evaluate potential acquisition opportunities
to support and strengthen our business.
We might not be able to locate suitable acquisition candidates, acquire
candidates on acceptable terms or integrate acquired businesses successfully.
Future acquisitions may require us to incur additional debt and
contingent liabilities, which may materially and adversely affect our business,
operating results and financial condition.
In addition, we may issue shares of our common stock in order to
consummate future acquisitions. Such
issuances might have a dilutive effect on our current equity holders. Furthermore, the process of integrating
acquired businesses effectively involves the following risks:
• assimilating
operations and products may be unexpectedly difficult;
• management’s
attention may be diverted from other business concerns;
• we may enter
markets in which we have limited or no direct experience; and
• we may lose key
employees of an acquired business.
Our commercial alliances with other OCTG, line pipe, and specialty
tubing mills may not continue which could adversely affect our business,
financial condition, and revenues. We maintain commercial relationships with
several tubular producers, which we do not own, that provide us exclusive
distribution rights of their products in specific geographic regions,
principally marketing and sales of oilfield tubular products in the United States. These mills produce specific products that
expand our product offerings to our customers and allow us to concentrate our
capital expenditures and manufacturing expertise on our more premium products. These alliances accounted for 18% of our
total oilfield products segment revenues in 2004. A loss of one or more of these alliance
relationships could reduce our ability to offer these specific products to our
customers and therefore, adversely affect our business, financial condition,
and our revenues.
We are subject to numerous lawsuits concerning exposure to
asbestos on our premises which could adversely affect our financial condition.
During the last six years our Lone Star Steel subsidiary
has been named as one of a number of defendants in 42 lawsuits alleging that
certain individuals were exposed to asbestos on the defendants’ premises. Three pending asbestos-related claims have
been asserted against another of our subsidiaries. We did not manufacture or distribute any
products containing asbestos. Some or
all of these claims may not be covered by our insurance. Although we have accrued for our estimated
exposure to known claims, we do not know the extent to which future claims may
be filed, and therefore we cannot estimate our exposure, if any, to unasserted
claims.
Failure to renew or reach acceptable new collective
bargaining agreements could result in labor disruptions which could adversely
affect our business, financial condition and revenues.
Our subsidiaries are subject to three collective bargaining
agreements. At December 31, 2004, Lone
Star Technologies and its subsidiaries had approximately 2,422 employees, of
whom approximately 994, all at our Lone Star Steel subsidiary, are part of
collective bargaining agreements with three unions. The majority of these union workers are
production and maintenance workers represented by the United Steel Workers of
America under a contract which expires on May 31, 2005. The two other agreements, covering an
aggregate of approximately 15 of our warehouse and plant security workers as of
December 31, 2004, expire on May 31, 2005 and September 30, 2006,
respectively. A collective bargaining
agreement covering 48 warehouse and maintenance employees of Star Tubular
Services, a subsidiary of Lone Star Steel, expired in February 2004 and the
employees have worked without a contract since that time.
Collective bargaining agreements with our employees generally cover
wages, health care benefits and retirement plans, seniority, job classes and
work rules. Failure to renew these
agreements upon expiration or to establish new collective bargaining agreements
on terms acceptable to us could result in work stoppages or other labor
disruptions which could adversely impact our customer relationships, financial
condition and results of operations.
We would have greater taxable income, and therefore be
subject to increased federal income taxes, if we lose our federal tax net
operating loss carryforwards due to our, or the consolidated group with whom we
file tax returns, experiencing an ownership change of more than 50%. We had federal income tax net
operating loss carryforwards of approximately $263 million at
December 31, 2004 that, if not utilized to reduce our taxable income, will
expire in varying amounts between years 2005 and 2023. Our ability to use these net operating loss
carryforwards to reduce taxable income is dependent upon our not experiencing
an ownership change of more than 50 percentage points as defined by IRS
regulations. Lone Star’s common stock is
publicly traded, and management cannot assure that future trading will not
result in an ownership change, as defined by IRS regulations, which would limit
the availability of our net operating loss carryforwards. In addition, a portion of our net operating
loss carryforwards relates to our former subsidiary, American Federal Bank,
F.S.B., and is subject to an agreement with the Federal Deposit Insurance
Corporation under which we may be required to pay that government agency for
certain tax benefits relating to the use of the net operating loss
carryforwards.
Our significant shareholders, whose interests may not be
aligned with yours, will be able to significantly influence the outcome of
shareholder votes. As of December
31, 2004 a significant shareholder group collectively owned approximately 16.8%
of our common stock. Accordingly, these
shareholders, as a group, will be able to significantly influence the outcome
of shareholder votes, including votes concerning the election of directors, the
adoption or amendment of provisions in our certificate of incorporation or
bylaws, and the approval of mergers and other significant corporate
transactions, and their interests may not be aligned with yours. One of the eight members of our Board of
Directors serves on our Board at the request of this significant shareholder
group. The existence of these
6
levels of ownership concentrated in a few persons makes it
less likely that any other holder of common stock will be able to affect our
management or direction. These factors
may also have the effect of delaying or preventing a change in our management
or voting control or our acquisition by a third party.
We have unfunded pension plan liabilities of at least $29.3
million, which could result in claims against our assets if the plans’ assets
are insufficient to satisfy pension obligations. Our three defined benefit pension plans for
our Lone Star Steel subsidiary’s bargaining unit employees were underfunded by
an aggregate of approximately $29.3 million as of December 31, 2004 using an
investment return assumption of 8% per annum and a discount rate of 6.25% per
annum. Moreover, if the plans were
terminated under the distress termination provisions of the Employee Retirement
Income Security Act of 1974, as amended, or ERISA, the Pension Benefit Guaranty
Corporation, or PBGC, would have claims against our assets for the amount
necessary to satisfy the plans’ unfunded benefit liabilities under the PBGC’s
actuarial assumptions, which amount may be greater than $29.3 million as of
December 31, 2004.
Various governmental regulations and environmental risks
applicable to our business may require us to take actions which will adversely
affect our results of operations. Our business is
subject to numerous federal, state, provincial, local and foreign laws and
regulations, including regulations with respect to air emissions, wastewater
discharges and the generation, handling, storage, transportation, treatment and
disposal of waste materials. Although we
believe we are in substantial compliance with all applicable laws and
regulations, legal requirements are frequently changed and subject to
interpretation, and the presently unpredictable ultimate cost of compliance
with these requirements could affect our operations. We may be required to make significant
expenditures to comply with governmental laws and regulations. Existing laws or regulations, as currently
interpreted or reinterpreted in the future, or future laws or regulations,
could have a material adverse effect on our results of operations and financial
condition.
Potential casualties and product liability claims relating
to the products we manufacture, service and sell to the oil and gas industry
and industries using heat recovery applications could harm our business. The oil and gas casing, tubing,
coupling and line pipe products we manufacture and service are sold primarily
for use in oil and gas drilling and transmission activities, which are subject
to inherent risks, including well failures, line pipe leaks and fires, that
could result in death, personal injury, property damage, pollution or loss of
production. In addition, defects in our
specialty tubing products could result in death, personal injury, property
damage, pollution, damage to equipment and facilities or inefficient heat
recovery. We warrant our oilfield
products, specialty tubing, and the commercial alliance products we sell or
distribute to be free of various defects.
Actual or claimed defects in our products and services may give rise to
claims against us for losses and expose us to claims for damages. Our insurance may be inadequate or
unavailable to protect us in the event of a claim or our insurance coverage may
be canceled or otherwise terminated.
Market volatility and downturns of industries that use our
Fintube products for heat recovery applications could reduce demand for those
products and adversely affect our revenues. Our Fintube subsidiary is the largest
domestic specialty tubing manufacturer of heat recovery finned tubulars, which
are used in various applications including fuel economizers, petrochemical
plants, refineries and combined-cycle electrical power generation plants. Our Fintube business is therefore dependent
on power plant construction, the cost of alternative fuels for power generation
and, to a lesser extent, industrial plant processing and petrochemical plant
construction. Demand for these products
has been down since fourth quarter 2001 as construction of new power plants was
curtailed due to lower energy demand attributable to the slowdown in the
general economy and constraints on capital to fund the construction
projects. Power plant construction
curtailments and cancellations are expected to continue. This construction activity and the
corresponding demand for our Fintube products are also related to natural gas
and oil prices and are therefore subject to the volatility of the oil and gas
market. Demand for these products
fluctuates significantly in response to a number of economic, market and other
factors, most of which are beyond our control.
A decrease in demand for these Fintube products could adversely affect
our results of operations. Some
additional factors affecting demand are:
• the level of
consumer and industrial demand for electrical power generation;
• fluctuations in
construction levels of gas-fired, combined-cycle power generation plants;
• the price and
amount of imports of foreign boiler tubes, finned tubes and other products;
• worldwide and
domestic supplies of natural gas;
• weather
conditions; and
• domestic and foreign governmental
regulations and taxes.
7
OUR STRATEGIES
We believe that the
better we serve our customers, the better we serve our shareholders. Our primary responsibility is to grow
shareholder value. Thus, our goal is to
be the leading provider of both oilfield tubular products and specialty tubing
products and to increase our market presence in order to benefit from favorable
market conditions. The key elements of our strategy to achieve commercial
leadership and operational excellence are:
Achieving increased production, greater
productivity and penetration into new markets through capital investment and
commercial alliances expansion. Our customers demand a broad product
line and a quick delivery response. Our
operational flexibility gives us the ability to match production to customer
needs and has earned us the reputation of having the shortest order to delivery
times in the industry. We constantly
seek to improve our production efficiency by upgrading our manufacturing
methods and processes. By becoming more
efficient, we will be able to continue offering our products at attractive
prices to an increasing number of customers. Through our exclusive commercial
alliances with several mills, we have been able to outsource production of
specific types of OCTG, line pipe, and specialty tubing, enabling us to
concentrate our capital expenditures and manufacturing expertise on our premium
products and new technologies. Expanding
these alliances will enable us both to offer a wider variety of tubular
products to our customers and to increase our offering of premium products. For example, we initiated two new alliances
during the year, one with a Russian tubular producer and the other with a
Brazilian tubular producer, both of which further expand our product
offering. Through our alliances and with
Star Energy Group, we now deliver the industry’s most complete line of oilfield
tubular products and services.
Continuing to develop and market new
product applications and technologies. We have the products, the engineering
capabilities, and the commitment to provide solutions so customers think of
Lone Star first when they have a need, even if it is a need that has never been
met before. Commercial leadership
demands that we continually look for new ways to do business. We have historically been successful in
pioneering new production methods to expand the market acceptance of our oil
country tubular goods, line pipe, and specialty tubing products. For example,
we pioneered the electric resistance welded, full-body normalized process,
which, together with our extensive heat-treating capabilities, enables us to
manufacture and sell our oil country tubular goods and line pipe for deep wells
and other critical applications. We have also developed expandable casing
products which are used in critical repair and extended reach drilling
applications to save time and costs for our customers. In addition, we have produced and sold
slotted tubes for expandable sand screens and new riser sleeves to provide
solutions for completion in unconsolidated sand formations and subsea
completions, respectively. We will
continue to invest in new equipment technologies and develop new products for
the markets we serve.
Growing through strategic acquisitions. Our acquisitions of the companies
comprising our Star Energy Group have enabled us to broaden our customer base
and expand the selection of products we offer and the markets we serve at a
cost significantly less than that required to develop these operations on our
own. We will continue to pursue
strategic acquisitions that we believe to be beneficial to our business.
INDUSTRY BACKGROUND
Oilfield Products. The product group referred to as oil country
tubular goods, or OCTG, includes casing and tubing, which we manufacture, as
well as drill pipe. We do not currently
manufacture drill pipe. Casing acts as a
structural retainer wall in oil and natural gas wellbores to provide support
and prevent caving during drilling operations and is used to protect water-bearing
formations during the drilling of a well. Casing is generally not removed after
it has been installed in a well. Tubing, which is used to transmit oil and
natural gas to the surface, may be replaced during the life of a producing
well.
8
Demand for oil country tubular goods depends on several factors most
notably the number of oil and natural gas wells being drilled, completed and re-worked,
and the depth and drilling conditions of these wells. The level of these
activities depends primarily on the demand for natural gas and oil and the
expectation of future prices of these commodities. A key indicator of domestic
demand is the average number of drilling rigs operating in the United
States. According to the Baker Hughes
rig count, the most commonly cited indicator of the level of domestic drilling
activity, the average United States rig count was 1,192 working rigs in 2004
compared to 1,032 and 830 in 2003 and 2002, respectively, the highest annual
average in the last fifteen years.
Rigs drilling offshore in the United States in 2004 fell to an average
97 rigs compared to 108 rigs during 2003 and 113 rigs during 2002, though the
average for the final month of 2004 and through the first month of 2005 rose to
105 rigs indicating a possible positive trend toward deeper drilling. Further supporting this assertion, the number
of rigs drilling at depths of 8,000 feet and deeper, which is the general depth
in which alloy-grade OCTG is employed, was 979 at the end of 2004, an increase
of 16% from the end of 2003. At year-end
2004, 1,243 rigs were working, of which 85% were drilling for natural gas.
Further impacting demand
for oilfield products in 2004 were rising natural gas and crude oil
prices. Average 2004 natural gas prices
at the Henry Hub increased nearly 7% over the 2003 average. The average price of West Texas Intermediate
crude oil increased 31% in 2004 compared to 2003. These factors led to continuing strong demand
for our oilfield products.
The oil country tubular
goods market is also affected by the level of inventories maintained by
manufacturers, distributors, threading companies, and end users. During downturns in drilling activity,
customers typically utilize the inventory of these products rather than
purchase new products, causing demand for new production to further decrease. Conversely, in periods of increased drilling
activity, increases in oil country tubular goods inventory levels by
distributors and end users typically occur, accelerating demand for new
production. However, throughout 2004
although drilling activity had increased over the prior year, distributor
inventory remained at lower than anticipated levels, especially in the fourth
quarter of 2004 as distributors remained cautious purchasing inventory for spot
resale due principally to uncertainties about future OCTG pricing.
The amount of imported
oilfield products also affects the oil country tubular goods market. According to statistics from the U.S.
Department of Commerce, imported oil country tubular goods accounted for
approximately 40% of the apparent domestic oil country tubular goods consumption
in 2004 and 35% in 2003.
Protective tariffs on oil
country tubular goods from Argentina, Japan, Korea, Italy and Mexico remain in
effect from successful 1995 trade suits.
The protective tariffs are subject to sunset review in 2006. The quantity of imported electric resistance
welded (“ERW”) line pipe in sizes up to 16-inches in diameter accounted for 57%
of total consumption in 2004 and 56% in 2003.
The industry filed trade cases against China, Korea, and Mexico in March
2004 but the cases were subsequently dropped on February 1, 2005 prior to
hearings being scheduled by the International Trade Commission. These cases could possibly be renewed in the
future.
9
Manufacturers produce oil
country tubular goods in numerous sizes, weights, grades, and thread profiles.
The grade of pipe used in a particular application depends on technical
requirements for strength, corrosion resistance, and other performance
characteristics. Oil country tubular goods are generally classified by “carbon”
and “alloy” grades. Carbon grades of oil country tubular goods have yield
strengths of 75,000 pounds per square inch or less and are generally used in
oil and natural gas wells drilled to depths less than 8,000 feet. Alloy grades
of oil country tubular goods, often referred to as premium oil country tubular
goods, have yield strengths of 75,000 pounds per square inch or more and are
generally used in oil and natural gas wells drilled to depths in excess of
8,000 feet or for high temperature wells, highly corrosive wells, or other
critical applications.
Carbon and alloy grades
of oil country tubular goods are available from both electric resistance welded
and seamless tube producers. Electric
resistance welded tubes are produced by processing flat rolled steel into
strips which are cold-formed, welded, full-body normalized or seam-annealed,
and end-finished with threads and couplings. Seamless products are produced by
individually heating and piercing solid steel billets into tubes and then
end-finishing those tubes into oil country tubular goods in a manner similar to
electric resistance welded pipe.
Based on published
industry statistics, electric resistance welded products have accounted for
approximately half of total consumption of oil country tubular goods. Electric resistance welded, full-body
normalized casing and tubing and seamless casing and tubing compete for
critical applications such as deep natural gas wells and offshore wells.
Customers purchasing products for these applications require high-performance
oil country tubular goods that can sustain enormous pressure as measured by
burst, collapse, and yield strength. Operators drilling shallow wells generally
purchase oil country tubular goods based primarily on price and availability,
as these wells require less stringent performance characteristics.
Line pipe products are
used for surface production flow lines and gathering and transmission of oil,
natural gas, and fluids. Line pipe is primarily produced in welded form. Line
pipe markets are dependent not only on the factors which influence the oil
country tubular goods market, but also on pipeline construction activity, line
pipe replacement requirements, new residential construction, and utility
purchasing programs.
Couplings are used to
connect individual sections of oilfield casing and tubing. We manufacture a full product size range of
high quality couplings including both standard oilfield API grades as well as
premium connections. The market for
couplings is dependent on the same factors that impact the oil country tubular
goods market.
Specialty Tubing Products. The specialty tubing business includes the
manufacture, marketing, and sale of a broad variety of steel tubing products,
including premium and custom-made products. Applications for specialty tubular
products include precision mechanical tubular products for automotive, fluid
power, and other markets for various mechanical applications and finned tubular
products for heat recovery applications.
The demand for precision
mechanical tubulars and other specialty tubing used for automotive, fluid
power, and other mechanical applications is cyclical and dependent on the
general economy, the automotive and construction industries, product inventory levels,
and other factors affecting general domestic industrial activity. Demand for precision mechanical tubulars
within the traditional markets significantly increased in 2004 as a result of
the overall economic improvement experienced in the United States during the
year. The increased demand across most
manufacturing sectors boosted the demand for precision mechanical tubulars in
2004 at a rate significantly higher than what was experienced in 2002 and 2003. We experienced a slight decrease in the latter
half of the fourth quarter of 2004 due to expected seasonality.
Demand for heat recovery
tubular products, or finned tubes, depends on several factors including
industrial processing plant and petrochemical plant construction, the cost of
alternative fuels for power generation and combined-cycle electrical power
plant construction. Demand for
combined-cycle electrical generated power slowed considerably in 2002 and
remained slow throughout 2003 and 2004 as construction of new power plants was
curtailed due to lower energy demand attributable to the slowdown in the
general economy, high natural gas prices, and constraints on capital to fund
new plant construction. Also, the final
assembly of power plant components continues to move to lower cost foreign
labor markets.
Flat Rolled Steel and Other Products. The market for flat rolled steel is affected
by a number of factors, including price, capacity utilization, and material
costs. Flat rolled steel is sold in
highly competitive markets and price, quality, and availability are the main
determinants of customer purchasing decisions.
Other products consist of tubular goods that serve a variety of uses,
such as structural piling applications in the construction industry.
10
OUR OILFIELD PRODUCTS
We manufacture and market
premium oil country tubular goods. Our oil country tubular goods, also referred
to as OCTG, include casing and production tubing but not drill pipe. We also
manufacture and market line pipe and couplings and we provide a complete line
of oilfield tubular finishing services including threading and inspection.
Oil
Country Tubular Goods – We manufacture premium alloy and
carbon welded oil country tubular goods, including casing, which acts as a
structural retainer wall in oil and natural gas wellbores, and production
tubing, which transmits hydrocarbons to the surface. We also market and sell under exclusive
arrangements oil country tubular goods produced by other manufacturers that we
refer to as alliance mills. We offer
casing and tubing products with the widest variety of diameters, grades and
wall thicknesses in the United States. This variety provides us with a distinct
competitive advantage as a single source supplier of a complete range of
oilfield casing and production tubing. As a result of our broad product range
and unique heat-treating capabilities, we are able to service nearly all
typical drilling applications for oil and natural gas wells.
Casing, which
historically represents 75% to 80% of our oil country tubular goods revenues,
is the structural retainer wall in oil and natural gas wellbores. It also
serves to prevent pollution of nearby water reservoirs and contamination of a
well’s production. Casing is generally not removed after it has been installed.
Production tubing is installed within the casing to convey oil and natural gas
to the surface. We offer the widest range of grades and outside diameters in
casing (3 1/2” to 20”) and tubing (1.9” to 3 1/2”)
produced in the United States, including products that have been successfully
used in wells with depths of over 30,000 feet.
Our premium product line
includes tubulars manufactured with the electric resistance welded, full-body
normalized process and other thermal techniques that we pioneered. Because this
process gives our tubes better performance characteristics than typical seam-annealed
casing and tubing, we are able to serve both primary markets for oil country
tubular goods: deep critical wells and shallow wells. Our premium products
successfully compete both with seamless oil country tubular goods for critical
applications and with conventional seam-annealed tubular products manufactured
for shallow wells. We also offer
seamless and seam-annealed products through our alliance marketing arrangements
with other producers.
Critical applications,
such as deep natural gas wells and offshore wells, require high-performance
casing and tubing that can withstand enormous pressure as measured by burst
strength, collapse strength, and yield strength. Both major and independent oil companies that
conduct drilling programs of this nature emphasize quality and compliance with
specific standards. In our electric resistance welded, full-body normalized
manufacturing process, which meets and exceeds API standards, we heat treat the
entire tube and not just the weld area. This process strengthens the entire
tube and makes our premium casing, tubing, and line pipe interchangeable with
seamless tubulars for nearly all critical applications. Revenues from our high-strength alloy grade
products increased slightly to 64% of total OCTG revenues in 2004 from 62% in
2003.
Operators drilling
shallow wells generally purchase oil country tubular goods based primarily on
price and availability, as wells of this nature require less stringent
performance characteristics. We compete in this market, which is served
primarily by producers of seam-annealed oil country tubular goods, with our
Wildcat™ brand of oil country tubular goods and other brands produced through
our exclusive alliance mills.
Line
Pipe – We offer the widest size and chemistry range of line
pipe used to gather and transmit oil and natural gas in the United States with
outside diameters from 2 3/8” to 60”.
Historically, approximately 15% to 20% of our oilfield product revenues
are from line pipe sales.
Couplings
– Through our Wheeling subsidiary, part of our Star Energy
Group, we produce a full range of coupling products used to connect individual
sections of oilfield casing and production tubing from 2 3/8” to 20”, including
premium grades and premium threads. The
demand for coupling products is correlative to demand for OCTG products. Prior to its acquisition by Lone Star,
Wheeling had a multi-year partnering arrangement with Steel to provide 100% of
Steel’s coupling requirements. In
addition to Steel, which comprised approximately 41%, 43%, and 47% of Wheeling’s
2004, 2003, and 2002 sales respectively, Wheeling maintains contract
distribution arrangements with other large domestic OCTG producers and sells
coupling products to certain distributors of OCTG products.
Finishing
– By acquiring DTP and DTI during 2003, we took another major
step toward providing complete tubular solutions for our customers. DTP and DTI provide the full-size range of
OCTG finishing, including premium
11
threading, heat-treating,
upsetting, inspection, and storage services.
They join Bellville and Wheeling as part of our Star Energy Group.
Sales and Distribution. Our domestic oil country tubular goods sales
distribution network includes 14 non-exclusive stocking distributors that
maintain and deliver product inventory to major and independent oil and gas
companies that explore for oil and natural gas. We also sell line pipe through
distributors and to end-users. Internationally, oil country tubular goods are
sold through distributors and trading companies as well as directly to
end-users. Less than 1% each of the
shipments of oil country tubular goods and line pipe in 2004 were to
destinations outside the United States.
Our three largest customers, all distributors of our oilfield products
in 2004, accounted for approximately 15%, 14%, and 12% respectively, of the
total oil country tubular good tons we shipped. About 75% of the oil and
natural gas wells drilled in the United States in 2004 were located within an
approximate 750 mile radius of our mills in Texas. The majority of our oilfield products were
sold for use in Texas, Oklahoma, Louisiana, New Mexico, and Kansas, as well as
the Gulf of Mexico, which is less than 250 miles from our mills.
Alliance Mills. In addition to production from our mills, we
have marketing agreements to sell other steel oilfield tubular products
manufactured by several companies. Through commercial alliances with several
mills, we have expanded our oilfield product offering. These arrangements
enable us to outsource production of specific products, allowing us to offer a
wider variety of casing, tubing, and line pipe without a permanent capital
investment. These alliances allow us to concentrate our capital expenditures
and manufacturing expertise on our premium products, while offering our
customers a complete size range of casing, tubing, and line pipe. These
transactions are performed on a commission basis and through purchase and
resale of the products. Our alliance
arrangements accounted for approximately 18%, 17%, and 21% of our revenues from
oilfield products during 2004, 2003, and 2002, respectively.
Competition. Oil country tubular goods and line pipe are
sold in highly competitive markets. Once users of oil country tubular goods
determine which performance characteristics are relevant, they base their
purchasing decisions on four factors: quality, availability, service, and
price. We believe that we are competitive in all of these areas. We
successfully compete with both seamless oil country tubular goods and seam-annealed
electric resistance welded products, as described above under “Business-Industry
Background – Oilfield Products.” Our
electric resistance welded, full-body normalized casing and tubing products
compete with seamless oil country tubular goods, and we offer products with the
widest variety of diameters, grades, and wall thicknesses in the United
States. Several domestic manufacturers
produce limited lines of oil country tubular goods, and a number of foreign
manufacturers produce oil country tubular goods for export to the United
States.
The level of imports of oil country tubular goods has been reduced by
the existence of anti-dumping duty orders.
Since 1995, the level of imports of oil country tubular goods from
Argentina, Italy, Japan, Korea, and Mexico has been greatly reduced by the
existence of anti-dumping duty orders covering imports from these
countries. The orders may also have had
a beneficial impact on prices for oil country tubular goods in the domestic
market. Affected parties can request administrative reviews of imposed duties
and tariffs. The protective tariffs are
subject to sunset review in 2006.
Despite the existence of various anti-dumping duty orders, imports were
40% of apparent domestic consumption in 2004 and 35% in 2003.
In March 2004, the
domestic industry, including us, filed petitions alleging the dumping of line
pipe from China, Mexico, and Korea. In
February 2005, the industry withdrew the petitions and the investigations were terminated.
OUR SPECIALTY TUBING PRODUCTS
Our specialty tubing
business includes the manufacture, marketing, and sale of a variety of tubular
products. Our specialty tubular products are generally high value-added premium
or custom products often involved in exacting applications. Our specialty tubing products include finned
tubulars used in industrial processing, petrochemical plants, and power
technology applications.
Precision
Mechanical Tubulars – We have one of the largest production
capacities in the world for precision mechanical tubular products using the
Drawn Over Mandrel (“DOM”) manufacturing process. The use of the DOM
manufacturing process enables us to achieve higher critical tolerances and
dimensional control than other processes. Our precision mechanical tubular product
line includes a wide array of high-quality, custom-made steel tubular products
with precise dimensional control and special metallurgical properties. Our
precision mechanical tubular
12
products have the widest
size range in the world, from 1/2” to 15” in outside
diameter, and are made from a variety of combinations of chemical compositions,
thermal treatments, mechanical properties, and surface finishes. Product uses
include the manufacture of hydraulic cylinders for construction and farm
equipment; automotive applications, such as stabilizers and intrusion tubes;
and other uses, including machine parts, bearing races, down-hole pump barrels,
heavy-lift crane boom chords, drill rods, and liner hangers. As a result of the
wide range of industrial applications for precision mechanical tubular
products, sales traditionally follow general domestic economic conditions.
The Drawn Over Mandrel
process uses a drawbench to pull tubing through a die and over a mandrel to
shape and smooth surfaces and impart precise dimensional tolerances to tubes.
Our production facilities include seven drawbenches. Our 1,000,000 pound
drawbench, the largest in the Western Hemisphere, combined with our
800,000 pound drawbench enable us to access broader markets through the
manufacture of larger diameter, thicker wall products. Order quantities for our
precision mechanical tubular products are typically less than
20,000 pounds, and the products are made to exact customer specifications.
Heat
Recovery Tubular Products – We manufacture custom-engineered
specialty finned tubular products used in a variety of heat recovery
applications. We have the major portion of domestic manufacturing capacity of
finned tubes that are used in heat recovery steam generators. Finned tubes are steel tubes with various
types of fins or studs welded to the outside to increase the amount of surface
area for maximized recovery of heat. Our
heat recovery products are used in fuel economizers, petrochemical plants,
refineries, and combined-cycle electrical power generation.
In connection with our
production of finned tubes, we design and manufacture other products relating
to large-scale applied heat recovery technology, such as boiler tubing and
economizers. Economizers are bundles of
finned tubes arranged to maximize the amount of heat captured from boiler
exhaust gases. Economizers are normally
used on large boilers for office buildings, hospitals, universities, prisons,
breweries, and food processing plants. We also manufacture and sell X-ID
tubing, which has specific patterns on the interior surface of the tube for
enhanced heat transfer.
Other
Specialty Tubing Products – We also produce hot finished
specialty tubing. We have developed new thick wall products using enhanced hot
reduction technology for applications such as heavy axles for trailers and
light axles for trucks, including sport utility vehicles that were typically
made out of seamless tubes. This product
is also used for other industrial applications.
Sales and Distribution. Domestically, we market and sell our
precision mechanical tubulars through major non-exclusive steel service centers
and directly to end-users. Our precision
mechanical tubulars have detailed design specifications and are manufactured to
extremely precise processing requirements.
Our closely controlled manufacturing process results in an efficient low
cost sourcing solution for large purchasers. Internationally, the majority of
our precision mechanical tubulars is currently sold to end-users and exports
accounted for approximately 7%, 3%, and 11% in 2004, 2003, and 2002
respectively, of the shipment volume of our precision mechanical tubulars. We market and sell our finned tubes and other
heat recovery products through four outside sales managers providing direct
sales to most original equipment manufacturer (“OEM”) accounts and through
approximately 50 independent sales representative companies which sell to
end-users and contractors. Since reorganizing our heat recovery tubular
products around new marketing and commercial lines directed at more traditional
heat recovery markets including fuel economizers and traditional boiler
applications, we have experienced increased activity related to the improving
general domestic industrial economy. Exports of finned tubulars and other heat
recovery tubes accounted for approximately 16%, 21%, and 11% of the revenues
from those products in 2004, 2003, and 2002, respectively.
Competition. The market for specialty tubing is competitive
and is served by several manufacturers.
We have one of the largest capacities in the world to manufacture
precision mechanical tubulars using the DOM manufacturing process.
Since these products are
made to end-user specifications and often require just-in-time delivery, only
small quantities are imported into the United States. In contrast to the oil
country tubular goods market, seamless and electric resistance welded specialty
tubing products differ in their applications. Electric resistance welded
tubing, such as precision mechanical tubulars, is preferred for many mechanical
tubing applications because its consistent wall thickness requires less
machining in the finishing process. In contrast, seamless tubes are often
specified in heavy gauge applications such as boiler and pressure tubing.
13
Based on generally
available market data, we estimate that we have a major portion of the domestic
manufacturing capacity for finned tubes used for heat recovery steam
generation. We have one significant
domestic competitor and a number of smaller foreign competitors.
OUR FLAT ROLLED STEEL AND OTHER PRODUCTS
Products and Services. We also manufacture and market flat rolled
steel and other miscellaneous products that are secondary to our manufacture of
oilfield and specialty tubing products.
We have a rolling mill that has the capacity to produce 1.25 million
tons of flat rolled steel per year.
Participation in flat rolled steel markets allows us to maintain
flexibility in procurement of lower cost steel. Flat rolled steel, produced primarily for
the manufacture of oilfield and specialty tubing products, is also sold to
fabricators of large diameter transmission pipe, storage tanks, rail cars, and
a variety of other construction and industrial products.
We also market other
products such as tubulars for use in structural and piling applications in the
construction industry, and we provide transportation, storage, and other
services.
We also have a supplementry
stand-alone steel coil slitting business. This business includes a steel coil
storage and processing business, where we provide toll slitting services for
major steel customers and also provide steel storage and custom cutting. The
steel coil division ships its processed steel on a just-in-time basis
principally to our finned tubing manufacturing operations and to outside
customers.
Sales and Distribution. We manufacture and sell flat rolled steel
directly to end-users and through service centers, primarily in the
Southwestern region of the United States.
Our two largest customers of our flat rolled steel accounted for
approximately 69% of our flat rolled steel sales in 2004, as well as
substantially all other sales of miscellaneous tubular products other than
oilfield and specialty tubing products. One of these customers has steel
processing facilities located adjacent to our facilities in Lone Star, Texas,
and those facilities purchase most of their flat rolled steel from us. Sales to these two customers represented
approximately 7% of our total revenues in 2004 and 2003 and 8% in 2002.
We also provide flat rolled steel processing services to steel mills
where we receive processing revenues but do not purchase and resell steel.
Competition. Our flat rolled steel is sold in highly
competitive markets generally concentrated in the Southwestern region of the
United States. Sales and earnings are affected by the cost of raw materials,
use of flat rolled steel by us in the manufacture of our tubular products,
demand by outside customers, and general economic conditions. Our steel coil slitting services compete
against service centers located in the Midwest.
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information
for each segment regarding revenues, profits or losses (as applicable) and
total assets, see “Business Segments – Note B” of the Notes to Consolidated
Financial Statements.
14
CUSTOMERS
We sell our oilfield
products through our exclusive distributors to numerous end-users, including
BP, ChevronTexaco, El Paso Exploration, Anadarko Petroleum, Devon Energy,
Burlington Resources, Apache, and ExxonMobil. We sell our finned and other heat
recovery tube products to over 50 end-users, including Foster Wheeler, Chicago
Tube and Iron, Peerless, Alstom Power, Cerrey, Nooter Eriksen, and Vogt
Power International. We sell our
precision mechanical tubulars to such distributors and end users as Chicago Tube
and Iron, Earle M. Jorgensen Company, Marmon/Keystone, Hyva, DaimlerChrysler,
Ford Motor Company, and Dana.
RESEARCH, DEVELOPMENT, INFORMATION TECHNOLOGY AND PATENTS
We are committed to
technologically innovative product development. With respect to oilfield
products, we collaborate with customers and industry groups to develop new
grades of oil country tubular goods as well as new products, such as expandable
casing. Our expandable casing product was developed for a joint venture between
Shell Oil Company and Halliburton Company and was first successfully installed
in late 1999 in the Gulf of Mexico. As
of December 2004, there have been more than 290 successful installations
totaling more than 61 miles of expandable tubulars for 67 end-users in 20
countries. We have also developed
slotted tubes for expandable sand screens and riser sleeves to provide new
product solutions for our customers. Our
technical knowledge and high-performance casing products are also being applied
in an innovative method for drilling wells using casing instead of drill
pipe. We also have used our expertise to
develop high-strength, thick wall line pipe for offshore applications. In
addition, we developed ultrasonic testing methods to assure the quality of our
tubing. In the specialty tubing area, our product developments include the
Aeroseg finned tube, a thermal mechanically processed Drawn Over Mandrel
product called QDOM for applications requiring extreme mechanical properties
and thick wall products using hot reduction technology for applications such as
heavy axles that are normally made out of seamless tubes. We hold several United States patents
covering some of our manufacturing processes and products.
We have made significant
investments in information technologies that provide the platform for internet-based
commercial marketing and resource constrained production planning. We believe
our information technologies capabilities will allow us to more effectively run
our facilities, give our customers excellent service, and facilitate web-based
commercial initiatives.
MANUFACTURING CAPABILITIES
We manufacture our
oilfield products, precision mechanical tubulars, flat rolled steel and other
products at our facilities located on an approximately 2,000-acre site we own
in Lone Star, Texas which contains over 2,000,000 square feet of manufacturing
space and approximately 91,000 square feet of oilfield products manufacturing
facilities in Bellville, Texas. We
manufacture our finned tubular products in approximately 364,000 square feet of
manufacturing facilities on approximately 71.5 acres that we own or lease in
the Tulsa, Oklahoma metropolitan area; Quebec, Canada; and Monterrey,
Mexico. Our coupling products are
manufactured at three owned facilities totaling 231,000 square feet of
manufacturing space and located in Pine Bluff, Arkansas; Hughes Springs, Texas;
and, Houston, Texas. Our finishing and
storage services provided by Delta and Delta International are performed at two
owned facilities totaling 281,500 square feet across 230 acres located in
Houston, Texas.
The annual rated capacity
of our facilities in Lone Star, Texas approximates 1,250,000 flat rolled tons
and 1,000,000 welded pipe tons. We have access through marketing arrangements
and alliances with mills for additional oilfield tubular capacity of
approximately 500,000 tons per year. Our
electric arc furnaces (“EAF”) have an estimated capacity of 360,000 ingot
tons. In 2004, the precision mechanical
specialty tubing facilities operated at 64% of capacity. The rolling mills and pipe mills generally
operated at 64% and 67% of capacity, respectively, while the electric arc
furnaces (“EAF”) generally operated at 92% of capacity in 2004.
Wheeling operates PMC high volume finishers and CNC lathes at
facilities in Pine Bluff, Arkansas, Hughes Springs, Texas, and Houston,
Texas. Wheeling also maintains finished
product at its production facilities as well as warehouses at Steel, and a
facility servicing U.S. Steel operated by Wheeling in Birmingham, Alabama. The Houston facility was established to handle
premium threads, material that requires third party inspections and as an entry
point into the oilfield accessories business.
Wheeling offers a wide range of eight round and buttress couplings for 2
3/8” tubing through 20” casing.
15
Delta Tubular Processing
(“DTP”) is a licensed API processor for upsetting, threading, and heat treating
of OCTG products to API specifications.
DTP has two upsetters that are capable of upsetting tubing, two quench
and tempering operations that can heat treat tubing and coupling stock through
3.668” outside diameter (OD), and one full-body normalizing line that can
normalize tubing up to 4 ½” OD. DTP has
two hydrostatic tubing testers, two high-speed PMC tubing threaders, one
threading repair line, and one NDT (non-destructive testing) operation. The facility capacity is calculated to be
120,000 tons per year with an average mix of products. DTP operates on an 80-acre tract in Houston,
Texas with 150,000 square feet of building use and leases an additional
building with 14,500 square feet which houses its second heat treat line.
Delta Tubular
International (“DTI”) is a licensed API processor for OCTG casing for sizes
ranging from 4 ½” to 20” OD. We have two Four-Function Electro Magnetic
Inspection lines that inspect pipe ranging from 2 3/8” through 13 3/8” OD and
one ultrasonic line for full body ultrasonic inspection up to 20” OD. We have
three double-ended thread lines capable of threading API and Specialty threads
from 4 ½” through 20” OD pipe. Our
annual rated capacity for casing threading is 225,000 tons and inspection is
450,000 tons. This facility is located
on a 150-acre tract in Houston, Texas with 117,000 square feet of building
usage. We completed installation of a
new, state-of-the-art UT line and two new CNC (computer numerical control)
threaders in the second half of 2004, which will increase these capacities.
Both DTP and DTI
facilities have truck and rail access, and are located in close proximity to
the Houston Ship Channel.
We have a major portion
of the North American manufacturing capacity for production of finned tubes for
heat recovery applications.
RAW MATERIALS AND INVENTORY
In general, we attempt to
procure raw materials and manage our finished goods inventory in a manner that
will provide:
• significant flexibility in responding to the levels of
demand for our various products;
• a short lead time in filling our customers’ orders;
• a broad product range offering; and
• the ability to offer our products at competitive prices.
We generally produce oil country tubular goods and line pipe to fill
specific orders and, accordingly, we maintain the majority of our inventory in
the form of steel slabs and coils, while work-in-process or finished goods are
generally earmarked for specific orders. Some work-in-process and finished
goods inventories are maintained in order to provide flexibility in responding
to customer delivery demands.
The majority of domestic
steel mills produced at higher levels in 2004, limited at times only by their
inability to obtain adequate supplies of inputs such as coke for blast furnaces
and scrap. Prices on the domestic and
global steel markets saw historic highs in 2004 as demand for steel surged,
particularly by increased consumption in certain Asian markets. We continue to believe that steel costs will
remain volatile in 2005 and there are currently no strong indicators that steel
costs will moderate significantly in the coming year.
We can use steel slabs,
scrap steel, and steel coils in the manufacture of our tubular products. We
purchased steel slabs to meet approximately 63% of our steel needs in 2004,
down from 80% in 2003 as we expanded our steel scrap purchases to source
greater amounts of internally produced flat-rolled steel from our East Texas
electric arc furnace operations.
Generally, we commit to purchase slabs 60 to 90 days prior to
production. We anticipate again using
steel slabs for most of our production needs in 2005. Our principal raw
material for our internally produced steel slabs is scrap steel, which is
internally generated from our operations and available in the spot market. The
volatile price of steel is influenced by a number of competitive market
conditions beyond our control, and is not directly related to the demand for
our products.
Raw materials for our
specialty tubing products are readily available from multiple sources. Steel
coil is the primary raw material used in the manufacture of our finned tubular
products and in the manufacture of our precision mechanical tubulars. We
usually produce our specialty tubing products to meet
16
specific orders and,
accordingly, inventory is managed to minimize the amount of finished goods on
hand. Work-in-process inventories are maintained in order to provide
flexibility in responding to customer needs.
We manufacture flat
rolled steel primarily for use in producing oilfield and precision mechanical
tubulars, but also for sale to third parties.
We manufacture flat rolled steel using both purchased steel slabs and
internally produced slabs on our rolling mill.
EMPLOYEES
At December 31, 2004,
Lone Star Technologies employed approximately 2,422 employees. Of this number, approximately 994 employees,
all at Steel, are a part of collective bargaining agreements with three unions,
the International Bricklayers of America (“Bricklayers Union”); Security,
Police & Fire Professionals of America (“Security Union”); and the United
Steel Workers of America (“Steel Workers Union”).
The collective bargaining
agreement between Steel and the Bricklayers Union has an expiration date of May
31, 2005 and covers three brick masons.
The agreement between Steel and the Security Union has an expiration date
of September 30, 2006 and covers twelve security professionals. The agreement between Steel and the Steel
Workers Union has an expiration date of May 31, 2005 and covers 979 production
and maintenance employees. Steel has
begun discussions with the Steel Workers Union to identify the location and
start date for the negotiations. The
Company considers its relationship with these bargaining units as good.
The agreement between
Star Tubular Services, Inc. (“STSI”), a wholly-owned subsidiary of Steel, and
the Steel Workers Union expired in February 2004. The expired agreement covered 48 warehouse
and maintenance employees. The wages
have remained intact; however, the benefits have been adjusted to a similar
plan of the salaried employees of Steel.
Steel and the Steel Workers Union representing the 48 STSI employees
have reached a tentative settlement agreement to resume negotiations during
2005. We cannot predict the outcome of
these contract negotiations. Steel
considers the current relationship with the associated workforce acceptable and
the employees continue to work without a contract.
We are committed to providing a clean, safe workplace through the
establishment and support of health and safety programs that meet or exceed the
Occupational Safety & Health Administration’s (“OSHA”) standards. We have developed safety procedures that are
utilized in the training of new employees as well as promote the specific
hazards related to each specific operation.
We have also implemented a behavior-based safety program that is
employee driven to improve safety performance.
On July 29, 2004, the
Texas Workers’ Compensation Commission (“TWCC”) notified Steel that we had been
identified as a hazardous employer, and that the designation is in effect until
July 29, 2005. TWCC determined that
Steel’s number of injury cases with eight or more lost workdays during the
period from October 1, 2002 through September 30, 2003, exceeded the
expectation for steel pipe and tube manufacturers (SIC Code 3317). Prior to the receipt of this notification,
Steel had re-implemented its early return-to-work program. There was a 46% reduction in the number of
cases with eight or more lost workdays in the subsequent 12-month period. Steel continues its efforts to identify and
correct workplace hazards and reduce at-risk behaviors.
We endeavor to provide a
safe and healthful work environment for our employees, contractors, vendors,
and visitors to our facilities. We
frequently evaluate and update our programs to ensure compliance. We encourage all employees to be involved in
our safety efforts. We utilize a variety
of methods to increase the skills and knowledge of our employees to improve
safety performance.
FOREIGN OPERATIONS
Our export sales to
destinations outside the United States were approximately $30.0 million in
2004, $13.3 million in 2003, and $24.0 million in 2002. We own a manufacturing facility in Quebec,
Canada and lease a manufacturing facility in Monterrey, Mexico. Long-lived assets maintained in Quebec,
Canada were $3.0 million, $3.1 million, and $2.8 million at December 31, 2004,
2003, and 2002, respectively. Long-lived
assets maintained in Monterey, Mexico were $1.5 million, $1.6 million, and $2.1
million at December 31, 2004, 2003, and 2002, respectively. Our export sales of $30.0 million to
destinations outside the United States included $5.9 million from these foreign
facilities in 2004.
17
ENVIRONMENTAL
Oilfield Products.
Steel’s
operations are subject to extensive environmental regulations with respect to
air emissions, wastewater and storm water discharges, and waste
management. Our environmental protection
and improvement expenditures totaled approximately $3.2 million over the past
three years, including expenditures related to energy efficiency efforts,
asbestos abatement, wastewater treatment system and secondary containment
upgrades, waste disposal site closures, and out-of-service facility remediation
projects. We are nearing the completion
of installing an acid recovery unit at our specialty tubing operations. This
unit will recover and recycle sulfuric acid generated during pickling of
specialty tubing and reduce risks associated with offsite shipments of the
hazardous material.
In
connection with the cleanup of two offsite commercial waste management sites,
we, along with many other entities, have been designated a potentially
responsible party (PRP) by the U.S. Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). CERCLA subjects PRPs to
potential liability for such cleanup costs.
Cost estimates have been obtained for each of the cleanup actions, and
our share has been determined. Based
upon these estimates, we do not believe our liability, individually or in the
aggregate, will be material to our financial position and our results of
operations.
The
solid waste units that received wastes defined as hazardous waste under the
Resource Conservation and Recovery Act (RCRA) have been closed. The two RCRA units requiring continued
monitoring are undergoing post-closure care.
Lone Star has submitted a letter to the Texas Commission on
Environmental Quality (TCEQ) guaranteeing the remaining cost of post-closure
care (estimated to be approximately $380,000), which meets our financial
assurance requirements. The TCEQ is in
the process of determining what, if any, corrective action is required to
address the remaining non-RCRA solid waste management units.
We
possess necessary authorizations for air emissions, wastewater and storm water
discharges and waste management. We are
presently in substantial compliance with our permits and applicable air, water
and waste management rules and regulations.
We have an environmental management system in place, which conforms to
the internationally recognized ISO 14001:1996 standard, to assist in
maintaining compliance and improving performance. In addition, third party compliance audits
are conducted systematically of Steel’s operations in accordance with the Texas
Audit Privilege Act. We do not expect
future environmental expenditures necessary to comply with existing
environmental rules and regulations to have a material impact on our financial
position or operations.
Star Energy Group. The
operations of DTP, DTI, Bellville, and Wheeling are also subject to
environmental regulations in the area of air emissions, wastewater and storm
water discharges and waste management.
The companies possess or have applied for, necessary authorizations for
air emissions, wastewater and storm water discharges, and waste
management. All facilities are
classified as either Small Quantity Generators or Conditionally Exempt Small
Quantity Generators. Wastes are
temporarily stored onsite, but are disposed or recycled offsite by a third
party. There are no onsite waste
disposal units.
Specialty Tubing. The operations at Steel to produce specialty
tubing and Fintube are also subject to environmental regulations in the area of
air emissions, wastewater and storm water discharges, and waste management, and
possess necessary authorizations for such activities. Wastes at Fintube are temporarily stored
onsite, but are disposed or recycled offsite by a third party. Fintube does not use onsite waste disposal
units.
INTERNET WEBSITE POSTINGS
Our internet website is www.lonestartech.com. We make available through our internet
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
In addition, our code of business conduct and ethics, Corporate
Governance Guidelines, and Charters of the Audit, Corporate Governance, and
Human Resources Committees are available on our website and in print to any
shareholder who requests a printed copy.
18
ITEM 2. PROPERTIES
We manufacture our oilfield products, precision mechanical tubulars,
flat rolled steel and other products at our facilities located on an
approximately 2,000-acre site we own in Lone Star, Texas which contains over
2,000,000 square feet of manufacturing space.
The original facilities, constructed in the 1940’s and 1950’s, have been
expanded and modernized, and include two EAFs equipped with oxy-fuel burners;
two rolling mills, a “two-high” mill that rolls the EAF ingots into slabs and a
“four-high” single stand reversing Steckel mill that produces flat rolled
coils; coil slitting and handling equipment; two pipe welding mills; seven draw
benches, including the largest specialty tubing drawbench in the Western
Hemisphere; three heat-treating facilities; numerous types of ultrasonic and
electromagnetic testing and inspection equipment; finishing facilities at which
oil country tubular goods are threaded and couplings are applied; and various
support facilities including a shortline railroad and other transportation and
storage facilities.
We also have 91,000 square feet of oilfield products manufacturing
facilities in Bellville, Texas. We
manufacture our finned tubular products in approximately 364,000 square
feet of manufacturing facilities on approximately 71.5 acres that we own or
lease in the Tulsa, Oklahoma metropolitan area; Quebec, Canada; and Monterrey,
Mexico. Our coupling products are
manufactured at three owned facilities totaling 267,940 square feet of
manufacturing, warehouse and office space and located in Pine Bluff, Arkansas
on 12.7 acres; Hughes Springs, Texas on 19.4 acres; and Houston, Texas on 5.3
acres.
Delta Tubular Processing operates in a total 117,000 square feet
situated on approximately 150 acres of land that we own in Houston, Texas. Delta Tubular International utilizes 165,000
square feet located on approximately 80 acres of land that we own in Houston,
Texas. Both facilities utilize the owned
acreage for pipe storage and warehousing.
We own 7,000 acres in Texas that was purchased primarily for iron ore,
coal reserves, or water rights; and, mineral interests in an additional 12,000
acres in Oklahoma and 60,000 acres in Texas.
No minerals have been recovered from these properties for many years
because their use is no longer required in our operations. We own nominal oil and gas interests in an
additional 18,000 acres in Texas. Our
headquarters are located in leased facilities in Dallas, Texas.
19
ITEM 3. LEGAL PROCEEDINGS
In August 2001, Lone Star
entered into an agreement to purchase the assets of North Star Steel Company’s
Tubular Steel Division. Consummation of
the acquisition was subject to completion of financing arrangements. Due to lack of common stock financing which,
along with certain debt financing, was required by the acquisition agreement to
close the acquisition, Lone Star notified Cargill, Incorporated, the parent
company of North Star Steel Company, on December 14, 2001, that it was not able
to complete the acquisition. Later that
day, Cargill, Incorporated notified Lone Star that it was filing a lawsuit
against Lone Star seeking unspecified damages and alleging that Lone Star had
breached the agreement. On March 13,
2003, the jury in Minnesota returned a verdict of $32 million in damages
against Lone Star. On June 1, 2004, the
Minnesota Court of Appeals affirmed the judgment. The Minnesota Supreme Court decided on August
17, 2004 that it would not review the Court of Appeals’ decision. At September 30, 2004, Lone Star had a
reserve totaling $35 million which included accrued interest of $3
million. Lone Star paid Cargill $32
million on October 1, 2004 and $2 million on October 6, 2004 to satisfy the
judgment. After the $34 million payment,
approximately $1 million of accrued interest remains in the reserve, which
represents pre-judgment interest that Lone Star is contesting in the Minnesota
courts.
During the last six
years, Steel has been named as one of a number of defendants in 42 lawsuits
alleging that certain individuals were exposed to asbestos on the defendants’
premises. The plaintiffs are seeking
unspecified damages. To date several of
these lawsuits have been settled for approximately $300,000 in the aggregate. Of the 42 lawsuits, sixteen have been settled
or are pending settlement and twelve have been dismissed or are pending
dismissal. Steel did not manufacture or
distribute any products containing asbestos.
Some or all of these claims may not be covered by the Company’s
insurance. The Company has accrued for
the estimated exposure to known claims, but does not know the extent to which
future claims may be filed. Therefore,
the Company cannot estimate its exposure, if any, to unasserted claims.
Beginning in 2003, Lone
Star’s subsidiary Zinklahoma, Inc., inactive since 1989, has been named as one
of a number of defendants in seven lawsuits alleging that the plaintiffs had
contracted mesothelioma as the result of exposure to asbestos in products
manufactured by the defendants and John Zink Company (“Zink”). Three of these lawsuits have been
dismissed. Lone Star acquired the stock
of Zink in 1987 and, in 1989, sold the assets of the former Zink to Koch
Industries, Inc. (“Koch”) and renamed the now-inactive subsidiary “Zinklahoma,
Inc.” Lone Star retained, and agreed to
indemnify Koch against, certain pre-closing liabilities of Zink. It is Lone Star’s understanding that Zink
never manufactured asbestos and primarily used it only in certain purchased
gaskets that were encapsulated in copper and contained in burners and flares
made by Zink prior to 1984, when Zink ceased using asbestos-containing products
entirely. Koch continues to operate the
business as John Zink Company, LLC (“Zink LLC”). In addition, Zink LLC has been named in six
lawsuits in which the plaintiffs, two of whom have mesothelioma, allege
exposure to asbestos in Zink’s products (three of these have been dismissed)
and three personal injury lawsuits resulting from a 2001 explosion and flash fire
at a flare stack and crude unit atmospheric heater. Zink allegedly manufactured the flare and
related components for the flare stack in the early 1970s. Koch is seeking indemnification from Lone
Star with respect to these six pending lawsuits. The costs of defending and settling the
lawsuits alleging exposure to asbestos in Zink’s products have been borne by
Zink’s insurance carrier. Lone Star
believes that Koch’s indemnity claim with respect to the 2001 explosion and
flash fire is covered by its insurance, subject to a deductible, and has
notified its insurance carrier of that claim.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SHAREHOLDERS
None.
20
PART II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Lone Star’s Common Stock
trades on the New York Stock Exchange under the symbol LSS. The following table summarizes the range of
trading prices by quarter for the last two years:
|
|
|
2004
|
|
2003
|
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
|
First quarter
|
|
$
|
19.98
|
|
$
|
14.07
|
|
$
|
22.09
|
|
$
|
12.00
|
|
|
Second quarter
|
|
$
|
28.25
|
|
$
|
17.10
|
|
$
|
25.25
|
|
$
|
19.85
|
|
|
Third quarter
|
|
$
|
37.92
|
|
$
|
26.13
|
|
$
|
21.12
|
|
$
|
13.00
|
|
|
Fourth quarter
|
|
$
|
40.00
|
|
$
|
24.86
|
|
$
|
16.86
|
|
$
|
12.91
|
|
As of February 8, 2005, we had 2,673 common shareholders of
record. We have not paid dividends on
our common stock since becoming a public company and have no present plan to do
so.
Information required under this item with respect to securities
authorized for issuance under equity compensation plans is contained in Lone
Star’s proxy statement for the 2005 Annual Meeting of Shareholders, and is
incorporated herein by reference.
21
ITEM 6. SELECTED FINANCIAL DATA
($ and shares in millions, except per share and employee
data)
|
|
|
2004
|
|
2003(1)
|
|
2002(2)
|
|
2001
|
|
2000 (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilfield
products revenues
|
|
$
|
695.4
|
|
$
|
364.8
|
|
$
|
304.2
|
|
$
|
401.9
|
|
$
|
362.0
|
|
|
Specialty tubing
products revenues
|
|
175.1
|
|
121.8
|
|
165.4
|
|
187.7
|
|
220.9
|
|
|
Flat rolled and
other tubular revenues
|
|
96.3
|
|
47.5
|
|
54.1
|
|
60.6
|
|
62.4
|
|
|
Total revenues
|
|
$
|
966.8
|
|
$
|
534.1
|
|
$
|
523.7
|
|
$
|
650.2
|
|
$
|
645.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
162.0
|
|
$
|
5.2
|
|
$
|
7.4
|
|
$
|
69.3
|
|
$
|
85.9
|
|
|
Selling,
general, and administrative expenses
|
|
(44.6
|
)
|
(41.8
|
)
|
(68.2
|
)
|
(35.7
|
)
|
(33.7
|
)
|
|
Goodwill
impairment charge
|
|
—
|
|
(18.7
|
)
|
—
|
|
—
|
|
—
|
|
|
Operating income
(loss)
|
|
$
|
117.4
|
|
$
|
(55.3
|
)
|
$
|
(60.8
|
)
|
$
|
33.6
|
|
$
|
52.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
101.0
|
|
$
|
(68.2
|
)
|
$
|
(69.2
|
)
|
$
|
16.4
|
|
$
|
38.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per common share - basic
|
|
$
|
3.51
|
|
$
|
(2.40
|
)
|
$
|
(2.52
|
)
|
$
|
0.67
|
|
$
|
1.59
|
|
|
Net income
(loss) per common share - diluted
|
|
$
|
3.46
|
|
$
|
(2.40
|
)
|
$
|
(2.52
|
)
|
$
|
0.66
|
|
$
|
1.59
|
|
|
Common shares
used for diluted EPS
|
|
29.2
|
|
28.4
|
|
27.5
|
|
25.0
|
|
24.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
288.1
|
|
$
|
184.2
|
|
$
|
281.9
|
|
$
|
259.0
|
|
$
|
165.8
|
|
|
Total assets
|
|
$
|
646.7
|
|
$
|
574.7
|
|
$
|
612.1
|
|
$
|
580.3
|
|
$
|
514.4
|
|
|
Long-term debt
|
|
$
|
150.0
|
|
$
|
150.0
|
|
$
|
150.0
|
|
$
|
150.0
|
|
$
|
136.2
|
|
|
Total
liabilities
|
|
$
|
292.2
|
|
$
|
328.8
|
|
$
|
299.5
|
|
$
|
265.0
|
|
$
|
258.6
|
|
|
Shareholders’
equity
|
|
$
|
354.5
|
|
$
|
245.9
|
|
$
|
312.6
|
|
$
|
315.3
|
|
$
|
255.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued
|
|
29.2
|
|
28.7
|
|
28.5
|
|
25.2
|
|
23.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial and Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities
|
|
$
|
61.7
|
|
$
|
(40.6
|
)
|
$
|
(12.4
|
)
|
$
|
31.3
|
|
$
|
(8.6
|
)
|
|
Cash flows from
investing activities
|
|
$
|
(71.4
|
)
|
$
|
(48.0
|
)
|
$
|
(54.0
|
)
|
$
|
(14.7
|
)
|
$
|
(96.6
|
)
|
|
Cash flows from
financing activities
|
|
$
|
6.4
|
|
$
|
0.5
|
|
$
|
81.5
|
|
$
|
63.2
|
|
$
|
109.7
|
|
|
Earnings before
interest, taxes, depreciation and amortization(4)
|
|
$
|
147.2
|
|
$
|
(27.7
|
)
|
$
|
(36.9
|
)
|
$
|
51.1
|
|
$
|
74.2
|
|
|
Capital
expenditures
|
|
$
|
13.0
|
|
$
|
14.4
|
|
$
|
15.9
|
|
$
|
25.2
|
|
$
|
23.3
|
|
|
Active employees
|
|
2,422
|
|
2,270
|
|
1,900
|
|
1,892
|
|
2,358
|
|
See
footnotes at page 23 of this Form 10-K.
22
Reconciliation
of EBITDA (as defined)(4) to Cash Flows from Operations:
|
|
|
2004
|
|
2003(1)
|
|
2002(2)
|
|
2001
|
|
2000 (3)
|
|
|
Cash flows from
operating activities
|
|
$
|
61.7
|
|
$
|
(40.6
|
)
|
$
|
(12.4
|
)
|
$
|
31.3
|
|
$
|
(8.6
|
)
|
|
Non-cash charge
for stock compensation
|
|
(1.6
|
)
|
(1.1
|
)
|
0.1
|
|
0.2
|
|
(0.7
|
)
|
|
Net loss (gain)
on asset disposals and impairments
|
|
(0.1
|
)
|
(0.4
|
)
|
0.1
|
|
—
|
|
—
|
|
|
Goodwill
impairment
|
|
—
|
|
(18.7
|
)
|
—
|
|
—
|
|
—
|
|
|
Changes in
working capital
|
|
63.0
|
|
(11.5
|
)
|
(8.6
|
)
|
5.5
|
|
61.9
|
|
|
Other balance
sheet changes
|
|
5.8
|
|
29.5
|
|
(26.6
|
)
|
3.0
|
|
7.4
|
|
|
Interest
expense, net
|
|
15.0
|
|
15.0
|
|
11.2
|
|
10.3
|
|
12.4
|
|
|
Income tax
expense (benefit)
|
|
3.4
|
|
0.1
|
|
(0.7
|
)
|
0.8
|
|
1.8
|
|
|
EBITDA
|
|
$
|
147.2
|
|
$
|
(27.7
|
)
|
$
|
(36.9
|
)
|
$
|
51.1
|
|
$
|
74.2
|
|
(1) Includes the results of operations of DTP and
DTI since the acquisitions became effective on May 1, 2003 and June 2, 2003,
respectively.
(2) Includes Wheeling results of operations since the acquisition became
effective on October 1, 2002.
(3) Includes the results of operations of Fintube and Bellville since the
acquisitions became effective on January 1, 2000 and April 1, 2000,
respectively.
(4) EBITDA is a measure of our liquidity that is not required by or
presented in accordance with GAAP.
EBITDA should not be considered as an alternative to cash flow from
operating activities as a measure of our liquidity or as an alternative to net
income, operating income, or any other performance measures derived in
accordance with GAAP.
EBITDA
represents earnings before interest, taxes, depreciation, and
amortization. We use EBITDA:
• as a liquidity measure, because our existing
senior secured credit facility contains covenants relating to our fixed charge
coverage ratio that use EBITDA;
• to evaluate and price potential acquisition
candidates, which are evaluated and priced by other issuers in our industry
based upon EBITDA;
• to facilitate company-to-company comparisons
by backing out potential differences caused by variations in capital structures
(affecting interest expense), taxation, and the age and book depreciation of
facilities and equipment (affecting relative depreciation expense), which may
vary for different companies for reasons unrelated to operating performance;
and
• because EBITDA is a liquidity measure that is
commonly used by oilfield service and supply companies.
However, EBITDA has limitations as an analytical tool,
and you should not consider EBITDA in isolation or as a substitute for analysis
of our results as reported under GAAP.
For example, EBITDA does not reflect:
• our cash expenditures, or future requirements,
for capital expenditures or contractual commitments;
• changes in, or cash requirements for, our
working capital needs;
• our significant interest expense, or the cash
requirements necessary to service interest and principal payments on our debts;
• any cash requirements for the replacement of
assets being depreciated and amortized, which will often have to be replaced in
the future, even though depreciation and amortization are non-cash charges; and
• the fact that other companies in our industry
may calculate EBITDA differently than we do, which limits its usefulness as a
comparative measure.
Because
of these limitations, you should not consider EBITDA as a measure of
discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by
relying primarily on our GAAP results and by using EBITDA only supplementally.
23
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This
MD&A should be read in conjunction with the other sections of this Annual
Report on Form 10-K, including “Item 1: Business”; “Item 6: Selected Financial
Data”; and “Item 8: Consolidated Financial Statements and Supplementary Data.”
The various sections of this MD&A contain a number of forward-looking
statements, all of which are based on our current expectations and could be
affected by the uncertainties and risk factors described throughout this filing
and particularly in the “Overview,” and “Principal Lines of Business, Products,
and Services” sections. Our actual
results may differ materially.
Our financial results are
impacted by our ability to anticipate and to take action in response to
industry-wide trends. Our principal raw
material costs in 2004, steel slabs and coils, increased an average 82% over
the prior year. The average cost of
purchasing steel scrap, which comprised approximately 20% of our total steel
raw material tonnage purchased in 2004, increased approximately 109% in 2004
over the 2003 average cost. As a result
of higher steel costs, increasing natural gas costs, and improved demand for
our products, we initiated price increases and raw material surcharges
beginning in the first quarter of 2004.
During the second quarter of 2004 our surcharges and base price were
merged into one price subject to possible change at the time of shipment. Similar pricing policies remain in effect
today as our principal raw material costs aggressively increased throughout
2004 and into 2005.
The manufacture of our
products is capital intensive. Utilization rates at our manufacturing
facilities in Lone Star, Texas increased steadily in 2004 compared to 2003 as
shipment volumes increased for nearly all product categories within our
oilfield segment. Shipment volumes of
our premium alloy-grade tubing and casing increased 33% in 2004 compared to
2003 shipment volumes, while the average price increased 53% over the prior
year average. Similarly, 2004 shipment
volumes of our carbon-based tubing and casing increased 12% over 2003 volumes,
while average pricing increased 70% compared to the 2003 average price.
Shipment volumes
increased in all principal business segments with total overall volume up 20%
in 2004 compared to the prior year. The
increased production volumes had a positive effect on the cost of our products
sold throughout the year as fixed and semi-fixed costs were absorbed by the
larger number of tons produced and shipped.
Historically, our
oilfield products have accounted for the majority of our total revenues. For fiscal year 2004, they were 72% of total
revenues. As a result, our revenues are
largely dependent upon the state of the oil and gas industry, which has
historically been volatile. Oil and
natural gas prices were higher on average throughout 2004 compared to 2003 and
2002 as higher energy demand, relatively low supply, and geopolitical
instabilities maintained upward pressure on pricing. This prompted increased domestic
drilling. The U.S. active rig counts
rose throughout the first half of 2004 from 1,126 rigs at the end of 2003 to
1,201 rigs at the end of the first half of 2004 to 1,243 rigs by the end of
2004. However, the majority of drilling
continued to be biased toward lower-risk, shallow developmental fields such as
shale areas in Texas and coal seam methane plays. Shallow wells typically use mainly
carbon-grade OCTG, which generally have lower margins than our alloy-grade
premium products. Further, shallow
wells require proportionally fewer tons per foot of well depth than deeper
wells as the initial surface casing is generally smaller in diameter, fewer
intermediate casing strings are needed, and generally the wall thickness of the
casing is less. In addition, imports,
which accounted for approximately 40% of the total apparent OCTG consumption in
2004 compared to 35% and 31% in 2003 and 2002, respectively, are typically more
accepted for these less critical shallow well applications.
Demand for our oilfield
products depends on a number of factors including the number of oil and natural
gas wells being drilled, completed and re-worked and the depth and drilling
conditions of these wells. Baker Hughes
reported the average domestic rig count increased in 2004 to 1,192 working
rigs, or by 16% compared to the previous year’s average of 1,032 working
rigs. Although most of the drilling has
continued to be biased toward shallow-well developmental fields, there was a
sustained increase in the number of rigs drilling deeper than 15,000 feet,
where the need for premium alloy-grade products increases. Rigs drilling deeper than 15,000 feet have
increased from a range of 165 to 170 rigs during the second half of 2003 to
approximately 185 rigs for the first half of 2004, and to approximately 205
rigs during the second half of 2004. We
believe this trend will positively impact demand for our higher margin
alloy-grade products as deeper well activity progresses.
24
Demand for our specialty
tubing products increased during 2004 along with the overall improvement in the
general domestic economy. Total shipment
volumes for the segment improved in 2004 by approximately 13% over the prior
year and current trends indicate continued improving industrial demand as we
proceed into 2005. Revenues of specialty
tubing products increased nearly 44% in 2004 compared to 2003 on increased
demand and higher average price per ton. Shipments of flat rolled steel were up nearly
29% in 2004 compared to 2003 as a tight domestic supply of flat-rolled steel
stimulated demand for our flat-rolled products.
Revenues of flat-rolled products were up nearly 103% as the increased
demand and market conditions drove significant increases in pricing.
Approximately 82% and 90%
of our inventory on-hand at December 31, 2004 and 2003, respectively, is
accounted for under the Last-In, First-Out (“LIFO”) method. The LIFO reserve is determined at year-end
when inventory levels and pricing are finalized. Cost of goods sold includes a LIFO provision
of $63.4 million and $8.3 million for the years ended December 31, 2004 and
2003, respectively. The increase in the
LIFO provision from 2003 to 2004 is due to the significant increase in our
principal raw material costs, which is steel purchased as slabs, in coil form,
and/or scrap. Steel costs represented
approximately 55% of our total cost of goods sold at the beginning of 2004 and
increased to approximately 65% by the end of 2004 due to the rapid rise in the
price of steel. Steel is the largest
single component of product cost. Increases
in steel costs and our ability to pass those increases on to our customers
through product pricing have a significant impact on our results from
operations.
Our future operating
results may fluctuate significantly depending upon a number of factors,
including industry conditions, the level of oil and gas drilling activity,
competition from domestic and foreign manufacturers, and costs of our raw
materials. Sales of our finned tubular
products are affected by the level of domestic and foreign demand for power
generation, the relative state of the general industrial economy, as well as
domestic and foreign competition.
The level of production
volume through our various facilities has a significant effect on the cost of
manufacturing. As shipment volumes
increase, a larger portion of fixed and semi-fixed costs are absorbed over
greater units of production thereby reducing the impact of these costs on cost
of goods sold. Key variable costs
include costs of labor and raw materials, including scrap steel, steel slabs,
steel coils, electricity, and natural gas.
Most of our finned tubes and other heat recovery products are
manufactured to customer specifications.
Accordingly, our manufacturing costs for heat recovery products are to
some extent factored into product prices on an order-by-order basis.
We have entered into
marketing alliances and manufacturing arrangements with several companies.
These alliances and arrangements involve the sale and marketing of their
products which provide us access to additional manufacturing capacity. Our exclusive commercial alliances with these
mills allow us to outsource production of specific types of OCTG, line pipe,
and specialty tubing and enable us to concentrate our capital expenditures and
manufacturing expertise on our premium products and new technologies. We will continue to explore opportunities to
expand our global alliance partners to enable us to offer our customers a wider
variety of tubular products at competitive prices while enhancing our margins,
and to focus our production on higher-margin premium products.
PRINCIPAL LINES OF BUSINESS, PRODUCTS, AND SERVICES
Oilfield Products – Our oilfield products
and services consist of (1) casing, which acts as a structural retainer
wall in oil and natural gas wellbores, (2) production tubing, which
transmits hydrocarbons to the surface, (3) line pipe, which is used in
gathering and transmitting hydrocarbons, (4) couplings, which are used to
connect individual sections of oilfield casing and tubing, and (5) OCTG
finishing services, including threading, thermal treating, upsetting,
non-destructive testing, inspection, and storage services.
We expect demand for our
oilfield products to continue to remain strong throughout 2005 as both crude
oil prices and natural gas prices are expected to sustain the number of active
drilling rigs. The U.S. Energy Information
Agency (“EIA”) has projected that the average West Texas Intermediate (WTI)
crude oil price should remain in the low- to mid-$40’s per barrel range
throughout 2005-2006. During 2004, U.S.
petroleum demand increased 2.4% over the prior year, the largest increase in
five years, despite the significant increase in prices. The EIA expects U.S. petroleum demand to grow
at an approximate average of 1.7% growth rate in 2005 and 2006. U.S. natural gas spot prices averaged around $6
per thousand cubic feet (“mcf”) during 2004 and ended the month of December
2004 at $6.77 per mcf. The EIA expects
natural gas spot prices to range from $5.45 - $5.75 per mcf during 2005 and
2006 due to high crude oil prices and a relatively tight natural gas supply to
demand condition. We believe that these
are positive indicators of increasing and sustainable demand for our oilfield
products in 2005.
Specialty Tubing Products – Our specialty
tubing product segment includes two principal product groups: (1) precision mechanical tubulars and (2)
finned tubular products. Our precision
mechanical tubulars consist of a wide array of high-quality, custom-made steel
tubular products with precise dimensional control and special metallurgical
25
properties which are
manufactured by the “Drawn Over Mandrel” process. This process allows us to
achieve higher critical tolerances and dimensional control than other
processes. These products are used for several industrial applications,
including the manufacture of hydraulic cylinders for construction and farm
equipment; automotive applications, such as stabilizers and intrusion tubes;
and other uses, including machine parts, bearing races, down-hole pump barrels,
heavy-lift crane boom chords, drill rods, and liner hangers.
Demand for our precision
mechanical tubular products improved in 2004 with shipment volume increasing
approximately 22% over fiscal year 2003 as the general domestic economy
continued to improve throughout the year.
The composite Purchasing Managers’ Index remains above 50 percent which
generally indicates that the manufacturing economy is expanding. We believe that demand for our precision
mechanical tubing products in 2005 will continue to be positively impacted by
the improving general domestic economy.
Our finned tubular
products are used in heat recovery applications such as fuel economizers,
petrochemical plants, refineries, and combined-cycle electrical power
generation plants. Demand for
domestically produced finned tubulars and related products fell slightly in
2004 and shipment volumes decreased 15% from 2003. Since reorganizing our finned tubular
business around new marketing and commercial business lines directed at more
traditional heat recovery markets including fuel economizers and traditional
boiler applications, we have experienced increased customer activity related to
improvements in the general industrial economy.
However, with few exceptions, demand for our finned products for
installation in new power plant construction projects is not likely to improve until
existing electrical power generation capacity is more fully utilized.
Flat Rolled Steel and Other Products – We
manufacture and market flat rolled steel, which is primarily used in the
manufacture of our oil country tubular products and precision mechanical
tubular products. We also sell flat rolled steel to fabricators of large-diameter
transmission pipe, storage tanks, rail cars and a variety of other construction
and industrial products. Our other products are principally used for structural
and piling applications in the construction industry. We sell flat rolled steel directly to
end-users and through service centers primarily in the Southwestern region of
the United States.
We sell flat rolled steel in highly competitive markets, with price,
quality, and availability primarily determining customer purchase
decisions. Flat rolled steel processing
services are also sold to steel mills where we receive processing revenues but
do not take title to the steel.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion
and Analysis, Results of Operations, and Financial Condition are based on the
related consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America. The preparation of the
financial statements requires the use of estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, and expenses. Lone Star evaluates its estimates primarily
based on historical experience and business knowledge. These estimates are evaluated by management
and revised as circumstances change. A
discussion of the significant estimates made by Lone Star follows:
Warranty Claims
Our products are used in applications that are subject to inherent
risks including well failures, performance deficiencies, line pipe leaks,
personal injury, property damage, environmental contamination, or loss of oil
and gas production. We warrant our
products to meet certain specifications.
Actual or claimed deficiencies in meeting these specifications may give
rise to claims. We maintain a reserve
for asserted and unasserted warranty claims.
The warranty claim exposure is evaluated using historical claim trends and
information available on specifically asserted claims. We also maintain product
and excess liability insurance subject to certain deductibles that limits our
exposure to these claims. We consider
the extent of insurance coverage in our 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 our
exposure and the related reserve.
26
Bad Debts
Our customers are concentrated in markets and industries that are
subject to volatility. In addition, we
sell a substantial amount of products to a few customers, none of which
individually comprise more than 10% of total net revenues. We maintain a reserve for known and estimated
unknown bad debts. We evaluate credit
risk and the adequacy of our reserve by monitoring the age of our accounts
receivable and the credit worthiness of our customers. In addition, we monitor the overall status of
the industries where our products and services are utilized. Typically, this reserve is not subject to
significant fluctuations from period to period.
However, the incurrence of an unusual amount of bad debt could alter our
exposure and the related reserve.
Environmental Obligations
Our business is subject to numerous environmental regulations. We are actively remediating a few known
exposures and conducting post closure monitoring activities. Our environmental department monitors the
status of our environmental exposures and compliance with regulations through
various means. We maintain an
environmental reserve to cover the costs of expected remediation and post
closure monitoring. We estimate the
range of cost for the remediation and post closure based on historical
experience, results of monitoring and the known extent of exposure. We evaluate the range of exposure and record
the reserve at the most probable amount within that range. Typically, this reserve
is not subject to significant fluctuations from period to period; although
given the nature of environmental exposure, significant changes in the reserve
are possible.
Impairment
of Goodwill and Long-Lived Assets
Long-lived assets, which include property, goodwill, intangible assets,
and certain other assets, comprise a significant amount of our total
assets. We make judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods, and useful lives.
Additionally, the carrying value of goodwill is reviewed annually for
impairment or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The carrying values of all other long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period
in which it is determined that the carrying amount is not recoverable. This
requires us to make long-term forecasts of our future revenues and costs
related to the assets subject to review. These forecasts require assumptions
about demand for our products and services, future market conditions, and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period.
Pension
and Postretirement Benefit Obligations
Accounting for pensions
and other postretirement benefit plans requires management to make several
estimates and assumptions (see Note J in the Notes to Consolidated Financial
Statements). These include the expected rate of return from investment
of the plans’ assets, projected increases in medical costs and the expected
retirement age of employees as well as their projected mortality. In
addition, the amounts recorded are affected by changes in the interest rate
environment because the associated liabilities are discounted to their present
value. Management makes these estimates based on Lone Star’s historical
experience and other information that it deems pertinent under the
circumstances (for example, expectations of future stock market performance).
Management engages an independent consulting actuarial firm to aid it in
selecting appropriate assumptions and valuing its pension related liabilities.
Lone Star’s net pension
benefit expense, which is included in “Cost of goods sold” on our Consolidated
Results of Operations, was $4.8 million for the year ended December 31,
2004. In recording this amount, Lone Star assumed a
27
long-term investment rate
of return of 8%. Changes to this rate of return assumption would result
in a change to the pension credit and, as a result, an equal change in cost of
goods sold. Changes that are reasonably likely to occur in assumptions
concerning retirement age, projected earnings and mortality would not be
expected to have a material effect on Lone Star’s net pension benefit expense
or net pension liability in the future. The net pension liability is
recorded at its net present value using a discount rate of 6.00% that is based
on the current interest rate environment.
Lone Star’s net cost for
other postretirement benefits, which is also included in cost of goods sold,
was $1.4 million for the year ended December 31, 2004. In recording this expense and valuing the net
liability for other postretirement benefits, which is included in “Other
Benefits” as disclosed in Note J, management estimated future increases in health-care
costs. This and other assumptions, along with the effect of a one
percentage point change in them, are described in Note J.
RESULTS
OF OPERATIONS
Net Revenues
Our revenues are derived
from three business segments: oilfield products, specialty tubing products, and
flat rolled steel and other products.
In the last three years, net revenues and shipments by segment were as
follows:
|
|
|
($ in millions)
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
Oilfield
products
|
|
695.4
|
|
72
|
|
364.8
|
|
68
|
|
304.2
|
|
58
|
|
|
Specialty tubing
products
|
|
175.1
|
|
18
|
|
121.8
|
|
23
|
|
165.4
|
|
32
|
|
|
Flat rolled
steel and other products
|
|
96.3
|
|
10
|
|
47.5
|
|
9
|
|
54.1
|
|
10
|
|
|
Total net
revenues
|
|
966.8
|
|
100
|
|
534.1
|
|
100
|
|
523.7
|
|
100
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
Tons
|
|
%
|
|
Tons
|
|
%
|
|
Tons
|
|
%
|
|
|
Oilfield
products
|
|
592,900
|
|
67
|
|
496,200
|
|
68
|
|
457,600
|
|
60
|
|
|
Specialty tubing
products
|
|
118,400
|
|
14
|
|
104,900
|
|
14
|
|
143,800
|
|
19
|
|
|
Flat rolled
steel and other products
|
|
171,100
|
|
19
|
|
132,700
|
|
18
|
|
158,700
|
|
21
|
|
|
Total shipments
|
|
882,400
|
|
100
|
|
733,800
|
|
100
|
|
760,100
|
|
100
|
|
2004
Compared to 2003 – Revenues from our oilfield products
increased by 91% over fiscal year 2003 on significant increases in both
shipment volume and average pricing. The
table below illustrates the impact of volume changes and average price changes
on net revenues from oilfield products for the year ended December 31, 2004 ($
in millions).
|
|
|
Oilfield
|
|
|
Year ended
December 31, 2003
|
|
$
|
364.8
|
|
|
|
|
|
|
|
Change due to
shipment volume
|
|
113.4
|
|
|
|
|
|
|
|
Change due to
price
|
|
217.2
|
|
|
|
|
|
|
|
Year ended
December 31, 2004
|
|
$
|
695.4
|
|
Average pricing of our
oilfield products increased nearly 60% in 2004 over the prior year. Average pricing for OCTG and line pipe
increased by 61% and 74%, respectively, in 2004 compared to 2003. OCTG revenues generally account for
approximately 75% of our total oilfield revenues. Sales of our high-strength,
alloy-grade OCTG, which comprised nearly 64% of our total OCTG revenues, were
up more than 104% as average prices increased 53%. Sales of carbon-grade OCTG products increased
nearly 91% on 70% increase in average pricing.
Line pipe revenues, which were 15% of our total oilfield product
revenues in 2004, were up 85% over the prior year on a 74% increase in average
pricing and a 6% increase in shipment volume. Our increases in average oilfield
product pricing are due principally to our success in implementing price
increases along with raw material surcharges, both of which were necessary as
the cost of our principal raw materials, steel slabs and coils, increased an
average 82% in 2004 compared to the prior year.
28
Demand for our oilfield
products also increased in 2004.
Shipment volumes of our high-strength alloy-grade OCTG and carbon-based
OCTG increased 33% and 12%, respectively, as high crude oil and natural gas
prices stimulated the number of working drilling rigs to their highest annual
average in fifteen years.
Specialty tubing product
revenues increased nearly 44% in 2004 compared to 2003 as average pricing
increased more than 27% and shipment volumes were up nearly 13%. The table below summarizes the impact of
volume and average price changes on specialty tubing products for the year
ended December 31, 2004 ($ in millions).
|
|
|
Specialty
Tubing
|
|
|
|
|
|
|
|
Year ended
December 31, 2003
|
|
$
|
121.8
|
|
|
|
|
|
|
|
Change due to
shipment volume
|
|
20.0
|
|
|
|
|
|
|
|
Change due to
price
|
|
33.3
|
|
|
|
|
|
|
|
Year ended
December 31, 2004
|
|
$
|
175.1
|
|
Similar to oilfield products, we raised prices of our specialty tubing
products and instituted raw material surcharges as a result of the significant
increases in our principal raw material cost, steel, and improved demand as
indicated by our increased shipment volume.
Sales of our precision mechanical tubulars, which accounted for 75% of
our total specialty tubing segment revenues in 2004, increased by 57% compared
to 2003. Average pricing of our
precision mechanical tubulars increased 30% and shipment volumes grew by 22%
over the prior year as general industrial demand continued to increase
throughout 2004 along with the improvement in the domestic economy. Heat recovery tubular goods revenues
increased 14% compared to the prior year as average pricing increased 33% due
principally to product price increases related to increases in raw material
costs, namely steel. Total tons shipped
decreased by 15% as excess capacity in the North American electricity
generating market and foreign competition continue to negatively impact sales
of our heat recovery tubulars.
Sales of flat-rolled and
other products increased by nearly 103% compared to 2003 as the tight domestic
steel market drove significant increases in demand for flat-rolled steel and
pushed prices to new high levels. Total
shipment volume in tons increased by 29% with average pricing up over 57%. The table below illustrates the impact of
volume and average price changes on flat-rolled and other products for the year
ended December 31, 2004 ($ in millions).
|
|
|
Flat Rolled
and Other
Products
|
|
|
|
|
|
|
|
Year ended December
31, 2003
|
|
$
|
47.5
|
|
|
|
|
|
|
|
Change due to
shipment volume
|
|
21.6
|
|
|
|
|
|
|
|
Change due to
price
|
|
27.2
|
|
|
|
|
|
|
|
Year ended
December 31, 2004
|
|
$
|
96.3
|
|
2003
Compared to 2002 – The increase in oilfield product revenues
in 2003 compared to 2002 was due in part to a 28% increase in total OCTG
shipments slightly offset by a 2% decrease in average OCTG selling price per
ton. This increase in revenues was
primarily related to increased demand for our lower-margin carbon-grade OCTG
products, which typically are used in more shallow wells, resulting in a
reduced mix of higher priced products.
Shallow wells require proportionally fewer tons per foot of well depth
than deeper wells as the initial surface casing is generally smaller in
diameter, fewer intermediate casing strings are needed, and generally the wall
thickness of the casing is less. Average
selling price per ton of our alloy-grade OCTG in 2003 did not change from 2002
despite several announced price increases.
Shipments of carbon-grade OCTG increased by 42% in 2003 compared to the
prior year while shipments of premium alloy-grade OCTG increased 19% over the
same period even though the average rig count increased by 24% from 2002 to
2003. The number of working rigs is the
most commonly followed indicator of demand for oilfield products.
Line pipe revenues, which
were approximately 16% of total oilfield product segment revenues in 2003, were
down 31% on a 31% decrease in shipment volumes in 2003 compared to 2002. Although average sales price per ton did not
change, the decrease in shipments is due principally to the termination of a
commercial alliance arrangement for
29
seam-annealed line pipe
in the second half of 2002, which accounted for approximately 79,800 tons
shipped in 2002 and only 3,400 tons in 2003.
This alliance produced only nominal operating profits in 2002.
Oilfield product revenues
in 2002 included only three months of revenues of our September 2002 Wheeling
acquisition and none from our 2003 DTP and DTI acquisitions. In 2003, these three operations contributed
approximately 10% of the total oilfield product revenues.
Revenues from specialty
tubing products decreased in 2003 compared to the prior year as the general
industrial economy remained in a contraction through most of the year. Total specialty tubing shipments decreased
27% and revenues decreased 26% in 2003 compared to 2002. Average sales price per ton shipped decreased
by 1% in 2003 compared to 2002 as the over capacity within the industry that
preceded the decline in the industrial economy placed downward pressure on
pricing. The trend of original equipment
manufacturers (“OEM”) that relocate to countries with substantially lower
operating rates than the United States continued to reduce demand for domestic
specialty tubing products. Similarly,
excess capacity in the North American electricity generating market and foreign
competitors continued to negatively impact sales of our heat recovery tubulars.
Revenues from our flat
rolled and other products segment decreased in 2003 compared to 2002 as our two
principal customers, who accounted for 76% and 73% of total flat rolled
revenues in 2003 and 2002, respectively, decreased their purchase of our flat
rolled products by 28% in 2003 compared to 2002. However, in the fourth quarter of 2003, flat
rolled revenues increased to $14.3 million, a 61% increase compared to the
third quarter of 2003, due principally to the tightening domestic steel supply
during the fourth quarter of 2003.
Gross Margin
At December 31, 2004,
2003, and 2002, we valued 82%, 90%, and 84%, respectively, of our inventories
at the lower of cost or market determined on the last-in, first-out (“LIFO”)
inventory valuation method. In periods
of increasing costs, the LIFO method generally results in higher cost of goods
sold than under the first-in, first-out (“FIFO”) method. Likewise, in periods of decreasing costs the
results are generally the opposite.
Steel costs increased dramatically in 2004 which negatively impacted
gross profit under the LIFO method as compared to what gross profit would have
been had we used the FIFO method.
The following table
illustrates the comparative effect of LIFO and FIFO accounting on our
consolidated results of operations. This
table is provided solely for the purpose of providing comparisons to other
companies that may use the FIFO method of inventory valuation. The supplemental FIFO earnings reflect the
after-tax effect of eliminating the LIFO reserve adjustment as disclosed in the
footnotes to the Consolidated Financial Statements for the years ended December
31, 2004, 2003, and 2002 ($ in millions).
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
LIFO
|
|
FIFO
|
|
LIFO
|
|
FIFO
|
|
LIFO
|
|
FIFO
|
|
|
Cost of goods
sold
|
|
$
|
804.8
|
|
$
|
741.4
|
|
$
|
528.9
|
|
$
|
520.6
|
|
$
|
516.3
|
|
$
|
501.7
|
|
|
Net income
(loss)
|
|
101.0
|
|
162.3
|
|
(68.2
|
)
|
(59.9
|
)
|
(69.2
|
)
|
(54.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows
cost of sales and the related gross margin percentages (“GM%”) for the last
three years ($ in millions):
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
$
|
|
GM%
|
|
$
|
|
GM%
|
|
$
|
|
GM%
|
|
|
Cost of goods
sold
|
|
804.8
|
|
16.8
|
%
|
528.9
|
|
1.0
|
%
|
516.3
|
|
1.4
|
%
|
2004
Compared to 2003 – Margins improved substantially in 2004
compared to 2003 as both increased demand and higher average product pricing
offset increases in raw materials including steel and natural gas. Beginning in the first quarter of 2004, we
began instituting price increases across all product segments as well as
implemented raw material surcharges in response to rapidly increasing steel
costs and rising natural gas costs.
During the second quarter of 2004 our surcharges and base price were
merged into one price subject to possible change at the time of shipment. We continue to closely monitor our raw
material costs including their impact on our margins and examine the need to
further raise product prices as raw material costs increase and as appropriate
with market demand. For 2004, the
increase in shipment volumes across all three reporting segments absorbed a
larger amount of fixed and semi-fixed costs over greater units of production
thereby reducing the impact of fixed and semi-fixed costs on cost of goods
sold.
30
2003
Compared to 2002 – Gross margin declined slightly in 2003
compared to 2002, but remained just above break-even as significantly higher
raw material costs, namely steel and natural gas, combined with a difficult
year in product pricing to reduce margins across all product lines. Although we announced several OCTG price
increases totaling approximately $135 per ton during the year, only about
one-third of these announced price increases were realized or impacted existing
customer programs. We had similar low
realization of announced line pipe and specialty tubing price increases during
2003. Our inability to realize price
increases was principally due to an increase in foreign imports and competitive
pressures domestically and internationally.
For OCTG, imports increased from an average of 31% of the apparent
consumption of domestic OCTG in 2002 to 35% in 2003.
Selling, General, and Administrative
Expenses
The following table
presents consolidated selling, general, and administrative (“SG&A”)
expenses and the related percentage of total consolidated revenues for the last
three years ($ in millions):
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
$
|
|
% of
Rev.
|
|
$
|
|
% of
Rev.
|
|
$
|
|
% of
Rev.
|
|
|
Selling,
general, and administrative
|
|
44.6
|
|
4.6
|
%
|
41.8
|
|
7.8
|
%
|
68.2
|
|
13.0
|
%
|
2004 Compared to 2003 – In 2004,
SG&A costs increased less than 7%, but fell to 4.6% of revenues principally
due to the significant increase in our revenues. The increase in SG&A costs is principally
due to increases in wages, salaries, and related benefits of approximately $2.8
million related to the increase in our operating rates and business activities;
and, increases in audit and consulting fees related to public company
compliance requirements, principally Sarbanes-Oxley Section 404, and other
professional fees of approximately $1.8 million. These increases were partially offset by
reductions in other SG&A expenses related to taxes other than income,
reductions in information technology operating costs, and reductions in other
miscellaneous SG&A expenses totaling $1.4 million.
2003 Compared to 2002 – Excluding
the impact of a significant charge of $18.7 million for a goodwill impairment
in 2003 and a $32 million charge for the unfavorable Cargill litigation
judgment in 2002 (See Item 3., Legal Proceedings), SG&A expenses increased
by $5.6 million in 2003 compared to 2002.
This increase was due principally to the inclusion of $4.7 million of
SG&A expenses from a full year of Wheeling’s operations and a partial year
of DTP’s and DTI’s operations in 2003.
In comparison, for 2002, total SG&A expense included only $0.4
million of Wheeling SG&A costs. The
remaining increase in 2003 compared to 2002 is due to expenditures for our
Sarbanes-Oxley Section 404 readiness initiative and additional legal costs
related to our appeal of the Cargill judgment.
These increases were partially offset by our initiatives to reduce costs
and improve profitability implemented during 2003.
Interest Expense
Interest expense increased in 2004 by $0.4 million, principally as a
result of incrementally higher interest costs associated with higher steel
costs as part of our product financing arrangements. Interest expense increased in 2003 compared
to 2002 by $2.7 million, principally as a result of interest accruing on the
$32 million unfavorable judgment against Lone Star in 2002.
Income Taxes
Lone Star’s effective tax
rate is affected by the carryforward of net operating losses (“NOL”) recognized
or not recognized in a particular year and the full valuation allowance placed
against the associated net deferred tax assets. In 2004, NOL’s totalling $46.9 million were
utilized to reduce our federal income tax expense. In 2003, a tax benefit at the U.S. statutory
rate of 35% was reduced by $25.5 million of NOL benefit not recognized in that
period as management believed that it was more likely than not the related tax
benefits would not be realized. The
ultimate realization of our deferred tax assets depends upon our ability to
generate sufficient taxable income in the future. Accordingly, due to the uncertainty regarding
possible utilization of NOL’s and the sensitivity of our earnings to the level
of domestic drilling activity, we record a valuation allowance to fully reserve
the computed net deferred tax assets. We
evaluate the amount recorded as a valuation allowance quarterly and as
conditions change. The income tax
expense for the years ended December 31, 2004 and 2003 consists of state income
taxes.
31
LIQUIDITY
AND CAPITAL RESOURCES
Overview
We have historically
funded our business through our operating results. We believe these sources of funds will
provide the liquidity necessary to fund our cash requirements during 2005. The following table shows our capital
resources ($ in millions):
|
|
|
2004
|
|
2003
|
|
|
Cash and cash
equivalents
|
|
$
|
30.2
|
|
$
|
33.3
|
|
|
Total
investments in debt securities
|
|
$
|
59.1
|
|
$
|
—
|
|
|
Restricted cash
|
|
$
|
—
|
|
$
|
32.2
|
|
|
Working capital
|
|
$
|
288.1
|
|
$
|
184.2
|
|
|
Unused credit
facility
|
|
$
|
120.9
|
|
$
|
124.2
|
|
At December 31, 2004, our
cash and cash equivalents and investments in debt securities totaled $89.3
million, compared to $33.3 million of only cash and cash equivalents at
December 31, 2003. Our cash and cash
equivalents include commercial bank accounts and highly liquid money market
instruments issued by corporations, banks and the U.S. government or its agencies
with original maturities of less than three months. Our investments in debt securities consist of
U.S. government and related agency debt obligations, debt securities of public
companies, and municipal securities with maturities at purchase less than two
years. These investments in debt
securities generally earn higher yields than the yields of our cash and cash
equivalents. Our total cash equivalents
and investments in debt securities, the combined weighted average maturity of
which is less than one year, are classified as either held-to-maturity as we
have the positive intent and ability to hold them to maturity, or
available-for-sale (See Investments – Note D
to the Notes to Consolidated Financial Statements). The increase in working capital was primarily
due to the increase in accounts receivable of $52.8 million and our investments
in debt securities totaling $59.1 million, both of which are directly related
to our increase in net revenues in 2004, and $35.8 million in other current
assets which includes inventory deposits of $28.7 million, offset by the
decrease in inventories on-hand of $24.5 million and the increase in current
liabilities of $3.5 million. In 2003,
our liquidity and capital resources were affected by our putting up a cash deposit
totaling $32.0 million to collateralize a bond for a breach of contract
judgment on appeal. On October 1, 2004,
$34.0 million was paid to the plaintiffs in response to the Minnesota Supreme
Court’s decision that it would not review a lower court’s affirmation of the
judgment. Of these funds, $32.0 million
was released from the bond and $2.0 million in interest was paid (See Item 3.,
Legal Proceedings).
Discussion of Changes in Liquidity and
Capital Resources
Cash provided by (used
in) operating activities was $61.7 million, $(40.6) million, and $(12.4)
million for 2004, 2003, and 2002, respectively.
Cash provided from operations increased $102.3 million for the year
ended December 31, 2004, which is primarily attributable to net income of
$101.0 million. The following table
summarizes our sources and uses of cash from operations ($ in millions):
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
Cash received
from customers
|
|
$
|
914.0
|
|
$
|
525.2
|
|
$
|
536.3
|
|
|
Cash paid to
suppliers and employees
|
|
(804.6
|
)
|
(554.9
|
)
|
(540.7
|
)
|
|
Interest
received
|
|
1.7
|
|
1.2
|
|
2.5
|
|
|
Interest paid
|
|
(17.0
|
)
|
(14.0
|
)
|
(13.7
|
)
|
|
Income taxes
(paid) refunded
|
|
(1.8
|
)
|
—
|
|
1.0
|
|
|
Litigation
settlement paid
|
|
(32.0
|
)
|
—
|
|
—
|
|
|
Miscellaneous
cash (paid) received
|
|
1.4
|
|
1.9
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities
|
|
$
|
61.7
|
|
$
|
(40.6
|
)
|
$
|
(12.4
|
)
|
Cash received from
customers increased 74% in 2004 compared to 2003 principally due to increases
in demand for our products and to higher average sales prices. Days sales outstanding (“DSO”) decreased to
36 days in 2004 compared to 44 days in 2003.
DSO is calculated using the average accounts receivable balance for each
fiscal year. Cash paid to suppliers and
employees increased 45% in 2004 compared to 2003, principally as a result of
significant increases in raw material costs in 2004, namely steel and natural
gas, but also due in part to
32
greater levels of
production requiring larger quantities of raw materials. Cash received from customers in 2003
decreased by 2% compared to 2002, although DSO decreased slightly to 44 days in
2003 compared to 45 days in 2002. Cash paid
to suppliers and employees increased by 3% in 2003 compared to 2002, principally
as a result of higher raw material costs in 2003.
Interest paid in 2004
increased principally due to $2.0 million of interest paid related to the
litigation settlement in 2004 (See Item 3. Legal Proceedings).
Cash used in investing
activities was $71.4 million, $48.0 million and $54.0 million for 2004, 2003,
and 2002, respectively. During 2004,
cash used in investing was due to the purchase of investments in debt
securities totaling $88.6 million and $13.0 million of investments in capital
expenditures, offset by proceeds from the sale of property of $0.7 million and
proceeds from the sale of investments classified as available-for-sale
securities totaling $29.5 million.
Primarily, the investments in capital expenditures were related to the
expansion of our production capabilities at our Star Energy Group
facilities. Cash used in 2003 related
principally to our acquisitions of DTP and DTI and capital expenditures. Cash used in 2002 relates to our acquisition
of Wheeling and capital expenditures to improve the efficiencies and
effectiveness of our production capabilities and to install new computer-based
enterprise resource planning systems.
Cash provided by financing activities was $6.4 million, $0.5 million,
and $81.5 million in 2004, 2003, and 2002, respectively. In 2004, cash was provided from the proceeds
of exercising stock options. Cash
provided in 2003 from proceeds of stock option exercises totaling $1.3 million
was offset by purchases of treasury stock of $0.8 million. Cash provided in 2002
relates to proceeds from the offering of 3.3 million shares of Lone Star common
stock totaling $82.8 million, partially offset by $1.3 million purchase of
treasury shares.
In December 2003, Lone
Star amended and restated its $100 million credit facility to increase the
total available borrowings to $125 million and extend the expiration date to
November 2006. Borrowings under the
credit facility can be used for general corporate purposes. Borrowings under the credit facility are
collateralized by substantially all of Lone Star’s assets, other than real
estate. At Lone Star’s option, the
interest rate is the prime lending rate or the LIBOR plus the applicable
additional interest. Under the
agreement, Lone Star can borrow an amount based on a percentage of eligible
accounts receivable and inventories reduced by outstanding letters of credit,
which totaled $4.1 million at December 31, 2004. The credit facility remains undrawn and the
total availability was $120.9 million at December 31, 2004. For 2004, we were in compliance with the
facility’s covenants and we do not anticipate non-compliance in the foreseeable
future.
In May 2003, we acquired substantially all of the assets of Delta
Tubular Processing (“DTP”) for $14.0 million in cash plus acquisition
costs. In June 2003, we acquired certain
assets of Frank’s Tubular International (since renamed Delta Tubular
International, or “DTI”) for $18.9 million in cash plus acquisition costs.
On April 23, 2002, Lone
Star sold 3.3 million shares of common stock under a previously filed universal
shelf registration statement. Proceeds
to Lone Star were $82.8 million. Lone
Star used the remaining net proceeds from this sale to acquire other
complementary businesses, to make compatible asset investments, and provide
funds for working capital and other general corporate purposes.
On October 16, 2002, Lone
Star filed a universal shelf registration statement that became effective on
April 18, 2003 to sell from time to time up to a total of $136.0 million of
debt securities, preferred stock, common stock, depository shares and
warrants. Lone Star has an aggregate of
approximately $250.0 million of registered securities available, including a
previously filed universal shelf registration statement.
We operate in capital intensive businesses. We have made, and we expect
we will be required to make, significant capital expenditures each year for
recurring maintenance necessary to keep manufacturing facilities operational,
to comply with environmental and other legal requirements and to improve our
information systems. Additionally, we regularly make capital expenditures for
technological improvements and for research and development projects. If
funding is insufficient at any time in the future, we may be unable to develop
or enhance our products or services, take advantage of business opportunities
or respond to competitive pressures. Our
capital expenditures budget for 2005 is approximately $11 million.
Our operations are
subject to environmental compliance and permitting requirements of various
foreign, federal, state and provincial governmental agencies. We believe that
the cost of maintaining compliance with environmental
33
requirements will fall
within our contemplated operating and capital expenditure plans, averaging $1.0
million to $2.0 million annually in the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
At December 31, 2004, we had contractual cash obligations to repay
debt, to make payments under leases, purchase obligations, and commercial
commitments in the form of unused lines of credit. Payments due under these long-term
obligations are as follows ($ in millions):
|
|
|
Obligations Due By Period (1)
|
|
|
|
|
Total
|
|
2005
|
|
2006
to
2007
|
|
2008
to
2009
|
|
Thereafter
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
obligations (2)
|
|
$
|
237.8
|
|
$
|
13.5
|
|
$
|
27.0
|
|
$
|
27.0
|
|
$
|
170.3
|
|
|
Operating lease
obligations
|
|
8.4
|
|
2.3
|
|
3.9
|
|
2.2
|
|
—
|
|
|
Purchase
obligations
|
|
9.1
|
|
9.1
|
|
—
|
|
—
|
|
—
|
|
|
Other long-term
obligations (3)
|
|
7.9
|
|
7.9
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Obligations
|
|
$
|
263.2
|
|
$
|
32.8
|
|
$
|
30.9
|
|
$
|
29.2
|
|
$
|
170.3
|
|
(1) The table does not
include an estimate for income taxes which we are required to make but not
required to include above.
(2) The long-term debt
obligations represent our cash debt service obligations, including both
interest at a fixed rate of 9.0% and principal.
(3) Other long-term
obligations represent cash contributions to our pension plan.
Commercial commitment expirations are as follows ($ in millions):
|
|
|
Commitment Expiration by Period
|
|
|
|
|
Total
|
|
2005
|
|
2006
to
2007
|
|
2008
to
2009
|
|
Thereafter
|
|
|
Unused credit
facility
|
|
$
|
125.0
|
|
$
|
—
|
|
$
|
125.0
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004,
the Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standard (“SFAS”) No. 151, Inventory
Costs—An Amendment of ARB No. 43, Chapter 4 (“SFAS 151”). SFAS 151 amends the guidance in ARB
No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires
that items such as idle facility expense, excessive spoilage, double freight,
and rehandling costs be recognized as current-period charges regardless of
whether they meet the criterion of “so abnormal” as stated in ARB
No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and we are required to adopt it beginning on
January 1, 2006. We are currently
evaluating the effect that the adoption of SFAS 151 will have on our
consolidated results of operations and financial condition but do not expect
SFAS 151 to have a material impact.
In December 2004,
the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS
No. 123, Accounting for Stock-Based
Compensation, (“SFAS 123”) and supercedes APB Opinion
No. 25, Accounting for Stock Issued to
Employees. SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period after June 15,
2005, with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative to financial
statement recognition.
34
We are required to adopt
SFAS 123R in the third quarter of fiscal 2005, beginning July 1,
2005. Under SFAS 123R, we must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption.
The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods
may be restated either as of the beginning of the year of adoption or for all
periods presented. The prospective
method requires that compensation expense be recorded for all unvested stock
options and restricted stock at the beginning of the first quarter of adoption
of SFAS 123R, while the retroactive methods would record compensation
expense for all unvested stock options and restricted stock beginning with the
first period restated. We are evaluating
the requirements of SFAS 123R and expect that the adoption of
SFAS 123R will have a material impact on our consolidated results of
operations and earnings per share. We
have not yet determined the method of adoption or the effect of adopting
SFAS 123R, and we have not determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under
SFAS 123.
In December 2004,
the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions (“SFAS 153”). SFAS 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets
in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it
with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods
beginning after June 15, 2005 and we are required to adopt it beginning on
January 1, 2006. We are currently evaluating
the effect that the adoption of SFAS 153 will have on our consolidated
results of operations and financial condition but we do not expect it to have a
material impact.
FORWARD-LOOKING INFORMATION
The statements included
in this Annual Report regarding future financial performance and results and
the other statements that are not historical facts are forward-looking
statements. The words “believes,” “intends,”
“expects,” “anticipates,” “projects,” “estimates,” “predicts,” and similar
expressions are also intended to identify forward-looking statements. Such statements involve risks, uncertainties
and assumptions, including, but not limited to, industry and market conditions,
environmental liabilities, competitive pricing, practices and conditions,
availability and pricing of raw materials, fluctuations in prices of crude oil
and natural gas, the trade environment, the impact of current and future laws
and governmental regulations (particularly environmental laws and regulations),
and other factors discussed in this Annual Report and in other filings with the
Securities and Exchange Commission.
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
35
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain
risks associated with the change in foreign currency rates, interest rates and
commodity prices. We seek to minimize
the potential adverse impact of those market risks through the use of
appropriate management techniques including the limited use of derivative
financial instruments.
Our operations in Mexico
and Canada are accounted for in the local currencies, converted to the U.S.
dollar equivalent based on published exchange rates for the period reported and
are therefore subject to risk of exchange rate fluctuations. We believe that our current risk exposure to
exchange rate movements is not significant.
Our investments in cash
equivalents, the weighted average maturity of which is less than three months,
and our investments in debt securities, the weighted average maturity of which
is less than one year, are subject to interest rate risk. The value of these securities would decline
in the event of increases in market interest rates. We manage this risk by investing in
securities that have relatively short-term maturities and with varying maturity
dates. In addition, we intend to hold
these securities until maturity and, as a result, avoid the losses resulting
from sudden changes in interest rates.
To the extent that we
borrow against our credit facility, we are exposed to interest rate risk
arising from the variable-rate nature of the facility. There were no borrowings
on this facility at December 31, 2004. In
the past, we have used interest rate swaps to effectively fix a portion of the
interest rates on our variable rate credit facilities. We did not have any interest rate swaps at
December 31, 2004 and 2003. Our senior
subordinated notes accrue interest at a fixed rate of 9%. The fair value of the notes is sensitive to
changes in interest rates. The fair
value of Lone Star’s senior subordinated debt based on quoted market prices was
$156.8 million and $149.3 million at December 31, 2004 and 2003, respectively.
We are subject to
commodity price risk, primarily with respect to purchases of steel and natural
gas. Purchased steel represents a
significant portion of our cost of goods sold.
As a result, fluctuations in the cost of purchased steel, which can be
volatile and cyclical in nature, have a significant impact on our margins both
positively and negatively. Our steel
costs have risen significantly since the end of 2003. We have been successful in passing these
higher steel costs on to our customers.
However, there can be no assurance that we will continue to be able to
do so in the future.
We purchase natural gas
for our operations and therefore have a limited market risk in natural gas
prices. As a result, our earnings could
be affected by changes in the price of natural gas. As market conditions dictate, we may enter
into contracts to acquire a significant portion of our natural gas requirements
over periods ranging from six to eighteen months. Our remaining requirements are purchased on
the market at the current value. Our
natural gas purchase commitments at December 31, 2004 totaled $9.1 million.
36
ITEM 8. CONSOLIDATED
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Report
of Independent Registered Public Accounting Firm
|
|
|
Management’s
Report on Internal Controls over Financial Reporting
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
Consolidated Results
of Operations for the years ended December 31, 2004, 2003, and 2002
|
|
|
Consolidated Balance Sheets
at December 31, 2004 and 2003
|
|
|
Consolidated
Statements of Cash Flows, for the years ended December 31, 2004, 2003, and
2002
|
|
|
Consolidated
Statements of Shareholders’ Equity for the years ended December 31, 2004,
2003, and 2002
|
|
|
Notes to
Consolidated Financial Statements
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
|
37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
Lone
Star Technologies, Inc.:
We
have audited the accompanying consolidated balance sheets of Lone Star
Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and
2003, and the related consolidated results of operations, statements of
shareholders’ equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Lone Star Technologies, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 28, 2005
expressed an unqualified opinion on management’s assessment of the
effectiveness of the Company’s internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2005
38
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors
and Shareholders of Lone Star Technologies, Inc.:
The management of Lone Star Technologies, Inc. and subsidiaries (“Lone
Star”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Lone Star’s internal control
system was designed to provide reasonable assurance to the company’s management
and board of directors regarding the preparation and fair presentation of
published financial statements.
All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Lone Star’s management,
including its principal executive officer and principal financial officer,
assessed the effectiveness of the company’s internal control over financial
reporting as of December 31, 2004. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment we believe that, as
of December 31, 2004, the company’s internal control over financial reporting
is effective based on those criteria.
Lone Star’s independent
registered public accounting firm, Deloitte & Touche LLP, has issued an
audit report on our assessment of the company’s internal control over financial
reporting, which is included herein.
Lone Star Technologies,
Inc.
Dallas, Texas
February 28, 2005
|
/s/ Rhys J. Best
|
|
/s/ Charles J. Keszler
|
|
|
|
|
|
|
|
|
Rhys J. Best
|
Charles J. Keszler
|
|
Chief Executive Officer
|
Chief Financial Officer
|
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of Lone Star Technologies, Inc.:
We
have audited management’s assessment, included in the accompanying “Management’s
Report on Internal Control Over Financial Reporting,” that Lone Star
Technologies, Inc. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed by,
or under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by
the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our opinion, management’s assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheet as of December 31, 2004 and the
related consolidated results of operations, statements of shareholders’ equity
and cash flows for the year ended December 31, 2004 of the Company and our
report dated February 28, 2005 expressed an unqualified opinion on those
financial statements.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2005
40
LONE
STAR TECHNOLOGIES, INC.
CONSOLIDATED
RESULTS OF OPERATIONS
($ and shares in millions, except per share
data)
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
966.8
|
|
$
|
534.1
|
|
$
|
523.7
|
|
|
Cost of goods
sold
|
|
804.8
|
|
528.9
|
|
516.3
|
|
|
Gross profit
|
|
162.0
|
|
5.2
|
|
7.4
|
|
|
Selling,
general, and administrative expenses
|
|
44.6
|
|
41.8
|
|
68.2
|
|
|
Goodwill
impairment charge
|
|
—
|
|
18.7
|
|
—
|
|
|
Operating income
(loss)
|
|
117.4
|
|
(55.3
|
)
|
(60.8
|
)
|
|
Interest income
|
|
1.8
|
|
1.4
|
|
2.5
|
|
|
Interest expense
|
|
(16.8
|
)
|
(16.4
|
)
|
(13.7
|
)
|
|
Other income,
net
|
|
2.0
|
|
2.2
|
|
2.1
|
|
|
Income (loss)
before income tax
|
|
104.4
|
|
(68.1
|
)
|
(69.9
|
)
|
|
Income tax
benefit (expense)
|
|
(3.4
|
)
|
(0.1
|
)
|
0.7
|
|
|
Net income
(loss)
|
|
$
|
101.0
|
|
$
|
(68.2
|
)
|
$
|
(69.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Per
common share - basic:
|
|
|
|
|
|
|
|
|
Net income
(loss) available to common shareholders
|
|
$
|
3.51
|
|
$
|
(2.40
|
)
|
$
|
(2.52
|
)
|
|
|
|
|
|
|
|
|
|
|
Per
common share - diluted:
|
|
|
|
|
|
|
|
|
Net income
(loss) available to common shareholders
|
|
$
|
3.46
|
|
$
|
(2.40
|
)
|
$
|
(2.52
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
28.7
|
|
28.4
|
|
27.5
|
|
|
Diluted
|
|
29.2
|
|
28.4
|
|
27.5
|
|
See Notes to Consolidated
Financial Statements.
41
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions, except share data)
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
30.2
|
|
$
|
33.3
|
|
|
Short-term
investments
|
|
46.4
|
|
—
|
|
|
Accounts
receivable, less allowances of $1.3 and $1.7, respectively
|
|
122.6
|
|
69.8
|
|
|
Inventories
|
|
128.3
|
|
152.8
|
|
|
Other current
assets
|
|
51.6
|
|
15.8
|
|
|
Total current
assets
|
|
379.1
|
|
271.7
|
|
|
|
|
|
|
|
|
|
Investments
|
|
12.7
|
|
—
|
|
|
Property, plant,
and equipment, net
|
|
205.8
|
|
220.0
|
|
|
Goodwill
|
|
40.9
|
|
40.9
|
|
|
Restricted cash
|
|
—
|
|
32.2
|
|
|
Other noncurrent
assets
|
|
8.2
|
|
9.9
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
646.7
|
|
$
|
574.7
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
53.9
|
|
$
|
59.5
|
|
|
Accrued
liabilities
|
|
37.1
|
|
28.0
|
|
|
Total current
liabilities
|
|
91.0
|
|
87.5
|
|
|
|
|
|
|
|
|
|
Senior
subordinated debt
|
|
150.0
|
|
150.0
|
|
|
Postretirement
benefit obligations
|
|
40.1
|
|
44.5
|
|
|
Other noncurrent
liabilities
|
|
11.1
|
|
46.8
|
|
|
Total
liabilities
|
|
292.2
|
|
328.8
|
|
|
|
|
|
|
|
|
|
Commitments and
Contingencies (See Note K)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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: 29,240,866 and 28,660,903,
respectively)
|
|
29.2
|
|
28.7
|
|
|
Capital surplus
|
|
363.0
|
|
355.1
|
|
|
Accumulated
other comprehensive loss
|
|
(32.6
|
)
|
(32.2
|
)
|
|
Accumulated
deficit
|
|
(2.4
|
)
|
(103.4
|
)
|
|
Treasury stock,
at cost (195,958 and 174,107 shares, respectively)
|
|
(2.7
|
)
|
(2.3
|
)
|
|
Total
shareholders' equity
|
|
354.5
|
|
245.9
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
646.7
|
|
$
|
574.7
|
|
See Notes to Consolidated
Financial Statements.
42
LONE
STAR TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
($ in millions)
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
101.0
|
|
$
|
(68.2
|
)
|
$
|
(69.2
|
)
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used in) operating
activities, net of acquired companies:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
27.8
|
|
25.4
|
|
21.8
|
|
|
Non-cash charge
for stock compensation
|
|
1.6
|
|
1.1
|
|
(0.1
|
)
|
|
Net loss (gain)
on property disposals and impairments
|
|
0.1
|
|
0.4
|
|
(0.1
|
)
|
|
Goodwill
impairment
|
|
—
|
|
18.7
|
|
—
|
|
|
Accounts
receivable
|
|
(52.8
|
)
|
(7.1
|
)
|
11.7
|
|
|
Inventories
|
|
24.5
|
|
(4.0
|
)
|
6.4
|
|
|
Other current
assets
|
|
(35.8
|
)
|
(2.8
|
)
|
(3.3
|
)
|
|
Accounts payable
and accrued liabilities
|
|
1.9
|
|
27.2
|
|
(7.2
|
)
|
|
Litigation
reserves
|
|
(33.0
|
)
|
2.0
|
|
32.0
|
|
|
Restricted cash
|
|
32.2
|
|
(32.2
|
)
|
—
|
|
|
Other
|
|
(5.8
|
)
|
(1.1
|
)
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities
|
|
61.7
|
|
(40.6
|
)
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(13.0
|
)
|
(14.4
|
)
|
(15.9
|
)
|
|
Purchase of
investments
|
|
(88.6
|
)
|
—
|
|
—
|
|
|
Proceeds from
sale of property, plant and equipment
|
|
0.7
|
|
0.4
|
|
0.2
|
|
|
Proceeds from
sales of investments
|
|
29.5
|
|
—
|
|
—
|
|
|
Cash paid for
acquisitions, net of cash received
|
|
—
|
|
(34.0
|
)
|
(38.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
investing activities
|
|
(71.4
|
)
|
(48.0
|
)
|
(54.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from
exercise of options
|
|
6.4
|
|
1.3
|
|
—
|
|
|
Net proceeds
from stock offering
|
|
—
|
|
—
|
|
82.8
|
|
|
Purchase of
treasury stock
|
|
—
|
|
(0.8
|
)
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities
|
|
6.4
|
|
0.5
|
|
81.5
|
|
|
|
|
|
|
|
|
|
|
|
Effect of
foreign exchange rate changes on cash
|
|
0.2
|
|
0.9
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Net change in
cash and cash equivalents
|
|
(3.1
|
)
|
(87.2
|
)
|
14.0
|
|
|
Cash and cash
equivalents, beginning of year
|
|
33.3
|
|
120.5
|
|
106.5
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents, end of year
|
|
$
|
30.2
|
|
$
|
33.3
|
|
$
|
120.5
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow disclosure:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
17.0
|
|
$
|
13.9
|
|
$
|
13.7
|
|
|
Income taxes
paid (refunded), net
|
|
$
|
1.8
|
|
$
|
—
|
|
$
|
(1.0
|
)
|
See Notes to Consolidated
Financial Statements.
43
LONE
STAR TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
($ in millions)
|
|
|
Common
Stock
|
|
Capital
Surplus
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Accumulated
Earnings
(Deficit)
|
|
Treasury
Stock
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2002
|
|
$
|
25.2
|
|
$
|
272.0
|
|
$
|
(15.9
|
)
|
$
|
34.0
|
|
$
|
—
|
|
$
|
315.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
(69.2
|
)
|
—
|
|
(69.2
|
)
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension
liability adjustment
|
|
—
|
|
—
|
|
(14.9
|
)
|
—
|
|
—
|
|
(14.9
|
)
|
|
Foreign currency
translation adjustment
|
|
—
|
|
—
|
|
(1.3
|
)
|
—
|
|
—
|
|
(1.3
|
)
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
(85.4
|
)
|
|
Stock offering
|
|
3.3
|
|
79.5
|
|
—
|
|
—
|
|
—
|
|
82.8
|
|
|
Employee benefit
plan stock issuance
|
|
—
|
|
1.2
|
|
—
|
|
—
|
|
—
|
|
1.2
|
|
|
Acquisition of
treasury stock
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1.3
|
)
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2002
|
|
28.5
|
|
352.7
|
|
(32.1
|
)
|
(35.2
|
)
|
(1.3
|
)
|
312.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
—
|
|
—
|
|
(68.2
|
)
|
—
|
|
(68.2
|
)
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension
liability adjustment
|
|
—
|
|
—
|
|
(1.0
|
)
|
—
|
|
—
|
|
(1.0
|
)
|
|
Foreign currency
translation adjustment
|
|
—
|
|
—
|
|
0.9
|
|
—
|
|
—
|
|
0.9
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
(68.3
|
)
|
|
Employee benefit
plan stock issuance
|
|
0.2
|
|
2.4
|
|
—
|
|
—
|
|
(0.2
|
)
|
2.4
|
|
|
Acquisition of
treasury stock
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(0.8
|
)
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2003
|
|
28.7
|
|
355.1
|
|
(32.2
|
)
|
(103.4
|
)
|
(2.3
|
)
|
245.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
—
|
|
—
|
|
101.0
|
|
—
|
|
101.0
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension
liability adjustment
|
|
—
|
|
—
|
|
(0.6
|
)
|
—
|
|
—
|
|
(0.6
|
)
|
|
Foreign currency
translation adjustment
|
|
—
|
|
—
|
|
0.2
|
|
—
|
|
—
|
|
0.2
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
100.6
|
|
|
Employee benefit
plan stock issuance
|
|
0.5
|
|
7.9
|
|
—
|
|
—
|
|
(0.4
|
)
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
29.2
|
|
$
|
363.0
|
|
$
|
(32.6
|
)
|
$
|
(2.4
|
)
|
$
|
(2.7
|
)
|
$
|
354.5
|
|
See Notes to Consolidated
Financial Statements.
44
LONE STAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Lone Star Technologies,
Inc. (“Lone Star”, or the “Company”), a Delaware corporation, is a management
and holding company with six principal operating subsidiaries, Lone Star Steel
Company (“Steel”), Fintube Technologies, Inc. (“Fintube”), Bellville Tube
Company, L.P. (“Bellville”), Wheeling Machine Products, Inc. (“Wheeling”), acquired October 1, 2002, Delta
Tubular Processing, Inc. (“DTP”), acquired May 1, 2003 and, Delta Tubular
International, Inc. (“DTI”), acquired June 2, 2003. Steel manufactures and globally markets
oilfield tubular products to the oil and gas drilling industry, mechanical
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. Fintube
manufactures specialty finned tubular products used in a variety of heat
recovery applications including combined-cycle electrical power
generation. Bellville manufactures
oilfield tubular products. Wheeling
manufactures couplings used to connect individual sections of oilfield casing
and tubing. Delta and Delta
International provide oil country tubular processing services including
threading and inspection services.
Lone Star’s consolidated
revenues are not seasonal. However,
demand for oilfield products is subject to significant fluctuations due to the
volatility of oil and gas prices and domestic drilling activity as well as
other factors including competition from imports. Demand for mechanical tubing and finned
tubular products is primarily subject to fluctuations in general economic
conditions.
ACCOUNTING POLICIES - NOTE A
Principles of consolidation. The consolidated financial statements include
the accounts of Lone Star and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. In the Notes to Consolidated Financial
Statements, all dollar and share amounts in tabulation are in millions of
dollars and shares, respectively, except per share data and unless otherwise
noted. Certain prior year amounts have
been reclassified to conform to the current year’s presentation.
Cash and cash equivalents. Lone Star’s cash and cash equivalents include
commercial bank accounts and highly liquid investments in a fund consisting of
U. S. government and related agencies obligations with original maturities of
less than three months.
At December 31, 2003,
Lone Star had restricted cash of $32.2 million related to a cash deposit that
collateralized a bond for a breach of contract judgment. See Commitments and Contingencies – Note K.
Investments. Lone Star accounts for
its investments in debt securities under Statement of Financial Accounting
Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities (“SFAS No. 115”). Under
SFAS No. 115, investments for which Lone Star has the positive intent and the
ability to hold to maturity are reported at amortized cost, which approximates
fair market value at December 31, 2004.
Those classified as available-for-sale are reported at fair value with
unrealized gains and losses recorded in comprehensive income.
Inventories are
stated at the lower of cost or market value.
Cost is determined using the last-in, first-out (“LIFO”) method for
approximately 82% and 90% of the Company’s total current inventories after LIFO
reserve at December 31, 2004 and 2003, respectively. The cost of remaining inventories is
determined using the first-in, first-out (“FIFO”) method. Inventories include raw materials and certain
supplies.
Property, plant, and equipment
are stated at cost. Significant
betterments and improvements are capitalized if they extend the useful life of
the asset, while maintenance and repairs are expensed when incurred. Depreciation is provided on the straight-line
method over the estimated useful lives of depreciable assets as follows:
|
Land improvements
|
3 - 39 Years
|
|
Buildings, structures and improvements
|
4 - 30 Years
|
|
Machinery and equipment
|
3 - 30 Years
|
45
Impairment of long-lived assets. In accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, Lone Star
periodically evaluates the recoverability of long-lived assets whenever events
and changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable. At December
31, 2004, the Company believes that its long-lived assets have not been
impaired.
Income taxes.
Lone Star applies the provisions of SFAS No. 109, Accounting for Income Taxes, which
utilizes an asset and liability approach for financial accounting and income
tax reporting. Deferred tax liabilities
or assets are recognized for the estimated future tax effects attributable to
temporary differences and carryforwards and are adjusted whenever tax rates or
other provisions of income tax statutes change.
Deferred tax assets are reduced, if deemed necessary, by a valuation
allowance for any tax benefits that are not expected to be realized. A full valuation has been maintained for all
tax benefits, principally consisting of federal tax net operating loss
carryforwards.
Revenue recognition. Product revenues are recognized as sales when
revenue is earned and is realized or realizable. This includes satisfying the following
criteria: the arrangement with the
customer is evident, usually through the receipt of a purchase order; the sales
price is fixed or determinable; delivery has occurred, which may include
delivery to the customer storage warehouse location at one of the Company’s
subsidiaries in which instance, the risk of loss has been passed to the
customer; and collectibility is reasonably assured. Freight and shipping billed to customers is
included in net sales, and the cost of freight and shipping is included in cost
of sales. The Company has marketing
agreements to sell steel oilfield tubular products manufactured by other
companies. Revenue is recorded on a
gross basis for certain transactions with alliance mills when the Company is
the primary obligor and has general inventory and credit risk, and certain
other transactions are recorded net.
Foreign currency translation. In accordance with SFAS No. 52, Foreign Currency Translation, one of Lone Star’s international
operations uses the local currency as its functional currency while another
international operation uses the U.S. Dollar as its functional currency.
Revenue and expenses from the Company’s international operations are translated
using the monthly average exchange rates in effect for the period in which the
items occur. The Company’s international operation that has the U.S. Dollar as
its functional currency translates monetary assets and liabilities using
current rates of exchange at the balance sheet date and translates non-monetary
assets and liabilities using historical rates of exchange. Gains and losses
from remeasurement for such operations are included in other income, on a net
basis and have historically not been significant. The Company’s international
operation that does not have the U.S. Dollar as its functional currency
translates assets and liabilities at current rates of exchange in effect at the
balance sheet date. The resulting gains and losses from translation for such
subsidiary are included as a component of shareholders’ equity.
Business and Credit Risk. Lone Star sells products to numerous customers
primarily in the oil and gas drilling industry.
Although this concentration could affect the Company’s overall exposure
to credit risk, management believes that the Company is exposed to minimal risk
since the majority of its business is conducted with major companies within the
industry. The Company performs on-going
credit evaluations of its customers and generally does not require collateral
when extending credit. The Company maintains a reserve for potential credit
losses. Such losses have historically been within management’s
expectations. The Company does not have
financial instruments with off-balance sheet risk.
Lone Star maintains cash
and cash equivalents and investments in debt securities with various financial
institutions. As part of its cash and risk management processes, the Company
performs periodic evaluations of the relative credit standing of the financial
institutions. Lone Star has not
sustained credit losses from instruments held at financial institutions.
Stock-Based Employee Compensation. The Company accounts
for stock-based compensation utilizing the intrinsic value method in accordance
with the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees
and related Interpretations. Accordingly, no compensation expense is recognized
for fixed option plans because the exercise prices of employee stock options
equal or exceed the market prices of the underlying stock on the dates of
grant. As permitted, the Company has
elected to adopt the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Refer to Note J for further information.
46
The weighted average fair
value per option granted in 2004, 2003, and 2002 was $8.58, $9.70, and $9.65,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions for grants in 2004, 2003, and 2002, respectively: risk-free
interest rates of 2.61%, 2.93%, and 4.79%; volatility of 63.19%, 61.86%, and
62.25%; expected lives of 3.5 years, 5.0 years, and 5.0 years; and, all option
grants without payment of dividends. Had
compensation cost for this plan been determined consistent with SFAS No. 123,
net income and earnings per share would have been reduced to the following pro
forma amounts:
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Net income
(loss) as reported
|
|
$
|
101.0
|
|
$
|
(68.2
|
)
|
$
|
(69.2
|
)
|
|
Add: Stock-based
employee compensation expense included in reported net income (loss), net of
related tax effects
|
|
1.6
|
|
1.1
|
|
0.9
|
|
|
Deduct: Total
stock-based employee compensation expense determined under fair value based
method for all awards, net of related tax effects
|
|
(7.5
|
)
|
(7.7
|
)
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro forma net
income (loss)
|
|
$
|
95.1
|
|
$
|
(74.8
|
)
|
$
|
(75.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) per share
|
|
|
|
|
|
|
|
|
as reported
|
|
$
|
3.51
|
|
$
|
(2.40
|
)
|
$
|
(2.52
|
)
|
|
pro forma
|
|
$
|
3.31
|
|
$
|
(2.63
|
)
|
$
|
(2.76
|
)
|
|
Diluted earnings
(loss) per share
|
|
|
|
|
|
|
|
|
as reported
|
|
$
|
3.46
|
|
$
|
(2.40
|
)
|
$
|
(2.52
|
)
|
|
pro forma
|
|
$
|
3.26
|
|
$
|
(2.63
|
)
|
$
|
(2.76
|
)
|
Fair Value of Financial Instruments.
The carrying amount of cash and cash equivalents, trade
receivables and payables approximates fair value because of the short maturity
of those instruments. The estimated fair
value of Lone Star’s investments in debt securities based on quoted market
prices was $59.1 million at December 31, 2004.
The estimated fair value of Lone Star’s senior subordinated debt based
on quoted market prices was $156.8 million and $149.3 million at December 31,
2004 and 2003, respectively. These
estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of year-end or that will
be realized in the future.
As of December 31, 2004
and 2003, the Company had outstanding letters of credit of $4.1 million and
$0.8 million, respectively, which approximates fair value.
Accumulated
Other Comprehensive Income. As of December 31, 2004, accumulated other
comprehensive income consisted of $32.5 million related to minimum pension
liability adjustments and $0.1 million related to cumulative translation
adjustments.
Use of Estimates. Preparation of the
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. The Company’s estimates are primarily based on historical experience
and business knowledge and are revised as circumstances change. However, actual results could differ from
those estimates.
Lone Star’s products are used in applications which are subject to
inherent risks including but not limited to well failures, performance
deficiencies, line pipe leaks, personal injury, property damage, environmental
contamination or loss of oil and gas 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.
47
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 January
1, 2002 to December 31, 2004:
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Beginning
balance
|
|
$
|
2.4
|
|
$
|
2.1
|
|
$
|
3.0
|
|
|
Warranty expense
accruals
|
|
3.1
|
|
2.0
|
|
2.9
|
|
|
Changes in estimates
to pre-existing warranty accruals
|
|
—
|
|
0.2
|
|
(0.1
|
)
|
|
Warranty
settlements
|
|
(3.1
|
)
|
(1.9
|
)
|
(3.7
|
)
|
|
Ending balance
|
|
$
|
2.4
|
|
$
|
2.4
|
|
$
|
2.1
|
|
Lone Star is subject to numerous environmental regulations and is
actively remediating a few known exposures and conducting post-closure
monitoring activities. The Company
maintains an environmental reserve to cover the costs of expected remediation
and post-closure monitoring and estimates the range of cost for the remediation
and post-closure monitoring based on historical experience, results of
monitoring and the known extent of exposure.
The Company evaluates the range of exposure and records the reserve at
the most probable amount within that range.
Typically, this reserve is not subject to significant fluctuations from
period-to-period. However, given the
nature of environmental exposures, significant changes in the reserve are
possible.
New Accounting Pronouncements. In November 2004, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs—An Amendment of ARB No. 43,
Chapter 4 (“SFAS 151”).
SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage).
Among other provisions, the new rule requires that items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs be
recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by Lone Star
beginning on January 1, 2006. Lone
Star is currently evaluating the effect that the adoption of SFAS 151 will
have on its consolidated results of operations and financial condition but does
not expect SFAS 151 to have a material impact.
In December 2004,
the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS
No. 123, Accounting for Stock-Based
Compensation, (“SFAS 123”) and supercedes APB Opinion
No. 25, Accounting for Stock Issued to
Employees. SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values beginning with the first interim or annual period after June 15,
2005, with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative to financial
statement recognition. Lone Star is
required to adopt SFAS 123R in the third quarter of fiscal 2005, beginning
July 1, 2005. Under SFAS 123R,
Lone Star must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for compensation cost and
the transition method to be used at date of adoption. The transition methods include prospective
and retroactive adoption options. Under
the retroactive option, prior periods may be restated either as of the beginning
of the year of adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of SFAS 123R,
while the retroactive methods would record compensation expense for all unvested
stock options and restricted stock beginning with the first period
restated. Lone Star is evaluating the
requirements of SFAS 123R and expects that the adoption of SFAS 123R
will have a material impact on Lone Star’s consolidated results of operations
and earnings per share. Lone Star has
not yet determined the method of adoption or the effect of adopting
SFAS 123R, and it has not determined whether the adoption will result in
amounts that are similar to the current pro forma disclosures under
SFAS 123.
In December 2004,
the FASB issued SFAS No. 153, Exchanges
of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions (“SFAS 153”). SFAS 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets
in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it
with an exception for exchanges that do not have
48
commercial
substance. SFAS 153 specifies that
a nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods
beginning after June 15, 2005 and is required to be adopted by Lone Star
beginning on January 1, 2006. Lone
Star is currently evaluating the effect that the adoption of SFAS 153 will
have on its consolidated results of operations and financial condition but does
not expect it to have a material impact.
BUSINESS
SEGMENTS - NOTE B
Lone Star currently has
six operating subsidiaries that have separate management teams and
infrastructures that offer different products and services. The subsidiaries have been aggregated under
three reportable segments: oilfield,
specialty tubing, and flat rolled steel and other tubular goods. Management evaluates segment performance
based primarily on revenue and earnings from operations and segments are
organized around the products and services provided to the customers each
segment serves. No single customer
comprised more than 10% of total net revenues in 2004, 2003, or 2002. Direct foreign revenues as a percent of total
revenues were 3% in 2004, 2% in 2003, and 5% in 2002. Foreign assets as a percent of total assets
were less than 1% at December 31, 2004, 2003, and 2002, respectively.
The accounting policies
of each segment are the same as those described in Note A of Notes to
Consolidated Financial Statements.
Intersegment sales and transfers are not significant. Interest expense, interest income, other
income and expense, and income taxes have not been allocated to the segments.
Oilfield. Oilfield products are comprised of casing,
tubing, line pipe and couplings that are manufactured and marketed globally to
the oil and gas drilling industry. The
oilfield segment includes premium alloy and carbon welded oil country tubular
goods, including casing, which acts as a structural retainer wall in oil and
natural gas wellbores, and production tubing, which transmits hydrocarbons to
the surface. Line pipe is used to gather
and transmit oil and natural gas.
Couplings are used to connect individual sections of oilfield casing and
tubing. The oilfield segment also
includes end-finishing, heat treating, inspection, and storage services.
Specialty tubing. Lone Star’s specialty tubing business
includes the manufacture, marketing and sale of a variety of custom-engineered
tubular products used in exacting applications, such as the manufacture of
hydraulic cylinders for construction and farm equipment, automotive
applications, such as stabilizers and intrusion tubes; and other uses,
including machine parts, bearing races, down-hole pump barrels, heavy lift
crane boom chords, drill rods and liner hangers. Finned tubulars are used in fuel economizers,
industrial processing, petrochemical plants, refineries and combined cycle
electrical power generation.
Flat rolled steel and other tubular goods. Flat rolled steel is manufactured principally
for use by the Company in the manufacture of tubular products. The Company also sells flat rolled steel to
fabricators of large diameter pipe, storage tanks, rail cars and a variety of
other construction and industrial products.
Lone Star also provides transportation, storage and other services to a
variety of industries.
49
The following tables
present information on the segments. The
“Corporate / Other” column includes corporate related items and other
insignificant nonsegments.
|
|
|
Oilfield
|
|
Specialty
Tubing
|
|
Flat
Rolled
Steel and
Other
Products
|
|
Corporate
/ Other
|
|
Total
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
695.4
|
|
$
|
175.1
|
|
$
|
96.3
|
|
$
|
—
|
|
$
|
966.8
|
|
|
Segment
operating income (loss)
|
|
105.8
|
|
(1.5
|
)
|
19.5
|
|
(6.4
|
)
|
117.4
|
|
|
Depreciation and
amortization
|
|
16.9
|
|
9.9
|
|
0.9
|
|
0.1
|
|
27.8
|
|
|
Total assets
|
|
359.1
|
|
164.5
|
|
25.0
|
|
98.1
|
|
646.7
|
|
|
Capital
expenditures
|
|
11.0
|
|
1.9
|
|
—
|
|
0.1
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
364.8
|
|
$
|
121.8
|
|
$
|
47.5
|
|
$
|
—
|
|
$
|
534.1
|
|
|
Segment
operating income (loss)
|
|
(8.2
|
)
|
(39.7
|
)
|
(1.5
|
)
|
(5.9
|
)
|
(55.3
|
)
|
|
Depreciation and
amortization
|
|
15.1
|
|
9.3
|
|
0.9
|
|
0.1
|
|
25.4
|
|
|
Total assets
|
|
325.6
|
|
154.0
|
|
16.2
|
|
78.9
|
|
574.7
|
|
|
Capital
expenditures
|
|
10.5
|
|
3.8
|
|
—
|
|
0.1
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
304.2
|
|
$
|
165.4
|
|
$
|
54.1
|
|
$
|
—
|
|
$
|
523.7
|
|
|
Segment
operating income (loss)
|
|
(8.6
|
)
|
(13.5
|
)
|
(2.4
|
)
|
(36.3
|
)
|
(60.8
|
)
|
|
Depreciation and
amortization
|
|
11.2
|
|
9.5
|
|
1.1
|
|
—
|
|
21.8
|
|
|
Total assets
|
|
255.6
|
|
208.0
|
|
18.8
|
|
129.7
|
|
612.1
|
|
|
Capital
expenditures
|
|
9.1
|
|
6.8
|
|
—
|
|
—
|
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL AND OTHER INTANGIBLE ASSETS– NOTE C
All acquisitions in 2003
and 2002 have 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 values at the date of the
acquisition. The excess purchase price
over the fair value of the tangible and intangible net assets acquired has been
recorded as goodwill.
The Company adopted SFAS
No. 142 on January 1, 2002 and subsequently ceased goodwill amortization. The Company completed the first step of the
transitional goodwill impairment test at the beginning of 2002, and completes
the annual goodwill impairment test during the fourth quarter of each
subsequent year. The Company estimates
the fair value of each reporting unit using a present value method that
discounts estimated future cash flows. The cash flow estimates incorporate assumptions
on future cash flow growth, terminal values, and discount rates.
In 2003, because the fair
value of the Fintube unit was below its carrying value, application of SFAS No.
142 required the completion of the second step of the goodwill impairment test,
comparing the implied fair value of Fintube’s goodwill with its carrying
value. After performing this evaluation
an impairment charge of $18.7 million within the Company’s Specialty Tubing
segment was recognized for the year ended December 31, 2003.
As of both December 31,
2004 and 2003, Lone Star’s Oilfield and Specialty Tubing segments included
$13.7 million and $27.2 million of goodwill, respectively. There were no changes in the carrying amount
of goodwill for the year ended December 31, 2004.
50
Intangible assets other
than goodwill that are subject to amortization are amortized on a straight-line
basis over their respective estimated useful lives. The non-compete agreements and license
agreements are amortized over four to five years. The other amortizable intangible assets are
amortized over five to ten years. The
components of intangible assets were as follows:
|
|
|
2004
|
|
2003
|
|
|
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Amortized intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
Non-compete
agreements
|
|
$
|
1.3
|
|
$
|
(0.9
|
)
|
$
|
1.3
|
|
$
|
(0.7
|
)
|
|
Other
|
|
0.5
|
|
(0.4
|
)
|
0.5
|
|
(0.3
|
)
|
|
|
|
$
|
1.8
|
|
$
|
(1.3
|
)
|
$
|
1.8
|
|
$
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization
expense related to intangible assets, other than goodwill, was $0.3 million,
$0.4 million, and $0.3 million for the years ended December 31, 2004, 2003, and
2002, respectively.
The estimated future
amortization expense related to purchased intangible assets at December 31,
2004 is as follows:
|
Fiscal Year:
|
|
|
|
|
2005
|
|
$
|
0.1
|
|
|
2006
|
|
0.1
|
|
|
2007
|
|
0.1
|
|
|
2008
|
|
0.1
|
|
|
2009
|
|
—
|
|
|
Thereafter
|
|
0.1
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.5
|
|
INVESTMENTS – NOTE D
Investments in
held-to-maturity and available-for-sale debt securities were as follows at
December 31, 2004:
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
Held-to-Maturity
Securities (carried at amortized cost):
|
|
|
|
|
|
|
|
|
|
|
U.S. government
and agencies
|
|
$
|
8.4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8.4
|
|
|
Debt securities
of public companies
|
|
6.7
|
|
—
|
|
—
|
|
6.7
|
|
|
|
|
15.1
|
|
—
|
|
—
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
Securities (carried at fair value):
|
|
|
|
|
|
|
|
|
|
|
Municipal
securities
|
|
44.0
|
|
—
|
|
—
|
|
44.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
in debt securities
|
|
$
|
59.1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
59.1
|
|
51
Lone Star accounts for
its investments in debt securities under Statement of Financial Accounting
Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities (“SFAS No. 115”). Under
SFAS No. 115, investments for which Lone Star has the positive intent and the
ability to hold to maturity are reported at amortized cost, which approximates
fair market value at December 31, 2004.
Those classified as available-for-sale are reported at fair value with
unrealized gains and losses recorded in comprehensive income. The weighted average maturities of the
Company’s held-to-maturity and available-for-sale securities were approximately
1.3 years and 38 days, respectively, at December 31, 2004.
Contractual maturities of
held-to-maturity and available-for-sale securities at December 31, 2004 were as
follows:
|
|
|
Amortized
Cost
|
|
Estimated
Fair Value
|
|
|
Due in less than
one year
|
|
$
|
46.4
|
|
$
|
46.4
|
|
|
Due in 1 - 2
years
|
|
12.7
|
|
12.7
|
|
|
|
|
$
|
59.1
|
|
$
|
59.1
|
|
Proceeds from sales of available-for-sale
securities were $29.5 million in fiscal 2004.
No realized gain or loss was recognized upon the sale of these
securities in 2004. The specific
identification method is used to account for gains and losses on
available-for-sale securities. A summary
of the carrying values and balance sheet classification of all held-to-maturity
and available-for-sale securities was as follows at December 31, 2004:
|
|
|
2004
|
|
|
Held-to-maturity
securities
|
|
$
|
2.4
|
|
|
Available-for-sale
securities
|
|
44.0
|
|
|
Short-term
investments
|
|
46.4
|
|
|
|
|
|
|
|
Held-to-maturity
securities
|
|
12.7
|
|
|
Investments,
non-current
|
|
12.7
|
|
|
|
|
|
|
|
Total
investments
|
|
$
|
59.1
|
|
DEBT - NOTE E
In October 2001, Lone
Star entered into a three-year $100 million senior secured credit facility (the
“Credit Facility”) for use by Lone Star and its domestic subsidiaries. In December 2003, the Credit Facility was
amended and restated (“Amended Credit Facility”) to increase the total
available borrowings to $125 million and extend the expiration date to November
2006. Borrowings under the Amended
Credit Facility can be used for general corporate purposes. Under the agreement, the Company can borrow
an amount based on a percentage of eligible accounts receivable and inventories
reduced by outstanding letters of credit, which totaled $4.1 million at
December 31, 2004. The availability
under the Amended Credit Facility was $120.9 million at December 31, 2004. Borrowings under the Amended Credit Facility
are collateralized by substantially all of the Company’s assets, other than
real estate. At the Company’s option,
the interest rate is the prime lending rate or the LIBOR plus the applicable
additional interest. At December 31,
2004 and 2003, no amount was outstanding under the Amended Credit Facility.
Steel engages in slab
consignment and sales agreements with third parties. Under these agreements, Steel arranges for
third parties to purchase slabs from vendors that manufacture the slabs and the
third party consigns the slab inventory to Steel. Steel is then required to repurchase the slab
inventory based on usage within specified time periods. These inventory financing transactions have
been accounted for as product financing arrangements. Inventory financed under these arrangements
is recorded as inventory by Steel. At
December 31, 2004 and 2003, there were $8.0 million and $15.6 million,
respectively, included in accounts payable under these financing arrangements.
On May 29, 2001, Lone
Star issued $150.0 million 9% senior subordinated notes due June 1, 2011 to
qualified institutional buyers (the “Senior Notes”). Interest on the outstanding Senior Notes
accrues at a rate of 9% per year, payable semi-annually in arrears on each June
1 and December 1.
52
The Senior Notes are fully and unconditionally (as well as jointly and
severally) guaranteed on an unsecured, senior
subordinated basis by each subsidiary of the Company (the “Guarantor
Subsidiaries”) other than Aletas y Birlos S.A., de C.V. (the “Non-Guarantor
Subsidiary”) (see Note M). Each of the
Guarantor Subsidiaries and the Non-Guarantor Subsidiary is wholly owned by the
Company.
Total interest incurred including amortization of deferred financing
costs was $16.8 million, $16.4 million, and $13.7 million for the years ended
December 31, 2004, 2003, and 2002, respectively. Total interest
capitalized for the years ended December 31, 2003 and 2002 was $0.6 million and
$1.0 million, respectively. No interest
was capitalized for the year ended December 31, 2004.
SHAREHOLDERS’
EQUITY – NOTE F
On April 23, 2002, Lone Star sold 3.3 million shares of common stock
under a previously filed universal shelf registration statement. Net
proceeds to Lone Star were $82.8 million and were used to acquire Wheeling,
Delta and Delta International, and provide funds for working capital and other
general corporate purposes.
Under a previously authorized stock buy-back program, a total of
160,600 shares at a cost of $2.0 million, or a weighted average price of $12.61,
were repurchased as treasury shares. The
additional shares held at December 31, 2004 and December 31, 2003 result from
the Company’s withholding of an equivalent number of shares for federal taxes
related to the Company’s long-term incentive employee benefit plan. The 195,958 and 174,107 treasury shares held
as of December 31, 2004 and December 31, 2003, respectively, are reported at
their acquired cost.
The following table (in whole shares) identifies changes in common
stock issued and treasury stock from January 1, 2002 to December 31, 2004:
|
|
|
Issued
|
|
Treasury
Stock
|
|
Outstanding
|
|
|
Balance, January
1, 2002
|
|
25,201,595
|
|
(313
|
)
|
25,201,282
|
|
|
Stock offering
|
|
3,250,000
|
|
—
|
|
3,250,000
|
|
|
Employee benefit
plans
|
|
87,419
|
|
(4,931
|
)
|
82,488
|
|
|
Treasury stock
purchase
|
|
—
|
|
(100,600
|
)
|
(100,600
|
)
|
|
Balance,
December 31, 2002
|
|
28,539,014
|
|
(105,844
|
)
|
28,433,170
|
|
|
Employee benefit
plans
|
|
121,889
|
|
(8,263
|
)
|
113,626
|
|
|
Treasury stock
purchase
|
|
—
|
|
(60,000
|
)
|
(60,000
|
)
|
|
Balance,
December 31, 2003
|
|
28,660,903
|
|
(174,107
|
)
|
28,486,796
|
|
|
Employee benefit
plans
|
|
579,963
|
|
(21,851
|
)
|
558,112
|
|
|
Treasury stock
purchase
|
|
—
|
|
—
|
|
—
|
|
|
Balance,
December 31, 2004
|
|
29,240,866
|
|
(195,958
|
)
|
29,044,908
|
|
53
EARNINGS PER SHARE - NOTE G
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. 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.
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
101.0
|
|
$
|
(68.2
|
)
|
$
|
(69.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average
shares used to compute basic EPS
|
|
28.7
|
|
28.4
|
|
27.5
|
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
0.5
|
|
—
|
|
—
|
|
|
Weighted-average
shares used to compute diluted EPS
|
|
29.2
|
|
28.4
|
|
27.5
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the losses incurred in 2003 and 2002, 2.3 million and
2.6 million options, respectively, were excluded in computing diluted EPS as
such options would be anti-dilutive. In
2004, options to purchase 1.1 million shares of Lone Star stock were excluded
from the calculation of diluted earnings per share because the exercise price
of these options was greater than the average market price of the common shares
for the year, and therefore the effect would have been anti-dilutive.
54
ADDITIONAL BALANCE SHEET
INFORMATION – NOTE H
|
|
|
At December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Inventories
|
|
|
|
|
|
|
Finished goods
|
|
$
|
47.4
|
|
$
|
55.4
|
|
|
Work in process
|
|
100.0
|
|
66.9
|
|
|
Raw materials
|
|
67.6
|
|
55.0
|
|
|
Materials,
supplies, and other
|
|
22.8
|
|
22.6
|
|
|
Total
inventories at FIFO
|
|
237.8
|
|
199.9
|
|
|
Reserve to
reduce inventories to LIFO value
|
|
(107.5
|
)
|
(44.1
|
)
|
|
Total
inventories
|
|
130.3
|
|
155.8
|
|
|
Amount included
in other noncurrent assets
|
|
(2.0
|
)
|
(3.0
|
)
|
|
Inventories,
current
|
|
$
|
128.3
|
|
$
|
152.8
|
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
|
|
|
|
Insurance and
other deposits
|
|
$
|
9.2
|
|
$
|
5.6
|
|
|
Inventory
deposit
|
|
28.7
|
|
—
|
|
|
Other
|
|
13.7
|
|
10.2
|
|
|
Total
other current assets
|
|
$
|
51.6
|
|
$
|
15.8
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment
|
|
|
|
|
|
|
Land and land
improvements
|
|
$
|
18.2
|
|
$
|
18.2
|
|
|
Buildings,
structures, and improvements
|
|
34.4
|
|
32.0
|
|
|
Machinery and
equipment
|
|
431.6
|
|
418.2
|
|
|
Construction in
progress
|
|
5.5
|
|
10.5
|
|
|
Total
property, plant, and equipment
|
|
489.7
|
|
478.9
|
|
|
Less accumulated
depreciation and amortization
|
|
(283.9
|
)
|
(258.9
|
)
|
|
Property,
plant, and equipment, net
|
|
$
|
205.8
|
|
$
|
220.0
|
|
|
|
|
|
|
|
|
|
Other
noncurrent assets
|
|
|
|
|
|
|
Inventory
(supplies and spare parts)
|
|
$
|
2.0
|
|
$
|
3.0
|
|
|
Deferred
financing costs
|
|
3.8
|
|
4.5
|
|
|
Other
|
|
2.4
|
|
2.4
|
|
|
Total
other noncurrent assets
|
|
$
|
8.2
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
|
|
|
|
Accrued
compensation
|
|
$
|
14.4
|
|
$
|
9.3
|
|
|
Warranty
reserves
|
|
2.4
|
|
2.4
|
|
|
Environmental
reserves
|
|
1.8
|
|
0.7
|
|
|
Pension
obligations
|
|
3.7
|
|
5.0
|
|
|
Other
|
|
14.8
|
|
10.6
|
|
|
Total
accrued liabilities
|
|
$
|
37.1
|
|
$
|
28.0
|
|
|
|
|
|
|
|
|
|
Other
noncurrent liabilities
|
|
|
|
|
|
|
Environmental
reserves
|
|
$
|
7.4
|
|
$
|
8.8
|
|
|
Litigation
reserves
|
|
—
|
|
34.0
|
|
|
Other
|
|
3.7
|
|
4.0
|
|
|
Total
other noncurrent liabilities
|
|
$
|
11.1
|
|
$
|
46.8
|
|
|
|
|
|
|
|
|
|
|
During 2004, inventory quantities were reduced. This reduction resulted
in a liquidation of LIFO inventory layers, the effect of which increased net
income by approximately $17.9 million or $0.61 per diluted share.
55
INCOME TAXES - NOTE I
Income tax expense was $3.4 million and $0.1 million in 2004 and 2003,
respectively; and, for 2002, income tax benefit was $0.7 million, including
federal alternative minimum tax (“AMT”) and state and foreign income
taxes. There was no deferred income tax
expense or benefit for 2004, 2003, or 2002.
A reconciliation of the U.S. federal statutory rate to actual income
tax benefit (expense) is as follows:
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Benefit
(expense) at U.S. statutory rate
|
|
$
|
(36.5
|
)
|
$
|
23.8
|
|
$
|
24.5
|
|
|
State and other
income taxes, net of federal benefit
|
|
(3.4
|
)
|
(0.1
|
)
|
0.7
|
|
|
Goodwill
impairment charge
|
|
—
|
|
(6.5
|
)
|
—
|
|
|
Change in
valuation allowance
|
|
36.6
|
|
(19.0
|
)
|
(23.7
|
)
|
|
Other
|
|
(0.1
|
)
|
1.7
|
|
(0.8
|
)
|
|
Total income tax
benefit (expense)
|
|
$
|
(3.4
|
)
|
$
|
(0.1
|
)
|
$
|
0.7
|
|
At December 31, 2004, Lone Star had federal tax net operating loss
carryforwards (NOL’s) of approximately $263 million available to offset future
payments of federal income taxes, a portion of which may be related to American
Federal Bank, a former 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. The NOL’s are available for utilization by
Lone Star and its subsidiaries. If not
utilized, the NOL’s will expire in varying amounts between years 2005 and 2023,
and their future availability may be limited if Lone Star or a member of the
consolidated group experiences an ownership change of more than 50 percentage
points, as defined by IRS regulations.
Lone Star’s common stock is publicly traded, and management cannot
assure that future trading will not result in an ownership change, as defined
by IRS regulations, which would limit the availability of the NOL’s. The Company has an AMT credit carryforward
totaling $2.8 million that may be carried forward indefinitely under U.S. law.
The following table discloses the components of the deferred tax
amounts at December 31, 2004 and 2003:
|
|
|
2004
|
|
2003
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Postretirement
benefit accruals
|
|
$
|
15.0
|
|
$
|
16.9
|
|
|
Environmental
reserves
|
|
3.2
|
|
3.3
|
|
|
Other expense
accruals and reserves
|
|
4.7
|
|
5.0
|
|
|
Inventories
|
|
18.5
|
|
11.0
|
|
|
Other
|
|
1.5
|
|
0.8
|
|
|
Net operating
loss carryforwards
|
|
65.2
|
|
112.1
|
|
|
Alternative
minimum tax credit carryforward
|
|
2.8
|
|
1.6
|
|
|
Total deferred
tax assets
|
|
110.9
|
|
150.7
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
Property, plant
and equipment
|
|
(35.4
|
)
|
(38.6
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax
assets
|
|
75.5
|
|
112.1
|
|
|
Less valuation
allowance
|
|
(75.5
|
)
|
(112.1
|
)
|
|
Net deferred tax
amount
|
|
$
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
The ultimate realization of the deferred tax asset depends on the
Company’s ability to generate sufficient taxable income in the future. Management believes it is more likely than
not that the net deferred tax asset will not be realized by future operating
results. Because of the uncertainty
regarding possible utilization of NOL’s and the sensitivity of earnings to the
level of domestic drilling activity, valuation allowances were recorded to
fully reserve the computed net deferred tax assets. The Company evaluates the amount recorded as
a valuation allowance quarterly and as conditions change.
56
EMPLOYEE BENEFIT PLANS -
NOTE J
Defined contribution plans. Defined contribution plans are available to
substantially all full-time employees under which participants can make
voluntary pretax contributions. For
nonbargaining unit employees, matching contributions are provided within
specified limits. Steel makes
contributions at rates specified under collective bargaining agreements for its
bargaining unit employees. Contributions
totaled $3.4 millon, $3.3 million, and $2.9 million for the years ended
December 31, 2004, 2003, and 2002, respectively.
Nonqualified deferred compensation plan. The Company has a nonqualified compensation
plan for certain management personnel and highly compensated employees of Lone
Star and its participating affiliates that provides eligible employees the
opportunity to defer a specified percentage of their cash compensation. Participants may elect to defer up to 50% of
total compensation and Lone Star will match 50% of the amount deferred by each
employee with the matching not to exceed $25,000. The obligation included in other noncurrent
liabilities was $2.7 million and $2.1 million at December 31, 2004 and 2003,
respectively.
Employee stock purchase plan. The Company has an employee stock purchase
plan for all eligible employees.
Eligible employees include all regular full-time employees of Lone Star
and its subsidiaries who have been employed for at least 12 months. Eligible employees may defer up to 5% of
their compensation for each quarter for the purchase of Lone Star common
stock. Shares are purchased at the end
of each quarter at a price equal to the lower of: (a) 90% of the market price
of Lone Star’s common stock on the first day of the quarter, or (b) 90% of the
market price of Lone Star’s common stock on the last day of the quarter. The maximum number of Lone Star shares that
may be purchased for all participants under the plan is 200,000 shares, of
which 163,409 shares were available to be issued at December 31, 2004.
Long-term incentive plan. Lone Star has a long-term incentive plan
which provides for the issuance of up to 6,700,000 shares of common stock to
key employees and outside directors through the granting of incentive and
nonqualified stock options, stock appreciation rights, restricted stock grants,
and performance unit grants. The option
price is the average of the high and low market price on the date of the grant. Options are generally exercisable for ten years
with one-fourth of the shares becoming exercisable on the one-year anniversary
of the grant date and an additional one-fourth becoming exercisable on the same
anniversary date over the next three years.
In 2004, 293,500 options were granted to certain key employees that
become fully exercisable on the one-year anniversary of the grant date and are
exercisable for five years. For all
options granted, if the optionee’s employment is terminated under certain
circumstances after a change of control of Lone Star occurs before an option’s
fourth anniversary, the option may be exercised in full earlier. Also, accelerated vesting of options can
occur upon death or retirement from employment of an option holder. The following discloses the stock option activity
for the years shown (not in millions):
|
|
|
Shares Under
Option
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding,
December 31, 2001
|
|
1,860,475
|
|
$
|
28.66
|
|
|
Granted
|
|
555,000
|
|
16.90
|
|
|
Exercised
|
|
(1,500
|
)
|
27.19
|
|
|
Cancelled/forfeited
|
|
(65,250
|
)
|
29.82
|
|
|
Outstanding,
December 31, 2002
|
|
2,348,725
|
|
25.85
|
|
|
Granted
|
|
447,000
|
|
17.77
|
|
|
Exercised
|
|
(87,750
|
)
|
13.65
|
|
|
Cancelled/forfeited
|
|
(94,750
|
)
|
24.00
|
|
|
Outstanding,
December 31, 2003
|
|
2,613,225
|
|
24.95
|
|
|
Granted
|
|
394,000
|
|
18.19
|
|
|
Exercised
|
|
(449,025
|
)
|
14.35
|
|
|
Cancelled/forfeited
|
|
(75,150
|
)
|
34.71
|
|
|
Outstanding,
December 31, 2004
|
|
2,483,050
|
|
$
|
25.49
|
|
57
At December 31, 2004,
1,674,803 shares were available for future grant. At December 31, 2004, 2003, and 2002,
1,442,706, 1,535,913, and 1,100,351 options, respectively, were exercisable. The following table summarizes information
with respect to options outstanding and exercisable at December 31, 2004 (not
in millions):
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Yrs.)
|
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$6.88 - $8.81
|
|
40,000
|
|
$
|
8.13
|
|
0.4
|
|
40,000
|
|
$
|
8.13
|
|
|
11.06 - 16.52
|
|
712,550
|
|
15.41
|
|
7.3
|
|
274,675
|
|
14.97
|
|
|
16.75 - 23.39
|
|
603,625
|
|
19.33
|
|
4.6
|
|
142,250
|
|
20.45
|
|
|
27.19 - 39.27
|
|
1,012,500
|
|
34.51
|
|
5.4
|
|
887,500
|
|
34.42
|
|
|
41.11 - 50.06
|
|
114,375
|
|
47.04
|
|
5.9
|
|
98,281
|
|
47.42
|
|
|
$6.88 - $50.06
|
|
2,483,050
|
|
$
|
25.49
|
|
5.7
|
|
1,442,706
|
|
$
|
29.50
|
|
Lone Star also issued
137,500, 21,500, and 72,750 shares of restricted stock grants to certain
employees, with a value of $2.5 million, $0.4 million, and $1.1 million during
2004, 2003, and 2002, respectively. The
shares generally vest ratably over a four-year period beginning on the second
anniversary of date of grant. The fair
value of restricted stock is charged to Shareholders’ Equity and amortized to
expense over the requisite vesting periods.
In 2004, of the 137,500 shares of restricted stock grants, 120,000
shares were granted to certain key employees with accelerated vesting
provisions based on the achievement of certain performance objectives. If the performance objectives are met,
one-third of the shares become vested on the first anniversary of date of grant
with the remaining two-thirds becoming vested on the second anniversary of date
of grant. The Company recognized compensation
expense related to all awards of $1.6 million, $1.1 million, and $0.9 million
in 2004, 2003, and 2002, respectively.
Defined Benefit Pension and Postretirement
Benefit Plans.
Steel has three defined benefit pension plans covering a substantial
portion of its bargaining unit employees. Retirement benefits are based on years of
service at progressively increasing flat-rate amounts. A special initial lump-sum pension payment
equal to 13 weeks of vacation pay is also paid following retirement. It is generally the Company’s policy to fund
the minimum required contributions each year as required by applicable
regulations.
During 1996 and 1998, the
three pension plans were amended so that new employees do not participate in
the defined benefit plans. New employees
are eligible to participate in one of the defined contribution retirement
plans, as are substantially all other employees.
Steel also sponsors an
unfunded defined benefit postretirement health care plan for eligible
bargaining unit employees and a limited number of other retirees eligible under
special early retirement programs. These
health care plan benefits are limited to eligible retirees and their spouses
until age 65, at which time coverage terminates. Certain other postretirement benefits,
primarily life insurance, are also provided.
The anticipated costs of these postretirement benefits are accrued over
the employees’ years of service.
58
The following represents
the amounts recognized in the consolidated balance sheets at December 31, 2004
and 2003:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
|
Postretirement
benefit obligations - current
|
|
$
|
1.7
|
|
$
|
3.7
|
|
$
|
2.0
|
|
$
|
1.3
|
|
|
Postretirement
benefit obligations - noncurrent
|
|
27.3
|
|
30.1
|
|
12.8
|
|
14.4
|
|
|
Other noncurrent
assets - intangible asset
|
|
(0.8
|
)
|
(1.0
|
)
|
—
|
|
—
|
|
|
Accumulated
other comprehensive loss
|
|
(32.5
|
)
|
(31.9
|
)
|
—
|
|
—
|
|
|
Net amount
recognized
|
|
$
|
(4.3
|
)
|
$
|
0.9
|
|
$
|
14.8
|
|
$
|
15.7
|
|
Net periodic benefit
expense for 2004, 2003, and 2002, included the following components:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2004
|
|
2003
|
|
2002
|
|
|
Service cost
|
|
$
|
1.0
|
|
$
|
1.0
|
|
$
|
0.9
|
|
$
|
0.5
|
|
$
|
0.6
|
|
$
|
0.6
|
|
|
Interest cost
|
|
5.7
|
|
5.8
|
|
5.2
|
|
0.9
|
|
1.0
|
|
0.9
|
|
|
Expected return
on plan assets
|
|
(4.8
|
)
|
(4.2
|
)
|
(5.0
|
)
|
—
|
|
—
|
|
—
|
|
|
Amortization of
prior service cost
|
|
0.2
|
|
0.1
|
|
0.2
|
|
—
|
|
—
|
|
—
|
|
|
Recognized net
actuarial loss (gain)
|
|
2.7
|
|
2.7
|
|
0.8
|
|
—
|
|
—
|
|
(0.1
|
)
|
|
Net periodic
benefit expense
|
|
$
|
4.8
|
|
$
|
5.4
|
|
$
|
2.1
|
|
$
|
1.4
|
|
$
|
1.6
|
|
$
|
1.4
|
|
The following table sets forth the changes in the plans’ benefit
obligations, assets, and funded status at December 31, 2004 and 2003:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
|
2004
|
|
2003
|
|
2004
|
|
2003
|
|
|
Change
in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
93.5
|
|
$
|
86.9
|
|
$
|
14.9
|
|
$
|
15.0
|
|
|
Service cost
|
|
1.0
|
|
1.0
|
|
0.5
|
|
0.6
|
|
|
Interest cost
|
|
5.7
|
|
5.8
|
|
0.9
|
|
1.0
|
|
|
Plan
participants' contributions
|
|
—
|
|
—
|
|
0.1
|
|
—
|
|
|
Actuarial loss
(gain)
|
|
3.3
|
|
6.2
|
|
6.2
|
|
(0.6
|
)
|
|
Benefits paid
|
|
(6.5
|
)
|
(6.4
|
)
|
(2.3
|
)
|
(1.1
|
)
|
|
Projected
Benefit Obligation at end of year
|
|
$
|
97.0
|
|
$
|
93.5
|
|
$
|
20.3
|
|
$
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
Fair value of
plan assets at beginning of year
|
|
$
|
59.4
|
|
$
|
53.4
|
|
$
|
—
|
|
$
|
—
|
|
|
Actual return on
plan assets
|
|
4.8
|
|
6.8
|
|
—
|
|
—
|
|
|
Employer
contributions
|
|
10.0
|
|
5.6
|
|
2.2
|
|
1.1
|
|
|
Plan
participants' contributions
|
|
—
|
|
—
|
|
0.1
|
|
—
|
|
|
Benefits paid
|
|
(6.5
|
)
|
(6.4
|
)
|
(2.3
|
)
|
(1.1
|
)
|
|
Fair value of
plan assets at end of year
|
|
$
|
67.7
|
|
$
|
59.4
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of Funded Status
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
- obligation in excess of assets
|
|
$
|
29.3
|
|
$
|
34.1
|
|
$
|
20.3
|
|
$
|
14.9
|
|
|
Unrecognized
actuarial gain (loss)
|
|
(32.8
|
)
|
(32.2
|
)
|
(5.5
|
)
|
0.8
|
|
|
Unrecognized
prior service cost
|
|
(0.8
|
)
|
(1.0
|
)
|
—
|
|
—
|
|
|
Net amount
recognized
|
|
$
|
(4.3
|
)
|
$
|
0.9
|
|
$
|
14.8
|
|
$
|
15.7
|
|
59
The Accumulated Benefit
Obligation for all defined benefit pension plans was $96.7 million and $93.2
million at December 31, 2004 and 2003, respectively.
The following weighted
average assumptions were used in determining net periodic benefit expense and
benefit obligations:
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2004
|
|
2003
|
|
2002
|
|
|
Net
Periodic Benefit Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.25
|
%
|
6.75
|
%
|
6.75
|
%
|
6.25
|
%
|
6.75
|
%
|
6.75
|
%
|
|
Expected
long-term investment return on plan assets
|
|
8.00
|
%
|
8.00
|
%
|
8.00
|
%
|
—
|
|
—
|
|
—
|
|
|
Rate of
compensation increase
|
|
3.00
|
%
|
4.00
|
%
|
4.00
|
%
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.00
|
%
|
6.25
|
%
|
6.75
|
%
|
6.00
|
%
|
6.25
|
%
|
6.75
|
%
|
|
Rate of
compensation increase
|
|
3.00
|
%
|
3.00
|
%
|
4.00
|
%
|
—
|
|
—
|
|
—
|
|
The return on plan assets
reflects the weighted-average of the expected long-term rates of return for the
broad categories of investments held in the plans. The expected long-term rate of return is
adjusted when there are fundamental changes in expected returns on the plan
assets. The Company uses an annual
measurement date of November 30th.
The Company’s pension contributions to be paid in 2005 are estimated to
be $7.9 million, reflecting quarterly contributions to certain plans as
required by Internal Revenue Code Section 412.
The Company’s expected
future benefit payments for each of the next five years and in the aggregate
for the following five years thereafter are as follows:
|
Expected Future Benefit
Payments
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
2005
|
|
$
|
7.0
|
|
$
|
2.0
|
|
|
2006
|
|
7.1
|
|
1.8
|
|
|
2007
|
|
7.1
|
|
1.6
|
|
|
2008
|
|
7.1
|
|
1.7
|
|
|
2009
|
|
7.3
|
|
1.8
|
|
|
2010 through
2014
|
|
37.5
|
|
10.4
|
|
|
|
|
|
|
|
|
|
Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. The annual rate of increase
in the per capita costs of covered health care benefits is assumed to decrease
from 10% to an ultimate trend rate of 5% by the year 2011. Increasing the assumed medical cost trend
rates by one percentage point in each year would have resulted in a $1.6
million increase in the benefit obligation as of December 31, 2004, and a $0.1
million increase in the aggregate of the service cost and interest cost
components of net periodic benefit expense for 2004. A 1% decrease in the assumed trend rates
would have resulted in a $1.4 million decrease in the benefit obligation and a
$0.1 million decrease in expense.
Lone Star’s investment
strategy for its pension plans is to preserve the capital of the pension plans’
assets and maximize investment earnings in excess of inflation with acceptable
levels of volatility while meeting the pension plans’ goal of providing,
protecting, and enhancing the economic well-being of Lone Star employees,
retirees, and their beneficiaries. This
investment strategy will be achieved through target allocation for each asset
class with a maximum and minimum range around each target. No investments will be made in securities
that fall outside of the categories listed below. Without limiting the general scope of the
foregoing, private placements and the securities of Lone Star Technologies,
Inc. are specifically excluded and not deemed appropriate investments.
60
Target investment
allocations for 2005 are as follows:
|
|
|
|
|
Range
|
|
|
Asset Category
|
|
Target
|
|
Min%
|
|
Max%
|
|
|
Domestic equity
securities
|
|
40
|
%
|
30
|
%
|
50
|
%
|
|
International
equity securities
|
|
10
|
%
|
0
|
%
|
20
|
%
|
|
Fixed income
securities
|
|
48
|
%
|
35
|
%
|
65
|
%
|
|
Cash investments
|
|
2
|
%
|
0
|
%
|
5
|
%
|
The allocations are
rebalanced as considered necessary by the Company’s pension plan committee to
correspond with anticipated change in investing conditions. The following table sets forth the
percentage of fair value of total assets by asset category as of the Company’s
measurement date:
|
|
|
Fiscal Year
|
|
|
Asset Category
|
|
2004
|
|
2003
|
|
|
Domestic equity
securites
|
|
37
|
%
|
43
|
%
|
|
International
equity securities
|
|
16
|
%
|
16
|
%
|
|
Fixed income
securities
|
|
45
|
%
|
40
|
%
|
|
Cash investments
|
|
2
|
%
|
1
|
%
|
|
Total
|
|
100
|
%
|
100
|
%
|
Profit sharing plans. Certain Lone Star subsidiaries have profit
sharing plans for their employees that provide for payment of a specified
percentage of quarterly operating earnings.
Total payments to employees were $0.8 million, $0.4 million, and $0.4
million for 2004, 2003, and 2002, respectively.
COMMITMENTS AND CONTINGENCIES - NOTE K
As of December 31, 2004,
the Company has long-term purchase commitments totaling $9.1 million to acquire
natural gas at specified minimum volumes and at fixed prices through October
2005.
Equipment is leased under
various operating leases. Rental expense
totaled $4.5 million, $4.5 million, and $5.0 million in 2004, 2003, and 2002,
respectively. Future minimum lease
payments under noncancelable operating leases with initial or remaining terms
in excess of one year are as follows: 2005, $2.3 million; 2006, $2.1 million;
2007, $1.8 million; 2008, $1.4 million; and thereafter, $0.8 million.
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.
The primary governmental oversight agencies include the Texas Commission
on Environmental Quality and the Environmental Protection Agency. The Company is engaged in various ongoing
environmental monitoring and compliance programs, voluntary remediation
activities, and capital improvement projects.
Estimated expenditures for certain remediation programs are included in
accrued liabilities and other noncurrent liabilities as shown in Note H and are
computed on a non-discounted basis.
Included in other noncurrent liabilities are environmental reserves of
$7.4 million and $8.8 million at December 31, 2004 and 2003, respectively. Current reserves of $1.8 million and $0.7
million are included in accrued liabilities at December 31, 2004 and 2003,
respectively. The Company believes that
adequate accruals have been made related to all known environmental matters.
In August 2001, Lone Star
entered into an agreement to purchase the assets of North Star Steel Company’s
Tubular Steel Division. Consummation of
the acquisition was subject to completion of financing arrangements. Due to lack of common stock financing which,
along with certain debt financing, was required by the acquisition agreement to
close the acquisition, Lone Star notified Cargill, Incorporated, the parent
company of North Star Steel Company, on December 14, 2001, that it was not able
to complete the acquisition. Later that
day, Cargill, Incorporated notified Lone Star that it was filing a lawsuit
against Lone Star seeking unspecified damages and alleging that Lone Star had
breached the agreement. On March 13,
2003, the jury in Minnesota returned a verdict of $32 million in damages
against Lone Star. On June 1, 2004, the
Minnesota Court of Appeals affirmed the judgment. The Minnesota Supreme
61
Court decided on August
17, 2004 that it would not review the Court of Appeals’ decision. At September 30, 2004, Lone Star had a
reserve totaling $35 million which included accrued interest of $3
million. Lone Star paid Cargill $32
million on October 1, 2004 and $2 million on October 6, 2004 to satisfy the
judgment. After the $34 million payment,
approximately $1 million of accrued interest remains in the reserve, which
represents pre-judgment interest that Lone Star is contesting in the Minnesota
courts.
During the last six
years, Steel has been named as one of a number of defendants in 42 lawsuits
alleging that certain individuals were exposed to asbestos on the defendants’
premises. The plaintiffs are seeking
unspecified damages. To date several of
these lawsuits have been settled for approximately $300,000 in the
aggregate. Of the 42 lawsuits, sixteen
have been settled or are pending settlement and twelve have been dismissed or
are pending dismissal. Steel did not
manufacture or distribute any products containing asbestos. Some or all of these claims may not be
covered by the Company’s insurance. The
Company has accrued for the estimated exposure to known claims, but does not
know the extent to which future claims may be filed. Therefore, the Company cannot estimate its
exposure, if any, to unasserted claims.
Beginning in 2003, Lone
Star’s subsidiary Zinklahoma, Inc., inactive since 1989, has been named as one
of a number of defendants in seven lawsuits alleging that the plaintiffs had
contracted mesothelioma as the result of exposure to asbestos in products
manufactured by the defendants and John Zink Company (“Zink”). Three of these lawsuits have been
dismissed. Lone Star acquired the stock
of Zink in 1987 and, in 1989, sold the assets of the former Zink to Koch
Industries, Inc. (“Koch”) and renamed the now-inactive subsidiary “Zinklahoma,
Inc.” Lone Star retained, and agreed to
indemnify Koch against, certain pre-closing liabilities of Zink. It is Lone Star’s understanding that Zink
never manufactured asbestos and primarily used it only in certain purchased
gaskets that were encapsulated in copper and contained in burners and flares
made by Zink prior to 1984, when Zink ceased using asbestos-containing products
entirely. Koch continues to operate the
business as John Zink Company, LLC (“Zink LLC”). In addition, Zink LLC has been named in six
lawsuits in which the plaintiffs, two of whom have mesothelioma, allege
exposure to asbestos in Zink’s products (three of these have been dismissed)
and three personal injury lawsuits resulting from a 2001 explosion and flash
fire at a flare stack and crude unit atmospheric heater. Zink allegedly manufactured the flare and
related components for the flare stack in the early 1970s. Koch is seeking indemnification from Lone
Star with respect to these six pending lawsuits. The costs of defending and settling the
lawsuits alleging exposure to asbestos in Zink’s products have been borne by
Zink’s insurance carrier. Lone Star
believes that Koch’s indemnity claim with respect to the 2001 explosion and
flash fire is covered by its insurance, subject to a deductible, and has
notified its insurance carrier of that claim.
Steel’s workers’
compensation insurance was with one insurance carrier from 1992 through
2001. In March 2002, that carrier was
declared insolvent and placed in receivership.
Since then, the Texas Property and Casualty Insurance Guaranty
Association (“TPCIGA”) has been paying the insolvent carrier’s obligations
under those insurance policies, as required by Texas law. TPCIGA asserted that it was entitled to
recover from Steel what it has paid and will pay under those policies. Steel paid TPCIGA $1.9 million on October 4,
2004 in full settlement and release of all past, present, and future claims
paid by TPCIGA under those policies.
Lone Star and its subsidiaries are parties to a number of other
lawsuits and controversies which are not discussed herein. Management of Lone Star and its operating
companies, based upon their analysis of known facts and circumstances and
reports from legal counsel, does not believe that any such matter will have a
material adverse effect on the results of operations, financial condition or
cash flows of Lone Star and its subsidiaries, taken as a whole.
62
ACQUISITIONS – NOTE L
Wheeling. On October 1, 2002, Lone Star purchased the
majority of the assets of Wheeling Machine Products, Inc. and Wheeling Machine
Products of Texas, Inc. (collectively, “Wheeling”), in cash for a base purchase
price of $21.2 million plus a $16.7 million adjustment for working capital and
approximately $0.4 million in acquisition related expenses (the “Wheeling
Acquisition”). The Wheeling Acquisition
was effective October 1, 2002. The
results of Wheeling’s operations have been included in the consolidated
financial statements since that date.
The acquired business is a leading domestic supplier of couplings used
to connect individual sections of oilfield casing and tubing. No goodwill was recognized in the
acquisition. The net purchase price was
allocated as follows:
|
Current assets
|
|
$
|
17.3
|
|
|
Net property and
equipment
|
|
21.4
|
|
|
Other assets
|
|
0.2
|
|
|
Liabilities
assumed
|
|
(0.6
|
)
|
|
Net purchase
price
|
|
$
|
38.3
|
|
DTP.
On May 1, 2003, Lone Star purchased substantially
all of the assets of Delta Tubular Products, a leading provider of high-quality
customized oil country tubular processing services, for a base purchase price
of approximately $14.0 million in cash and approximately $0.2 million in
acquisition related expenses. The
acquisition of DTP is intended to improve Lone Star’s competitive position in
the oilfield segment and allow for certain cost synergies. In connection with the purchase,
$4.1 million was allocated to goodwill and $0.4 million allocated to
amortizable intangible assets. The
amortizable intangible assets are being amortized over their estimated useful
lives of five to ten years. DTP’s
results of operations have been included in the consolidated financial
statements since the date of acquisition.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
|
Current assets
|
|
$
|
2.9
|
|
|
Net property and
equipment
|
|
7.7
|
|
|
Other assets
|
|
0.4
|
|
|
Goodwill
|
|
4.1
|
|
|
Liabilities
assumed
|
|
(0.9
|
)
|
|
Net purchase
price
|
|
$
|
14.2
|
|
DTI. On June 2, 2003, Lone Star purchased certain
assets of Frank’s Tubular International (“Frank’s”), a leading provider of
high-quality threading and inspection services, for a base purchase price of $18.9
million in cash and approximately $0.9 million in acquisition related
expenses. Subsequent to the acquisition,
Lone Star changed the name of Frank’s to Delta Tubular International, or
DTI. The acquisition of DTI further
enhances Lone Star’s competitive position within the oilfield segment by
offering customers a broad range of oilfield services and allows for cost
synergies. In connection with the
purchase, $0.4 million was allocated to goodwill and $0.2 million was
allocated to amortizable intangible assets, which is being amortized over its
estimated useful life of five years. DTI’s
results of operations have been included in the consolidated financial
statements since the date of acquisition.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
|
Current assets
|
|
$
|
1.0
|
|
|
Net property and
equipment
|
|
18.5
|
|
|
Other assets
|
|
0.2
|
|
|
Goodwill
|
|
0.4
|
|
|
Liabilities
assumed
|
|
(0.3
|
)
|
|
Net purchase
price
|
|
$
|
19.8
|
|
63
Pro Forma Results. The
operating results of the Wheeling, DTP, and DTI acquisitions have been included
in the Consolidated Statements of Income from the effective dates of
acquisition. The unaudited pro forma
results below assume the acquisitions occurred on January 1, 2002:
|
|
|
For the Year Ended
|
|
|
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
540.2
|
|
$
|
554.1
|
|
|
Net income
(loss)
|
|
(69.3
|
)
|
(71.7
|
)
|
|
|
|
|
|
|
|
|
Basic income
(loss) per share
|
|
$
|
(2.44
|
)
|
$
|
(2.61
|
)
|
|
Diluted income
(loss) per share
|
|
(2.44
|
)
|
(2.61
|
)
|
The preceding pro forma results include adjustments to eliminate
intercompany sales and 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 if the acquisitions had been consummated as of
the beginning of the periods presented, nor are they necessarily indicative of
future operating results.
64
GUARANTOR SUBSIDIARIES –
NOTE M
The following condensed,
consolidating financial statements of the Company include the accounts of the
Company, the combined accounts of the Guarantor Subsidiaries and the accounts
of the Non-Guarantor Subsidiary. Each of
the Guarantor Subsidiaries and Non-Guarantor Subsidiary is wholly-owned by the
Company. Given the size of the
Non-Guarantor Subsidiary relative to the Company on a consolidated basis,
separate financial statements of the respective Guarantor Subsidiaries are not
presented because management has determined that such information is not
material in assessing the Guarantor Subsidiaries.
CONDENSED
CONSOLIDATING BALANCE SHEET
AT
DECEMBER 31, 2004
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
30.0
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
30.2
|
|
|
Short-term
investments
|
|
46.4
|
|
—
|
|
—
|
|
—
|
|
46.4
|
|
|
Accounts
receivable, net
|
|
20.4
|
|
122.7
|
|
2.4
|
|
(22.9
|
)
|
122.6
|
|
|
Inventories
|
|
—
|
|
127.5
|
|
0.8
|
|
—
|
|
128.3
|
|
|
Other current
assets
|
|
1.4
|
|
51.9
|
|
1.3
|
|
(3.0
|
)
|
51.6
|
|
|
Total current
assets
|
|
98.2
|
|
302.2
|
|
4.6
|
|
(25.9
|
)
|
379.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in
subsidiaries
|
|
344.4
|
|
—
|
|
—
|
|
(344.4
|
)
|
—
|
|
|
Investments
|
|
12.7
|
|
—
|
|
—
|
|
—
|
|
12.7
|
|
|
Property, plant,
and equipment, net
|
|
0.3
|
|
204.3
|
|
1.2
|
|
—
|
|
205.8
|
|
|
Goodwill
|
|
3.5
|
|
37.4
|
|
—
|
|
—
|
|
40.9
|
|
|
Advances from
parent
|
|
51.8
|
|
—
|
|
—
|
|
(51.8
|
)
|
—
|
|
|
Other noncurrent
assets
|
|
3.8
|
|
4.1
|
|
0.3
|
|
—
|
|
8.2
|
|
|
Total assets
|
|
$
|
514.7
|
|
$
|
548.0
|
|
$
|
6.1
|
|
$
|
(422.1
|
)
|
$
|
646.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3.3
|
|
$
|
64.8
|
|
$
|
11.7
|
|
$
|
(25.9
|
)
|
$
|
53.9
|
|
|
Accrued
liabilities
|
|
5.2
|
|
31.2
|
|
0.7
|
|
—
|
|
37.1
|
|
|
Total current
liabilities
|
|
8.5
|
|
96.0
|
|
12.4
|
|
(25.9
|
)
|
91.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
subordinated debt
|
|
150.0
|
|
—
|
|
—
|
|
—
|
|
150.0
|
|
|
Advances from
parent
|
|
—
|
|
51.8
|
|
—
|
|
(51.8
|
)
|
|
|
|
Other noncurrent
liabilities
|
|
1.7
|
|
49.5
|
|
—
|
|
—
|
|
51.2
|
|
|
Total
liabilities
|
|
160.2
|
|
197.3
|
|
12.4
|
|
(77.7
|
)
|
292.2
|
|
|
Total
shareholders' equity
|
|
354.5
|
|
350.7
|
|
(6.3
|
)
|
(344.4
|
)
|
354.5
|
|
|
Total
liabilities & equity
|
|
$
|
514.7
|
|
$
|
548.0
|
|
$
|
6.1
|
|
$
|
(422.1
|
)
|
$
|
646.7
|
|
65
CONDENSED
CONSOLIDATING BALANCE SHEET
AT
DECEMBER 31, 2003
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
33.0
|
|
$
|
0.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
33.3
|
|
|
Accounts
receivable, net
|
|
7.4
|
|
63.4
|
|
0.6
|
|
(1.6
|
)
|
69.8
|
|
|
Inventories
|
|
—
|
|
152.2
|
|
0.6
|
|
—
|
|
152.8
|
|
|
Other current
assets
|
|
4.2
|
|
11.1
|
|
0.5
|
|
—
|
|
15.8
|
|
|
Total current
assets
|
|
44.6
|
|
227.0
|
|
1.7
|
|
(1.6
|
)
|
271.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in
subsidiaries
|
|
238.4
|
|
—
|
|
—
|
|
(238.4
|
)
|
—
|
|
|
Property, plant,
and equipment, net
|
|
0.2
|
|
218.3
|
|
1.5
|
|
—
|
|
220.0
|
|
|
Goodwill
|
|
3.5
|
|
37.4
|
|
—
|
|
—
|
|
40.9
|
|
|
Other noncurrent
assets
|
|
147.1
|
|
5.1
|
|
0.2
|
|
(110.3
|
)
|
42.1
|
|
|
Total assets
|
|
$
|
433.8
|
|
$
|
487.8
|
|
$
|
3.4
|
|
$
|
(350.3
|
)
|
$
|
574.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities & Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
0.2
|
|
$
|
52.3
|
|
$
|
8.6
|
|
$
|
(1.6
|
)
|
$
|
59.5
|
|
|
Accrued
liabilities
|
|
1.7
|
|
25.9
|
|
0.4
|
|
—
|
|
28.0
|
|
|
Total current
liabilities
|
|
1.9
|
|
78.2
|
|
9.0
|
|
(1.6
|
)
|
87.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
subordinated debt
|
|
150.0
|
|
—
|
|
—
|
|
—
|
|
150.0
|
|
|
Other noncurrent
liabilities
|
|
36.0
|
|
165.6
|
|
—
|
|
(110.3
|
)
|
91.3
|
|
|
Total
liabilities
|
|
187.9
|
|
243.8
|
|
9.0
|
|
(111.9
|
)
|
328.8
|
|
|
Total
shareholders' equity
|
|
245.9
|
|
244.0
|
|
(5.6
|
)
|
(238.4
|
)
|
245.9
|
|
|
Total liabilities
& equity
|
|
$
|
433.8
|
|
$
|
487.8
|
|
$
|
3.4
|
|
$
|
(350.3
|
)
|
$
|
574.7
|
|
66
CONDENSED
CONSOLIDATING INCOME STATEMENT
FOR THE
YEAR ENDED DECEMBER 31, 2004
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
—
|
|
$
|
1,008.6
|
|
$
|
5.9
|
|
$
|
(47.7
|
)
|
$
|
966.8
|
|
|
Cost of goods
sold
|
|
—
|
|
846.0
|
|
6.5
|
|
(47.7
|
)
|
804.8
|
|
|
Gross profit
(loss)
|
|
—
|
|
162.6
|
|
(0.6
|
)
|
—
|
|
162.0
|
|
|
Selling, general
and administrative
|
|
6.4
|
|
37.9
|
|
0.3
|
|
—
|
|
44.6
|
|
|
Operating income
(loss)
|
|
(6.4
|
)
|
124.7
|
|
(0.9
|
)
|
—
|
|
117.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
subsidiaries' income (loss)
|
|
123.6
|
|
—
|
|
—
|
|
(123.6
|
)
|
—
|
|
|
Interest
expense, net
|
|
(13.4
|
)
|
(1.6
|
)
|
—
|
|
—
|
|
(15.0
|
)
|
|
Other income
(expense), net
|
|
0.6
|
|
1.2
|
|
0.2
|
|
—
|
|
2.0
|
|
|
Income (loss)
before income tax
|
|
104.4
|
|
124.3
|
|
(0.7
|
)
|
(123.6
|
)
|
104.4
|
|
|
Income tax
(expense) benefit
|
|
(3.4
|
)
|
—
|
|
—
|
|
—
|
|
(3.4
|
)
|
|
Net income
(loss)
|
|
$
|
101.0
|
|
$
|
124.3
|
|
$
|
(0.7
|
)
|
$
|
(123.6
|
)
|
$
|
101.0
|
|
CONDENSED
CONSOLIDATING RESULTS OF OPERATIONS
FOR THE
YEAR ENDED DECEMBER 31, 2003
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
—
|
|
$
|
561.0
|
|
$
|
5.7
|
|
$
|
(32.6
|
)
|
$
|
534.1
|
|
|
Cost of goods
sold
|
|
—
|
|
556.1
|
|
5.7
|
|
(32.9
|
)
|
528.9
|
|
|
Gross profit
|
|
—
|
|
4.9
|
|
—
|
|
0.3
|
|
5.2
|
|
|
Selling,
general, and administrative
|
|
5.8
|
|
35.1
|
|
0.9
|
|
—
|
|
41.8
|
|
|
Goodwill
impairment charge
|
|
—
|
|
18.7
|
|
—
|
|
—
|
|
18.7
|
|
|
Operating income
(loss)
|
|
(5.8
|
)
|
(48.9
|
)
|
(0.9
|
)
|
0.3
|
|
(55.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
subsidiaries' income (loss)
|
|
(47.6
|
)
|
—
|
|
—
|
|
47.6
|
|
—
|
|
|
Interest income
(expense), net
|
|
(15.2
|
)
|
0.2
|
|
—
|
|
—
|
|
(15.0
|
)
|
|
Other income
(expense), net
|
|
0.4
|
|
2.7
|
|
(0.9
|
)
|
—
|
|
2.2
|
|
|
Income (loss)
before income tax
|
|
(68.2
|
)
|
(46.0
|
)
|
(1.8
|
)
|
47.9
|
|
(68.1
|
)
|
|
Income tax
(expense) benefit
|
|
—
|
|
(0.1
|
)
|
—
|
|
—
|
|
(0.1
|
)
|
|
Net income
(loss)
|
|
$
|
(68.2
|
)
|
$
|
(46.1
|
)
|
$
|
(1.8
|
)
|
$
|
47.9
|
|
$
|
(68.2
|
)
|
67
CONDENSED
CONSOLIDATING RESULTS OF OPERATIONS
FOR THE
YEAR ENDED DECEMBER 31, 2002
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
—
|
|
$
|
528.6
|
|
$
|
8.3
|
|
$
|
(13.2
|
)
|
$
|
523.7
|
|
|
Cost of goods
sold
|
|
—
|
|
520.7
|
|
8.5
|
|
(12.9
|
)
|
516.3
|
|
|
Gross profit
|
|
—
|
|
7.9
|
|
(0.2
|
)
|
(0.3
|
)
|
7.4
|
|
|
Selling,
general, and administrative
|
|
36.2
|
|
30.9
|
|
1.1
|
|
—
|
|
68.2
|
|
|
Operating income
(loss)
|
|
(36.2
|
)
|
(23.0
|
)
|
(1.3
|
)
|
(0.3
|
)
|
(60.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
subsidiaries' income (loss)
|
|
(22.6
|
)
|
—
|
|
—
|
|
22.6
|
|
—
|
|
|
Interest expense
|
|
(13.7
|
)
|
—
|
|
—
|
|
—
|
|
(13.7
|
)
|
|
Interest income
|
|
2.5
|
|
—
|
|
—
|
|
—
|
|
2.5
|
|
|
Other income
(expense), net
|
|
0.1
|
|
1.7
|
|
—
|
|
0.3
|
|
2.1
|
|
|
Income (loss)
before income taxes
|
|
(69.9
|
)
|
(21.3
|
)
|
(1.3
|
)
|
22.6
|
|
(69.9
|
)
|
|
Income tax
(expense) benefit
|
|
0.7
|
|
—
|
|
—
|
|
—
|
|
0.7
|
|
|
Net income
(loss)
|
|
$
|
(69.2
|
)
|
$
|
(21.3
|
)
|
$
|
(1.3
|
)
|
$
|
22.6
|
|
$
|
(69.2
|
)
|
68
CONDENSED
CONSOLIDATING CASH FLOW STATEMENT
FOR THE
YEAR ENDED DECEMBER 31, 2004
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
Net cash
provided by (used in) operating activities
|
|
$
|
(15.3
|
)
|
$
|
76.9
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
61.7
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(0.1
|
)
|
(12.9
|
)
|
—
|
|
—
|
|
(13.0
|
)
|
|
Proceeds from
sale of PP&E
|
|
—
|
|
0.7
|
|
—
|
|
—
|
|
0.7
|
|
|
Purchase of
investments
|
|
(88.6
|
)
|
—
|
|
—
|
|
—
|
|
(88.6
|
)
|
|
Proceeds from
sales of investments
|
|
29.5
|
|
—
|
|
—
|
|
—
|
|
29.5
|
|
|
Net cash
provided by (used in) investing activities
|
|
(59.2
|
)
|
(12.2
|
)
|
—
|
|
—
|
|
(71.4
|
)
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from
parent, net
|
|
58.6
|
|
(58.6
|
)
|
—
|
|
—
|
|
—
|
|
|
Dividends to
parent
|
|
6.5
|
|
(6.5
|
)
|
—
|
|
—
|
|
—
|
|
|
Proceeds from
exercise of options
|
|
6.4
|
|
—
|
|
—
|
|
—
|
|
6.4
|
|
|
Net cash
provided by (used in) financing activities
|
|
71.5
|
|
(65.1
|
)
|
—
|
|
—
|
|
6.4
|
|
|
Effect of
exchange rate changes on cash
|
|
—
|
|
—
|
|
0.2
|
|
—
|
|
0.2
|
|
|
Net change in
cash
|
|
(3.0
|
)
|
(0.4
|
)
|
0.1
|
|
—
|
|
(3.1
|
)
|
|
Cash beginning
balance
|
|
33.0
|
|
0.3
|
|
—
|
|
—
|
|
33.3
|
|
|
Cash ending
balance
|
|
$
|
30.0
|
|
$
|
(0.1
|
)
|
$
|
0.1
|
|
$
|
—
|
|
$
|
30.2
|
|
CONDENSED
CONSOLIDATING CASH FLOW STATEMENT
FOR THE
YEAR ENDED DECEMBER 31, 2003
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
Net cash
provided by (used in) operating activities
|
|
$
|
(39.9
|
)
|
$
|
(0.7
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(40.6
|
)
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(0.1
|
)
|
(14.2
|
)
|
(0.1
|
)
|
—
|
|
(14.4
|
)
|
|
Proceeds from
sale of PP&E
|
|
—
|
|
0.4
|
|
—
|
|
—
|
|
0.4
|
|
|
Acquisitions,
net of cash received
|
|
(34.0
|
)
|
—
|
|
—
|
|
—
|
|
(34.0
|
)
|
|
Net cash
provided by (used in) investing activities
|
|
(34.1
|
)
|
(13.8
|
)
|
(0.1
|
)
|
—
|
|
(48.0
|
)
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from
parent
|
|
82.4
|
|
(83.0
|
)
|
0.6
|
|
—
|
|
—
|
|
|
Issuance of
preferred stock
|
|
(105.0
|
)
|
105.0
|
|
—
|
|
—
|
|
—
|
|
|
Proceeds from
exercise of options
|
|
1.3
|
|
—
|
|
—
|
|
—
|
|
1.3
|
|
|
Dividends to
parent
|
|
9.8
|
|
(9.8
|
)
|
—
|
|
—
|
|
—
|
|
|
Purchase of
treasury stock
|
|
(0.8
|
)
|
—
|
|
—
|
|
—
|
|
(0.8
|
)
|
|
Net cash
provided by financing activities
|
|
(12.3
|
)
|
12.2
|
|
0.6
|
|
—
|
|
0.5
|
|
|
Effect of
exchange rate changes
|
|
—
|
|
1.6
|
|
(0.7
|
)
|
—
|
|
0.9
|
|
|
Net change in
cash
|
|
(86.3
|
)
|
(0.7
|
)
|
(0.2
|
)
|
—
|
|
(87.2
|
)
|
|
Cash beginning
balance
|
|
119.3
|
|
1.0
|
|
0.2
|
|
—
|
|
120.5
|
|
|
Cash ending
balance
|
|
$
|
33.0
|
|
$
|
0.3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
33.3
|
|
69
CONDENSED
CONSOLIDATING CASH FLOW STATEMENT
FOR THE
YEAR ENDED DECEMBER 31, 2002
|
|
|
Company
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
Net cash
provided by (used in) operating activities
|
|
$
|
2.9
|
|
$
|
(14.9
|
)
|
$
|
(0.4
|
)
|
$
|
—
|
|
$
|
(12.4
|
)
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
—
|
|
(15.6
|
)
|
(0.3
|
)
|
—
|
|
(15.9
|
)
|
|
Proceeds from
sale of PP&E
|
|
—
|
|
0.2
|
|
—
|
|
—
|
|
0.2
|
|
|
Acquisitions,
net of cash received
|
|
(38.3
|
)
|
—
|
|
—
|
|
—
|
|
(38.3
|
)
|
|
Net cash
provided by (used in) investing activities
|
|
(38.3
|
)
|
(15.4
|
)
|
(0.3
|
)
|
—
|
|
(54.0
|
)
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances from
parent
|
|
(32.5
|
)
|
32.0
|
|
0.5
|
|
—
|
|
—
|
|
|
Proceeds from
issuance of stock
|
|
82.8
|
|
—
|
|
—
|
|
—
|
|
82.8
|
|
|
Purchase of
treasury stock
|
|
(1.3
|
)
|
—
|
|
—
|
|
—
|
|
(1.3
|
)
|
|
Net cash
provided by financing activities
|
|
49.0
|
|
32.0
|
|
0.5
|
|
—
|
|
81.5
|
|
|
Effect of
exchange rate changes
|
|
—
|
|
(1.1
|
)
|
—
|
|
—
|
|
(1.1
|
)
|
|
Net change in
cash
|
|
13.6
|
|
0.6
|
|
(0.2
|
)
|
—
|
|
14.0
|
|
|
Cash beginning
balance
|
|
105.6
|
|
0.5
|
|
0.4
|
|
—
|
|
106.5
|
|
|
Cash ending
balance
|
|
$
|
119.2
|
|
$
|
1.1
|
|
$
|
0.2
|
|
$
|
—
|
|
$
|
120.5
|
|
QUARTERLY FINANCIAL SUMMARY
(UNAUDITED) – NOTE N
|
|
|
2004 - Quarter Ended
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
Year
|
|
|
Net revenues
|
|
$
|
179.8
|
|
$
|
246.2
|
|
$
|
272.2
|
|
$
|
268.6
|
|
$
|
966.8
|
|
|
Gross profit
|
|
23.2
|
|
47.9
|
|
41.4
|
|
49.5
|
|
162.0
|
|
|
Net income
|
|
8.0
|
|
32.2
|
|
26.8
|
|
34.0
|
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to common shareholders
|
|
$
|
0.28
|
|
$
|
1.13
|
|
$
|
0.93
|
|
$
|
1.17
|
|
$
|
3.51
|
|
|
Per
common share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to common shareholders
|
|
$
|
0.28
|
|
$
|
1.11
|
|
$
|
0.91
|
|
$
|
1.15
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 - Quarter Ended
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
Year
|
|
|
Net revenues
|
|
$
|
128.1
|
|
$
|
141.3
|
|
$
|
132.0
|
|
$
|
132.7
|
|
$
|
534.1
|
|
|
Gross profit
|
|
4.3
|
|
3.4
|
|
(2.4
|
)
|
(0.1
|
)
|
5.2
|
|
|
Net loss
|
|
(7.9
|
)
|
(9.2
|
)
|
(17.1
|
)
|
(34.0
|
)
|
(68.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share - basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
available to common shareholders
|
|
$
|
(0.28
|
)
|
$
|
(0.32
|
)
|
$
|
(0.60
|
)
|
$
|
(1.20
|
)
|
$
|
(2.40
|
)
|
70
LONE
STAR TECHNOLOGIES, INC.
Schedule
II - Valuation and Qualifying Accounts
December
31, 2002, 2003, and 2004
($ in millions)
|
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Charged
to Other
Accounts
|
|
Deductions
|
|
Balance
at End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
|
1.8
|
|
$
|
0.1
|
|
$
|
—
|
|
$
|
(0.3
|
)
|
$
|
1.6
|
|
|
Valuation
allowance on net deferred tax assets
|
|
69.4
|
|
—
|
|
23.7
|
|
—
|
|
93.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
1.6
|
|
0.5
|
|
—
|
|
(0.4
|
)
|
1.7
|
|
|
Valuation allowance
on net deferred tax assets
|
|
93.1
|
|
—
|
|
19.0
|
|
—
|
|
112.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
1.7
|
|
0.1
|
|
—
|
|
(0.5
|
)
|
1.3
|
|
|
Valuation
allowance on net deferred tax assets
|
|
112.1
|
|
—
|
|
—
|
|
(36.6
|
)
|
75.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure control and
procedures.
Under supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of the end of the period covered by this Annual Report
on Form 10-K (the “Evaluation Date”); and whether any change has occurred in
the Company’s internal control over financial reporting pursuant to Exchange
Act Rules 13a-15(d) and 15d-15(d). Based
on this evaluation, our principal executive officer and principal financial
officer concluded as of the Evaluation Date that our disclosure controls and
procedures were effective such that the material information required to be
included in our Securities and Exchange Commission (“SEC”) reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to Lone Star, including our consolidated subsidiaries,
and was accumulated and communicated to them by others within those entities,
as appropriate during the period when this report was being prepared in order
to allow timely decisions regarding required disclosure.
(b) Management’s report on internal
control over financial reporting.
Management’s report on
internal control over financial reporting, which appears on page 39 of this
Annual Report, is incorporated herein by reference.
Management’s assessment
of the effectiveness of internal control over financial reporting as of
December 31, 2004, was audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in its report which appears on
page 40 of this Annual Report, which is incorporated herein by reference.
(c) Changes in internal control over
financial reporting.
There was no change in
our internal control over financial reporting that occurred in the fourth
quarter of 2004 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
71
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
Information required under this item is contained in Lone Star’s proxy
statement for the 2005 Annual Meeting of Shareholders, and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in Lone Star’s proxy
statement for the 2005 Annual Meeting of Shareholders, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Information required under this item with respect to beneficial owners
of more than 5 percent of outstanding common stock, directors and executive
officers and securities authorized for issuance under equity compensation plans
is contained in Lone Star’s proxy statement for the 2005 Annual Meeting of
Shareholders, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Information required
under this item with respect to directors and executive officers is contained
in Lone Star’s proxy statement for the 2005 Annual Meeting of Shareholders, and
is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES
Information with respect
to fees and services related to the Company’s independent auditors,
Deloitte & Touche LLP, and the disclosure of the Audit Committee’s
pre-approval policies and procedures are contained in Lone Star’s proxy
statement for the 2005 Annual Meeting of Shareholders, and are incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements - the following Consolidated
Financial Statements are filed as part of this report:
• Reports
of Independent Public Accountants
• Consolidated
Results of Operations - for the years ended December 31, 2004, 2003, and 2002
• Consolidated
Balance Sheets at December 31, 2004 and 2003
• Consolidated
Statements of Cash Flows - for the years ended December 31, 2004, 2003, and
2002
• Consolidated
Statements of Shareholders’ Equity - at December 31, 2004, 2003, and 2002
• Notes
to Consolidated Financial Statements
2. Schedule II - Valuation
and Qualifying Accounts
Note: All
schedules not filed herein for which provision is made under rules of
Regulation S-X have been omitted as not applicable or not required or the
information required has been included in the notes to the consolidated
financial statements.
72
3. Index to Exhibits
Description
2.1 Asset
Purchase Agreement dated as of November 16, 1999 by and among Lone Star,
Fintube Technologies, Inc. and Fintube Limited Partnership (incorporated by
reference to the same numbered Exhibit to Form 8-K of Lone Star as filed on
January 18, 2000).
2.2 First
Amendment to Asset Purchase Agreement dated as of January 1, 2000 by and among
Lone Star, Fintube Technologies, Inc. and Fintube Limited Partnership
(incorporated by reference to the same numbered Exhibit to Form 8-K of Lone
Star as filed on January 18, 2000).
2.3 Asset
Purchase Agreement dated as of March 7, 2000 by and among Lone Star, Bellville
Acquisition, Inc. and Bellville Tube Corporation (incorporated by reference to
Exhibit 2.1 to Form 8-K of Lone Star as filed on April 14, 2000).
2.4 First
Amendment to Asset Purchase Agreement dated as of March 31, 2000 by and among
Lone Star, Bellville Acquisition, Inc. and Bellville Tube Corporation
(incorporated by reference to Exhibit 2.2 to Form 8-K of Lone Star as filed on
April 14, 2000).
2.5 Purchase
and Sale Agreement among North Star Steel Company, Universal Tubular Services,
Inc., Cargill, Incorporated, Lone Star Technologies, Inc., and Star Seamless,
Inc., dated as of August 16, 2001 (incorporated by reference to Exhibit 2.1 to
Form 8-K of Lone Star as filed on August 17, 2001).
2.6 Asset
Purchase Agreement, dated September 9, 2002, among Lone Star, Wheeling
Acquisition Corporation (a wholly-owned subsidiary of Lone Star), Wheeling and
Nassau Holding Corporation, as Owner of Wheeling (incorporated by reference to
Exhibit 2.1 to Form 8-K of Lone Star dated September 30, 2002 and filed on
October 7, 2002).
2.7 Amendment
to Asset Purchase Agreement, dated September 30, 2002, among Lone Star,
Wheeling Acquisition Corporation (a wholly-owned subsidiary of Lone Star),
Wheeling and Nassau Holding Corporation (incorporated by reference to Exhibit
2.2 to Form 8-K of Lone Star dated September 30, 2002 and filed on October 7,
2002).
3.1 Certificate
of Incorporation of Registrant (incorporated by reference to Exhibit 3(a) to
Form S-4 Registration Statement of Lone Star as filed on April 4, 1986, File
No. 33-4581).
3.2 Certificate
of Amendment to Certificate of Incorporation dated September 30, 1986
(incorporated by reference to Exhibit 3.2 to Form S-3 Registration Statement of
Lone Star as filed on February 4, 2000, File No. 333-96207).
3.3 Agreement
and Plan of Merger dated March 6, 1986, among Steel, a Texas corporation, Lone
Star, a Delaware corporation, and Lone Star Steel Company Merging Corporation,
a Delaware corporation (incorporated by reference to Exhibit II to Form S-4
Registration Statement of Lone Star as filed on April 4, 1986, File No. 33-4581).
3.4 Amended
and Restated Bylaws, as amended and restated on September 21, 2004
(incorporated by reference to Exhibit 3.1 to Form 8-K of Lone Star as filed on
September 24, 2004).
3.5 Certificate
of Amendment to Certificate of Incorporation dated May 20, 1998 (incorporated
by reference to Exhibit 3.4 to Form 10-Q for the quarter ended June 30, 1998).
4.1 Statement
of Resolution establishing Cumulative Preferred Stock, Series A (par value $1
per share), dated September 9, 1988 (incorporated by reference to Exhibit 3(c)
of Form 10-K of Lone Star filed April 7, 1989).
4.2 Stock
Registration Agreement dated January 1, 2000 among Lone Star Technologies,
Inc., Fintube Limited Partnership, Yorktown Energy Partners, Brown University
Third Century Fund, Warburg, Dillon, Reed, L.L.C. and Ticonderoga Partners and
the stockholders named therein (incorporated by reference to Exhibit 4.1 to
Form S-3 Registration Agreement of Lone Star as filed on February 4, 2000, File
No. 333-96207).
4.3 Letter
Agreement dated October 19, 2000 by Alpine Capital, L.P., Keystone, Inc. and
The Anne T. and Robert M. Bass Foundation to Lone Star (incorporated by
reference to Exhibit 4.6 to Amendment No. 2 to Form S-3 Registration Statement
of Lone Star as filed on October 30, 2000, File No. 333-41130).
73
4.4 Indenture
dated as of May 29, 2001 among Lone Star, Environmental Holdings, Inc.,
Zinklahoma, Inc., Lone Star Steel Company, Lone Star Logistics, Inc., Lone Star
Steel International, Inc., Lone Star Steel Sales Company, Rotac, Inc., T&N
Lone Star Warehouse Co., Texas &
Northern Railway Company, Lone Star ST Holdings, Inc., Fintube Technologies,
Inc., Fintube Canada, Inc., Bellville Tube Corporation, and Wells Fargo Bank
Minnesota, National Association (incorporated by reference to Exhibit 4.3 to
Form S-4 Registration Statement of Lone Star as filed on June 27, 2001, File
No. 333-63944).
4.5 Exchange
and Registration Rights Agreement dated May 29, 2001, among Lone Star, Goldman,
Sachs & Co., Salomon Smith Barney Inc., Banc of America Securities LLC,
CIBC World Markets Corp., Dresdner Kleinwort Wasserstein Securities LLC, RBC
Dominion Securities Corporation, and The Robinson-Humphrey Company, LLC
(incorporated by reference to Exhibit 4.4 to Form S-4 Registration Statement of
Lone Star as filed on June 27, 2001, File No. 333-63944).
4.6 Letter
Agreement dated October 16, 2002 by Keystone, Inc., Alpine Capital L.P., and
the Anne T. and Robert M. Bass Foundation to Lone Star (incorporated by references
to Exhibit 4.11 to Form S-3 Registration Statement of Lone Star as filed on
October 16, 2002. File No. 333-100579).
10.1 Amended
1985 Long-Term Incentive Plan (incorporated by reference to Exhibit A of Proxy
Statement of Lone Star as filed on October 22, 1993).*
10.1(a) Amendments to the
Amended 1985 Long-Term Incentive Plan adopted on May 8, 1997 (incorporated by
reference to Exhibit 10.1(a) to Form 10-Q of Lone Star for the quarter ended
June 30, 1997). *
10.1(b) Amendments to the
Amended 1985 Long-Term Incentive Plan adopted on May 14, 1998 (incorporated by
reference to same numbered Exhibit to Form 10-Q for the quarter ended June 30,
1998). *
10.1(c) Amendments to the
Amended 1985 Long-Term Incentive Plan adopted on May 11, 1999 (incorporated by
reference to same numbered Exhibit to Form 10-Q for the quarter ended June 30,
1999). *
10.1(d) Amendment to the
Amended 1985 Long-Term Incentive Plan adopted on May 9, 2000 (incorporated by
reference to same numbered Exhibit to Form 10-Q for the quarter ended June 30,
2000.) *
10.1(e) Amendments to the
Amended 1985 Long-Term Incentive Plan adopted on May 8, 2001 (incorporated by
reference to same numbered exhibit to Form 10-Q for the quarter ended June 30,
2001). *
10.1(f) Amendment to the
1985 Long-Term Incentive Plan adopted on May 9, 2002 (incorporated by reference
to same numbered exhibit to Form 10-Q for the quarter ended June 30, 2002). *
10.1(g) Amendments to the
1985 Long-Term Incentive Plan adopted on May 13, 2003 (incorporated by
reference to same numbered exhibit to Form 10-K for the year ended December 31,
2003). *
10.1(h) 2004 Long-Term
Incentive Plan (incorporated by reference to Appendix A to the Proxy Statement
of Lone Star filed on March 19, 2004). *
10.2 Employment
Retention Policy adopted May 8, 1997, letter agreements dated May 22, 1997
between Lone Star, Charles J. Keszler and Robert F. Spears and between Steel
and W. Byron Dunn and letter agreement dated September 25, 1997 between Lone
Star and Rhys J. Best (incorporated by reference to same numbered Exhibit to
Form 10-K for the year ended December 31, 1997).*
10.3 Contract
for Electric Service dated September 30, 1996 between Southwestern Electric
Power Company and Steel (incorporated by reference to Exhibit 10.21 to Form
10-K for the year ended December 31, 1996).
10.4 Cost
Sharing Agreement dated as of July 1, 1997 between Lone Star and Steel
(incorporated by reference to Exhibit 10.24 to Form 10-K for the year ended
December 31, 1997).
10.5 Compromise
and Settlement Agreement and Release dated July 31, 1997 between Lone Star and
Guaranty Federal Bank, F.S.B. (incorporated
by reference to Exhibit 10.26 to Form 10-K for the year ended December 31,
1997).
10.6 Phantom
Stock Deferred Compensation Plan adopted on September 22, 1998 (incorporated by
reference to Exhibit 10.28 to Form 10-Q for the quarter ended September 30,
1998).*
10.7 Employee
Stock Purchase Plan adopted on May 9, 2000 (incorporated by reference to
Exhibit 10.36 to Form 10-Q for the quarter ended June 30, 2000).*
10.8 Second
Amended and Restated Deferred Compensation Plan adopted by Lone Star’s Board of
Directors on September 21, 2004 (incorporated by reference to Exhibit 10.36 to
Form 8-K of Lone Star as filed on December 16, 2004).
10.9 Employment
Agreement dated May 7, 2001 between Lone Star and Rhys J. Best (incorporated by
reference to Exhibit 99.1 to Form 8-K of Lone Star as filed on May 9, 2001). *
74
10.10 Purchase Agreement dated May 23,
2001 among Lone Star, Goldman, Sachs & Co., Salomon Smith Barney Inc., Banc
of America Securities LLC, RBC Dominion Securities Corporation, and The
Robinson-Humphrey Company, LLC (incorporated by reference to Exhibit 10.10 to
Form S-4 Registration Statement of Lone Star as filed on June 27, 2001, File
No. 333-63944).
10.11 Consulting Employment Agreement
dated January 1, 2000, among Fintube Technologies, Inc., Jerry E. Ryan, and
Lone Star (incorporated by reference to Exhibit 10.42 to Form 10-Q for the
quarter ended March 31, 2001).*
10.12 Employment
Agreement dated January 1, 2000 between Fintube Technologies, Inc. and Larry
Sims (incorporated by reference to Exhibit 10.43 to Form 10-Q for the quarter
ended March 31, 2001).*
10.13 Amended and
Restated Financing Agreement dated October 8, 2001 among The CIT Group/Business
Credit, Inc. (as Agent and Lender), the Lenders party thereto, and Lone Star,
Lone Star Steel Company, Fintube Technologies, Inc., Lone Star Logistics, Inc.,
T&N Lone Star Warehouse Co., Texas & Northern Railway Company, Fintube
Canada, Inc. and Bellville Tube Corporation (as Borrowers), and Environmental
Holdings, Inc., Zinklahoma, Inc., Lone Star Steel International, Inc., Lone
Star Steel Sales Company, Rotac, Inc., and Lone Star ST Holdings, Inc. (as
Guarantors) (incorporated by reference to Exhibit 10.13 to Amendment No. 2 to
Form S-4 of Lone Star as filed on October 9, 2001, File No. 333-63944).
10.14 First
Amendment, dated as of December 31, 2001, to Amended and Restated Financing
Agreement dated October 8, 2001 (incorporated by reference to Exhibit 10.31 to
Form 10-Q for the quarter ended March 31, 2002).
10.15 Second
Amendment, dated March 13, 2002, to Amended and Restated Financing Agreement
dated October 8, 2001 (incorporated by reference to Exhibit 10.32 to Form 10-Q
for the quarter ended March 31, 2002).
10.16 Third
Amendment, dated as of September 30, 2002, to Amended and Restated Financing
Agreement dated October 8, 2001 (incorporated by reference to Exhibit 10.33 to
Form 10-Q for the quarter ended September 30, 2002).
10.17 Fourth
Amendment, dated as of September 30, 2002, to Amended and Restated Financing
Agreement dated October 8, 2001 (incorporated by reference to Exhibit 10.34 to
Form 10-Q for the quarter ended September 30, 2002).
10.18 Fifth
Amendment, dated as of May 5, 2003, to Amended and Restated Financing Agreement
dated October 8, 2001 (incorporated by reference to Exhibit 10.1 to Form 10-Q
for the quarter ended June 30, 2003).
10.19 Sixth
Amendment, dated as of August 29, 2003, to Amended and Restated Financing
Agreement dated October 8, 2001 (incorporated by reference to same numbered
exhibit to Form 10-K for year ended December 31, 2003).
10.20 Seventh
Amendment, dated as of December 16, 2003, to Amended and Restated Financing
Agreement dated October 8, 2001 (incorporated by reference to same numbered
exhibit to Form 10-K for year ended December 31, 2003).
10.21 Eighth
Amendment, dated as of September 21, 2004, to Amended and Restated Financing
Agreement dated October 8, 2001 (incorporated by reference to Exhibit 10.35 to
Form 10-Q for quarter ended September 30, 2004).
10.22 Compensation
and benefits outline for Joe Alvarado dated May 7, 2004 and related letter
agreement dated October 8, 2004 between Lone Star and Joe Alvarado. *
10.23 Form of Director
Stock Option Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K of Lone Star as filed on September 24,
2004). *
10.24 Form of
Director Restricted Stock Unit Award (incorporated by reference to Exhibit 10.2
to Form 8-K of Lone Star as filed on September 24, 2004). *
10.25 Form of
Employee Stock Option Agreement with One-Year Vesting (incorporated by
reference to Exhibit 10.3 to Form 8-K of Lone Star as filed on September 24,
2004). *
10.26 Form of
Employee Stock Option Agreement with Four-Year Vesting (incorporated by
reference to Exhibit 10.4 to Form 8-K of Lone Star as filed on September 24,
2004). *
10.27 Form of
Employee Restricted Stock Agreement (incorporated by reference to Exhibit 10.5
to Form 8-K of Lone Star as filed on September 24, 2004). *
14.1 Code of
Ethics for Senior Financial Officers adopted by Lone Star’s Board of Directors
on March 20, 2003 (incorporated by reference to Exhibit 99.1 to Form 10-K for
the year ended December 31, 2002).
21 List of Subsidiaries.
23 Consent of Deloitte & Touche LLP.
24 Powers
of Attorney.
75
31.1 Certification
of Rhys J. Best pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification
of Charles J. Keszler pursuant to Rule 13a-14 of the Securities Exchange Act of
1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management
contract or compensatory plan or arrangement.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
Date: March 1, 2005
|
By:
|
|
/s/ Charles J.
Keszler
|
|
|
|
(Charles J.
Keszler)
|
|
|
|
Vice President
and Chief Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Rhys J. Best
|
,
|
|
Chairman, Director,
Chief
|
|
March 1, 2005
|
|
(Rhys J. Best)
|
|
Executive Officer and
President
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Charles J. Keszler
|
,
|
|
Vice President and
Chief
|
|
March 1, 2005
|
|
(Charles J. Keszler)
|
|
Financial Officer
(Principal Financial
and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Frederick B. Hegi,
Jr. *
|
,
|
|
Director
|
|
March 1, 2005
|
|
(Frederick B. Hegi,
Jr.)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert L. Keiser *
|
,
|
|
Director
|
|
March 1, 2005
|
|
(Robert L. Keiser)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert Kelley *
|
,
|
|
Director
|
|
March 1, 2005
|
|
(Robert Kelley)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ M. Joseph McHugh *
|
,
|
|
Director
|
|
March 1, 2005
|
|
(M. Joseph McHugh)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Thomas M. Mercer,
Jr. *
|
,
|
|
Director
|
|
March 1, 2005
|
|
(Thomas M. Mercer, Jr.)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Alfred M. Micallef
*
|
,
|
|
Director
|
|
March 1, 2005
|
|
(Alfred M. Micallef)
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jerry E. Ryan *
|
,
|
|
Director
|
|
March 1, 2005
|
|
(Jerry E. Ryan)
|
|
|
|
|
|
* By:
|
/s/ Charles J. Keszler
|
|
|
(Charles J. Keszler, Attorney-in-Fact)
|
77