ITEM 1. BUSINESS
GENERAL
We are the leading domestic manufacturer and marketer of premium welded
“oil country tubular goods,” which are steel tubular products used in the
completion and production of oil and natural gas wells. We are a major
manufacturer of line pipe, which is used in the gathering and transmission of
oil and natural gas. In addition, we are a leading manufacturer of specialty
tubing products used in power technology, automotive, construction,
agricultural and industrial applications. In January 2000, we acquired the
assets of Fintube Limited Partnership, the largest specialty tubing
manufacturer of heat recovery finned tubulars, which are used in various power
technology markets, including in the construction of gas-fired, combined-cycle
electrical power generation plants. We also completed an acquisition of the
assets of Bellville Tube Corporation (Bellville), a manufacturer of casing,
tubing and line pipe for the oil and gas industry, on April 1, 2000. We began
producing and marketing oil country tubular goods and other tubular products
over 45 years ago.
OUR STRATEGY
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. We constantly seek to improve our production
efficiency by upgrading our manufacturing technologies. 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 oil country tubular goods and line pipe, 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
production of premium products. We
also have increased our production capacity for finned tubulars utilizing our
proprietary technology for high-speed finned tubing welding machines.
• Continuing
to develop and market new product applications and technologies. We have historically been successful in
pioneering new production capabilities 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. In
addition, we have produced and sold slotted tubes for expandable sand screens
and new rise sleeves to provide solutions for completion in unconsolidated sand
formations and subsea completions, respectively. We will continue to invest in new technologies and develop new
products for the markets we serve.
• Growing
through strategic acquisitions.
Our acquisitions of Fintube and Bellville enable us to increase our production
capacity 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. During 2001, we attempted to
purchase an unrelated manufacturer of oil country tubular goods and line pipe
to further expand our product line.
However, the uncertainty that followed the tragic events of September 11th
made the cost of acquiring capital prohibitive and we did not complete this
acquisition. We will continue to pursue
strategic acquisitions that we believe to be beneficial to our business.
INDUSTRY BACKGROUND
Oilfield Products. Oil
country tubular goods, or OCTG, include casing and tubing, which we
manufacture, as well as drill pipe, which we do not manufacture. 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.
Demand for oil country tubular goods depends primarily on 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 natural gas and oil prices and industry expectations of future
prices. 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 1,156 in 2001 compared to 918 in
2000. Drilling increased until mid-2001
with a heavy emphasis on natural gas production activities. During the third and fourth quarters of
2001, oil and gas prices declined, resulting in a significant decrease in
domestic drilling activity. At
year-end, 887 rigs were working, of which 84% were drilling for natural
gas. The decrease resulted in less
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, which happened in the second half of 2001. 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.
The amount of imported oilfield products also affects the oil country
tubular goods market. Imported oil country tubular goods accounted for
approximately 37% of the apparent supply available to the domestic oil country
tubular goods market during 2001, 30% during 2000 and 17% during 1999. The domestic oil country tubular goods
industry expects to file a number of trade cases in the first half of 2002 against
foreign countries that are believed to be illegally importing oil country
tubular goods. The results of these
cases will not be known until the second half of 2002. Imported oil country tubular goods increased
significantly during 2000 and 2001, as domestic drilling activity accelerated
while international drilling activity increased at a much lower rate. The amount of imported oil country tubular
goods was lower in 1999 due to the dramatic decline in distributor stock
purchases during 1999 as inventories were liquidated and demand for new
products reduced as drilling activity declined. Protective tariffs on several foreign countries were imposed in
1995. These trade tariffs, which were intended to promote an equitable trade
environment were extended for another five years during 2001. In June 2000,
trade tariffs with respect to Canada and Taiwan were revoked.
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 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 now account for approximately half of the tonnage of domestic casing
and tubing consumed. 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 wells of this
nature 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. Line pipe sales often lag oil
country tubular goods sales by twelve or more months.
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 finned tubular
products for power technology markets for heat recovery applications and
precision mechanical tubular products for automotive, fluid power and other
markets for various mechanical applications.
Demand for finned tubular products depends on, among other factors,
combined-cycle electrical power plant construction, and the cost of alternative
fuels for power generation and, to a lesser extent, on industrial processing
plant and petrochemical plant construction. Demand for these products was down
in the fourth quarter of 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 during 2002.
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 and other factors affecting domestic goods activity. Demand for precision mechanical tubulars
within the traditional markets was up in 2000 as a result of economic
recoveries in certain foreign markets and a strong domestic economy during the
first half of 2000. The recession
experienced in the United States in 2001 significantly reduced demand for
precision mechanical tubulars throughout the year. Late in 2001, the continuing decline in the economy resulted in
further decreased demand for precision mechanical tubing, which is not expected
to increase until general domestic economic conditions improve.
Flat Rolled Steel and Other Products. We have a rolling mill which has the
capacity to produce 1.4 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 various construction and industrial 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.
OUR OILFIELD PRODUCTS
Products. We
manufacture and market premium oil country tubular goods. Our oil country
tubular goods include casing and production tubing but not drill pipe. We also
manufacture and market line pipe.
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 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 about 75% of the oil country
tubular goods tonnage sold by us, 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 grades
and ranges of outside diameters in casing (3½ “ to 20”) and tubing (1.9” to 3½
“) 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 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 American Petroleum Institute 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. Typically, greater than 45% to 60% of our
annual oil country tubular goods tonnage consists of premium, high-strength
tubular products. Because of higher
levels of deeper drilling, particularly for natural gas, 66% of our oil country
tubular goods revenues during 2001 were from high-strength alloy grade products
compared to 57% in 2000.
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 products
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 20% to 25% of our oilfield product revenues
are from line pipe sales.
Sales and Distribution. Our
domestic oil country tubular goods sales distribution network consists of 14
non-exclusive 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 directly to end users.
Internationally, oil country tubular goods are sold through distributors and
trading companies as well as directly to end users. Approximately 4% of the
tonnage of oil country tubular goods and 2% of the tonnage of line pipe that we
shipped in 2001 were to destinations outside the United States. Our two largest
customers, both distributors of our oilfield products in 2001, accounted for
approximately 10% each, of the total oil country tubular good tons we shipped.
About 78% of the oil and natural gas wells drilled in the United States in 2001
were located in Texas, Oklahoma, Kansas, Louisiana, New Mexico and the federal
waters of the Gulf of Mexico, all located within 750 miles of our mills in
Texas. The majority of our oilfield products were sold for use in these states,
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 22% of our revenues from oilfield products during 2001.
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.
From 1986 through June 2000, the level of imports of oil country
tubular goods from Canada and Taiwan was greatly reduced by the existence of
antidumping duty orders covering imports from these countries. In addition,
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 antidumping duty orders covering imports
from these countries and a countervailing duty order covering imports from
Italy. The orders 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. These orders against Argentina, Italy, Japan, Korea, and Mexico
were reviewed through the International Trade Commission in 2001 and will
remain in place for an additional five year period. The domestic oil country tubular goods industry expects to file a
number of trade cases in the first half of 2002 against foreign countries that
are believed to be illegally importing oil country tubular goods. The results of these cases will not be known
until the second half of 2002.
In February 2000, in response to a petition filed by domestic welded
line pipe producers and their workers, including us, the United States
government granted relief to the line pipe industry under Section 201 of the
Trade Act of 1974. The relief, effective March 1, 2000, restricts imports of
welded line pipe not exceeding 16 inches in outside diameter to a maximum of
9,000 tons from any country other than Canada and Mexico for three years.
Imports in excess of that amount are subject to significant tariffs.
OUR SPECIALTY TUBING PRODUCTS
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 power technology applications and in
industrial processing and petrochemical plants.
Finned Tubular Products
We manufacture custom-engineered specialty finned tubular products used
in a variety of heat recovery applications, primarily for heat recovery steam
generation in gas-fired, combined-cycle electrical power generating plants. We
have the major portion of domestic manufacturing capacity for finned tubes and
fabrication of 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. Modules, or large bundles, of finned tubes are fabricated into
heat-recovery steam generators that raise the efficiency of electric power
plants by more than 30% by converting exhaust heat into steam to generate
additional electricity. The Energy Information Administration expects the
amount of new combined-cycle generating capacity additions to increase
substantially by 2010. Accordingly, we
expect the heat recovery steam generation market to grow rapidly over the
long-term if the construction of combined-cycle power generation plants
accelerates as expected. However, in
the near-term, due to depressed economic conditions, construction of many
electric power plants has been delayed or cancelled resulting in less demand
for finned tubular products. Our heat
recovery products also serve the petrochemical and food processing industries.
Precision Mechanical Tubulars
We have one of the largest production capacities in the world for
precision mechanical tubular products using the Drawn Over Mandrel
manufacturing process. The use of the Drawn Over Mandrel 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 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.
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 trucks, including sport utility vehicles,
that were typically made out of seamless tubes. This product is also used for
other industrial applications.
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.
Sales and Distribution. Domestically,
we market and sell our precision mechanical tubulars through 19 non-exclusive
steel service centers and directly to end users. Our precision mechanical
tubulars have detailed design specifications and in some cases long lead times,
making annual contracts an efficient mechanism for large purchasers.
Internationally, the majority of our precision mechanical tubulars is currently
sold directly to end users and exports accounted for approximately 22% in 2001
and 20% in 2000 of the shipment tonnage of our precision mechanical tubulars.
We market our finned tubes and other heat recovery products through a small
domestic sales force, an international sales manager based in Quebec and
independent distributors. Exports of
finned tubulars and other heat recovery tubes accounted for approximately 18%,
and 21% of the revenues from those
products in 2001 and 2000, respectively.
Competition. The
market for specialty tubing is competitive and is served by several
manufacturers. During 1996, we completed a capital expenditure program to
expand our production capacity for precision mechanical tubulars, which is one
of the largest in the world using the Drawn Over Mandrel 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 used primarily in heavy gauge applications such as
boiler and pressure tubing.
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 AND SERVICES
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. Flat rolled steel is primarily used by us in the manufacture of
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 participation in the flat rolled
steel commodity market provides us flexibility in sourcing lower cost steel for
our tubular products and to some extent involves our excess capacity for flat
rolled steel as related to the manufacture of our oilfield and specialty tubing
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 stand-alone steel coil slitting business and a steel rod
to thin steel strip manufacturing process. This business includes a steel coil
storage and processing business, where we provide profitable, 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 for outside customers and to our finned tubing manufacturing
operations. We own the rights to our
patented cold-rolling process for flattening steel rod into narrow bands of
thin-gauge steel which we use as finning material for our finned tubes and thin
strip steel we sell to third parties.
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. The largest customer of our
flat rolled steel, Friedman Industries, Inc., historically has accounted for
approximately 75% to 80% of our flat rolled steel sales, as well as
substantially all other sales of miscellaneous tubular products other than
oilfield and specialty tubing products. This customer 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 this
customer represented approximately 8% and 9% of our total revenues for 2001 and
2000, respectively.
We sell thin steel strip directly to end users in North America through
a small sales force. Flat rolled steel processing services are also sold 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 thin strip
flat rolled steel and steel coil slitting services compete against service
centers located in the Midwest.
CUSTOMERS
We sell our oilfield products through our exclusive distributors to
numerous end users, including BP, Chevron, El Paso Exploration, Anadarko
Petroleum Corporation, Texaco Inc., Burlington Resources Inc., Apache
Corporation and Exxon Mobil Corporation. We sell our finned and other heat
recovery tube products to over 50 end users, including Foster Wheeler
Corporation, Chicago Tube and Iron Company, Cerrey, Nooter Eriksen, Inc., and
Deltak, L.L.C. We sell our precision
mechanical tubulars to such distributors and end users as Earle M. Jorgensen
Company, Marmon/Keystone Corp., Hyva, DaimlerChrysler Corporation, American
Axle & Manufacturing Holdings, Inc., Ford Motor Company, and Dana
Corporation.
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 with
over fifty successful installations to date.
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
recent product developments include the Aeroseg finned tube, a new 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 also have invested 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 profitably 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 near Houston, Texas. We manufacture our finned tubular products
in approximately 416,500 square feet of manufacturing facilities on
approximately 131.5 acres that we own or lease in the Tulsa, Oklahoma
metropolitan area; Pryor, Oklahoma; Quebec, Canada; Veracruz and Monterrey,
Mexico.
Our East Texas facilities’ annual rated capacity approximates 480,000
slab tons, 1,400,000 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 800,000 tons per year. In 2001, the precision mechanical specialty
tubing
facilities operated near 65% of capacity. The rolling mills and pipe mills generally operated at
approximately 52% of capacity, while the EAF’s operated at less than 44% of
capacity.
We have a major portion of the domestic manufacturing capacity for
production of finned tubes for heat recovery steam generation. We also license
technology relating to the production of finned tubular products to licensees
in India, Italy, Japan and Korea.
RAW MATERIALS AND INVENTORY
In general, we attempt to procure raw materials and to 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;
• the
capacity to offer a broad product range; and
• the
ability to offer our products at an effective cost.
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, steel coils, work-in-process or finished goods 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.
We can use steel slabs, scrap steel and steel coils in the manufacture
of our tubular products. We purchased steel slabs to meet approximately 70% of
our steel needs in 2001, and it was often necessary for us to commit to
purchase slabs 90 to 150 days prior to
production. We anticipate again using steel slabs for most of our production needs
in 2002. Our principal raw material for our internally produced steel slabs is
scrap steel, which is internally generated from our operations or available in
the spot market. The price of scrap steel and steel slabs can be volatile, is
influenced by a number of competitive market conditions beyond our control and
is not directly related to the demand for our products.
In February 2002, the U.S. Government imposed 30% tariffs on various
types of imported steel, principally steel coil, but also including steel
slabs. We procure steel slabs
principally from Mexico. Mexico and
Canada were excluded from these tariffs.
Tariffs on other countries that produce steel slabs are only imposed
after a quota of 5.4 million tons is exceeded.
These actions will reduce foreign imports of steel coils and increase
the cost of flat rolled steel, which is approximately 20% of our steel
requirements. However, the increased
cost of steel coils may in part be offset by better prices for flat rolled
steel produced and sold by us.
Raw materials for our specialty tubing products are readily available
from multiple sources. Steel coils and wire rod are the primary raw materials
used in the manufacture of our finned tubular products, and steel coils are the
principal raw material used in the manufacture of our precision mechanical
tubulars. We usually produce our specialty tubing products to meet 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.
EMPLOYEES
At December 31, 2001, we had a total of 1,892 active employees, of whom
826 were represented by four unions and five bargaining units. The majority of
these union workers are represented by the United Steelworkers of America under
a contract signed in June 2001, which expires on May 31, 2005. Two of the other
agreements, covering an aggregate of approximately 79 warehouse and plant
security workers as of December 31, 2001, expire in July 2003 and September
2003, respectively. The remaining two collective bargaining agreements covered
a total of 145 employees in Canada and Mexico as of December 31, 2001. Our management considers its relationship
with our employees to be good.
We have dedicated necessary resources and made the commitment to design
and implement a health and safety program that will meet the Occupational
Safety & Health Administration’s (OSHA) Voluntary Protection Program (VPP)
Star criteria at our East Texas facilities.
The VPP safety management program goes beyond OSHA standards to protect
workers more effectively than simple compliance. We plan to submit the VPP application to OSHA by the end of 2002.
FOREIGN OPERATIONS
Our export sales to destinations outside the United States including
finned tubulars and other heat recovery tubes were approximately $45.3 million
in 2001, $47.2 million in 2000, and $21.2 million in 1999. We own manufacturing facilities in Quebec,
Canada and Veracruz, Mexico and entered into a lease of manufacturing
facilities in Monterrey, Mexico that began operations in September 2000. Our export sales of $45.3 million to
destinations outside the United States included $7.7 million from these foreign facilities in 2001.
ENVIRONMENTAL
Our operations are subject to extensive environmental regulations with
respect to air emissions, wastewater discharges, and waste management. Our environmental protection and improvement
expenditures were approximately $4 million during the past three years,
including expenditures related to PCB transformer elimination, enhancing
containment in processing and storage areas, asbestos abatement, waste disposal
site closures and out-of-service facility remediation projects.
In connection with the cleanup of several 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 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.
The remaining cost of post-closure care is estimated to be approximately
$380,000. We have met our financial
assurance requirements by demonstrating the company’s ability to pay this
amount. The Texas Natural Resource
Conservation Commission (TNRCC) 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
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 to assist in
maintaining compliance. In March of
2002, we received formal certification that this system conformed to
Environmental Management System Standard ISO 14001, 1996. We do not expect future environmental
expenditures necessary to comply with environmental rules and regulations to
have a material impact on our financial position or operations.
ITEM 2.
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 electric-arc furnaces (EAF) equipped
with oxy-fuel burners with a combined capacity of approximately 575,000 ingot
tons per year; 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.
Our annual rated capacity at our East Texas facilities approximates
480,000 slab tons, 1,400,000 flat rolled tons, and 1,000,000 welded pipe
tons. We have access through marketing
arrangements and agreements with alliance mills to an additional oilfield pipe
capacity of approximately 800,000 tons.
We also have 91,000 square feet of oilfield products manufacturing
facilities near Houston, Texas. We
manufacture our finned tubular products in approximately 416,500 square feet of
manufacturing facilities on approximately 131.5 acres that we own or lease in
the Tulsa, Oklahoma metropolitan area; Pryor, Oklahoma; Quebec, Canada;
Veracruz and Monterrey, Mexico. Our
headquarters are located in leased facilities in Dallas, Texas.
We own 7,000 acres in Texas which were 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.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On August 16, 2001, we 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, we notified Cargill,
Incorporated, the parent company of North Star Steel Company, on December 14,
2001, that we were not able to complete the acquisition. Later that day, Cargill, Incorporated
notified us that it was filing a lawsuit against us seeking unspecified damages
and alleging that we had breached the agreement. We are confident that we have fully performed all of our
obligations under the agreement, and we will contest the lawsuit vigorously.
During the last three years, our subsidiary, Lone Star Steel Company
(Steel), has been named as one of a number of defendants in twenty lawsuits
alleging that certain individuals were exposed to asbestos on the defendants’
premises. To date several of these
lawsuits have been settled for less than $10,000 in the aggregate. Of the twenty lawsuits, three have been
settled or are pending settlement and four have been dismissed or are pending
dismissal. We did not manufacture or
distribute any products containing asbestos.
Some or all of these claims may not be covered by our insurance. We have accrued for our estimated exposure
to known claims, but do not know the extent to which future claims may be
filed. Therefore, we cannot estimate our exposure, if any, to
unasserted claims.
Management does not believe, based upon analysis of known facts and
circumstances and reports from legal counsel, that any pending legal proceeding
will have a material adverse effect on the financial condition or results of
our operations taken as a whole.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
PART II
ITEM 5.
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 (in
$):
As of January 31, 2002, we had approximately 3,090 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Includes
Fintube Technologies, Inc. and Bellville Tube Corporation results of operations
since the acquisitions became effective
on January 1, 2000 and April 1, 2000, respectively.
(2) Certain
charges for shipping and handling costs have been reclassified in accordance
with EITF 00-10 which requires freight charges billed to customers to be
classified in revenues and shipping costs incurred to be classified in cost of
goods sold. Lone Star previously
reported such amounts net in revenues.
The resulting reclassifications have increased revenues and cost of
goods sold. Gross profit, operating
income or loss, and net income or loss are unchanged in all periods.
(3) Earnings
before interest, taxes, depreciation and amortization (EBITDA) is calculated by
adding depreciation and amortization to operating income (loss). EBITDA is presented because it is a widely
accepted financial indicator of a company’s ability to incur and service
debt. EBITDA does not represent net
income or cash flows from operations as those terms are defined in generally
accepted accounting principles, or GAAP, and does not necessarily indicate
whether cash flows will be sufficient to fund cash needs.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
We are the leading domestic manufacturer and marketer of premium welded
oil country tubular goods, which are steel tubular products used in the
completion of and production from oil and natural gas wells. We are also a
major manufacturer of line pipe, which is used in the gathering and
transmission of oil and natural gas. In addition, we are a leading manufacturer
of specialty tubing products used in power technology, automotive,
construction, agricultural and industrial applications. Effective January 1,
2000, we acquired the assets of Fintube Technologies, Inc. (Fintube), the
largest specialty tubing manufacturer of heat recovery finned tubes, which are
used in various power technology markets, including the construction of gas
-fired, combined-cycle electrical power generation plants. On April 1, 2000, we
also completed an acquisition of the assets of Bellville Tube Corporation
(Bellville), a manufacturer of casing, tubing and line pipe for the oil and gas
industry. During 2001, we attempted to
purchase an unrelated manufacturer of oil country tubular goods and line
pipe. However, we were not able to
obtain financing and did not complete the purchase. The seller has filed a lawsuit against us claiming breach of
contract. We intend to vigorously defend
this lawsuit.
Historically, our oilfield products have accounted for approximately
60% of our total revenues and were 62% of total revenues in 2001. As a result, our revenues are largely
dependent upon the state of the oil and gas industry, which has historically
been volatile. Downturns in the oil and gas markets cause demand for our
principal products to decrease, which occurred in the second half of 2001. As a result, our historical operating
results have fluctuated based on the demand for our products. Our future operating results may fluctuate
significantly depending upon a number of factors, including industry
conditions, the level of oil and gas drilling activity and competition from
imports. Our finned tubular products are affected by the level of domestic and
foreign demand for power generation as well as domestic and foreign
competition.
Oilfield Products. Our
oilfield products 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, and (3) line pipe, which is used in gathering and
transmitting hydrocarbons from the wellhead to larger transmission pipelines.
Demand for our oilfield products depends primarily upon 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 natural gas and oil prices and industry expectations as to future
prices. According to industry reports, average domestic drilling activity
increased in 2001 by 26% compared to the previous year. However, drilling activity decreased
steadily through the second half of 2001 and by year-end 887 rigs were active,
compared to 1,114 rigs at the end of 2000.
Demand for our oilfield products are likely to remain weak until the
expectation of higher oil and gas prices results in an increase in the number
of active drilling rigs, which may not occur in the near term.
Specialty Tubing Products. Our specialty
tubing product segment includes finned tubular products and precision mechanical tubulars. Finned
tubular products are used in heat recovery steam generation applications such
as gas-fired, combined-cycle electrical power generation plants and, to a
lesser extent, in industrial processing plants and petrochemical plants. Demand for finned tubulars and related
products was down in the fourth quarter of 2001 as a result of curtailed and
cancelled power plant construction projects related to the slowdown in the
general economy and lack of affordable capital for these projects. Further curtailments and cancellations of
new power plant construction projects is likely in the near term.
Our precision mechanical tubulars consist of a wide array of high-quality,
custom-made steel tubular products with precise dimensional control and special
metallurgical 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 precision mechanical tubulars within the traditional markets
was down in 2001 due to the economic slowdown, particularly in the industrial
sector. Demand for our precision
mechanical tubing products in 2002 may be unfavorably impacted until the
current slowdown in the domestic economy subsides.
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. 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. During the first half of
1999, the United States government established antidumping duties and quotas
for flat rolled steel suppliers from certain foreign countries which reduced
the amount of imported foreign steel coils, resulting in increased shipments of
steel coils produced by us during the second half of 1999 and 2000. Flat rolled steel 2000 revenues also
benefited from the full year inclusion of steel coil slitting and steel strip
revenues. During 2001, imports of low
priced flat rolled steel increased throughout the year reducing our revenues
from flat rolled steel by 40% in the fourth quarter compared to the first
quarter of 2001. This surge of low
priced imports was in part the cause for bankruptcies of several domestic steel
mills. In March 2002, significant
tariffs on imported products from all foreign countries other than Canada and
Mexico were imposed, which will last for up to three years. This action has stabilized the domestic flat
rolled steel market and demand is expected to recover.
We sell steel strip directly to end users in North America through a
small sales force. Flat rolled steel processing services are also sold to steel
mills where we receive processing revenues but do not take title to the steel.
Manufacturing. The
manufacture of our products is capital intensive. Utilization rates at our East
Texas manufacturing facilities was up during the first half of 2001 and then
reduced significantly during the second half of 2001 as demand for our oilfield
products declined with decreased drilling, which was down 30% from the end of
the second quarter to the end of the year.
Specialty tubing demand further decreased following the tragic events of
September 11th and the general economic contraction which
followed. Flat rolled steel demand was
also down due to increased imports. As
a result, total shipment volumes were down 37% in the fourth quarter of 2001
compared to the second quarter of 2001.
The reduced production volumes negatively impacted cost of our products
sold in the second half of the year as fixed and semi-fixed costs were absorbed
by fewer units produced. The level of
production volume through our various facilities has a significant effect on
the cost of manufacturing. Key variable costs include costs of labor and raw
materials, including scrap steel, steel slabs, wire rod, steel coils,
electricity and natural gas. Most of
our finned tubes and other heat recovery products are manufactured in specific
configurations as ordered. Accordingly, our manufacturing costs 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 marketing
of their products which provide us access to additional manufacturing capacity. In addition, we have manufacturing
technology licensees in India, Italy, Japan and Korea.
CRITICAL ACCOUNTING POLICIES ANDESTIMATES
Management’s Discussion and Analysis and 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. 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 which are subject to inherent
risks including well failures, performance deficiencies, line pipe leaks,
personal injury, property damage, environmental contamination or loss of
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 known and unknown
warranty claims. The warranty claim
exposure is evaluated using historical claim trends and information available
on specifically known 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.
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. We maintain a reserve for known and unknown
bad debts. We evaluate credit risk and
the adequacy of our reserve by monitoring the age of our accounts receivable
and 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.
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.
HISTORICAL RESULTS OF PERATIONS
Our revenues are derived from three business segments: oilfield
products, specialty tubing products and flat rolled steel and other products
and services.
In the last three years, segment revenues were as follows:
Shipments of products by segment are as follows:
2001 COMPARED WITH 2000
Net revenues of $650.2 million for the year ended
December 31, 2001 were 1% higher than in 2000.
Revenues from oilfield products rose 11% to $401.9 million from 2000 on
12% higher shipment volumes. Demand for
oilfield products increased during the first half of 2001 due to a consistent
increase in drilling activity, with the active rig count rising from 1,114 at the end of 2000 to
1,275 at the end of the second quarter of 2001. However, from the end of the second quarter of 2001 to the end of
the year, the active rig count declined 30%, significantly reducing demand for
and revenues from our oilfield products in the second half of the year.
Specialty tubing product revenues decreased in 2001 by 15% from $220.9
million in 2000 to $187.7 million in 2001.
Revenues from precision mechanical tubing products were down due to
reduced industrial activity associated with slower general economic
conditions. Revenues from these
products were particularly weak following events of September 11th
as revenues dropped 28% from the third quarter of 2001 to the fourth quarter of
2001. Likewise, revenues from specialty
finned tubulars and related products fell 9% in the fourth quarter of 2001
following the cancellation and curtailment of some power plant construction
projects.
Flat rolled steel and other tubular products were down 3% from 2000 to
$60.6 million in 2001, due to a 3% decrease in shipment volumes and unchanged
prices due to reduced industrial demand.
Shipments decreased throughout the year as imports steadily increased.
Gross profit for 2001 decreased 19% to $69.3
million. Gross profit was down although
revenues were 1% higher than 2000 due to significantly reduced production
volumes in the second half of 2001, which caused fixed and semi-fixed cost to
be absorbed in less units of production.
Unit costs were particularly high in the fourth quarter as shipment
volumes were down substantially in our three business segments due to the
further slowdown in the economy after September 11th.
Selling, general, and administrative
expenses were
$36.1 million in 2001 compared to $33.7 million in 2000. This was due to increased expenses
associated with high sales volumes in the first half of 2001 and severance
costs related to workforce reductions associated with the business downturn in
the second half of 2001.
Interest income increased in 2001 to $2.9 million from $2.0
million in 2000 due to higher cash balances resulting from $50.8 million in
proceeds from the sale of common stock in April of 2001 and $150 million in
proceeds from sale of bonds in May of
2001, partially offset by lower average interest rates.
Interest expense decreased from $14.4 million in 2000 to
$12.8 in 2001 primarily due to lower interest rates.
Other expense, n e t of $5.5 million was primarily related to a
one-time charge of $5.0 million for the write-off of acquisition related
expenses and financing costs associated with the uncompleted acquisition and
$0.8 million charge to income from the settlement of our interest rate swap
upon early retirement of debt.
Income before extraordinary items was $17.0 million compared to $38.6 million
due to lower gross margins in the second half of 2001 resulting from
significantly lower production volumes and the $5.0 million write-off of
acquisition and financing costs associated with the uncompleted acquisition.
Extraordinary loss of $0.6 million for 2001 was due to early
retirement of debt associated with the extinguishment of a bank credit facility
using proceeds from the sale of stock and bonds.
Net operating loss carryforwards at December 31, 2001 totaled $231.0 million
(see Note G to the consolidated financial statements).
Net income in 2001 was $16.4 million, or $0.66 per
diluted share, compared to a net income of $38.6 million, or $1.59 per diluted
share in 2000. The decrease is
attributable to the factors discussed in income before extraordinary items
above.
2000 COMPARED WITH 1999
Net revenues of $645.3 million for the year ended
December 31, 2000 were up 78% from 1999.
Revenues rose 93% to $362.0 million for oilfield products, and shipment
volumes and prices increased 54% and 26%, respectively.
Demand for oilfield products improved in 2000, due to a consistent
increase in drilling activity, with the average rig count rising from 625 in
1999 to 918 in 2000.
Specialty tubing product revenues increased in 2000 to $220.9 million,
a 74% improvement from 1999 revenues of $126.6 million due to the inclusion of
finned tubular revenues for the full year and a 5% increase in shipment volumes
for precision mechanical tubulars with average prices equal to 1999.
Flat rolled steel and other tubular products revenues were up 30% to
$62.4 million. This increase is
attributable to inclusion of coil slitting revenues for the full year and a 10%
increase in flat rolled steel shipment volumes combined with 11% higher average
selling prices.
Gross profit for 2000 was $85.9 million, compared to
$12.8 million in 1999. Gross profit and
operating income benefited from higher margin contributions from our two
acquisitions, increased shipment volumes for all products and higher prices for
oilfield and flat rolled steel and other products. Also contributing to the increase in gross profit was 93% higher oilfield revenues that
included an oilfield product mix of higher margin premium alloy tubulars which
were 57% of casing and tubing sales.
Selling, general, and administrative
expenses
increased significantly in 2000 to $33.7 million, principally due to additional
expenses associated with our two acquisitions.
Interest income increased slightly in 2000 to $2.0 million
from $1.8 million in 1999 due to higher average interest rates on invested
cash, short-term investments and marketable securities.
Interest expense increased from $4.6 million in 1999 to $14.4
million in 2000 primarily due to additional debt associated with our two
acquisitions, increased borrowings to support expanded oilfield products
activity levels, and higher average interest rates.
Income before extraordinary items for 2000 was $38.6 million, or $1.59 per
diluted share, compared to the $5.5 million loss, or $0.24 loss per diluted
share in 1999. Factors contributing to
the increase in income from continuing operations include increased operating
income margins from our two acquisitions, and 93% higher oilfield revenues that
included an oilfield product mix of higher margin premium alloy tubulars which
were 57% of casing and tubing sales.
Net operating loss carryforwards at December 31, 2000 totaled $244.7 million
(see Note G to the consolidated financial statements).
Net income in 2000 was $38.6 million, or $1.59 per
diluted share, compared to a net loss of $5.5 million, or $0.24 loss per
diluted share, at the end of 1999. The
increase is attributable to the factors discussed in income before
extraordinary items above.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 2001, we had $106.5 million in cash and cash
equivalents and $259.0 million in working capital.
Cash provided by (used in) operating activities was $31.3 million,
($8.6) million, and $28.1 million for 2001, 2000, and 1999, respectively. Cash from operations in 2001 increased due
to higher sales in the first half of 2001 while business was strong and the
collection of the associated accounts receivable in the second half of 2001
when business weakened. Cash was used
by operating activities in 2000 attributable to increased accounts receivable
and the increase in inventories associated with higher oilfield products
shipments. In 1999 cash provided by
operations was $28.1 million due to the reduced net loss as our oilfield
business began recovery in the second half of 1999. In fiscal 1999, we used net
cash provided by operations to fund capital expenditures and reduce revolving credit
facilities.
Cash used in investing activities was $14.7 million, $96.6 million, and
$11.7 million for 2001, 2000, and 1999, respectively. Cash used in 2001 primarily relates to higher capital
expenditures to expand our finned tubular products capacity in Mexico and
Canada and install new computer based enterprise resource planning
systems. Cash used in 2000 and 1999
relates to our acquisitions of Fintube and Bellville and capital expenditures.
Cash provided by (used in) financing activities was $63.2 million in
2001, $109.7 million in 2000, and ($15.1) million in 1999. Cash provided by financing activities in
2001 was generated from the proceeds of the sale of $150 million
senior subordinated notes and $50.8 million of common stock, offset by
repayments on the revolving credit facilities and term loans. Cash provided by financing activities in
2000 was primarily attributable to borrowings to finance the Fintube and
Bellville acquisitions and higher borrowings to fund additional working capital
to meet the increased demand for oilfield products. Cash used by financing activities for fiscal 1999 was primarily
related to the reduction of revolving credit facilities.
On May 2, 2001, we sold 1.2 million shares of our common stock under a
previously filed universal shelf registration statement. The proceeds to us were $50.8 million. Proceeds of the sale were used to extinguish
debt associated with credit facilities at our subsidiary, Lone Star Steel
Company (Steel), and Fintube Technologies, Inc. (Fintube), and for general
corporate purposes.
On May 29, 2001, we issued $150.0 million 9% senior subordinated notes
due September 1, 2011 to qualified institutional buyers. Interest on the outstanding senior
subordinated notes will accrue at a rate of 9.0% per year, payable
semi-annually in arrears on each June 1 and December 1, commencing December 1,
2001. We used the proceeds received
from the senior notes to pay down the revolving lines of credit, term loans,
slab consignment obligations and for general corporate purposes. The notes are fully and unconditionally
guaranteed by each of our current and future domestic restricted subsidiaries.
In 2000, Steel had a credit facility consisting of a three-year $120.0
million revolving line of credit and a three-year $10.0 million term loan. Under this revolving credit facility, Steel
could borrow an amount based on a percentage of eligible accounts receivable
and inventories, reduced by outstanding letters of credit.
In October 2001, the Steel credit facility was restated and amended to
a three-year $100 million senior secured credit facility for use by Lone Star
and our domestic subsidiaries.
Borrowings from this facility can be used for general corporate purposes. Under this credit facility, we can borrow an
amount based on a percentage of eligible accounts receivable and inventories
reduced by outstanding letters of credit. The availability under this facility
was $99.7 million at December 31, 2001.
Substantially all of our assets, other than real estate, secure this
loan. At our option, the interest rate
is the prime lending rate or the LIBOR plus the applicable additional interest. As a result, we will be subject to interest
rate risk if we borrow from the credit facility. At December 31, 2001, no amount was outstanding under this
credit facility.
In 2000, Fintube had a senior credit facility providing a $20 million
revolving line of credit and a $39 million term loan used to pay part of the
cash portion of the purchase price in the Fintube acquisition. In August 2001, the Fintube credit facility
was paid in full early and terminated, resulting in the write off of $0.6
million in deferred financing costs as an extraordinary item. In addition, we terminated an interest rate
swap agreement related to the Fintube credit facility. The settlement of the interest rate swap
resulted in a $0.8 million charge included in other expenses.
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 2002 is approximately $20.0 million.
We require capital primarily to fund general working capital needs and
capital expenditures. Principal sources of funds include cash and investments,
cash generated from operations and borrowings under our credit facility. We
believe these sources of funds will provide the liquidity necessary to fund our
cash requirements during 2002.
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
requirements will fall within our contemplated operating and capital
expenditure plans, averaging $1.0 - $2.0 million annually in the foreseeable
future.
We lease equipment under various operating leases. Future minimum lease payments under
noncancelable operating leases are as follows:
2002, $2.1 million; 2003, $1.2 million; 2004, $1.1 million; 2005, $0.7
million; 2006, $0.6 million; and thereafter, $0.3 million.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and
Hedging Activities.” SFAS 133 requires
that all derivative financial instruments that qualify for hedge accounting be
recognized in the financial statements and measured at fair value, regardless
of purpose or intent of holding them.
On January 1, 2001, a transition obligation of $0.5 million was recorded
related to the interest rate swap agreement.
Additionally, a loss to other comprehensive income in the equity section of the balance sheet of $0.5 million
was recorded. Subsequent changes in
fair value were recorded through other comprehensive income. In August 2001, the credit facility associated
with the Fintube acquisition was paid in full and the related interest rate
swap was terminated. The settlement of
the interest rate swap resulted in a $0.8 million charge to income in the third
quarter.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business
Combinations,” and SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 141 requires, among other things, all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting. SFAS 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Under
SFAS 142, goodwill will no longer be amortized over its estimated useful life,
but instead will be tested for impairment at least annually. SFAS 142 will be effective for fiscal years
beginning after December 15, 2001 and must be adopted at the beginning of a
fiscal year. During 2001, we amortized
goodwill associated with the Fintube and Bellville acquisitions, as detailed in
Note A, of approximately $2.0 million.
We are currently performing the required goodwill impairment analyses
and expect to have these completed by April 2002. We do not expect an impairment of goodwill, but we cannot
definitively conclude until the analyses are complete.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset
Retirement Obligations” (“SFAS 143”).
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to all entities and legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the asset’s
useful life. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. We have not yet determined
the impact that SFAS No. 143 will have on our financial position or results of
operations.
In August, 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. This statement
supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of,” however, this statement retains the
fundamental provisions of SFAS 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.
This Statement also supersedes the accounting and reporting provisions
of APB Opinion No. 30, “Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions” for segments of a business to
be disposed. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. We do not believe that the adoption of SFAS 144 will have a
material effect on our financial position or results of operations.
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.
ITEM 7A.
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 measured 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, short-term investments and marketable 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 with short-term maturities and 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, 2001. 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, 2001. Our senior subordinated notes accrue
interest at a fixed rate of nine percent.
The fair value of the notes is sensitive to changes in interest rates.
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. 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.
ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL S TATEMENTS
Report of
Independent Public Accountants
Consolidated
Statements of Income for the years ended December 31, 2001, 2000, and 1999
Consolidated Balance Sheets
at December 31, 2001 and 2000
Consolidated
Statements of Cash Flows, for the years ended December 31, 2001, 2000, and
Consolidated
Statements of Shareholders’ Equity at December 31, 2001, 2000, 1999, and 1998
Notes to
Consolidated Financial Statements
Schedule I -
Condensed Financial Information of Registrant
Schedule II -
Valuation and Qualifying Accounts
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Lone Star Technologies,
Inc. (Lone Star):
We have audited the accompanying consolidated balance sheets of Lone
Star (a Delaware corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, shareholders’ equity,
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements and
the schedules referred to below are the responsibility of Lone Star’s
management. Our responsibility is to
express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Lone Star and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for the three years ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the index to consolidated financial
statements are presented for the purpose of complying with the Securities and
Exchange Commission’s rules and are not a part of the basic consolidated
financial statements. These schedules
have been subjected to the auditing procedures applied in our audits of the
basic consolidated financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in millions, except per share
data)
See
accompanying notes.
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions, except share data)
See
accompanying notes.
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
See accompanying notes.
LONE STAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($ in millions)
See
accompanying notes.
LONE
STAR
TECHNOLOGIES
, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lone Star Technologies, Inc. (Lone Star), a Delaware corporation, is a
management and holding company with three principal operating subsidiaries,
Lone Star Steel Company (Steel), Fintube Technologies, Inc. (Fintube), acquired
January 3, 2000, and Bellville Tube Corporation (Bellville), acquired April 1,
2000. Steel manufactures and globally
markets oilfield 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.
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 are primarily subject to economic
conditions.
ACCOUNTING POLICIES - NOTE A
Principles of consolidation. The
consolidated financial statements include the accounts of Lone Star and its
subsidiaries. Intercompany transactions
are eliminated in consolidation.
Cash, investments, and marketable
securities. 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.
Short-term investments consist of U. S. government and related agencies
debt obligations with maturities at purchase greater than three months and up
to one year. Marketable securities
consist of U. S. government and related agencies debt obligations with
maturities at purchase greater than one year and up to two years. Lone Star’s total cash equivalents, short
-term investments and marketable securities, the weighted average maturity of
which is less than one year, are classified as held-to-maturity because Lone
Star has the intent and ability to hold them to maturity. The recorded amount of our cash equivalents
approximates market value at December 31, 2001.
Inventories are stated at the lower of cost (principally
last-in, first-out “LIFO”) or market value and include raw materials, labor,
and overhead.
Property, plant, and equipment are stated at cost. Depreciation is provided on either a
straight-line method or an accelerated basis over the estimated useful lives
(5-10 years) of depreciable assets.
Long-lived assets including property, plant, and equipment are
periodically evaluated to determine whether events or changes in circumstances
have occurred that indicate the remaining asset balances may not be recoverable
and an impairment loss should be recorded.
Income taxes.
Lone Star files a consolidated federal income tax return. Lone Star 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.
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; and collectibility is reasonably
assured. Freight and shipping that is
billed to customers is included in net sales, and the cost of shipping is
included in cost of sales.
Goodwill and other intangibles. The
Fintube and Bellville acquisitions 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. Also,
goodwill was recorded when the
minority interest in Steel was acquired in 1997. Goodwill and other intangible amortization
is provided using the straight-line method over the periods as follows (in
millions):
Impairment of goodwill and other intangibles is assessed at each
balance sheet date based on a review of the acquired operations as to income,
growth of income in relation to the expected growth of income when acquired, if
the operations are considered for sale, and estimated realizable value. Valuation reserves are provided if the
carrying value of acquired goodwill and other intangibles is determined to be
permanently impaired. Beginning on
January 1, 2002, goodwill will no longer be amortized. Impairment of goodwill will be assessed
annually and as events and circumstances warrant. Goodwill and other intangibles are presented net of accumulated
amortization of $6.0 million and $3.4 million at December 31, 2001 and 2000,
respectively.
Reclassifications. In
accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and
Costs,” Steel changed its accounting policy for freight. The new pronouncement required freight
charges billed to customers to be classified in sales and shipping costs
incurred to be classified in cost of sales.
Steel previously reported such amounts as a reduction of net sales. Accordingly, reclassifications were made for
1999 to increase net sales and costs of sales by $8.6 million, with no effect
to reported gross profit. Certain other
2000 and 1999 amounts have been reclassified to conform with the current
presentation.
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. We evaluate our estimates
primarily based on historical experience and business knowledge. Our estimates are revised as circumstances
change. However, actual results could
differ from those estimates.
Significant estimates have been made to reserve for warranty claims, bad
debts and environmental obligations as follows:
Our products are used in applications which are subject to inherent
risks including well failures, performance deficiencies, line pipe leaks,
personal injury, property damage, environmental contamination or loss of
production. We warrant our products to
meet certain specifications. Actual or
claimed deficiencies from these specifications may give rise to claims. We maintain a reserve for known and unknown
warranty claims. The warranty claim
exposure is evaluated using historical claim trends and information available
on specifically known claims. We also maintain product and excess liability
insurance subject to certain deductibles that limit our exposure to these
claims. We consider the extent of insurance
coverage in its estimate of the reserve.
Typically, this reserve is not subject to significant fluctuations from
period to period. However, the
incurrence of an unusual amount of claims could alter our exposure and the
related reserve.
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. We maintain a reserve for known and unknown
bad debts. We evaluate credit risk and
the adequacy of our reserve by monitoring the age of our accounts receivable
and 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.
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.
CURRENT OPERATING ENVIRONMENT AND BUSINESS SEGMENTS - NOTE B
Oilfield products are comprised of casing, tubing, and line pipe that
are manufactured and marketed globally to the oil and gas drilling
industry. Specialty tubing products
consist of (1) precision mechanical tubing and as-welded tubing that are
manufactured and marketed globally to automotive, fluid power, and other
markets for various mechanical applications and (2) finned tubular products
used in a variety of heat recovery applications. Flat rolled steel and other tubular products and services are
manufactured and provided to general industrial markets.
Sales of oilfield products are greatly affected by the level of
domestic oil and gas drilling, which in turn is primarily dependent on oil and
natural gas prices. Because of the
volatility of oil and gas prices and drilling activity as well as other
factors, such as competition from foreign imports, demand for these steel
products can be subject to significant fluctuations.
The specialty precision mechanical tubing, flat rolled, and other
tubular product markets are more diversified than oilfield markets, with sales
traditionally following general domestic economic conditions. The principal market is
domestic, although sales are made into international markets. The majority of sales occur through networks
of sales distributors, although some sales are made directly to end-users. Tubular products produced by other
manufacturers are also marketed.
Sales of finned tubular products are dependent upon the amount of
construction of combined-cycle electric power plants. Construction of the power plants is based upon economic
conditions, the price of natural gas, and capital availability. Late in 2001, several power plant
construction projects were deferred or cancelled resulting in decreased demand
for these products for the near term.
Our participation in the flat rolled steel commodity market provides
flexibility in sourcing lower cost steel for our tubular products and to some
extent involves our excess capacity for flat rolled steel as related to the
manufacture of our oilfield and specialty tubing products and certain cost
considerations associated with our total manufacturing operations. Our flat rolled steel commodity market is
generally concentrated in the southwestern region of the United States. Flat rolled steel is sold in highly
competitive markets, with price, quality, and availability primarily
determining customer purchase decisions.
Sales to the largest oilfield products customer were $39.1 million or
approximately 6% of net revenues in 2001, $45.7 million or 7% in 2000, and
$28.1 million or 8% in 1999. Sales to
another significant customer of flat rolled steel and other tubular products
were $42.9 million or 7%, $48.3 million or 7%, and $36.4 million or 10% of net
revenues for 2001, 2000, and 1999 respectively. Direct foreign revenues as a percent of total oilfield revenues
were approximately 3%, 1%, and 6% of the total in 2001, 2000, and 1999,
respectively.
We manufacture our oilfield products, precision mechanical tubulars,
flat rolled steel and other products at our facilities located in Texas. Raw materials and supplies, principally
steel slabs and steel coils used in the manufacture of these products have
historically been readily available from various competitive sources. The manufacture of these products uses
several common facilities and shares administrative support. Accordingly, the segment information
contains certain costs and assets which are allocated and may not reflect each
line of business as if it were operated separately.
We also have operations in Oklahoma, Mexico, and Canada. Primary operations include the application
of fins and studs to tubes, specialty finned tubular products for heat recovery
applications, and the fabrication of heat recovery steam generators and
economizers. Domestic manufacturing
operations are internally supported by a steel coil slitting division and a
tube mill. Principal markets are
throughout North America, Asia, and South America.
The corporate segment is responsible for financial operations including
investing and managing financial assets, financing of product purchases,
shareholder relations, and assessing and evaluating strategic alternatives.
Of our total active employees, 44% are represented by five collective
bargaining agreements. The majority of
union workers are represented by the United Steelworkers of America under a
contract signed in June 2001, which expires on May 31, 2005. Two other agreements covering approximately
79 warehouse and plant security workers as of December 31, 2001, expire in July
2003 and September 2003, respectively.
The remaining two agreements covered a total of 145 employees in Canada
and Mexico as of December 31, 2001.
For the year ended December 31, 2001, Lone Star had net sales of $650.2
million and operating income of $33.2 million. This compares to net sales of
$645.3 million and an operating income of $52.2 million for 2000. Oilfield products revenues were 11% higher
than in 2000 due to an increase in drilling activity, with the active rig count
rising from 1,114 at the end of 2000 to 1,275 at the end of the second quarter
of 2001. However, drilling activity
decreased steadily through the second half of 2001 and by year-end 887 rigs
were active. Demand for oilfield
products is likely to remain weak until the expectation of higher oil and gas
prices results in an increase in the number of active drilling rigs. The levels
of oil and gas prices and related drilling activities are subject to many
factors. As a result, the market can be
subject to volatile economic swings.
Therefore, no assurance can be given regarding the extent of future
demand for our oil country tubular goods, or that profitability can be achieved
during periods of depressed demand.
Principal sources of funds include cash and cash equivalents held, cash
generated by operations and borrowings under our revolving credit facility.
Lone Star believes that reimbursements by Steel, Fintube, and Bellville
for most of its operating costs and funds generated by cash and investments
will be adequate to fund its cash requirements during 2002.
ADDITIONAL BALANCE SHEET INFORMATION - NOTE C
Accounts receivable on the consolidated balance sheet is stated net of
allowance for doubtful accounts of $1.8 million at December 31, 2001 and $2.0
million at December 31, 2000. Approximately $144.9 and $141.9 million of total
inventories before LIFO valuation reserves were accounted for on the LIFO basis
at December 31, 2001 and 2000, respectively.
Non-LIFO inventories are stated at the lower of average cost or market. The total inventories before LIFO valuation
reserves approximates replacement cost of the inventories.
SHAREHOLDERS‘ EQUITY - NOTE D
On May 2, 2001, Lone Star sold 1.2 million shares of its common stock
under a previously filed universal shelf registration statement. The proceeds to Lone Star was $50.8
million. Proceeds of the sale were used
to extinguish debt associated with our credit facilities at Steel and Fintube
and for general corporate purposes.
The following table identifies changes in common stock issued and
treasury stock from December 31, 1999 to December 31, 2001.
DEBT - NOTE E
In 2000, Steel had a credit facility consisting of a three-year $120.0
million revolving line of credit and a three-year $10.0 million term loan. Under this revolving credit facility, Steel
could borrow an amount based on a percentage of eligible accounts receivable
and inventories, reduced by outstanding letters of credit.
In October 2001, the Steel credit facility was restated and amended to
a three-year $100 million senior secured credit facility for use by us and our
domestic subsidiaries. Borrowings from
this facility can be used for general corporate purposes. Under this credit facility, we can borrow an
amount based on a percentage of eligible accounts receivable and inventories
reduced by outstanding letters of credit. The availability under this facility
was $99.7 million at December 31, 2001.
Substantially all of our assets, other than real estate, secure this
loan. At our option, the interest rate
is the prime lending rate or the LIBOR plus the applicable additional
interest. As a result, we will be
subject to interest rate risk if we borrow from the credit facility. At December 31, 2001, no amount was
outstanding under this credit facility.
In 2000, our subsidiary, Fintube, had a senior credit facility
providing a $20 million revolving line of credit and a $39 million term loan
used to pay part of the cash portion of the purchase price in the Fintube
acquisition. In August 2001, the
Fintube credit facility was paid in full early and terminated, resulting in the
write off of $0.6 million in deferred financing costs as an extraordinary
item. In addition, we terminated an
interest rate swap agreement related to the Fintube credit facility. The settlement of the interest rate swap
resulted in a $0.8 million charge included in other expenses.
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 has been recorded as
inventory by Steel. At December 31,
2001, we were not obligated for any slab consignment arrangements.
On May 29, 2001, Lone Star issued $150.0 million 9% senior subordinated
notes due September 1, 2011 to qualified institutional buyers. Interest on the outstanding senior
subordinated notes will accrue at a rate of 9.0% per year, payable
semi-annually in arrears on each June 1 and December 1, commencing December 1,
2001. Lone Star used the proceeds
received from the senior notes to pay down the revolving lines of credit, term
loans, slab consignment obligations, and for general corporate purposes. The notes are fully and unconditionally
guaranteed by each of the current and future domestic restricted subsidiaries
of Lone Star. The following condensed
consolidating financial statements of Lone Star and its subsidiaries are
presented for the periods in which nonguarantors of these notes were part of
the consolidated financial statements.
The information for Lone Star is presented in the “Parent Company”
column. The nonguarantors are
insignificant to the overall financial statements and are therefore included in
the “Subsidiaries” column.
LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
($ in millions)
LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
($ in millions)
LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATING CASH FLOW STATEMENT
($ in millions)
LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
($ in millions)
LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATING INCOME STATEMENT
($ in millions)
LONE STAR TECHNOLOGIES, INC.
CONDENSED CONSOLIDATING CASH FLOW STATEMENT
($ in millions)
NET EARNINGS PER SHARE - NOTE F
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock. The numbers of shares used to compute basic earnings per share in
2001, 2000, and 1999 were 24.7 million, 23.5 million, and 22.5 million,
respectively. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock and other dilutive securities. Dilutive securities (stock options) equivalent to 0.3 million
shares of common stock were outstanding at December 31, 2001. Lone Star had a net loss in 1999 and the effect
of including dilutive securities in earnings per share would have been
anti-dilutive. The numbers
of shares used to compute diluted earnings per share in 2001, 2000, and
1999, were 25.0 million, 24.3 million, and 22.5 million, respectively.
INCOME TAXES - NOTE G
Income tax expense was $0.8 million, $1.8 million, and $0.0 in 2001,
2000 and 1999, respectively, including federal alternative minimum tax and
state and foreign income taxes. There
was no deferred income tax expense or benefit for 2001, 2000 or 1999. A reconciliation of the U.S. Federal
statutory rate to actual income tax expense is as follows:
The following table discloses the components of the deferred tax
amounts at December 31, 2001 and 2000:
At December 31, 2001, Lone Star had federal tax net operating loss
carryforwards (NOL’s) of approximately $231.0 million, 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, Steel, Fintube, Bellville and the other subsidiaries. If not utilized, the NOL’s will expire
between years 2003 and 2019, 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 availability
of the NOL’s. Due to 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.
EMPLOYEE BENEFIT PLANS - NOTE H
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 $3.0 million, $2.7
million, and $1.2 million for the years ended December 31, 2001, 2000, and
1999, respectively.
Nonqualified deferred compensation
plan. Beginning in 2000, Lone Star offered a
nonqualified compensation plan to 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 25% 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 total liability included in other
noncurrent liabilities was $1.1 million and $0.4 million at December 31, 2001
and 2000, respectively.
Employee stock purchase plan.
During 2000, Lone Star adopted 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 191,020 shares were
available to be issued at December 31, 2001.
Long-term incentive plan.
Lone Star has a long-term incentive plan which provides for the issuance
of up to 2,700,000 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. 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. Following is a summary of stock
option activity during 2001, 2000, and 1999:
The weighted average fair value per option granted in 2001, 2000, and
1999 was $20.78, $17.45, and $6.68, 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 2001, 2000,
and 1999, respectively: risk-free interest rates of 4.77%, 6.69%, and 5.37%;
volatility of 54.10%, 49.37% and 48.53%; and expected lives of five years for
all option grants without payment of dividends. Lone Star accounts for this plan pursuant to APB Opinion No. 25,
under which compensation cost has not been recognized with the exception of the
performance options granted to certain Fintube employees described below. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to January 1, 1995,
the pro forma compensation cost may not be representative of that expected in
future years. 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:
On the acquisition date, Lone Star granted certain employees of Fintube
options which vest only upon the achievement of certain operating performance
criteria in 2000 and 2001. Fintube had
recorded approximately $0.5 million in compensation expense related to the
performance options granted to the employees of Fintube in 2000. Compensation expense for these options is
re-measured each reporting date based on the market price of Lone Star’s stock
and continuing achievement of performance criteria.
At December 31, 2001, 1,031,775 shares were available for grant and
722,663 shares were exercisable. The
following table reflects the weighted average exercise price and weighted
average contractual life of various exercise price ranges of the 1,860,475
options outstanding as of December 31, 2001:
Lone Star also issued 125,500 shares and 11,250 shares of restricted
stock grants to certain employees, with a value of $5.5 million and $0.4
million during 2001 and 2000, respectively.
We recognized compensation expense related to these awards of $0.7
million and $0.1 million in 2001 and 2000, respectively. Restricted stock grants were not made in
1999.
Defined Benefit Pension and Health
Care 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.
Steel funds the minimum required contributions each year as required by
applicable regulations.
During 1996, the largest of the three pension plans was amended so that
new employees do not participate in the defined benefit plan. During 1998, the other two plans were
similarly amended. 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.
The measurement dates for determining the assets and obligations of
these plans were November 30, 2001, 2000, and 1999. The following table sets forth the changes in the plans’ benefit
obligations, assets and funded status amounts recognized in the consolidated
balance sheets at December 31, 2001, 2000, and 1999 (in millions):
In determining the benefit obligation, weighted average discount rates
of 6.75%, 7.5% and 7.5% were used for 2001, 2000, and 1999, respectively. Other assumptions utilized for all three
years included a 9.0% expected long-term rate of return on plan assets and a
4.0% annual increase in the compensation rate.
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 gradually from 10.0% to an ultimate trend
rate of 6.0% by the year 2007.
Increasing the assumed medical cost trend rates by 1.0% in each year
would have resulted in a $1.2 million increase in the benefit obligation as of
December 31, 2001, and a $0.2 million increase in the aggregate of the service
cost and interest cost components of net periodic benefit expense for
2001. A 1.0% decrease in the assumed
trend rates would have resulted in a $1.0 million decrease in the benefit
obligation and a $0.1 million decrease in expense.
The pension plans’ assets consist primarily of short-term money market
investments, government and corporate obligations, real estate, and public
market equity securities.
Net periodic benefit expense for 2001, 2000, and 1999, included the
following components:
Profit sharing plans. Lone
Star and its subsidiaries have profit sharing plans for substantially all
employees which provide for payment of a specified percentage of quarterly
operating earnings. Total payments to
employees were $3.2 million, $3.6 million, and $0.7 million for 2001, 2000, and
1999, respectively.
COMMITMENTS AND CONTINGENCIES - NOTE I
Lone Star incurs various commitments for the purchase of raw materials,
certain tubular goods, supplies, services, and energy arising in the ordinary
course of business. The majority of
these commitments are for a period of less than one year.
Equipment is leased under various operating leases. Rental expense totaled $5.0 million, $3.8
million, and $3.6 million in 2001, 2000, and 1999, respectively. Future minimum lease payments under
noncancelable operating leases
are as follows: 2002, $2.1 million; 2003, $1.2 million; 2004, $1.1
million; 2005, $0.7 million; 2006, $0.6 million; and thereafter, $0.3 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 Natural Resource Conservation Commission and the
Environmental Protection Agency.
Agreements are in place with these agencies to conduct numerous
environmental studies and to develop plans to ensure continuous compliance with
applicable laws and regulations.
Various environmental studies, monitoring programs, and capital projects
are ongoing. Estimated expenditures for
certain remediation programs are included in accrued liabilities and other
noncurrent liabilities as shown in Note C and are computed on a non-discounted
basis. Included in other noncurrent
liabilities are environmental reserves of $9.5 million and $9.8 million at
December 31, 2001 and 2000 respectively.
Current reserves of $0.5 million and $1.0 million are included in
accrued liabilities at December 31, 2001 and 2000, respectively. Lone Star believes that its environmental
expenditures will continue to fall within its contemplated operating and
capital plans.
On August 16, 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. Lone Star is confident that
it has fully performed all of its obligations under the agreement, and it will
contest the lawsuit vigorously.
During the last three years, Steel has been named as one of a number of
defendants in twenty lawsuits alleging that certain individuals were exposed to
asbestos on the defendants’ premises.
To date several of these lawsuits have been settled for less than
$10,000 in the aggregate. Of the twenty
lawsuits three have been settled or are pending settlement and four have been
dismissed or are pending dismissal. We
did not manufacture or distribute any products containing asbestos. Some or all of these claims may not be
covered by our insurance. Steel has
accrued for its estimated exposure to known claims, but does not know the
extent to which future claims may be filed.
Therefore, Steel cannot estimate its exposure, if any, to unasserted
claims.
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 or financial condition of Lone Star
and its subsidiaries, taken as a whole.
ACQUISITIONS - NOTE J
On January 3, 2000, Lone Star through Fintube, a wholly owned subsidiary
of Lone Star, purchased substantially all of the assets of Fintube Limited
Partnership (“FLP”) for a base purchase price of $82 million plus a $2.5
million adjustment for working capital and approximately $1.2 million in
acquisition related expenses (the “Fintube Acquisition”). The Fintube Acquisition was effective as of
January 1, 2000. The working capital
adjustment was estimated at the closing and was reduced on an actual,
post-closing basis by $0.7 million in July 2000. The consideration for the Fintube Acquisition was determined
following a competitive bidding process in arm’s-length negotiations between
Lone Star and FLP. The acquired
business involves the design and production of finned tubes and other products
used in a variety of heat recovery applications. Lone Star is operating and using the assets acquired in the
Fintube Acquisition in substantially the same manner as they were used by FLP
prior to the Fintube Acquisition. Lone
Star and Fintube utilized three different sources of financing to pay the
purchase price. Lone Star used $20
million of cash that it received from Steel in connection with Steel’s
repayment of a $20 million subordinated loan from Lone Star. Steel borrowed the $20 million that it
repaid to Lone Star under Steel’s revolving line of credit. Additionally, Lone Star issued approximately
$20 million of Lone Star common stock directly to the limited partners or other
beneficial owners of FLP. Finally,
Fintube entered into a new credit agreement which provided (i) approximately $7
million under a revolving credit facility and (ii) $39 million under a term
loan facility.
The Fintube Acquisition has been accounted for under the purchase
method of accounting, and accordingly, the purchase price has been allocated to
the assets acquired and the liabilities assumed based upon fair value at the
date of the acquisition. The excess
purchase price over the fair values of the tangible and intangible net assets
acquired was
approximately $49.5 million, and was recorded as goodwill and other
intangibles amortized on a straight -line basis over periods ranging from 5 to
30 years. Beginning January 1, 2002,
goodwill will no longer be amortized.
Impairment of goodwill will be assessed annually and as events and
circumstances warrant.
On April 1, 2000, Lone Star through Bellville Acquisition, Inc., a
wholly owned subsidiary of Lone Star, purchased substantially all of the assets
of Bellville for a base purchase price of $14.8 million less a $0.2 million
adjustment for working capital (the “Bellville Acquisition”). The working capital adjustment was estimated
at the closing and was further adjusted by an additional $0.1 million on an
actual, post-closing basis in July 2000.
The consideration for the Bellville Acquisition was determined through
arm’s-length negotiations between Lone Star and Bellville. Lone Star financed the Bellville Acquisition
through cash held by Lone Star and $5.0 million of borrowings. In connection with these borrowings, Steel
borrowed $5.0 million under its present credit facility to repay the remaining
$5.0 million of its subordinated loan to Lone Star. Lone Star guaranteed an additional $5.0 million of Steel’s credit
facility and pledged the stock of Bellville as collateral for such
guaranty. The cash paid for the
Bellville Acquisition was wired to Bellville on March 31, 2000; however, the
purchase was not effective until April 1, 2000.
The Bellville Acquisition by Lone Star has been accounted for under the
purchase method of accounting, and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based upon fair
value at the date of the Bellville Acquisition. The excess purchase price over the fair values of the tangible
and intangible net assets acquired was approximately $7.2 million, has been
recorded as goodwill amortized on a straight -line basis over 30 years. Beginning January 1, 2002, goodwill will no
longer be amortized. Impairment of
goodwill will be assessed annually and as events and circumstances warrant.
The unaudited pro forma results below assume the acquisitions occurred
at the beginning of the periods presented ($ in millions, except per share
amounts):
The above pro forma results include adjustments to give effect to
amortization of goodwill, interest expense and other purchase price
adjustments. The pro forma results are
not necessarily indicative of the operating results that would have occurred
had the acquisitions been consummated as of the beginning of the periods
presented, nor are they necessarily indicative of future operating results.
NEW ACCOUNTING PRONOUNCEMENTS - NOTE K
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards (“SFAS”) No. 133, “Accounting
for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires that all derivative financial instruments
that qualify for hedge accounting be recognized in the financial statements and
measured at fair value, regardless of purpose or intent of holding them. On January 1, 2001, a transition obligation
of $0.5 million was recorded related to the interest rate swap agreement. Additionally, a loss to other comprehensive
income in the equity section of the balance sheet of $0.5 million was
recorded. Subsequent changes in fair
value were recorded through other comprehensive income. In August 2001, the Fintube credit facility
was paid in full and the related interest rate swap was terminated. The settlement of the interest rate swap
resulted in a $0.8 million charge to income in the third quarter.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, “Business Combinations,”
and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires, among other things,
all business combinations initiated after June 30, 2001, be accounted for using
the purchase method of accounting. SFAS
No. 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. Under
SFAS No. 142, goodwill will no longer be amortized over its estimated useful
life, but instead will be tested for impairment at least annually. SFAS No. 142 will be effective for fiscal
years beginning after December 15, 2001 and must be adopted at the beginning of
a fiscal year. During 2001, we amortized
goodwill associated with the Fintube and Bellville acquisitions, as detailed in
Note A, of approximately $0.5 million per quarter. We are currently performing the required goodwill impairment
analyses and expect to have these
completed by April 2002. We do
not expect an impairment of goodwill, but we cannot conclude until the analyses
are complete.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset
Retirement Obligations.” SFAS 143
addresses financial accounting and reporting for obligations associated with
the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to all entities and legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived
asset. SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset and are subsequently allocated to expense over the asset’s
useful life. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002. We have not yet determined the impact that SFAS No. 143 will have on
our financial position or results of operations.
In August, 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.”
SFAS No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of. This statement supersedes SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of,” however, this statement retains the fundamental provisions
of SFAS No. 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. This
Statement also supersedes the accounting and reporting provisions of APB
Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions” for segments of a business to
be disposed. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. We do not believe that the adoption of SFAS No. 144 will have a
material effect on our financial position or results of operations.
QUARTERLY FINANCIAL SUMMARY (UNAUDITED) - NOTE L
LONE STAR
TECHNOLOGIES, INC. AND SUBSIDIARIES
Schedule I - Condensed Financial
Information of Registrant
(Parent
Company Only)
LONE STAR TECHNOLOGIES, INC.
Schedule II - Valuation and Qualifying
Accounts
December 31, 1999, 2000, and 2001
($ in millions)
(a) Does not include special charge associated
with the write-down of property, plant, and equipment.
(b) Includes write-offs of accounts receivable
and utilization of reserves for special charges.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required under this item is contained in Lone Star’s proxy
statement for the 2002 Annual Meeting of Shareholders, and is incorporated
herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in Lone Star’s proxy
statement for the 2002 Annual Meeting of Shareholders, and is incorporated
herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item with respect to beneficial owners
of more than 5 percent of outstanding common stock and to directors and
executive officers is contained in Lone Star’s proxy statement for the 2002
Annual Meeting of Shareholders, and is incorporated herein by reference.
ITEM 13.
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 2002
Annual Meeting of Shareholders, and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. 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:
• Report
of Independent Public Accountants
• Consolidated
Statements of Income - for the
years ended December 31, 2001, 2000, and 1999
• Consolidated
Balance Sheets at December 31, 2001 and 2000
• Consolidated
Statements of Cash Flows - for
the years ended December 31, 2001, 2000, and 1999
• Consolidated
Statements of Shareholders’ Equity - at December 31, 2001, 2000, 1999, and 1998
• Notes
to Consolidated Financial Statements
2. Schedule I - Condensed Financial Information of Registrant
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.
3. Index to Exhibits
Description
1.1
Underwriting Agreement dated May 2, 2001 among Lone Star, Alpine
Capital, L.P., and Bear Stearns & Co., Inc. (incorporated by reference to
Exhibit 99.1 to Form 8-K of Lone Star as filed May 15, 2001).
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).
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 St eel, 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
By-Laws as adopted March 6, 1986, as amended effective September 30,
1986 and March 15, 1990 (incorporated by reference to Exhibit 3.5 to Form S-3
Registration Statement of Lone Star as filed on February 4, 2000, file No.
333-96207).
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
Lone Star Indenture with Bankers Trust Company, Trustee, with respect
to $50,000,000 8% Convertible Subordinated Debentures Due 2002 (Eurobonds),
dated August 26, 1987 (incorporated by reference to Exhibit 4(c) of Form 10-K
of Lone Star as filed on April 7, 1989).
4.3
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).
4.4
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.
4.5
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).
4.6
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).
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).*
10.2
Employment Retention Policy adopted May 8, 1997, letter agreements
dated May 22, 1997 between Lone Star and John P. Harbin, 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
Assignment, Termination and Release dated January 21, 1997, among
Steel, Lone Star, and the minority shareholders of Steel (incorporated by
reference to Exhibit 10.22 to Form 10-K for the year ended December 31,
1996).
10.5
Credit Agreement dated as of October 2, 1997 by and among Steel and
the banks named therein (incorporated by reference to Exhibit 10.23 to Form
10-K for the year ended December 31, 1997).
10.6
Cost Sharing Agreement dated as of July 1, 1997 between Lone Star and
St eel (incorporated by reference to Exhibit 10.24 to Form 10-K for the year
ended December 31, 1997).
10.7
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).
10.8
Consulting Agreement dated as of July 23, 1998 between Lone Star and
John P. Harbin (incorporated by reference to Exhibit 10.27 to Form 10-Q for
the quarter ended September 30, 1998).*
10.9
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).*
10.10
First Amendment dated as of December 24, 1998 to Credit Agreement
dated as of October 2, 1997 by and among Steel and the banks named therein
(incorporated by reference to Exhibit 10.29 to Form 10-K for the year ended
December 31, 1998).
10.11
Financing Agreement dated March 12, 1999 between Steel and The CIT
Group/Business Credit, Inc. (incorporated by reference to Exhibit 10.30 to
Form 10-Q for the quarter ended March 31, 1999).
10.12
Subordination Agreement dated March 12, 1999 between Lone Star and
The CIT Group/Business Credit, Inc. (incorporated by reference to Exhibit
10.31 to Form 10-Q for the quarter ended March 31, 1999).
10.13
Intercreditor Agreement dated March 12, 1999 among Lone Star, Steel
and The CIT Group/Business Credit, Inc. (incorporated by reference to Exhibit
10.32 to Form 10-Q for the quarter ended March 31, 1999).
10.14
Amendment agreement dated December 28, 1999 to Financing Agreement
dated March 12, 1999 between Steel and The CIT Group/Business Credit, Inc.
(incorporated by reference to Exhibit 10.33 to Form 10-K for the year ended
December 31, 1999.)
10.15(a)
Limited Guaranty dated December 28, 1999 of Lone Star in favor of The
CIT Group/Business Credit, Inc., as Agent (incorporated by reference to
Exhibit 10.34 to Form 10-K for the year ended December 31, 1999.)
10.16(b)
Limited Guaranty dated as of March 31, 2000 by and between the CIT
Group/Business Credit, Inc., as agent,
and Lone Star (incorporated by reference to Exhibit 2.3 to Form 8-K of
Lone Star as filed on April 14, 2000.)
10.17(c)
Stock Pledge Agreement dated as of March 31, 2000 by and between the
CIT Group/Business Credit, Inc., as agent, and Lone Star (incorporated by
reference to Exhibit 2.4 to Form 8-K of Lone Star as filed on April 14,
2000.)
10.18
Credit Agreement dated as of January 3, 2000 among Fintube
Technologies, Inc. (“Fintube”), the financial institutions named in the
Agreement (“Lenders”) and Bank of America, N.A., as Agent for the Lenders
(incorporated by reference to Exhibit 10.35 to Form 10-Q for the quarter
ended June 30, 2000.)
10.19
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.)*
10.20
Deferred Compensation Plan adopted by Lone Star’s Board of Directors
on May 9, 2000 (incorporated by reference to Exhibit 10.37 to Form 10-Q for
the quarter ended June 30, 2000.)*
10.21
Amendment agreement dated September 29, 2000 to Financing Agreement
dated March 12, 1999 between Steel and The CIT Group/Business Credit, Inc.
(incorporated by reference to Exhibit 10.38 to Form 10-Q for the quarter
ended September 30, 2000.)
10.22
Amendment agreement dated October 25, 2000 to Financing Agreement
dated March 12, 1999 between Steel and The CIT Group/Business Credit, Inc.
(incorporated by reference to Exhibit 10.39 to Form 10-K for the year ended
December 31, 2000.)
10.23
Modification Agreement dated September __, 2000 to Credit Agreement
dated as of January 3, 2000 among Fintube, the Lenders and Bank of America,
N.A., as Agent for the Lenders (incorporated by reference to Exhibit 10.40to
Form 10-K for the year ended December 31, 2000.)
10.24
Second Modification Agreement dated February 20, 2001 to Credit
Agreement dated as of January 3, 2000 among Fintube, the Lenders and Bank of
America, N.A., as Agent for the Lenders (incorporated by reference to Exhibit
10.41 to Form 10-K for the year ended December 31, 2000.)
10.25
Deferred Compensation Plan adopted by Lone Star's Board of Directors
on May 9, 2000 (incorporated by reference to Exhibit 10.37 to Form 10-Q for
the quarter ended June 30, 2000).
10.26
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).*
10.27
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).
10.28
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).*
10.29
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).*
10.30
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).
List of Subsidiaries.
Consent of Arthur Andersen LLP.
Powers of Attorney.
99.1
Letter from the Registrant to the Securities and Exchange Commission
regarding Arthur Andersen LLP.
*
Management contract or compensatory plan or arrangement.
(b)
Reports on Form 8-K:
ITEM 15.
ITEM 15. 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.
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.