UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to _____________
Commission file number 0-30146
MAVERICK TUBE CORPORATION
16401 Swingley Ridge Road
Seventh Floor
Chesterfield, Missouri 63017
(636) 733-1600
State or other jurisdiction of incorporation or organization - Delaware
I.R.S. Employee Identification No. 43-1455766
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $0.01 Par Value -
40,941,976 shares as of November 8, 2002
MAVERICK TUBE CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 3
Condensed Consolidated Statements of Operations - Three
and Nine Months Ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Certifications Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 27
Exhibit Index 29
[2]
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
(Unaudited)
------------------------------
ASSETS
Current assets:
Cash and cash equivalents........................ $1,791 $1,940
Accounts receivable, less allowances of
$2,713 and $2,412 on September 30, 2002 and
December 31, 2001, respectively................. 48,977 41,021
Inventories...................................... 154,228 141,739
Deferred income taxes............................ 4,366 7,305
Income taxes refundable.......................... 5,205 -
Prepaid expenses and other current assets........ 3,712 2,440
------------------------------
Total current assets.............................. 218,279 194,445
Property, plant and equipment, less accumulated
depreciation of $112,603 and $103,329 on
September 30, 2002 and December 31, 2001,
respectively..................................... 167,887 158,261
Goodwill.......................................... 43,161 -
Other assets...................................... 15,045 4,741
------------------------------
$444,372 $357,447
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $52,944 $23,668
Accrued expenses and other liabilities........... 18,041 15,605
Deferred revenue................................. 5,202 3,759
Income taxes payable............................. 40 4,940
Revolving credit facility........................ - 3,219
Current maturities of long-term debt............. 1,519 938
------------------------------
Total current liabilities......................... 77,746 52,129
Long-term debt, less current maturities........... 6,593 5,991
Revolving credit facility......................... 11,125 62,000
Other liabilities................................. 3,839 3,823
Deferred income taxes............................. 5,506 8,121
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000
authorized shares; 1 share issued and
outstanding at September 30, 2002 and
December 31, 2001, respectively.................. - -
Common stock, $0.01 par value; 80,000,000
authorized shares; 40,901,976 and
34,013,036 shares issued; 40,901,976 and
32,812,036 shares outstanding at
September 30, 2002 and December 31,
2001, respectively............................... 409 340
Treasury stock, 1,201,000 shares at December
31, 2001......................................... - (11,525)
Additional paid-in capital........................ 212,133 114,307
Retained earnings................................. 139,804 135,831
Accumulated other comprehensive loss.............. (12,783) (13,570)
------------------------------
339,563 225,383
------------------------------
$444,372 $357,447
==============================
See accompanying notes to condensed consolidated financial statements.
[3]
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------------------------
Net sales........... $114,092 $135,877 $317,528 $423,913
Cost of goods sold.. 103,036 109,323 283,299 335,287
------------------------------------------------------------
Gross profit........ 11,056 26,554 34,229 88,626
Selling, general and
administrative..... 8,910 8,504 25,487 22,817
Start-up costs...... - - - 1,101
------------------------------------------------------------
Income from
operations......... 2,146 18,050 8,742 64,708
Interest expense.... 908 797 2,397 2,388
------------------------------------------------------------
Income from
continuing
operations before
income taxes and
extraordinary items 1,238 17,253 6,345 62,320
Provision for income
taxes.............. 602 5,794 2,663 21,407
------------------------------------------------------------
Income from
continuing
operations before
extraordinary items 636 11,459 3,682 40,913
Loss from operations
of discontinued DOM
facility, net of
income taxes....... - - - (957)
Gain (loss) on
disposal of DOM
facility, net of
income taxes....... - - 518 (10,240)
------------------------------------------------------------
Income before
extraordinary items 636 11,459 4,200 29,716
Extraordinary items,
net of income taxes - - (227) -
------------------------------------------------------------
Net income.......... $636 $11,459 $3,973 $29,716
============================================================
Basic earnings
(loss) per share
Income from
continuing
operations........ $0.02 $0.34 $0.10 $1.21
Income (loss) from
discontinued
operations........ - - 0.01 (0.33)
Extraordinary items - - - -
------------------------------------------------------------
Net income......... $0.02 $0.34 $0.11 $0.88
============================================================
Diluted earnings
(loss) per share
Income from
continuing
operations........ $0.02 $0.34 $0.10 $1.19
Income (loss) from
discontinued
operations........ - - 0.01 (0.33)
Extraordinary items - - - -
------------------------------------------------------------
Net income......... $0.02 $0.34 $0.11 $0.86
============================================================
Weighted average
shares outstanding
Basic............. 40,875,448 33,801,622 37,204,646 33,797,151
Diluted........... 41,149,188 34,181,324 37,578,059 34,448,958
See accompanying notes to condensed consolidated financial statements.
[4]
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
2002 2001
------------------------------
OPERATING ACTIVITIES
Income from continuing operations................. $ 3,682 $40,913
Adjustments to reconcile net income from
continuing operations to net cash provided by
operating activities:
Depreciation and amortization..................... 14,137 10,951
Deferred income taxes............................. 810 2,863
Provision for losses on accounts receivable....... 93 (51)
Loss on sale of equipment......................... 10 14
Changes in operating assets and liabilities:
Accounts receivable.............................. 2,118 14,792
Inventories...................................... (8,008) (29,801)
Prepaid expenses and other current assets........ (437) 236
Other assets..................................... (1,501) (134)
Accounts payable................................. 27,578 2,149
Accrued expenses and other liabilities........... (16,548) 5,158
Deferred revenue................................. 1,443 (2,906)
------------------------------
Cash provided by operating activities............. 23,377 44,184
INVESTING ACTIVITIES
Cash paid for acquisition, net of cash received... (56,823) -
Expenditures for property, plant and equipment.... (17,945) (19,445)
Proceeds from disposal of equipment............... 63 -
------------------------------
Cash used by investing activities................. (74,705) (19,445)
FINANCING ACTIVITIES
Proceeds from borrowings and notes................ 338,783 192,451
Principal payments on borrowings and notes........ (395,123) (210,504)
------------------------------
(56,340) (18,053)
Principal payments on long-term note receivable... 1,238 -
Proceeds from sale of common stock................ 90,370 -
Purchase of treasury stock........................ - (11,525)
Proceeds from sale of treasury stock.............. 15,853 -
Proceeds from exercise of stock options........... 907 1,893
------------------------------
Cash provided (used) by financing activities...... 52,028 (27,685)
[5]
DISCONTINUED OPERATIONS
Income (loss) on discontinued operations.......... 518 (11,197)
Adjustments to reconcile income (loss) from
discontinued operations to net cash provided
(used) by discontinued operations:
Depreciation...................................... 376 1,079
(Gain) loss on disposal........................... (518) 10,240
Changes in operating assets and other liabilities
of discontinued operations....................... (742) 2,001
Capital expenditures.............................. - (296)
------------------------------
Net cash provided (used) by discontinued
operations....................................... (366) 1,827
Effect of exchange rate changes on cash........... (483) (157)
------------------------------
Increase (decrease) in cash and cash equivalents.. (149) (1,276)
Cash and cash equivalents at beginning of period.. 1,940 2,193
------------------------------
Cash and cash equivalents at end of period........ $1,791 $917
==============================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized)........... $2,354 $2,270
Income taxes.................................... $10,611 $9,470
Noncash investing and financing activities:
Sale of discontinued operations................. $8,115 $-
Stock issued for acquisition.................... $2,290 $-
See accompanying notes to condensed consolidated financial statements.
[6]
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The condensed consolidated financial statements include the accounts of Maverick
Tube Corporation and its direct and indirect wholly-owned subsidiaries
(collectively referred to as "the Company," whereas "Maverick" is the Company
exclusive of its subsidiaries Prudential Steel Ltd. and Precision Tube Holding
Corporation). All significant intercompany accounts and transactions have been
eliminated. All operational and financial information contained herein includes
the business activities of Prudential Steel Ltd. ("Prudential") for all periods
presented. All operational and financial information contained herein includes
the business activities of Precision Tube Holding Corporation ("Precision")
since its acquisition in March 2002.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for a
fair presentation have been included. Operating results for the three and nine
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year 2001.
2. BUSINESS ACQUISITION
- --------------------------------------------------------------------------------
In March 2002, the Company completed its purchase of all the common stock of
Precision in exchange for $60.7 million cash (which amount included an upward
adjustment of $3.6 million to reflect the cash of Precision on hand as of the
closing date and a $1.6 million working capital adjustment) and 200,000 common
shares of the Company. The acquisition was accounted for as a purchase business
combination and the financial statements of Precision have been consolidated
from the acquisition date. The cost to acquire Precision has been allocated to
the assets acquired and liabilities assumed according to their estimated fair
values. The final allocation of the purchase price was completed in the third
quarter and resulted in acquired goodwill of approximately $43.2 million. The
preliminary allocation of acquired goodwill was adjusted upward in the amount of
$1.9 million primarily due to a larger than expected working capital adjustment.
The Company did not have any goodwill prior to its acquisition of Precision. Pro
forma information has not been included herein because Precision is not a
significant subsidiary as such term is defined in Regulation S-X.
As a result of the acquisition and effective January 1, 2002, the Company
adopted SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill no longer be amortized, but tested for impairment at
least annually. On an ongoing basis (absent any impairment indicators), we
expect to perform our impairment tests during the fourth quarter of 2002.
[7]
3. INVENTORIES
- --------------------------------------------------------------------------------
Inventories consist of the following (in thousands):
September 30, December 31,
2002 2001
------------------------------
Finished goods.................................... $86,277 $86,256
Work-in-process................................... 2,914 3,574
Raw materials..................................... 53,953 41,938
Storeroom parts................................... 11,084 9,971
------------------------------
$154,228 $141,739
==============================
Inventories are principally valued at the lower of average cost or market.
4. RESTRUCTURING CHARGES
- --------------------------------------------------------------------------------
During December 2001, the Company announced its plans to exit its Longview,
Washington facility and move the operations to one of its existing buildings in
Hickman, Arkansas. As a result, all 124 employees at the facility have been
terminated as of September 30, 2002. Restructuring costs of $8,061,000
($5,573,000 after-tax) were recorded in the consolidated statement of operations
during the quarter ended December 31, 2001 and included the following items (in
thousands):
Noncash costs:
Write-down of property, plant and equipment to fair value..... $6,476
Cash costs:
Employee severance............................................ 581
Other......................................................... 1,004
----------------
1,585
----------------
Total restructuring costs....................................... $8,061
================
Following is a summary of the accrued restructuring liabilities and activity
through September 30, 2002 (in thousands):
Employee
Severance Other Total
--------------------------------------------
Initial reserves.................... $581 $1,004 $1,585
Cash payments....................... (239) (510) (749)
Reversal of the initial accrual..... (342) (14) (356)
--------------------------------------------
Balance, September 30, 2002......... $- $480 $480
============================================
The Company reversed $356,000 of the initial accrual primarily as a result of a
decision to retain certain employees that had been anticipated to be terminated.
The determination of net income for the nine months ended September 30, 2002
included this $356,000.
Future cash outlays expected in 2002 relating to the Company's exit from the
Longview, Washington facility are anticipated to be $622,000 comprised of the
remaining $480,000 cash costs above and $142,000 related primarily to capital
expenditures required at our existing facility in Hickman, Arkansas. These cash
outlays are ultimately expected to be funded through the future sale of the
Longview, Washington land and building along with a reduction in the working
capital requirements for this operation.
[8]
5. START-UP COSTS
- --------------------------------------------------------------------------------
The Company began construction on a new large diameter pipe and tubing facility
in Hickman, Arkansas during October 1999. The Company placed the new facility in
service as of June 30, 2001 at a total cost of $51.0 million. Start-up costs
expensed for the nine months ended September 30, 2001 were $1.1 million. These
costs are comprised primarily of manufacturing costs incurred prior to the fully
integrated operation of the facility.
6. INCOME PER SHARE
- --------------------------------------------------------------------------------
Diluted income per share for the three and nine months ended September 30, 2002
and 2001 was computed based upon the net income of the Company and the weighted
average number of shares of common stock net of treasury stock but including
exchangeable shares of a subsidiary of the Company on an as-if exchanged basis
(see Note 10 for further information) and the net effect of granted stock
options. Total shares utilized in this calculation were 41,149,188 and
34,181,324 for the three months ended September 30, 2002 and 2001, respectively,
and 37,578,059 and 34,448,958 for the nine months ended September 30, 2002 and
2001, respectively.
7. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
During the three months ended March 31, 2001, the Company adopted a formal plan
to sell the operating assets of its Cold Drawn Tubular Business (DOM).
Accordingly, the operating results of the DOM facility, including the provision
for the loss on disposal of $10.2 million (net of $5.8 million tax benefit),
have been segregated from continuing operations and reported separately as
discontinued operations in the statement of operations.
On March 29, 2002, pursuant to an asset purchase agreement dated March 21, 2002,
the Company completed the sale of the DOM business for $8.1 million, consisting
of cash in the amount of $1.3 million and the buyer's nine year secured
promissory note for the balance. To accommodate the buyer's purchase of the DOM
business, the Company guaranteed the $1.5 million asset-based line of credit
(advances limited to 80% of eligible accounts receivable) of the buyer. In
exchange, the Company was granted liens and appropriate subrogation rights in
the assets conveyed to the buyer. The Company recognized a $768,000 pre-tax gain
from discontinued operations for the three months ended March 31, 2002, which
increased net income by $518,000.
Summarized financial information for the discontinued operations is as follows
(in thousands, except tons shipped):
Three Months Ended
September 30,
2002 2001
------------------------------
Tons shipped...................................... - 2,416
Net sales......................................... $- $1,434
Loss from discontinued operations before
income taxes..................................... $- $-
Loss from discontinued operations, net of
tax benefit...................................... $- $-
Nine Months Ended
September 30,
2002 2001
------------------------------
Tons shipped...................................... - 9,281
Net sales......................................... $- $7,537
Loss from discontinued operations before
income taxes..................................... $- $1,524
Loss from discontinued operations, net of
tax benefit...................................... $- $957
[9]
8. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The following table sets forth data (in thousands) for the three and nine months
ended September 30, 2002 and 2001 for the continuing reportable industry
segments of Maverick Tube L.P. ("Maverick L.P."), Precision and Prudential.
Maverick L.P., a wholly-owned subsidiary of the Company, is responsible for the
Company's operations in Hickman, Arkansas and Conroe, Texas. Precision, a
wholly-owned subsidiary of the Company, is responsible for the Company's coiled
tubing operations in Houston, Texas. Prudential, a wholly-owned subsidiary of
the Company, is responsible for the Company's operations in Calgary, Alberta. As
noted in Note 4, the Company closed its Longview, Washington facility during the
three months ended March 31, 2002.
Identifiable assets are those used in the Company's operations in each segment.
Maverick
L.P. Precision Prudential Corporate Total
------------------------------------------------------------
Three Months Ended
September 30, 2002
- --------------------
Net sales........... $68,952 (1) $9,907 $35,233 (1) $- $114,092
Income (loss) from
operations......... (3,701) 251 5,596 - 2,146
Identifiable assets. 249,779 (2) 68,670 96,522 29,401 444,372
Depreciation and
amortization....... 2,796 (2) 221 675 741 4,433
Capital expenditures 3,660 (2) 552 877 225 5,314
Nine Months Ended
September 30, 2002
- --------------------
Net sales........... $195,738 (1) $18,809 $102,981 (1) $- $317,528
Income (loss) from
operations......... (9,010)(3) (534) 18,286 - 8,742
Identifiable assets. 249,779 (2) 68,670 96,522 29,401 444,372
Depreciation and
amortization....... 9,958 (2) 431 1,948 1,800 14,137
Capital expenditures 10,714 (2) 706 4,252 2,273 17,945
Three Months Ended
September 30, 2001
- --------------------
Net sales........... $89,536 (1) $- $46,341 (1) $- $135,877
Income from
operations......... 6,476 - 11,574 - 18,050
Identifiable assets. 233,218 - 142,784 (2) 13,389 389,391
Depreciation and
amortization....... 2,372 - 1,205 (2) 326 3,903
Capital expenditures 3,996 - 325 (2) 1,754 6,075
Nine Months Ended
September 30, 2001
- --------------------
Net sales........... $266,831 (1) $- $157,082 (1) $- $423,913
Income from
operations......... 29,085 (4) - 35,623 - 64,708
Identifiable assets. 233,218 - 142,784 (2) 13,389 389,391
Depreciation and
amortization....... 6,312 - 3,703 (2) 936 10,951
Capital expenditures 12,765 - 955 (2) 5,725 (5) 19,445
(1) Includes inter-segment sales of $1.8 million and $6.5 million for the
three and nine months ended September 30, 2002, respectively, and
inter-segment sales of $6.8 million and $14.8 million for the three
and nine months ended September 30, 2001, respectively.
(2) As a result of the transfer of the assets from the Longview,
Washington facility to the Hickman, Arkansas facility on January 1,
2002, the operations of the Longview, Washington facility are included
in the identifiable assets, depreciation and amortization and capital
expenditures of Prudential for the period ended September 30, 2001 and
of Maverick L.P. for the period ended September 30, 2002.
(3) Included in cost of goods sold for the nine months ended September 30,
2002 was $681,000 for additional restructuring charges in connection
with the Company's closing of its Longview, Washington facility.
[10]
(4) Includes start-up costs for the nine months ended September 30, 2001
of $1.1 million, relating to the construction of the new large
diameter pipe and tubing facility in Hickman, Arkansas during 1999.
These costs are comprised primarily of manufacturing costs incurred
prior to the fully integrated operation of the facility.
(5) Includes $1.8 million for the new coating facility.
9. REVOLVING CREDIT FACILITY
- --------------------------------------------------------------------------------
In connection with the Company's acquisition of Precision in March 2002, the
Company obtained a new senior credit facility consisting of a $150.0 million
revolving line of credit that provided a portion of the cash used to fund the
acquisition and replaced the Company's short-term and long-term revolving credit
facilities. The new senior credit facility, which expires in March 2006, will be
used to fund the working capital requirements of the Company and is secured by
real estate, all accounts receivable, inventories and equipment of the Company.
The new senior credit facility bears interest at U.S. or Canadian prime,
Bankers' Acceptance rates plus stamping fees or the LIBOR rate, all adjusted by
an interest margin, depending upon excess availability. Under the new senior
credit facility, the Company can borrow an amount based on a percentage of
eligible accounts receivable, eligible inventory and property, plant and
equipment, reduced by outstanding letters of credit. The new senior credit
facility includes restrictive covenants relating to, among other things, a
minimum fixed charge coverage ratio if excess availability falls below $30.0
million and a capital expenditure limitation of $25.0 million per year. As of
September 30, 2002, the applicable interest rate on this credit facility was
5.6% per annum.
10. CAPITAL STOCK
- --------------------------------------------------------------------------------
In conjunction with the Prudential transaction, the Company's Board of Directors
designated one share of the Company's authorized preferred stock as Special
Voting Stock. The Special Voting Stock is entitled to a number of votes equal to
the number of outstanding exchangeable shares of Maverick Tube (Canada) Inc., on
all matters presented to the common stockholders of the Company. The one share
of Special Voting Stock was issued to CIBC Mellon Trust Company, as trustee
pursuant to the Voting and Exchange Trust Agreement among the Company, Maverick
Tube (Canada) Inc. and CIBC Mellon Trust Company, for the benefit of the holders
of the exchangeable shares of Maverick Tube (Canada) Inc. For financial
statement purposes, all outstanding exchangeable shares are treated as if they
had been exchanged and are included in the Company's outstanding shares of
common stock.
As long as any exchangeable shares of Maverick Tube (Canada) Inc. are
outstanding, the Special Voting Stock may not be redeemed, the number of shares
comprising the Special Voting Stock shall not be increased or decreased and no
other term of the Special Voting Stock shall be amended without first obtaining
requisite stockholder approval. If the Special Voting Stock is purchased or
otherwise acquired by the Company, it shall be deemed retired, cancelled, and
therefore will become an authorized but unissued and undesignated preferred
share of the Company.
On March 13, 2002, the Company sold 2.0 million shares of common stock under the
Company's shelf registration statement. Of the 2.0 million shares, 1,201,000
shares came from the Company's treasury stock and 799,000 shares were
newly-issued shares. The net proceeds from the offering were $26.4 million, and
were used to fund a portion of the cash purchase price of the Company's
acquisition of Precision. On March 29, 2002, in connection with the Company's
acquisition of Precision, the Company issued 200,000 shares of common stock to
the shareholders of Precision (See Note 2).
On May 22, 2002, the Company sold 5.0 million shares of common stock under the
Company's shelf registration statement. On May 29, 2002, the underwriters
exercised their option to acquire an additional 750,000 shares to cover
over-allotments. The aggregate net proceeds from these two offerings were $79.9
million and were primarily used to repay indebtedness.
[11]
11. COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------
The following table sets forth the components of comprehensive income (loss) (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------------------------
Net income.......... $636 $11,459 $3,973 $29,716
Foreign currency
translation........ (1,484) (4,645) 789 (5,633)
Minimum pension
liability
adjustment.......... 29 - (2) -
------------------------------------------------------------
Comprehensive income
(loss)............. $(819) $6,814 $4,760 $24,083
============================================================
12. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On October 15, 2002, we entered into a definitive asset purchase agreement with
The LTV Corporation and its affiliates to acquire the assets that comprise the
business of LTV's Steel Tubular Products Division pursuant to Section 363 of the
United States Bankruptcy Code. We believe we will consummate this transaction at
the end of the fourth quarter of 2002 or the beginning of the first quarter of
2003.
The purchase price for the LTV Tubular Division is $110.0 million cash, subject
to a working capital adjustment. The transaction is contingent on ratification
of the collective bargaining agreement by the United Steel Workers of America,
who represent approximately 300 employees at four of LTV Tubular's five
facilities. The agreement is also contingent upon, among other things, the
completion of further environmental due diligence. LTV's Tubular Division
employs approximately 430 people at five locations in Georgia, Tennessee, Ohio
and Michigan.
We plan to fund the $110.0 million purchase price by drawing down on our
revolving credit facility, which is being expanded in connection with the
proposed transaction to provide aggregate availability of up to $185 million.
[12]
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
As used herein, Maverick Tube Corporation and its direct and indirect
wholly-owned subsidiaries are collectively referred to as "the Company," whereas
"Maverick" is the Company exclusive of its subsidiaries, Prudential Steel Ltd.
("Prudential") and Precision Tube Holding Corporation ("Precision"). Also,
unless the context otherwise requires, the terms "we," "us" or "our" refers to
the Company.
Certain statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this report regarding
matters (including statements as to the beliefs or expectation) that are not
historical facts are forward-looking statements, as that term is defined under
the Private Securities Litigation Reform Act of 1995. Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. For example, uncertainty continues to exist as to future levels and
volatility of oil and gas price expectations and their effect on drilling levels
and demand for our energy related products, the future impact of industry-wide
draw-downs of inventories and future import levels. Also, uncertainty continues
to exist as to future purchased steel cost (the Company's principal raw
material, representing approximately two-thirds of cost of goods sold).
It is not possible to foresee or identify all factors that could have a material
and negative impact on the future financial performance of the Company. The
forward-looking statements in this report are based on certain assumptions and
analyses we have made in light of our experience and perception of historical
conditions, expected future developments and other factors we believe
appropriate under the circumstances. Further information covering issues that
could materially affect our financial performance is contained in the "Risk
Factors" section of our Annual Report on Form 10-K for the year ended December
31, 2001, filed on March 13, 2002 (the "2001 Form 10-K").
Our condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. It should be
noted that certain accounting policies of the Company require judgment and/or
estimates of management in their application that could have a significant
impact on amounts reported in these financial statements. A summary of those
critical accounting policies can be found in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of our
2001 Form 10-K. In particular, the accounting for and analysis with respect to
areas such as revenue and accounts receivable collectibility, inventory
valuation, note receivable collectibility, potential product liability and
environmental claims and pension plan expense are discussed.
All amounts are expressed in U.S. dollars unless otherwise indicated.
[13]
We are a leading North American producer of tubular steel products used in
energy and industrial applications. We are the largest North American producer
of oil country tubular goods, sometimes referred to as OCTG, and line pipe
products for use in newly drilled oil and gas wells and for transporting oil and
natural gas. Our products are primarily sold to distributors in the United
States and Canada. We expanded into coiled tubing products with our acquisition
of Precision. Coiled tubing products are primarily used in maintaining existing
wells but are also used in completing new wells. These products are sold to
service companies throughout North America and internationally. OCTG, line pipe
and coiled tubing comprise our energy product line. We also manufacture
structural tubing (hollow structural sections, or HSS), standard pipe and pipe
piling. These products are sold to service centers, fabricators and end-users
and comprise our industrial product line. During the quarter ended September 30,
2002, energy products accounted for approximately 84% of our total revenues.
On February 12, 2002, we entered into a definitive stock purchase agreement
providing for the purchase of all the common stock of Precision in exchange for
$60.7 million cash, which amount included upward adjustments of $3.6 million to
reflect the cash of Precision on hand as of the closing date and $1.6 million in
increased working capital from the agreement date to the closing date, and
200,000 common shares of the Company.
On October 15, 2002, we entered into a definitive asset purchase agreement with
The LTV Corporation and its affiliates to acquire the assets that comprise the
business of LTV's Steel Tubular Products Division pursuant to Section 363 of the
United States Bankruptcy Code. We believe we will consummate this transaction at
the end of the fourth quarter of 2002 or the beginning of the first quarter of
2003.
OVERVIEW
- --------------------------------------------------------------------------------
Our energy products consist of electrical resistance welded ("ERW") oil country
tubular goods, line pipe and coiled steel pipe. We sell our OCTG and line pipe
products primarily to distributors who supply end-users in the energy industry.
We began selling coiled steel pipe for use in down-hole well servicing and line
pipe applications with our acquisition of Precision on March 29, 2002. Our
industrial products consist of structural tubing, standard pipe and pipe piling,
which are sold primarily to service centers who supply end-users in
construction, transportation, agriculture and other industrial enterprises.
Energy Products Demand and Consumption
- --------------------------------------
Demand for our energy related products depends primarily upon the number of oil
and natural gas wells being drilled, completed and worked over in the U.S. and
Canada and the depth and drilling conditions of these wells. The levels of these
activities are primarily dependent on oil and natural gas prices. Many factors,
such as the supply and demand for oil and natural gas, general economic
conditions, global weather patterns and potential government legislation may
affect these prices. As a result, the future level and volatility of oil and
natural gas prices are uncertain. In addition, seasonal fluctuations that affect
our customers may affect the demand for our products.
U.S. end-users obtain OCTG from domestic and foreign pipe producers and from
draw-downs of the inventories carried by end-users, distributors and mills.
Industry inventories of our products can change significantly from period to
period. This can have a direct effect on demand for our products when customers
draw-down from inventory rather than purchasing our products. Canadian
distributors typically hold significantly less amounts of inventories than U.S.
distributors.
[14]
The following table illustrates certain factors related to industry-wide
drilling activity, energy prices, OCTG consumption, shipments, imports and
inventories for the periods presented:
Three Months Ended
September 30,
2002 2001
------------------------------
U.S. Market Activity:
Average rig count................................ 853 1,241
==============================
Average U.S. energy prices
Oil per barrel (West Texas Intermediate)......... $28.52 $26.96
==============================
Natural gas per MCF (Average U.S.)............... $3.03 $2.70
==============================
U.S. OCTG Consumption:
(in thousands of tons)
U.S. producer shipments.......................... 438 466
Imports.......................................... 132 242
Inventory (increase)/decrease.................... (52) 22
Used pipe........................................ 45 20
------------------------------
Total U.S. Consumption........................... 563 750
==============================
Canadian Market Activity:
Average rig count................................. 250 320
==============================
Average Canadian energy prices
Natural gas per U.S. $ per MCF
(Alberta spot price)............................. $2.14 $2.60
==============================
Canadian OCTG Consumption:
(in thousands of tons)
Canadian producer shipments...................... 107 119
Imports.......................................... 47 63
Inventory (increase)/decrease.................... (7) (10)
------------------------------
Total Canadian Consumption....................... 147 172
==============================
The U.S. rig count in the table is based on weekly rig count reporting from
Baker Hughes, Inc. Energy prices in the table are monthly average period prices
as reported by Spears and Associates for West Texas Intermediate grade crude oil
and the average U.S. monthly natural gas cash price as reported by Natural Gas
Week. Imports are as reported by Duane Murphy and Associates in "The OCTG
Situation Report." Inventory (increase)/decrease is our estimate based upon
independent research by Duane Murphy and Associates. Used pipe quantities are
calculated by multiplying 8.3 recoverable tubing and casing tons by the number
of abandoned oil and gas wells. U.S. consumption of OCTG is our estimate based
on estimated per rig consumption of OCTG multiplied by the Baker Hughes rig
count. U.S. producer shipments are our estimates based on the components listed
above.
The Canadian rig count in the table is based on weekly rig count reporting from
Baker Hughes, Inc. Energy prices in the table are the average Alberta natural
gas spot price. Imports are as reported by Statistics Canada. Inventory
(increase)/decrease is our estimate based upon data reported by Statistics
Canada. Canadian producer shipments are reported by Statistics Canada in its
"Production and Shipments of Steel Pipe and Tubing" report.
According to published industry reports, average U.S. drilling for the third
quarter of 2002 was approximately 853 rigs, representing a decrease of 31.3%
compared to the third quarter of 2001. Despite an increase in oil and natural
gas prices during the quarter, up by 5.8% and 12.2%, respectively, drilling
levels for oil and natural gas have decreased by 42.0% and 28.9%, respectively.
We believe that the disconnect between these commodity prices and drilling is
due to decreased cash flows and increased debt to capital positions of the busy
independents, a fear that these prices are not sustainable due to natural gas
inventory over-hang and political uncertainty over Iraq and 2002 capital budgets
that have been depleted. Drilling levels remained flat throughout the quarter,
as the rig count at the end of the third quarter was only approximately 0.8%
higher than the average rig count during the quarter.
[15]
The U.S. Congress is currently contemplating the enactment of comprehensive
energy legislation that could impact drilling in the U.S. This proposed
legislation addresses drilling access, environmental issues and tax incentives.
The tax incentives, which could include Section 29 credits, would make it more
economically feasible to drill in areas where it had not been in the past.
According to published industry reports, average Canadian drilling for the third
quarter of 2002 was approximately 250 rigs, representing a decrease of 21.9%
compared to the third quarter of 2001. The lower drilling levels were primarily
attributable to lower natural gas prices down by 17.7% while oil completions
improved slightly with higher oil prices up by 5.8%. Drilling levels in Canada
remained flat throughout the third quarter, as the rig count at the end of the
third quarter and the average rig count during the quarter were both 250 rigs.
Imports into the U.S. decreased 45.5%, with import market share declining from
32.3% during the third quarter of 2001 to 23.4% during the third quarter of
2002. This decrease was primarily due to the decrease in drilling activity in
the U.S. During the third quarter of 2002, U.S. producer shipments of OCTG
decreased 6.0% as compared to the comparable prior year period. During the third
quarter of 2002, U.S. producer shipments were favorably impacted by industry
inventory increases that created an additional 9.2% of demand. During the third
quarter of 2001, U.S. producer shipments were unfavorably impacted by industry
inventory decreases that reduced demand by 2.9%. Management believes that at
September 30, 2002, industry inventories were somewhat below normal levels in
relation to demand, as inventory months of supply decreased 14.7%, from 6.8
months at September 30, 2001 to 5.8 months at September 30, 2002.
As a result of the decreased drilling activity, we estimate that total U.S.
consumption decreased by 24.9% in the third quarter of 2002, compared to the
prior year quarter. During that same period, our domestic shipments of OCTG
decreased 27.8% and our export sales, primarily to Canada, decreased by 2.3%. We
estimate that our domestic OCTG market share decreased from 20.3% during the
quarter ended September 30, 2001 to 15.7% during the quarter ended September 30,
2002. This decreased market share, slightly lower than the market share we have
captured historically, was partially due to the decreased business levels of our
customers compared to the market as a whole.
Imports into Canada decreased 25.4%, with import market share decreasing from
36.6% during the third quarter of 2001 to 32.0% during the third quarter of
2002. During the third quarter of 2002, Canadian producer shipments of OCTG
decreased by 10.1%. Overall, Canadian shipments in the third quarter 2002 were
negatively impacted by lower natural gas prices that led to weaker drilling
activity than experienced during the third quarter 2001.
As a result of the decreased drilling activity, we estimate that total Canadian
consumption decreased by 14.5% in the third quarter of 2002, compared to the
prior year quarter. During that same period, our Canadian shipments of OCTG
increased 7.5%. We estimate that our Canadian OCTG market share of domestic
shipments increased from 31.5% during the quarter ended September 30, 2001 to
37.7% during the quarter ended September 30, 2002. This increased market share,
approximately the market share we have captured historically, was partially due
to the increased business levels of our customers compared to the market as a
whole.
Published information suggests that U.S. demand for line pipe decreased during
the third quarter of 2002 by an estimated 19.7%. Line pipe domestic shipments
remained flat as the import market share fell from 42.3% to 28.3%. Canadian
demand for line pipe decreased during the third quarter by an estimated 31.6%.
Domestic shipments fell by 48.0% due to less project work than in the third
quarter 2001. Import volumes increased by 34.2%, and import market share
increased from 28.3% for the third quarter 2001 to 55.4% for the third quarter
2002 as imports reacted slowly to the reduced level of demand.
Coiled tubing products are primarily used in maintaining existing wells and in
completing new wells. These products are sold to service companies throughout
North America and internationally.
[16]
Industrial Products Demand and Consumption
- ------------------------------------------
Given the numerous applications for our industrial products, sources of demand
for these products are diversified. Demand depends on the general level of
economic activity in the construction, transportation, agricultural, material
handling and recreational segments, the use of structural tubing as a substitute
for other structural steel forms, such as I-beams and H-beams, and draw-downs of
existing customer inventories.
We estimate that the U.S. demand for structural tube products (commonly referred
to as hollow structural sections or HSS) of the type we produce decreased 3.1%
during the third quarter of 2002 from the prior year period. Total U.S. producer
shipments decreased 1.9% as import market share increased from 19.7% to 21.0%.
According to published reports, the U.S. standard pipe market demand decreased
7.1%. Total domestic producer shipments decreased 6.7% as the import market
share increased from 35.5% to 35.2%.
Pricing and Costs of Our Products
- ---------------------------------
Pricing of U.S. energy products was down 7.4% compared to the prior year
quarter. Pricing of U.S. industrial products was up 22.6% compared to the prior
year quarter. Pricing of Canadian energy products was down 0.7%, while pricing
of Canadian industrial products was up by 36.5% compared to the prior year
quarter.
The level of imports of oil country tubular goods, which has varied
significantly over time, affects the U.S. and Canadian oil country tubular goods
markets. High levels of imports into both the U.S. and Canada, reduce the volume
sold by domestic producers and tend to suppress selling prices, both of which
have an adverse impact on our business.
Antidumping and countervailing duty orders require special duties to be imposed
on imports in amounts designed to offset unfair pricing and government
subsidization, respectively. In the U.S., once an order is in place, foreign
producers, importers, domestic producers and other parties may request an
"administrative review" on a yearly basis to determine the duty rates to be
applied to imports during subsequent years, as well as the duty deposit rates
for future imports from the companies covered by the review. In addition, a
company that did not ship to the U.S. during the original period examined by the
U.S. government may request a "new shipper review" to obtain its own duty rate
on an expedited basis.
In March 2002, an antidumping petition was filed with the U.S. government
covering OCTG products from Austria, Brazil, China, France, Germany, India,
Indonesia, Romania, South Africa, Spain, Turkey, Ukraine and Venezuela. On May
10, 2002, the U.S. government voted to end this case. As a result of this
ruling, there will not be any additional immediate relief for domestic producers
on imports of OCTG products. Accordingly, imports may negatively impact our OCTG
shipment levels and prices in the future.
Since 1986, imports of certain OCTG into Canada from the U.S., Korea, Japan and
Germany have been restricted by the existence of antidumping and countervailing
duty orders. Following a sunset review process, the orders, to the extent
applicable to imports of carbon grade casing from the U.S. and Korea into
Canada, expired in June 2001. As a result, the requirement that an importer
obtain "normal values" for these products was not continued.
Purchased steel represents approximately two-thirds of our costs of goods sold.
As a result, the steel industry, which is highly volatile and cyclical in
nature, affects our business both positively and negatively. Numerous factors,
most of which are beyond our control, drive the cycles of the steel industry and
influence steel prices including general economic conditions, industry capacity
utilization, import duties and other trade restrictions and currency exchange
rates.
Changes in steel prices can affect the pricing and gross margin levels of our
products. With respect to industrial products, we intend to seek to recover any
increase in steel costs by attempting to increase the price of our products.
However, increases in the prices of our products often do not fully compensate
for
[17]
steel price increases and generally lag several months behind increases in steel
prices. Prices of energy products move in conjunction with demand for those
products and are not necessarily related to changes in steel costs. This could
result in an inability to recover steel cost increases on those products during
poor energy market conditions. Consequently, we typically have a limited ability
to recover increases in steel costs.
In November 2001, the International Trade Commission (ITC) recommended to the
President of the United States that a Section 201 case for steel and all steel
products, with the exception of OCTG, be supported with a wide scale program of
quotas and duties on steel imports. The President's remedy plan released on
March 5, 2002, provides a three year program of quotas and tariffs covering a
wide range of imported steel products. Of specific interest to our business,
imported flat rolled products, including hot rolled steel coils, are subject to
a 30% tariff in year one, a 24% tariff in year two and an 18% tariff in year
three. This plan resulted in an increase in the cost of foreign imported hot
rolled steel and steel products. This, in turn, increased the cost of our
purchased steel. We have experienced steel price increases that we believe were
caused by the ITC's recommendation, such as the increase in steel prices
described below.
U.S. steel costs included in cost of goods sold increased during the third
quarter of 2002 by 22.2%, compared to the quarter ended September 30, 2001. The
current replacement cost of steel is approximately 17.4% higher than the cost
recorded in cost of goods sold during the third quarter due to price increases
implemented by our major supplier of steel. Recently, our major supplier of
steel increased our steel prices by $15 per ton in January, by $40 per ton in
April and by $60 per ton in July. Due to the expansion of domestic capacity as
shuttered facilities are put back into production, January 2003 pricing levels
should fall by approximately 5% from the July 2002 levels. Based upon our
inventory levels, these cost changes will not impact our U.S. cost of goods sold
until the second quarter of 2003.
The same factors that influence steel costs and costs of goods sold in our U.S.
operations also affect the steel costs and cost of goods sold in our Canadian
operations. Canadian cost of goods sold increased by 18.3% as compared to the
comparable prior year period and will continue to increase until February 2003
as increased steel replacement costs are realized. January 2003 replacement cost
decreases will not impact our Canadian cost of goods sold until the third
quarter of 2003.
Prudential's facility located in Calgary, Alberta operates under a collective
bargaining agreement expiring on December 31, 2003 that covers approximately 72%
of all Prudential employees. While the Company believes its present labor
relations are good, there can be no assurance that the collective bargaining
agreement will be renewed or that a new collective bargaining agreement on terms
acceptable to us will be established.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overall Company
- ---------------
Net sales of $114.1 million recorded for the third quarter of 2002, represents a
decrease of $21.8 million, or 16.0%, compared to the prior year period. These
results were primarily attributable to a decrease of 21.0% in total product
shipments, from 230,633 tons in the third quarter of 2001 to 182,203 tons in the
third quarter of 2002. Overall average net selling prices increased from the
comparable quarter of the prior year by 6.3%.
Net sales of $317.5 million recorded for the nine months ended September 30,
2002, represents a decrease of $106.4 million, or 25.1%, compared to the prior
year period. These results were primarily attributable to a decrease of 22.0% in
total product shipments, from 700,151 tons for the nine months ended September
30, 2001 to 546,057 tons for the nine months ended September 30, 2002. Overall
average net selling prices decreased from the comparable period of the prior
year by 4.0%.
[18]
Cost of goods sold of $103.0 million recorded for the third quarter of 2002,
represents a decrease of $6.3 million, or 5.8%, compared to the prior year
period, resulting from the decrease in total shipments described above. However,
overall unit cost per ton of products sold increased from the comparable quarter
of the prior year by 19.4%. This increase was primarily due to the increase in
steel costs and less fixed cost absorption. See "Overview."
Cost of goods sold of $283.3 million recorded for the nine months ended
September 30, 2002, represents a decrease of $52.0 million, or 15.5%, compared
to the prior year period, resulting from the decrease in total shipments
described above. However, overall unit cost per ton of products sold increased
from the comparable period of the prior year by 8.4%. This increase was
primarily due to the increase in steel costs and less fixed costs absorption.
See "Overview."
The Company earned a gross profit of $11.1 million during the third quarter of
2002, compared to a gross profit of $26.6 million in the prior year period.
Gross profit was impacted by the higher steel cost and lower fixed cost
absorption offset by an increase in selling prices. Gross profit, as a
percentage of net sales, was 9.7% for the third quarter of 2002, compared to a
gross profit, as a percentage of net sales, of 19.5% for the prior year period.
The Company earned a gross profit of $34.2 million during the nine months ended
September 30, 2002, compared to a gross profit of $88.6 million in the prior
year period. Gross profit was impacted by the weakening selling prices and
higher steel costs. Gross profit, as a percentage of net sales, was 10.8% for
the nine months ended September 30, 2002, compared to a gross profit, as a
percentage of net sales, of 20.9% for the prior year period.
Selling, general and administrative expenses increased $0.4 million or 4.8%,
from $8.5 million in the third quarter of 2001 to $8.9 million in the third
quarter of 2002. This increase in selling, general and administrative expenses
primarily resulted from additional expenses associated with the addition of
Precision. Selling, general and administrative expenses as a percentage of net
sales in the third quarter of 2002 was 7.8% compared to 6.3% for the comparable
prior year period. The increase was due to the lower shipment levels in the
third quarter of 2002 compared to the third quarter of 2001.
Selling, general and administrative expenses increased $2.7 million or 11.7%,
from $22.8 million for the nine months ended September 30, 2001 to $25.5 million
for the nine months ended September 30, 2002. This increase in selling, general
and administrative expenses primarily resulted from additional expenses
associated with the addition of Precision, additional depreciation on our
enterprise resource planning system and general wage increases effective at the
beginning of the year. Selling, general and administrative expenses as a
percentage of net sales for the nine months ended September 30, 2002 was 8.0%
compared to 5.4% for the comparable prior year period. The increase was due to
the lower shipment levels for the nine months ended September 30, 2002 compared
to nine months ended September 30, 2001.
Interest expense increased $0.1 million or 13.9%, from $0.8 million in the third
quarter of 2001 to $0.9 million in the third quarter of 2002. This increase was
due to lower average borrowings during the third quarter of 2002 compared to
third quarter of 2001 offset by higher amortization of deferred loan costs
associated with our new senior credit facility in third quarter of 2002 compared
to third quarter of 2001. Our debt to capitalization ratio decreased from 24.2%
at December 31, 2001 to 5.4% at September 30, 2002, primarily resulting from the
issuance of 5,750,000 shares of common stock during the second quarter of 2002
and the pay-down of debt with the proceeds.
Interest expense remained flat at $2.4 million for the nine months ended
September 30, 2002 and 2001.
The provision for income taxes was $0.6 million for the third quarter of 2002,
compared to the prior year provision of $5.8 million. This change is
attributable to the generation of pre-tax income of $1.2 million for the third
quarter of 2002, compared to the pre-tax income in the third quarter of 2001 of
$17.3 million. The effective tax rate increased to 48.6% for the third quarter
of 2002 from 33.6% for the prior period due to the tax impact of dividends
received from our Canadian subsidiary.
[19]
The provision for income taxes was $2.7 million during the nine months ended
September 30, 2002, compared to the prior year provision of $21.4 million. This
change is attributable to the generation of pre-tax income of $6.3 million for
the nine months ended September 30, 2002, compared to the pre-tax income for the
nine months ended September 30, 2001 of $62.3 million. The effective tax rate
increased to 42.0% for the nine months ended 2002 from 34.4% for the prior
period due to the tax impact of dividends received from our Canadian subsidiary.
As a result of the decrease in OCTG shipments and the other factors discussed
above, we generated net income from continuing operations of $0.6 million and
$3.7 million in the third quarter of 2002 and during the nine months ended
September 30, 2002, respectively, which represents a decrease in net income from
continuing operations of $10.8 million and $37.2 million from the comparable
prior year periods, respectively.
The gain associated with the sale of the Company's discontinued DOM facility was
$518,000 (net of taxes of $250,000) for the nine months ended September 30,
2002. The loss associated with the operations of the Company's discontinued DOM
facility was $957,000 (net of taxes of $567,000) for the nine months ended
September 30, 2001. The estimated loss on the disposal of the DOM facility was
$10.2 million (net of taxes of $5.8 million) for the nine months ended September
30, 2001.
The Company incurred an extraordinary loss of $227,000 (net of taxes of
$109,000) due to early retirement of debt associated with the extinguishment of
two bank credit facilities during the nine months ended September 30, 2002.
Net income of $0.6 million was generated in the third quarter of 2002, a
decrease of $10.8 million from the comparable prior year period. Net income of
$3.9 million was generated during the nine months ended September 30, 2002, a
decrease of $25.7 million from the comparable prior year period.
Maverick Tube L.P. Segment
- --------------------------
Maverick Tube L.P. ("Maverick L.P."), a wholly-owned subsidiary of the Company,
is responsible for our operations in Hickman, Arkansas, Conroe, Texas and
Longview, Washington. Precision, a wholly-owned subsidiary of the Company, is
responsible for the Company's coiled tubing operations in Houston, Texas.
Prudential is responsible for our operations in Calgary, Alberta.
Maverick L.P.'s sales of $69.0 million decreased $20.5 million, or 23.0%, for
the third quarter of 2002, compared to the prior year period. Maverick L.P.'s
shipments decreased 32,091 tons, or 20.9%, from 153,856 tons to 121,765 tons.
Energy shipments decreased 27,763 tons due to the rig count decreasing from
1,241 active rigs to 853 active rigs. Industrial product shipments decreased
4,328 tons. Overall average net selling prices for Maverick L.P.'s products
decreased from the comparable quarter of the prior year by 2.7%. The change in
the price was a result of the rig count decreasing and a less favorable product
mix. Energy selling prices decreased 7.5%. Industrial selling prices increased
22.5%. The decreases in energy product sales were primarily due to weakening
market conditions. The increase in industrial product sales were primarily due
to our ability to pass increases in steel costs to our customers. See
"Overview."
Maverick L.P.'s sales of $195.7 million decreased $71.1 million, or 26.6%, for
the nine months ended September 30, 2002, compared to the prior year period.
Maverick L.P.'s shipments decreased 77,670 tons, or 17.4%, from 445,435 tons to
367,765 tons. Energy shipments decreased 77,028 tons due to the rig count
decreasing from 1,207 active rigs to 826 active rigs. Industrial product
shipments decreased 642 tons. Overall average net selling prices for Maverick
L.P.'s products decreased from the comparable period of the prior year by 11.2%.
The change in the price was a result of the rig count decreasing and a less
favorable product mix. Energy selling prices decreased 12.7%. Industrial selling
prices increased 3.1%. The decreases in energy product sales were primarily due
to weakening market conditions. The increase in industrial product sales were
primarily due to our ability to pass increases in steel costs to our customers.
See "Overview."
[20]
Maverick L.P.'s cost of goods sold of $67.8 million decreased $8.0 million, or
10.6%, for the third quarter of 2002, compared with the prior year period. The
decrease was primarily due to decreased product shipments offset by higher steel
costs. See "Overview." Gross profit for Maverick L.P. of $1.2 million for the
quarter ended September 30, 2002 compared to a gross profit of $13.7 million for
the prior year period. See "Overview." Gross profit was 1.7% as compared to
15.3% in the comparable prior year period, reflecting weakening selling prices,
higher steel prices and lower fixed cost absorption.
Maverick L.P.'s cost of goods sold of $188.2 million decreased $30.3 million, or
13.9%, for the nine months ended September 30, 2002, compared with the prior
year period. The decrease was primarily due to decreased product shipments
offset by higher steel costs. See "Overview." Gross profit for Maverick L.P. of
$7.6 million for the nine months ended September 30, 2002 compared to a gross
profit of $48.3 million for the prior year period. See "Overview." Gross profit
was 3.9% as compared to 18.1% in the comparable prior year period, reflecting
weakening selling prices, higher steel prices and lower fixed cost absorption.
Prudential Segment
- ------------------
Prudential's sales of $35.2 million decreased $11.1 million, or 24.1%, for the
third quarter of 2002, compared with the prior year period. Prudential's
shipments decreased 19,987 tons, or 26.0%, from 76,777 tons to 56,790 tons.
Energy product shipments decreased 13,524 tons due to the rig count decreasing
from 320 active rigs to 250 active rigs. Industrial product shipments decreased
2,389 tons. Tolling tons comprised the remainder of the decrease in shipments.
Overall average net selling price for Prudential's products increased 2.6% from
the comparable quarter of the prior year. Energy selling prices decreased 0.6%.
Industrial product selling prices increased by 36.5%. The decreases in energy
product sales are primarily due to weakening market conditions. The increase in
industrial product sales were primarily due to our ability to pass increases in
steel costs to our customers. See "Overview."
Prudential's sales of $103.0 million decreased $54.1 million, or 34.4%, for the
nine months ended September 30, 2002, compared with the prior year period.
Prudential's shipments decreased 83,468 tons, or 32.8%, from 254,716 tons to
171,248 tons. Energy product shipments decreased 64,121 tons due to the rig
count decreasing from 363 active rigs to 273 active rigs. Industrial product
shipments decreased 8,566 tons. Tolling tons comprised the remainder of the
decrease in shipments. Overall average net selling price for Prudential's
products decreased 2.6% from the comparable period of the prior year. Energy
selling prices decreased 4.6%. Industrial product selling prices increased by
13.1%. The decreases in energy product sales are primarily due to weakening
market conditions. The increase in industrial product sales were primarily due
to our ability to pass increases in steel costs to our customers. See
"Overview."
Prudential's cost of goods sold of $27.4 million decreased $6.1 million, or
18.1%, in the third quarter of 2002 from the prior year period. The decrease was
primarily due to decreased product shipments offset by higher steel costs. See
"Overview." Gross profit for Prudential of $7.8 million for the quarter ended
September 30, 2002 compares to a gross profit of $12.9 million for the prior
year period. Gross profit was 22.2% as compared to 27.8% in the comparable prior
year period, reflecting weakening selling prices, higher steel prices and lower
fixed cost absorption.
Prudential's cost of goods sold of $79.7 million decreased $37.1 million, or
31.8%, for the nine months ended September 30, 2002 from the prior year period.
The decrease was primarily due to decreased product shipments offset by higher
steel costs. See "Overview." Gross profit for Prudential of $23.3 million for
the nine months ended September 30, 2002 compares to a gross profit of $40.3
million for the prior year period. Gross profit was 22.6% as compared to 25.7%
in the comparable prior year period, reflecting weakening selling prices, higher
steel prices and lower fixed cost absorption.
[21]
Precision Segment
- -----------------
The Company began manufacturing coiled steel pipe with its acquisition of
Precision.
Precision had sales of $9.9 million on shipment of 3,648 tons during the third
quarter of 2002. Cost of goods sold was $7.8 million resulting in a gross profit
of $2.1 million. Precision's gross profit margin was 21.2% for the third quarter
of 2002.
Precision had sales of $18.8 million on shipment of 7,043 tons for the nine
months ended September 30, 2002. Cost of goods sold was $15.4 million resulting
in a gross profit of $3.4 million. Precision's gross profit margin was 18.1% for
the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Working capital at September 30, 2002 was $140.5 million and the ratio of
current assets to current liabilities was 2.8 to 1.0. Working capital at
December 31, 2001 was $142.3 million and the ratio of current assets to current
liabilities was 3.7 to 1.0. The decrease in working capital from December 31,
2001 to September 30, 2002 was due to a $8.0 million increase in accounts
receivable, $12.5 million increase in inventory and $5.2 million increase in
income taxes receivable partially offset by a $29.2 million increase in accounts
payable. Cash provided by operating activities was $23.4 million for the nine
months ended September 30, 2002.
Cash used in investing activities was $74.7 million for the nine months ended
September 30, 2002, resulting primarily from the acquisition of Precision ($56.8
million, net of cash received).
Cash provided by financing activities was $52.0 million for the nine months
ended September 30, 2002. Outstanding borrowings on our revolving credit
facilities decreased $54.1 million. The Company received proceeds of $107.1
million from the sale of the Company's common shares during the nine months
ended September 30, 2002, which proceeds were primarily used to acquire
Precision on March 29, 2002 and repay indebtedness.
Cash used by discontinued operations was $366,000 for the nine months ended
September 30, 2002.
Our capital budget for 2002 was originally set at approximately $16.3 million,
which does not include $5.8 million in carryover from the 2001 capital budget.
The 2002 capital budget includes $5.5 million for the relocation of the
Longview, Washington equipment to one of our existing facilities in Hickman,
Arkansas. The remaining $16.6 million of our capital budget is for the
acquisition of new equipment for our existing manufacturing facilities and to
enhance our new enterprise resource planning system. Approximately $17.9 million
has been spent during the nine month period ended September 30, 2002. We expect
to meet ongoing working capital and the capital expenditure requirements from a
combination of cash flow from operating activities and available borrowings
under our revolving credit facility.
In connection with our acquisition of Precision on March 29, 2002, the Company
secured a new senior credit facility consisting of a $150.0 million revolving
line of credit that provided a portion of the cash used to fund the acquisition
and replaced the Company's short-term and long-term revolving credit facilities.
The new senior credit facility, which will be used to fund the working capital
requirements of the Company and is secured by all accounts receivable,
inventories and equipment of the Company along with real estate and expires in
March 2006. The new senior credit facility bears interest at U.S. or Canadian
prime, Bankers' Acceptance rates plus stamping fees or the LIBOR rate, all
adjusted by an interest margin, depending upon excess availability. Under the
new senior credit facility, the Company can borrow an amount based on a
percentage of eligible accounts receivable, eligible inventory and property,
plant and equipment reduced by outstanding letters of credit. The new senior
credit facility includes restrictive covenants relating to, among other things,
a minimum fixed charge coverage ratio if excess availability
[22]
falls below $30.0 million and a capital expenditure limitation of $25.0 million
per year. As of September 30, 2002, the applicable interest rate on this credit
facility was 5.6% per annum. In addition to the $113.7 million in available
borrowings as of September 30, 2002, we had $1.8 million in cash and cash
equivalents at September 30, 2002.
On October 15, 2002, we entered into a definitive asset purchase agreement with
the LTV Corporation and its affiliates to acquire the assets that comprise the
business of LTV's Steel Tubular Products Division pursuant to Section 363 of the
United States Bankruptcy Code. We believe we will consummate this transaction at
the end of the fourth quarter of 2002 or the beginning of the first quarter of
2003. We plan to fund the $110 million purchase price by drawing down on our
revolving credit facility, which is being expanded in connection with the
proposed transaction to provide aggregate availability of up to $185 million.
Maverick's total debt at closing is estimated to be approximately $135.0
million, with an additional $50.0 million available under the expanded credit
facility.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
A summary of the Company's critical accounting policies and estimates is
included on page 24 of our Annual Report on Form 10-K for the year ended
December 31, 2001. Management believes that the application of these policies on
a consistent basis enables the Company to provide the users of the financial
statements with useful and reliable information about the Company's operating
results and financial conditions.
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make judgments, estimates
and assumptions regarding uncertainties that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses.
Areas of uncertainty that require judgments, estimates and assumptions include
the collectibility of accounts receivables, inventory valuation, potential
product liability, environmental claims, pension plans, exit costs associated
with the closure of the Longview, Washington facility and tax matters.
Additional areas of uncertainty that require judgments, estimates and
assumptions include the collectibility of the $6.9 million notes receivable
related to the sale of the Cold Drawn Tubular business as well as the annual
testing of goodwill for impairment.
Management uses historical experience and all available information to make
these judgments and estimates; however actual results will inevitably differ
from those estimates and assumptions that are used to prepare the Company's
financial statements at any given time. Despite these inherent limitations,
management believes that Management's Discussion and Analysis and the financial
statements and footnotes provide a meaningful and fair perspective of the
Company.
PPROSPECTIVE ACCOUNTING STANDARDS
- ---------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides accounting
guidance for legal obligations associated with the retirement of tangible
long-lived assets. This statement is effective for fiscal years beginning after
June 15, 2002. We are currently assessing the impact of this new standard.
[23]
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statement No. 4,
44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 requires, in most cases, gains and losses on extinguishments of debt to
be classified as income or loss from continuing operations, rather than as
extraordinary items. The statement is effective for fiscal years beginning after
May 15, 2002. Upon adoption of SFAS No. 145, we expect to reclassify previously
recognized extraordinary losses from the early extinguishment of debt into
income from operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces
EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
We are subject to interest rate risk to the extent we borrow against our credit
facility with variable interest rates. Assuming the current level of borrowings
at variable rates and assuming a two-percentage point change in the average
interest rates under these borrowings, it is estimated that our interest expense
for the quarter ended September 30, 2002 would have increased by approximately
$56,000. In the event of an adverse change in interest rates, management would
likely take actions that would mitigate our exposure to interest rate risk
particularly if our borrowing levels increase to any significant extent;
however, due to the uncertainty of the actions that would be taken and their
possible effects, this analysis assumes no such action. Further, this analysis
does not consider the effects of the change in the level of overall economic
activity that could exist in such an environment.
We are also subject to commodity price risk with respect to purchases of steel.
Purchased steel represents approximately two-thirds of our cost of goods sold.
As a result, the steel industry, which is highly volatile and cyclical in
nature, affects and will affect our business both positively and negatively.
Numerous factors, most of which are beyond our control, drive the cycles of the
steel industry and influence steel prices. Changes in steel prices have and will
have a significant impact on the margin levels of our products.
The Company's reported cash flows related to its Canadian operations are based
on cash flows measured in Canadian dollars converted to the U.S. dollar
equivalent based on published exchange rates for the period reported. The
Company believes its current risk exposure to the exchange rate movements, based
on net cash flows, to be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Our chief executive officer and chief financial officer have reviewed and
evaluated the Company's disclosure controls and procedures within 90 days of the
filing date of this Quarterly Report. Based on such review and evaluation, the
officers believe that the disclosure controls and procedures are designed
effectively to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Securities Exchange
Act of 1934, as amended, (a) is recorded, processed, summarized and reported
within the time period specified in the SEC's rules and forms and that the
information required to be discussed by the Company in the reports that it files
and submits under the Securities Exchange Act of 1934, as amended, and (b) is
documented and communicated to the Company's management, including the officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, the officers believe that there have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
[24]
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
----------- -----------
10.1 First Amendment to Credit Agreement dated as of July
15, 2002 among Registrant and its subsidiaries, on the
one hand, and the Senior Lenders, on the other hand.
99.1 Certificate (Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002) of Chief Executive Officer
99.2 Certificate (Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002) of Chief Financial Officer
(b) Reports on Form 8-K.
--------------------
On July 18, 2002, the Company filed a Report on Form 8-K containing
the announcement of its second quarter 2002 results.
[25]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Maverick Tube Corporation
----------------------------------------------
(Registrant)
Date: November 13, 2002 /s/ Gregg M. Eisenberg
----------------------------------------------
Gregg M. Eisenberg, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2002 /s/ Pamela G. Boone
----------------------------------------------
Pamela G. Boone, Vice President - Finance
and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
[26]
CERTIFICATIONS
I, Gregg M. Eisenberg, Chairman of the Board, President and Chief Executive
Officer of Maverick Tube Corporation (Maverick), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Maverick;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of Maverick as of, and for, the periods presented in this quarterly
report;
4. Maverick's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for Maverick and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Maverick, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Maverick's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Maverick's other certifying officer and I have disclosed, based on our most
recent evaluation, to Maverick's auditors and the audit committee of
Maverick's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Maverick's ability to record,
process, summarize and report financial data and have identified for
Maverick's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Maverick's internal controls; and
6. Maverick's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Gregg M. Eisenberg
----------------------------------------------
Gregg M. Eisenberg, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
[27]
CERTIFICATIONS
I, Pamela G. Boone, Vice President - Finance and Administration and Chief
Financial Officer of Maverick Tube Corporation (Maverick), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Maverick;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of Maverick as of, and for, the periods presented in this quarterly
report;
4. Maverick's other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14 and 15d-14) for Maverick and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Maverick, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Maverick's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Maverick's other certifying officer and I have disclosed, based on our most
recent evaluation, to Maverick's auditors and the audit committee of
Maverick's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect Maverick's ability to record,
process, summarize and report financial data and have identified for
Maverick's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Maverick's internal controls; and
6. Maverick's other certifying officer and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Pamela G. Boone
----------------------------------------------
Pamela G. Boone, Vice President - Finance
and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
[28]
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 First Amendment to Credit Agreement dated as of July 15, 2002
among Registrant and its subsidiaries, on the one hand, and
the Senior Lenders, on the other hand.
99.1 Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
of Chief Executive Officer
99.2 Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
of Chief Financial Officer
[29]