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 June 30, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 - 41,916,544 shares as of August 8, 2003
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 3
Condensed Consolidated Statements of Income - Three
and Six Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 7
Independent Accountants' Review Report 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT INDEX 33
2
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
(Unaudited)
-------------------------
ASSETS
Current assets:
Cash and cash equivalents............................ $19,689 $2,551
Accounts receivable, less allowance of $4,605
and $5,188 on June 30, 2003 and December 31,
2002, respectively................................. 92,237 73,660
Inventories.......................................... 190,087 210,207
Deferred income taxes................................ 11,450 11,338
Income taxes refundable.............................. 5,386 637
Prepaid expenses and other........................... 8,952 10,375
-------------------------
Total current assets................................... 327,801 308,768
Property, plant and equipment, less accumulated
depreciation of $141,095 and $117,412 on
June 30, 2003 and December 31, 2002,
respectively......................................... 185,578 179,244
Goodwill............................................... 112,888 93,184
Note receivable........................................ 6,627 6,877
Other assets........................................... 10,951 7,810
-------------------------
$643,845 $595,883
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $37,115 $78,457
Accrued expenses and other liabilities............... 29,625 23,531
Deferred revenue..................................... 8,727 2,608
Current maturities of long-term debt................. 4,955 2,977
-------------------------
Total current liabilities.............................. 80,422 107,573
Long-term debt, less current maturities................ 4,448 2,742
Convertible senior subordinated notes.................. 120,000 -
Revolving credit facility.............................. 62,744 132,927
Other liabilities...................................... 10,013 7,640
Deferred income taxes.................................. 7,615 6,715
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000
authorized shares; 1 share issued and
outstanding.......................................... - -
Common stock, $0.01 par value; 80,000,000
authorized shares; 41,916,544 and
40,942,976 shares issued and outstanding
at June 30, 2003 and December 31, 2002,
respectively......................................... 419 409
Additional paid-in capital............................. 226,072 212,361
Retained earnings...................................... 140,540 139,235
Accumulated other comprehensive loss................... (8,428) (13,719)
-------------------------
358,603 338,286
-------------------------
$643,845 $595,883
=========================
See accompanying notes to condensed consolidated financial statements.
3
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MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------------------------------------------
Net sales...................... $194,925 $106,454 $414,363 $210,377
Cost of goods sold............. 179,279 94,227 383,808 186,523
-------------------------------------------------
Gross profit................... 15,646 12,227 30,555 23,854
Selling, general and
administrative................ 11,785 9,713 24,098 16,889
Restructuring charges.......... - - - 369
-------------------------------------------------
Income from operations......... 3,861 2,514 6,457 6,596
Interest expense............... 2,207 894 4,442 1,855
-------------------------------------------------
Income from continuing
operations before income taxes 1,654 1,620 2,015 4,741
Provision for income taxes..... 591 640 710 1,922
-------------------------------------------------
Income from continuing
operations.................... 1,063 980 1,305 2,819
Gain on disposal of DOM
facility, net of income taxes. - - - 518
-------------------------------------------------
Net income..................... $1,063 $980 $1,305 $3,337
=================================================
Basic earnings per share
Income from continuing
operations.................. $0.03 $0.03 $0.03 $0.08
Gain on disposal of DOM
facility.................... - - - 0.01
-------------------------------------------------
Net income................... $0.03 $0.03 $0.03 $0.09
=================================================
Diluted earnings per share
Income from continuing
operations.................. $0.03 $0.03 $0.03 $0.08
Gain on disposal of DOM
facility.................... - - - 0.01
-------------------------------------------------
Net income................... $0.03 $0.03 $0.03 $0.09
=================================================
See accompanying notes to condensed consolidated financial statements.
4
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MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
2003 2002
-------------------------
OPERATING ACTIVITIES
Income from continuing operations...................... $1,305 $2,819
Adjustments to reconcile income from continuing
operations to net cash provided (used) by operating
activities:
Depreciation and amortization.......................... 11,020 9,704
Deferred income taxes.................................. 340 584
Provision for losses on accounts receivable............ (701) (53)
(Gain) loss on sale of equipment....................... (5) 10
Changes in operating assets and liabilities:
Accounts receivable.................................. (16,295) (13,255)
Inventories.......................................... 31,321 26,680
Prepaid expenses and other........................... 1,707 (1,535)
Other assets......................................... 450 (1,428)
Accounts payable..................................... (45,940) 20,854
Accrued expenses and other liabilities............... (1,321) (15,045)
Deferred revenue..................................... 6,119 2,768
-------------------------
Cash (used) provided by continuing operating activities (12,000) 32,103
INVESTING ACTIVITIES
Cash paid for acquisition, net of cash received........ (3,964) (55,988)
Expenditures for property, plant and equipment......... (8,006) (12,631)
Proceeds from disposal of equipment.................... - 17
-------------------------
Cash used by investing activities...................... (11,970) (68,602)
FINANCING ACTIVITIES
Net borrowings (repayments) on revolving credit
facility............................................. (75,860) (32,118)
Proceeds from convertible senior subordinated notes.... 120,000 -
Principal payments on long-term borrowings and notes... (1,316) (7,121)
Deferred debt costs.................................... (4,232) -
Principal payments on long-term note receivable........ 250 -
Proceeds from sale of common stock..................... - 90,438
Proceeds from sale of treasury stock................... - 15,853
Proceeds from exercise of stock options................ 1,617 578
-------------------------
Cash provided by financing activities.................. 40,459 67,630
5
DISCONTINUED OPERATIONS
Gain on discontinued operations........................ - 518
Adjustments to reconcile income (loss) from
discontinued operations to net cash used by
discontinued operations:
Depreciation....................................... - 376
Gain on disposal................................... - (518)
Changes in operating assets and other liabilities
of discontinued operations....................... - (742)
Proceeds from sale of discontinued operations...... - 1,238
-------------------------
Net cash provided by discontinued operations........... - 872
Effect of exchange rate changes on cash................ 649 (402)
-------------------------
Increase in cash and cash equivalents.................. 17,138 31,601
Cash and cash equivalents at beginning of period....... 2,551 1,940
-------------------------
Cash and cash equivalents at end of period............. $19,689 $33,541
=========================
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Note receivable for sale of discontinued operations $- $6,877
Stock issued for acquisition....................... $12,104 $2,290
Debt issued for acquisition........................ $5,000 $-
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 unaudited, 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." All significant
intercompany accounts and transactions have been eliminated. The accompanying
condensed, consolidated financial statements include the financial statements of
Prudential Steel Ltd. ("Prudential") for all periods presented, Precision Tube
Holding Corporation ("Precision") since its acquisition on March 29, 2002, the
tubular division of The LTV Corporation since its acquisition on December 31,
2002 and SeaCAT Corporation ("SeaCAT") since its acquisition on February 28,
2003.
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 notes 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 six months ended
June 30, 2003 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2003. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report in the 2002 Form 10-K.
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
2. BUSINESS ACQUISITIONS
- --------------------------------------------------------------------------------
Precision Tube Holding Corporation
- ----------------------------------
On March 29, 2002, the Company completed its purchase of all the common stock of
Precision, a privately held, Houston based, coiled tubular goods manufacturer,
in exchange for $60,678,000 cash 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 as described
below. The final allocation resulted in acquired goodwill of $43,131,000, which
is not deductible for tax purposes. The Company acquired Precision to add
premium coiled tubing and coiled line pipe to its product lines.
The Tubular Division of The LTV Corporation
- -------------------------------------------
On December 31, 2002, the Company acquired the assets and certain liabilities of
the tubular division of The LTV Corporation for $119,863,000 cash (which
included a $9,863,000 working capital adjustment). The acquisition was accounted
for as a purchase business combination and the financial statements of the
tubular division of The LTV Corporation have been consolidated from the
acquisition date. The cost to acquire the tubular division of The LTV
Corporation has been preliminarily allocated to the assets acquired and
liabilities assumed according to their estimated fair values as described below.
The final fixed asset appraisals, identification of intangible assets and the
exit costs associated with the Company's rationalization plans are subject to
adjustment as additional information becomes available. The preliminary
allocation resulted in acquired goodwill of $54,582,000, which is deductible for
tax purposes. The Company acquired the tubular division of The LTV Corporation
to add steel electrical conduit to its product lines and to expand its line pipe
sales.
7
SeaCAT Corporation
- ------------------
On February 28, 2003, the Company completed its purchase of all the common stock
of SeaCAT, a privately held, Houston based, coiled tubular goods manufacturer,
in exchange for $4,000,000 cash, a $5,000,000 subordinated note and 733,676
common shares of the Company. The purchase price is subject to an earn-out over
a three-year period with a maximum payment of $250,000 per year. The acquisition
was accounted for as a purchase business combination and the financial
statements of SeaCAT have been consolidated from the acquisition date. The cost
to acquire SeaCAT has been preliminarily allocated to the assets acquired and
liabilities assumed according to their estimated fair values as described below.
The identification of intangible assets is subject to adjustment as additional
information becomes available. The preliminary allocation resulted in acquired
goodwill of $15,175,000, which is not deductible for tax purposes. The Company
acquired SeaCAT to expand its premium coiled tubing operations.
Following is a summary of the net assets and liabilities acquired during 2003
and 2002 (in thousands):
The tubular
division of
The LTV
Precision Corporation SeaCAT
-------------------------------------
Purchase price (including transaction
costs)................................... $62,966 $122,006 $21,767
Assets acquired:
Cash..................................... 3,855 5 35
Accounts receivable...................... 8,141 22,208 187
Inventory................................ 4,217 42,462 2,563
Property, plant and equipment............ 7,443 12,874 5,706
Other assets............................. 5,218 2,541 327
-------------------------------------
28,874 80,090 8,818
Liabilities acquired:
Accounts payable......................... (1,718) (6,430) (1,328)
Other accruals........................... (7,321) (6,236) (898)
-------------------------------------
(9,039) (12,666) (2,226)
Net assets acquired...................... 19,835 67,424 6,592
-------------------------------------
Goodwill................................... $43,131 $54,582 $15,175
=====================================
As a result of the Precision acquisition, the Company adopted Statement of
Financial Accounting Standards ("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), the Company expects to perform its impairment tests during the
fourth quarter.
3. DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
During the quarter 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 have been segregated from
continuing operations and reported separately as discontinued operations in the
statements of income.
On March 29, 2002, pursuant to an asset purchase agreement dated March 21, 2002,
the Company completed the sale of the DOM business for $8,115,000, consisting of
cash in the amount of $1,238,000 and the buyer's nine-year secured promissory
note of $6,877,000. To accommodate the buyer's purchase of the DOM business, the
Company guaranteed the $1,500,000 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 to the assets conveyed to
the buyer. The Company recognized a $518,000 after-tax gain from the sale of the
DOM facility in the quarter ended March 31, 2002.
8
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 were
terminated as of September 30, 2002. Restructuring costs recorded in the
consolidated statement of income during the six months ended June 30, 2002
included the following items (in thousands):
Cash costs:
Adjustment to the original estimate................................ $(312)
Other.............................................................. 681
-------------
Total restructuring costs.......................................... $369
=============
Following is a summary of the accrued restructuring liabilities and activity
through June 30, 2003 (in thousands):
Employee
Severance Other Total
-------------------------------------
Balance, December 31, 2001................. $581 $1,004 $1,585
Additional costs........................... - 681 681
Cash payments.............................. (239) (1,671) (1,910)
Adjustment to original estimate............ (342) (14) (356)
-------------------------------------
Balance, June 30, 2003..................... $- $- $-
=====================================
The Longview, Washington land and building, are held for sale at a carrying
value of $6,000,000 and are currently being marketed through a national broker.
5. REVOLVING CREDIT FACILITY
- --------------------------------------------------------------------------------
The Company has a $185,000,000 senior revolving credit facility, which is used
to fund working capital requirements of the Company. The facility is secured by
all accounts receivable, inventories, equipment and real estate and expires in
March 2006. The 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 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 senior credit facility includes
restrictive covenants relating to, among other things, a minimum fixed charge
coverage ratio if excess availability falls below $30,000,000 and a capital
expenditure limitation of $30,000,000 per year. As of June 30, 2003, the
applicable interest rate on this credit facility was 4.5% per annum. The
additional available borrowing amount under the senior credit facility is
approximately $117,963,000 as of June 30, 2003.
6. CONVERTIBLE SENIOR SUBORDINATED NOTES
- --------------------------------------------------------------------------------
The Company issued $120,000,000 of contingent convertible senior subordinated
notes due June 15, 2033. The notes pay interest semi-annually at the rate of
4.0% per annum and beginning with the six-month interest period commencing on
June 15, 2008, the Company will pay contingent interest during a six-month
interest period if the average trading price of a note equals or exceeds 130.0%
of the principal amount of a note during a specified period prior to such
six-month interest period. The embedded derivative related to this contingent
interest feature is required to be bifurcated and valued separately under
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. However, the fair
value of this derivative is not material at June 30, 2003. The notes will be
general unsecured obligations of the Company and will be subordinated to its
present and
9
future senior indebtedness.
The notes are convertible under certain limited circumstances into shares of the
Company's common stock at an initial conversion rate of 34.2583 shares of the
Company's common stock per $1,000 principal amount of notes, representing a
conversion price of $29.19 per common share.
The Company has the right to redeem the notes after June 15, 2008, but before
June 15, 2011, at a redemption price equal to par plus accrued interest, if any,
if the closing price of the Company's common stock has exceeded 130.0% of the
conversion price then in effect over 20 trading days out of a period of 30
consecutive trading days. After June 15, 2011, the Company may redeem the notes
at any time. Holders of the notes have the right to require the Company to
repurchase all or some of their notes on June 15, 2011, 2013, 2018, 2023 and
2028 at a price equal to par plus accrued interest, if any, payable in cash.
Holders of the notes also have the right to require the Company to purchase all
or some of their notes at a cash purchase price equal to par plus accrued
interest, if any, upon the occurrence of certain change of control events that
occur prior to June 15, 2011.
7. DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The components of the adjustment to accumulated other comprehensive loss for
derivatives qualifying as hedges of future cash flows at December 31, 2002 and
June 30, 2003 are presented in the following table (in thousands):
Adjustment
of Fair Income Net
Value of Tax Unrealized
Derivatives Effects Loss (Gain)
-------------------------------------
Balance at December 31, 2002............... $- $- $-
Change in values of derivatives
qualifying as cash flow hedges.......... 771 (270) 501
-------------------------------------
Balance at June 30, 2003................... $771 $(270) $501
=====================================
The unrealized loss as of June 30, 2003 reflects the Company's use of interest
rate swaps to convert variable rate debt to fixed rate debt and the decline in
interest rates from the inception date of the derivative contracts. During the
quarter ended June 30, 2003, no additional interest expense was recorded as the
cash flow hedge was considered to be effective. The accumulated other
comprehensive loss (along with the corresponding swap liability) will be
adjusted as market interest rates change over the remaining life of the swap.
The Company uses derivatives for hedging purposes only and does not enter into
derivative financial instruments for trading or speculative purposes. As part of
managing the exposure to changes in market interest rates, the Company, as an
end user, enters into various interest rate swap transactions in the
over-the-counter markets, with other financial institutions acting as principal
counterparties. To ensure both appropriate use as a hedge and hedge accounting
treatment, all derivatives are designated according to a hedge objective against
the revolving credit facility. The Company's primary hedge objectives include
the conversion of variable rate debt to fixed rates. The notional amounts,
rates, indices and maturities of the Company's derivatives are required to
closely match the related terms of the Company's hedged liabilities.
The following table presents the notional principal amounts of interest rate
swaps by class and the corresponding hedge objectives at June 30, 2003 (in
thousands):
Interest Rate Swaps Notional Amount Description
- --------------------------------------------------------------------------------
Floating to fixed rate swaps $50,000 Effectively converts the
(cash flow hedges) interest rate on an
equivalent amount of
variable rate borrowings
to a fixed rate
10
8. INVENTORIES
- --------------------------------------------------------------------------------
Inventories at June 30, 2003 and December 31, 2002 consist of the following (in
thousands):
2003 2002
-------------------------
Finished goods......................................... $109,127 $109,878
Work-in-process........................................ 11,450 7,982
Raw materials.......................................... 57,639 80,480
Storeroom parts........................................ 11,871 11,867
-------------------------
$190,087 $210,207
=========================
Inventories are principally valued at the lower of average cost or market.
11
9. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The following table sets forth data (in thousands) for the three and six months
ended June 30, 2003 and 2002, regarding the continuing reportable industry
segments of energy products and industrial products of the Company. Intersegment
sales are not material. Identifiable assets are those used in the Company's
operations in each segment.
Energy Industrial
Products Products Corporate Total
-------------------------------------------------
Three Months Ended June 30, 2003
- --------------------------------
Net sales...................... $131,196 $63,729 $- $194,925
Income (loss) from operations.. 4,144 (283) - 3,861
Identifiable assets............ 419,189 154,988 69,668 643,845
Goodwill....................... 58,306 54,582 - 112,888
Depreciation and amortization.. 3,613 939 1,093 5,645
Capital expenditures........... 1,387 980 2,947 5,314
Six Months Ended June 30, 2003
- ------------------------------
Net sales...................... $283,609 $130,754 $- $414,363
Income (loss) from operations.. 7,423 (966) - 6,457
Identifiable assets............ 419,189 154,988 69,668 643,845
Goodwill....................... 58,306 54,582 - 112,888
Depreciation and amortization.. 7,044 1,878 2,098 11,020
Capital expenditures........... 2,772 1,869 3,365 8,006
Three Months Ended June 30, 2002
- --------------------------------
Net sales...................... $84,766 $21,688 $- $106,454
Income from operations......... 2,181 333 - 2,514
Identifiable assets............ 293,207 72,560 77,016 442,783
Goodwill....................... 42,110 - - 42,110
Depreciation and amortization.. 2,746 1,388 1,187 5,321
Capital expenditures........... 5,007 980 1,029 7,016
Six Months Ended June 30, 2002
- ------------------------------
Net sales...................... $170,024 $40,353 $- $210,377
Income (loss) from operations.. 7,968 (1,372) - 6,596
Identifiable assets............ 293,207 72,560 77,016 442,783
Goodwill....................... 42,110 - - 42,110
Depreciation and amortization.. 5,157 2,433 2,114 9,704
Capital expenditures........... 8,488 2,095 2,048 12,631
Segment information is presented in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This standard is based
on a management approach which requires segmentation based upon the Company's
internal organization and reporting of revenue and operating income based upon
internal accounting methods.
On January 1, 2003, the Company revised its segments. The two new segments are
designed to improve the alignment of strategies and objectives between sales,
marketing and production; provide for more timely and rational allocation of
resources within businesses and focus long-term planning efforts on key
objectives and initiatives. The Company's two segments are Energy Products and
Industrial Products.
The Energy Products segment includes revenue and operating expenses associated
with those products of the Company sold to the energy industry, such as oil
country tubular goods ("OCTG"), line pipe, coiled steel pipe and tolling
services. The Industrial Products segment includes revenue and operating
expenses associated with those products of the Company sold to the industrial
industry, such as electrical conduit, rigid conduit, structural shapes and
rounds, standard pipe, mechanical tubing and pipe piling.
The corporate information in the above table is not considered a segment;
however, it represents the corporate assets necessary for the day-to-day
operations of the Company (that are not identifiable to the reporting segments)
and their related depreciation, amortization and capital expenditures.
12
10. STOCK-BASED COMPENSATION
- --------------------------------------------------------------------------------
The Company has three employee stock option plans and two stock option plans for
eligible directors allowing for incentive and non-qualified stock options.
Effective January 1, 2003, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation," which allows the Company to account for stock option
plans under the intrinsic value method in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. Pursuant
to the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, pro forma net income and earnings per
share are presented in the table below as if compensation cost for stock options
was determined as of the grant date under the fair value method (in thousands,
except per share information):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------------------------------------------
Net income, as reported........ $1,063 $980 $1,305 $3,337
Deduct: total stock-based
employee compensation expense
determined under fair value-
based method for all awards,
net of related tax effects.... (562) (287) (994) (496)
-------------------------------------------------
Pro forma net income........... $501 $693 $311 $2,841
=================================================
Basic earnings per share
Net income - as reported...... $0.03 $0.03 $0.03 $0.09
Net income - pro forma........ $0.01 $0.02 $0.01 $0.08
Diluted earnings per share
Net income - as reported...... $0.03 $0.03 $0.03 $0.09
Net income - pro forma........ $0.01 $0.02 $0.01 $0.08
SFAS No. 123 requires the use of option pricing models that were not developed
for use in valuing employee stock options. Further, option pricing models
require the input of highly subjective assumptions, including the options'
expected life and price volatility of the underlying stock. Thus, in the opinion
of management, existing option pricing models do not necessarily provide a
reliable measure of the fair value of employee stock options.
The compensation expense associated with the fair value of the options
calculated for the three months and six months ended June 30, 2003 and 2002, is
not necessarily representative of the potential effects on reported net income
(loss) in future periods. The fair value of each option grant is estimated on
the date of the grant by use of the Black-Scholes option pricing model.
11. 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, the exchangeable shares that have not been exchanged for
shares of the Company's common stock have been treated as if they had been
exchanged and are included in the Company's outstanding shares of common stock.
13
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, except upon the
unanimous approval of all common stockholders of the Company. 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 February 28, 2003, in connection with the Company's acquisition of SeaCAT,
the Company issued 733,676 shares of common stock to the shareholders of SeaCAT.
12. EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Basic earnings per share exclude any dilutive effects of options but include the
exchangeable shares (as further discussed in Note 11) from the business
combination with Prudential on an as-if exchanged basis. Diluted earnings per
share include the exchangeable shares on an as-if exchanged basis and the net
effect of stock options.
The reconciliation for diluted earnings per share for the three and six months
ended June 30, 2003 and 2002 is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------------------------------------------
Average shares outstanding..... 41,855 37,521 41,533 35,339
Dilutive effect of outstanding
stock options................. 430 453 392 423
-------------------------------------------------
Average shares deemed
outstanding................... 42,285 37,974 41,925 35,762
=================================================
Net income used in the
calculation of basic and
diluted earnings per share.... $1,063 $980 $1,305 $3,337
=================================================
13. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The following table sets forth the components of other comprehensive income for
the three and six months ended June 30, 2003 and 2002 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------------------------------------------
Net income..................... $1,063 $980 $1,305 $3,337
Change in fair value of
derivative qualifying as a
cash flow hedge............... (127) - (501) -
Foreign currency translation... 3,392 1,462 6,068 2,273
adjustment
Minimum pension liability
adjustment.................... (151) (33) (276) (31)
-------------------------------------------------
Comprehensive income........... $4,177 $2,409 $6,596 $5,579
=================================================
14
Independent Accountants' Review Report
The Board of Directors and Stockholders
Maverick Tube Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Maverick Tube Corporation and Subsidiaries as of June 30, 2003, and the related
condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 2003 and 2002, and the condensed consolidated statements
of cash flows for the six-month periods ended June 30, 2003 and 2002. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Maverick Tube
Corporation and Subsidiaries as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended [not presented herein] and in our report dated February 3, 2003,
except for Note 18, as to which the date is February 19, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
August 4, 2003
St. Louis, Missouri
15
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." 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 beliefs or expectations) 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, future import levels and the value of the U.S.
dollar. 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 made by the Company in light of its experience and perception of
historical conditions, expected future developments and other factors it
believes appropriate under the circumstances. Further information covering
issues that could materially affect the Company's financial performance is
contained in the "Risk Factors" section of the Company's Annual Report on Form
10-K for the year ended December 31, 2002, filed with the Securities and
Exchange Commission on March 28, 2003. This information can be found on the
Company's website at www.maverick-tube.com.
Our condensed, consolidated financial statements have been prepared in
accordance with accounting principles generally applied in the United States. It
should be noted that the application of certain accounting estimates of the
Company require judgment and/or estimates of management that could have a
significant impact on amounts reported in these financial statements. In
particular, the accounting for and analysis with respect to areas such as
goodwill, accounts receivable collectibility, discontinued operations, income
tax matters and pension plan are discussed. These critical accounting estimates
are more fully described in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our 2002 Annual
Report on Form 10-K.
The market data and other statistical information used throughout this quarterly
report are based on independent industry publications, government publications,
reports by market research firms or other published independent sources. Some
data are also based on our good faith estimates that are derived from our review
of internal surveys, as well as the independent sources listed above. Although
we believe these sources are reliable, we have not independently verified the
information and cannot guarantee its accuracy and completeness.
All amounts are expressed in U.S. dollars unless otherwise indicated.
OVERVIEW
- --------------------------------------------------------------------------------
We are a leading North American producer of welded tubular steel products used
in energy and industrial applications. We are the largest producer of oil
country tubular goods ("OCTG") and line pipe products for use in newly drilled
oil and gas wells and for transporting oil and natural gas. We primarily sell
these products to distributors in the U.S. and Canada. We expanded our business
into coiled tubing products with our acquisition of Precision Tube Holding
Corporation ("Precision") and SeaCAT Corporation ("SeaCAT"). Coiled tubing
products are used primarily to maintain existing wells and to complete new
wells. We sell coiled tubing to customers throughout North America and
internationally. OCTG, line pipe
16
and coiled tubing products comprise our energy product line. We also manufacture
structural tubing, also known as hollow structural sections or HSS, standard
pipe and pipe piling. In January 2003, we entered the steel electrical conduit
business with our acquisition of the tubular division of The LTV Corporation.
Structural tubing, standard pipe, pipe piling and steel electrical conduit
products comprise our industrial product line. We sell these industrial products
to service centers, fabricators and end-users. During the second quarter of
2003, energy products accounted for approximately 67% of our total revenues.
Business Acquisitions
- ---------------------
On March 29, 2002, we completed the purchase of all the common stock of
Precision, a privately held, Houston based, coiled tubular goods manufacturer,
in exchange for $60.7 million cash and 200,000 common shares. The acquisition
was accounted for as a purchase business combination and the financial
statements of Precision have been consolidated from the acquisition date.
On December 31, 2002, we acquired the assets and certain liabilities of the
tubular division of The LTV Corporation for $119.9 million cash. The acquisition
was accounted for as a purchase business combination and the financial
statements of the tubular division of The LTV Corporation have been consolidated
from the acquisition date. In February 2003, we announced the closure of the
Youngstown facility, one of the facilities acquired in the LTV acquisition.
On February 28, 2003, we completed the acquisition of SeaCAT, a privately held,
Houston based, coiled tubular goods manufacturer, in exchange for $4.0 million
cash, a $5.0 million secured, 11.0% subordinated note and 733,676 shares of
common stock of the Company. The purchase price is subject to an earn-out over a
three-year period with a maximum payment of $250,000 per year. The acquisition
was accounted for as a purchase business combination and the financial
statements of SeaCAT have been consolidated from the acquisition date.
Energy Products Demand and Consumption
- --------------------------------------
OCTG
Demand for our energy 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 and global weather patterns, influence these prices. As a result, the
future level and volatility of oil and natural gas prices are uncertain.
U.S. end-users obtain OCTG not only from domestic and foreign pipe producers,
but also from inventories held by end-users, distributors and mills. Industry
inventories of our products can change significantly from period to period.
These changes generally signal shifts in demand for our products caused by
customers drawing down from inventory rather than purchasing our products.
Canadian distributors do not generally hold significant amounts of inventories.
17
The following table illustrates certain factors related to industry-wide
drilling activity, energy prices, OCTG consumption, shipment, imports and
inventories for the periods presented:
Three Months Ended
June 30,
2003 2002
-------------------------
U.S. Market Activity:
Average rig count...................................... 1,028 806
=========================
Average U.S. energy prices
Oil per barrel (West Texas Intermediate)............. $29.10 $26.18
=========================
Natural gas per MCF (Average U.S.)................... $5.34 $3.23
=========================
U.S. OCTG Consumption:
(in thousands of tons)
U.S. producer shipments.............................. 604 396
Imports.............................................. 194 108
Inventory (increase)/decrease........................ (124) 43
Used pipe............................................ 17 24
-------------------------
Total U.S. Consumption.............................. 691 571
=========================
Canadian Market Activity:
Average rig count...................................... 203 144
=========================
Average Canadian energy prices
Natural gas per U.S. $ per MCF
(Average Alberta spot price)......................... $5.16 $2.93
=========================
Canadian OCTG Consumption:
(in thousands of tons)
Canadian producer shipments.......................... 117 74
Imports.............................................. 47 34
Inventory (increase)/decrease........................ (33) (11)
-------------------------
Total Canadian Consumption.......................... 131 97
=========================
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 estimates 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 estimates based upon data reported by
Statistics Canada. Canadian producer shipments are reported by Statistics
Canada Steel Pipe and Tube Report.
According to published industry reports, average U.S. drilling for the second
quarter of 2003 was approximately 1,028 rigs, representing an increase of 27.5%
compared to the second quarter of 2002. Natural gas drilling increased by 28.7%,
while oil related drilling increased by 23.5%. The higher drilling levels for
both oil and natural gas were primarily attributable to significant increases in
oil and natural gas prices, up by 11.1% and 65.3%, respectively. Drilling levels
increased throughout the second quarter of 2003, as the rig count at the end of
the quarter was approximately 3.8% higher than the average rig count during the
quarter.
According to published industry reports, average Canadian drilling for the
second quarter of 2003 was approximately 203 rigs, representing an increase of
41.0% compared to the second quarter of 2002. The higher drilling levels were
primarily attributable to significant increases in oil and natural gas prices,
up by 11.1% and 76.1%, respectively. Drilling levels increased throughout the
second quarter of 2003, as the rig count at the end of the quarter was
approximately 51.7% higher than the average rig count during the quarter.
18
Imports into the U.S. increased by 79.6%, with import market share increasing
from 18.9% during the second quarter of 2002 to 28.1% during the second quarter
of 2003. During the second quarter of 2003, U.S. producer shipments of OCTG
increased 52.3% as compared to the comparable prior year period. During the
second quarter of 2003, U.S. producer shipments were positively impacted by
industry inventory build-ups that resulted in an additional 17.9% of
consumption. During the second quarter of 2002, U.S. producer shipments were
negatively impacted by industry inventory draw-downs that supplied an additional
7.5% of demand. Management believes that at June 30, 2003, industry inventories
were below historical levels in relation to demand, as inventory months of
supply decreased 19.4%, from 6.2 months at June 30, 2002 to 5.0 months at June
30, 2003.
As a result of the increased drilling activity, we estimate that total U.S.
consumption increased by 21.0% in the second quarter of 2003, compared to the
prior year quarter. During that same period, our domestic shipments of OCTG
increased 38.2% and our export sales, primarily to Canada, increased by 33.9%.
We estimate that our domestic OCTG market share decreased from 19.4% during the
quarter ended June 30, 2002 to 18.2% during the quarter ended June 30, 2003.
This market share is approximately the market share we have captured
historically.
Imports into Canada increased 38.2%, with import market share increasing from
35.1% during the second quarter of 2002 to 35.9% during the second quarter of
2003. During the second quarter of 2003, Canadian producer shipments of OCTG
increased by 58.1%. Overall, Canadian shipments in the second quarter 2003 were
positively impacted by higher commodity energy prices that led to stronger
drilling activity than experienced during the second quarter 2002.
As a result of the increased drilling activity, we estimate that total Canadian
consumption increased by 35.1% in the second quarter of 2003, compared to the
prior year quarter. During that same period, our Canadian shipments of OCTG
increased 32.4%. We estimate that our Canadian OCTG market share of domestic
shipments increased from 37.6% during the quarter ended June 30, 2002 to 37.7%
during the quarter ended June 30, 2003.
Line Pipe
Published information suggests that U.S. demand for line pipe decreased during
the second quarter of 2003 by an estimated 11.3%, and domestic shipments
decreased by 16.9% as the import market share increased from 31.2% to 37.9%.
Canadian demand for line pipe increased during the second quarter by an
estimated 35.1%, and domestic shipments increased by 45.0% due to more project
work than in the second quarter 2002. Import volumes decreased by 58.2%, and the
import market share decreased from 87.2% for the second quarter 2002 to 27.0%
for the second quarter 2003.
Coiled Tubing
Coiled tubing is continuously milled steel tubing that is used in four primary
applications: down-hole well servicing, production tubing, line pipe, and
umbilical lines for controlling subsea wellheads. Commodity pricing and industry
cash flow are primary drivers of demand for this product. Industry cash flow
fell throughout 2002 as natural gas prices declined. Expectations for 2003 are
for increased activity in the energy industry as a whole which should positively
influence demand for coiled tubing in each of its applications.
19
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 market 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 4.3%
during the second quarter of 2003 over the prior year period. Total U.S.
producer shipments decreased 8.8% during the second quarter of 2003 over the
prior year period as import market share increased from 19.4% to 23.2%. Imports
increased due to a stronger Canadian and Turkish presence in the structural tube
market.
On December 31, 2002, we acquired the tubular division of the LTV Corporation
and expanded our industrial product line into electrical conduit. Electrical
conduit is primarily used as sheathing for electrical and computer wiring in
industrial, commercial and institutional construction, which are classified as
non-residential construction. As such, electrical conduit demand is primarily
influenced by changes in spending on non-residential construction expenditures.
Published forecasts for non-residential construction activity in 2003 are mixed,
ranging from flat to a drop of 7.7%. We estimate that the U.S. demand for
electrical conduit of the types we produce decreased by 21.7% during the second
quarter of 2003 as compared to the prior year period bringing the total year to
date decrease in demand to 15.1%. Maverick and three other domestic producers
manufacture most of the electrical conduit consumed in the U. S. The import and
export markets for conduit are limited because this light walled product is
easily damaged during shipping.
Standard pipe is used primarily in construction applications for transporting
water, steam, gases, waste, etc. Demand for this product is primarily affected
by general economic activity and non-residential construction expenditures.
According to published reports and management estimates, preliminary numbers
indicate that U.S. standard pipe demand in the second quarter was down from last
year by about 6%. Import market share increased from 31.4% to 35.3% resulting in
a decline in domestic shipments of about 11.3%.
Pricing and Costs of Our Products
- ---------------------------------
Pricing of our products was up during the second quarter of 2003. Pricing of
U.S. energy products was up 1.9% compared to the prior year quarter. Pricing of
U.S. industrial products, excluding electrical conduit and mechanical tubing,
was up 7.0% compared to the prior year quarter. This pricing increase was
primarily due to increased steel costs being passed on to our customers.
However, the addition of the tubular division of The LTV Corporation, which
added both electrical conduit and mechanical tubing, increased the average
selling price of our U.S. industrial product line by an additional 36.8%. These
products are more value added and thus sell for a higher price. Pricing of
Canadian energy and industrial products was up 16.2% and 11.4%, respectively,
compared to the prior year quarter. Canadian prices were impacted by an 11.3%
increase in the exchange rate.
Average steel costs included in cost of goods sold increased during the second
quarter of 2003 over the second quarter of 2002 by $47 per ton, or 16.2%. The
majority of this change resulted from our major supplier of steel effecting
several price increases (offset by several price decreases) since January 1,
2002, which resulted in a net increase of $65 per ton. Replacement cost of hot
rolled steel is approximately 10.1% below the average cost of goods sold per
unit experienced during the quarter ended June 30, 2003.
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 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 have a significant impact
20
on the margin levels of our energy products because energy product pricing is
driven by OCTG and line pipe demand and not steel costs. In addition, we depend
on a few suppliers for a significant portion of our steel. The loss of one or
more of our significant steel suppliers could affect our ability to produce our
products and could have a material adverse effect on our business.
Impact of Market Conditions
- ---------------------------
The OCTG market conditions described above impacted our operations and our
competitors significantly during the second quarter of 2003 as sales returned to
normal levels throughout the second quarter of 2003 due to the increase in
drilling activity. The increase in drilling levels during the second quarter of
2003 resulted in higher-than-expected sales. Consequently, industry-wide
inventory levels increased during the year and the impact of these inventory
increases had a positive impact on domestic shipments. As our recent experience
indicates, oil and gas prices are volatile and can have a substantial effect on
drilling levels and resulting demand for our energy related products.
Uncertainty also exists as to the future demand and pricing for our electrical
conduit, HSS and other industrial products.
Trade Cases
- -----------
The Section 201 trade case signed by the President in March 2002 provides a
three-year program of quotas and tariffs covering a wide range of imported steel
products with the exception of OCTG. Of specific interest to our business,
imported flat rolled products, including hot rolled steel coils, are subject to
a three-year decreasing tariff system of 30%, 24% and 18%. Also, our standard
pipe product line and HSS product line are subject to this same tariff system of
15%, 12% and 9%. Our OCTG and electrical conduit product lines were not
protected in the trade case ruling. The Section 201 trade case is scheduled for
a review in September 2003. The President may continue, adjust or eliminate the
tariffs based upon the results of this review.
In August of 2002, the Canadian International Trade Tribunal found injury on the
part of all imported steel products except hot rolled products. At this point in
time, the Canadian government has not acted on the Tribunal's findings; thus, no
further trade action has been taken.
The U.S. Section 201 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. During 2002, we experienced steel price increases that
we believe were caused by the U.S. Section 201 trade case.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overall Company
- ---------------
Net sales of $194.9 million recorded for the second quarter of 2003 represent an
increase of $88.5 million, or 83.1%, compared to the prior year period. These
results were primarily attributable to an increase of 63.9% in total product
shipments, from 179,371 tons in the second quarter of 2002 to 294,033 tons in
the second quarter of 2003. Also, overall average net selling prices increased
from the comparable quarter of the prior year by 11.8%, from an average of $593
per ton to $663 per ton. The increase we experienced in shipments and average
selling prices primarily resulted from our acquisitions of the tubular division
of The LTV Corporation and SeaCAT as none of these acquisitions contributed to
our operations during the second quarter of 2002 and the strengthening market
conditions in the energy segment. See "Overview."
Net sales of $414.4 million recorded for the six months ended June 30, 2003
represent an increase of $204.0 million, or 97.0%, compared to the prior year
period. These results were primarily attributable to an increase of 70.6% in
total product shipments, from 363,854 tons in the six months ended June 30, 2002
to 620,705 tons in the six months ended June 30, 2003. Also, overall average net
selling prices increased from the comparable quarter of the prior year by 15.6%,
from an average of $578 per ton to $668 per ton. The increase we experienced in
shipments and average selling prices primarily resulted from our acquisitions of
Precision, the tubular division of The LTV Corporation and SeaCAT and the
strengthening
21
market conditions in the energy segment. The tubular division of The LTV
Corporation and SeaCAT acquisitions did not contribute to our operations during
the six months ended June 30, 2002 and the Precision acquisition only
contributed to our operations during the quarter ended June 30, 2002. See
"Overview."
Cost of goods sold of $179.3 million recorded for the second quarter of 2003
represents an increase of $85.1 million, or 90.3%, compared to the prior year
period. Overall unit cost per ton of products sold increased from the comparable
quarter of the prior year by 16.2%, from an average of $525 per ton to $610 per
ton. Costs increased as a result of our recent acquisitions of the tubular
division of The LTV Corporation and SeaCAT as none of these acquisitions
contributed to our operations during the second quarter of 2002. These entities
product lines are more value added and thus have higher steel and conversion
costs associated with them. The increase was also partially due to a net
increase in steel cost. See "Overview."
Cost of goods sold of $383.8 million recorded for the six months ended June 30,
2003 represents an increase of $197.3 million, or 105.8%, compared to the prior
year period. Overall unit cost per ton of products sold increased from the
comparable period of the prior year by 20.5%, from an average of $513 per ton to
$618 per ton. Costs increased as a result of our recent acquisitions of
Precision, the tubular division of The LTV Corporation and SeaCAT. These
entities product lines are more value added and thus have higher steel and
conversion costs associated with them. The tubular division of The LTV
Corporation and the SeaCAT acquisitions did not contribute to our operations
during the six months ended June 30, 2002 and the Precision acquisition only
contributed to our operations during the quarter ended June 30, 2002. The
increase was also partially due to a net increase in steel cost. See "Overview."
The Company earned a gross profit of $15.6 million during the second quarter of
2003, compared to a gross profit of $12.2 million in the prior year period.
Gross profit per ton was $53 per ton as compared to $68 per ton in the
comparable prior year period. Gross profit per ton decreased because the higher
steel costs more than offset the higher selling prices experienced by the
Company. Accordingly, gross profit, as a percentage of net sales, was 8.0% for
the three-month period ended June 30, 2003, compared to a gross profit, as a
percentage of net sales, of 11.5% for the comparable prior year period.
The Company earned a gross profit of $30.6 million during the six months ended
June 30, 2003, compared to a gross profit of $23.9 million in the prior year
period. Gross profit per ton was $49 per ton as compared to $66 per ton in the
comparable prior year period. Gross profit per ton decreased because the higher
steel costs more than offset the higher selling prices experienced by the
Company. Accordingly, gross profit, as a percentage of net sales, was 7.4% for
the six-month period ended June 30, 2003, compared to a gross profit, as a
percentage of net sales, of 11.3% for the comparable prior year period.
Selling, general and administrative expenses increased $2.1 million, or 21.6%,
from $9.7 million in the second quarter of 2002 to $11.8 million in the second
quarter of 2003. This increase resulted primarily from the additional expenses
associated with the tubular division of The LTV Corporation. See "Overview."
Selling, general and administrative expenses as a percentage of net sales in the
second quarter of 2003 were 6.0% compared to 9.1% for the comparable prior year
period. The decrease was due to the higher shipment levels in the second quarter
of 2003 compared to the second quarter of 2002.
Selling, general and administrative expenses increased $7.2 million, or 42.6%,
from $16.9 million for the six months ended June 30, 2002 to $24.1 million for
the six months ended June 30, 2003. This increase resulted primarily from the
additional expenses associated with the Precision and the tubular division of
The LTV Corporation businesses. See "Overview." Selling, general and
administrative expenses as a percentage of net sales for the six months ended
June 30, 2003 were 5.8% compared to 8.0% for the comparable prior year period.
The decrease was due to the higher shipment levels in the six months ended June
30, 2003 compared to the six months ended June 30, 2002.
Interest expense increased $1.3 million or 146.9%, from $0.9 million in the
second quarter of 2002 to $2.2 million in the second quarter of 2003. This
increase was due to higher average borrowings (primarily as a
22
result of the acquisitions of the tubular division of The LTV Corporation and
the SeaCAT Corporation and the issuance of the convertible senior subordinated
notes in June 2003) and lower average interest rates during the second quarter
2003 compared to the second quarter of 2002. Our debt to capitalization ratio
increased from 29.1% at December 31, 2002 to 34.9% at June 30, 2003.
Interest expense increased $2.6 million or 139.5%, from $1.9 million in the six
months ended June 30, 2002 to $4.4 million in the six months ended June 30,
2003. This increase was due to higher average borrowings (primarily as a result
of the acquisitions of Precision, the tubular division of The LTV Corporation
and the SeaCAT Corporation and the issuance of the convertible senior
subordinated notes in June 2003) and lower average interest rates during the six
months ended June 30, 2003 compared to six months ended June 30, 2002.
The provision for income taxes was $0.6 million for the second quarter of 2003,
compared to the prior year's provision of $0.6 million. The provision for income
taxes remained flat due to the generation of pre-tax income of $1.7 million for
the second quarter of 2003, compared to the pre-tax income in the second quarter
of 2002 of $1.6 million.
The provision for income taxes was $0.7 million for the six months ended June
30, 2003, compared to the prior year's provision of $1.9 million. This change is
attributable to the generation of pre-tax income of $2.0 million for the six
months ended June 30, 2003, compared to the pre-tax income in the six months
ended June 30, 2002 of $4.7 million.
Net income of $1.1 million was generated in the second quarter of 2003, an
increase of $0.1 million from the comparable prior year period. Net income of
$1.3 million was generated in the six months ended June 30, 2003, a decrease of
$2.0 million from the comparable prior year period.
Segment Information
- -------------------
The Company revised its segments for 2003. The Company's two segments are now
the Energy Products segment and the Industrial Products segment.
Energy Products Segment
- -----------------------
Energy product sales of $131.2 million for the second quarter of 2003
represented an increase of $46.4 million, or 54.8%, compared to the prior year
period. Energy product shipments increased 63,936 tons, or 49.0%, from 130,571
tons to 194,507 tons. Energy product shipments primarily increased due to the
U.S. and Canadian rig counts increasing from 806 and 144 active rigs,
respectively, for the second quarter of 2002 to 1,028 and 203 active rigs,
respectively, for the second quarter of 2003. Overall average net selling prices
for energy products increased from the comparable quarter of the prior year by
4.0%, from an average of $649 per ton to $675 per ton. The increase in energy
product sales was primarily due to strengthening market conditions and the
additional sales attributable to the Precision and SeaCAT businesses. See
"Overview."
Energy product sales of $283.6 million for the six months ended June 30, 2003
represented an increase of $113.6 million, or 66.8%, compared to the prior year
period. Energy product shipments increased 151,155 tons, or 55.9%, from 270,203
tons to 421,358 tons. Energy product shipments primarily increased due to the
U.S. and Canadian rig counts increasing from 812 and 265 active rigs,
respectively, for the six months ended June 30, 2002 to 964 and 348 active rigs,
respectively, for the six months ended 2003. Overall average net selling prices
for energy products increased from the comparable period of the prior year by
7.0%, from an average of $629 per ton to $673 per ton. The increase in energy
product sales was primarily due to strengthening market conditions and the
additional sales attributable to the Precision and SeaCAT businesses. See
"Overview."
Energy product cost of goods sold of $119.1 million for the second quarter of
2003 represented an increase of $44.4 million, or 59.4%, compared with the prior
year period. The increase was primarily due to
23
increased product shipments and higher steel costs. See "Overview." Gross profit
for energy products of $12.1 million for the quarter ended June 30, 2003
compared to a gross profit of $10.1 million for the prior year period. See
"Overview." Gross profit was $62 per ton as compared to $77 per ton in the
comparable prior year period, reflecting higher steel prices, partially offset
by stronger selling prices and higher fixed cost absorption. Energy product
gross profit margin percentage was 9.3% for the quarter ended June 30, 2003,
compared to a gross profit margin percentage of 11.9% for the prior year period.
Energy product cost of goods sold of $259.9 million for the six months ended
June 30, 2003 represented an increase of $111.6 million, or 75.3%, compared with
the prior year period. The increase was primarily due to increased product
shipments and higher steel costs. See "Overview." Gross profit for energy
products of $23.7 million for the six months ended June 30, 2003 compared to a
gross profit of $21.7 million for the prior year period. See "Overview." Gross
profit was $56 per ton as compared to $80 per ton in the comparable prior year
period, reflecting higher steel prices, partially offset by stronger selling
prices and higher fixed cost absorption. Energy product gross profit margin
percentage was 8.4% for the six months ended June 30, 2003, compared to a gross
profit margin percentage of 12.8% for the prior year period.
Industrial Products Segment
- ---------------------------
Industrial product sales of $63.7 million for the second quarter of 2003
represented an increase of $42.1 million, or 193.8%, compared with the prior
year period. Industrial product shipments increased 50,726 tons, or 103.9%, from
48,800 tons to 99,526 tons. This increase in industrial product sales and
shipments resulted from the additional $43.3 million in sales and 56,346 tons
attributable to the industrial products sold by the tubular division of The LTV
Corporation. See "Overview." Overall average net selling price for industrial
products increased 44.1% from the comparable quarter of the prior year from an
average of $444 per ton to $640 per ton. The addition of the tubular division of
The LTV Corporation that added both electrical conduit and mechanical tubing
increased the average selling price of our industrial product line by an
additional 36.8%. These products are more value-added and thus sell for a higher
price.
Industrial product sales of $130.8 million for the six months ended June 30,
2003 represented an increase of $90.4 million, or 224.0%, compared with the
prior year period. Industrial product shipments increased 105,696 tons, or
112.9%, from 93,651 tons to 199,347 tons. This increase in industrial product
sales and shipments resulted from the additional $92.1 million in sales and
118,567 tons attributable to the industrial products sold by the tubular
division of The LTV Corporation. See "Overview." Overall average net selling
price for industrial products increased 52.2% from the comparable period of the
prior year from an average of $431 per ton to $656 per ton. The addition of the
tubular division of The LTV Corporation that added both electrical conduit and
mechanical tubing increased the average selling price of our industrial product
line by an additional 36.3%. These products are more value-added and thus sell
for a higher price.
Industrial product cost of goods sold of $60.2 million in the second quarter of
2003 represented an increase of $40.7 million, or 207.9%, from the prior year
period. The increase was primarily due to increased product shipments and higher
steel costs. See "Overview." Gross profit for industrial products of $3.5
million for the quarter ended June 30, 2003 compared to a gross profit of $2.1
million for the prior year period. The increase in gross profit was primarily
attributable to the addition of the industrial products from the tubular
division of The LTV Corporation. Gross profit was $35 per ton as compared to $44
per ton in the comparable prior year period, reflecting higher steel costs,
partially offset by stronger selling prices. Industrial product gross profit
margin percentage was 5.5% for the quarter ended June 30, 2003, compared to 9.8%
gross profit margin during the prior year period.
Industrial product cost of goods sold of $123.9 million in the six months ended
June 30, 2003 represented an increase of $85.7 million, or 224.3%, from the
prior year period. The increase was primarily due to increased product shipments
and higher steel costs. See "Overview." Gross profit for industrial products of
$6.8 million for the six months ended June 30, 2003 compared to a gross profit
of $2.1 for the prior year period. The increase in gross profit was primarily
attributable to the addition of the industrial products from the tubular
division of The LTV Corporation. Gross profit was $34 per ton as compared to $23
per ton in the comparable prior year period, reflecting higher steel prices,
partially offset by stronger selling
24
prices. Industrial product gross profit margin percentage was 5.2% for the six
months ended June 30, 2003, compared to 5.2% gross profit margin during the
prior year period.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Working capital at June 30, 2003 was $247.4 million, and the ratio of current
assets to current liabilities was 4.1 to 1.0. Working capital at December 31,
2002 was $201.2 million, and the ratio of current assets to current liabilities
was 2.9 to 1.0. The increase in working capital for the six months ended June
30, 2003 was due to an $18.6 million increase in accounts receivables, $17.1
million increase in cash and cash equivalents, $4.7 million increase in income
taxes receivable and $41.3 million decrease in accounts payable partially offset
by a $20.1 million decrease in inventory, $6.1 million increase in accrued
liabilities and $6.1 million increase in deferred revenue. The primary reason
for the increase in cash and cash equivalents and the decrease in accounts
payable was the issuance of the convertible senior subordinated notes in June
2003. Cash used by operating activities was $12.0 million for the six months
ended June 30, 2003.
Cash used by investing activities was $12.0 million for the six months ended
June 30, 2003, attributable primarily to the cash paid in connection with the
acquisition of SeaCAT ($4.0 million, net of cash received) and $8.0 million for
expenditures on property, plant and equipment.
Cash provided by financing activities was $40.5 million for the six months ended
June 30, 2003.
We have a senior credit facility providing for up to a $185.0 million revolving
line of credit. In addition, we have outstanding letters of credit under this
agreement representing an additional $1.5 million at June 30, 2003. Interest is
payable monthly either at U.S. or Canadian prime, Bankers' Acceptance rates plus
stamping fees or the LIBOR rate, all adjusted by an interest margin, depending
upon certain financial measurements. Under the revolving senior credit facility,
we 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 additional available borrowings under the senior credit
facility is approximately $118.0 million as of June 30, 2003. The senior credit
facility includes a restrictive covenant relating to maintaining a minimum fixed
charge coverage ratio if availability falls below $30.0 million. The senior
credit facility also limits capital expenditures to $30.0 million per year and
limits our ability to pay dividends, create liens, sell assets or enter into
transactions with affiliates without the consent of the lenders.
We anticipate we will comply with the covenants in 2003 and beyond; however, if
our operations are less than projected, we could be in default under this
facility. We believe that our projections for 2003 are based on reasonable
assumptions and that it is unlikely that we would default absent any material
negative event affecting our industry and the economy as a whole. Although we
would attempt to obtain an amendment to the facility to cure this breach or a
waiver from the lender, we cannot give any assurance that we could obtain an
amendment or waiver or one with terms as favorable as the terms of the facility.
If we are unable to obtain an amendment or waiver, we would remain in default
and the lender would have the right to exercise all of its remedies, including,
without limitation, the ability to accelerate all of the debt under the
facility. We also believe our lender would provide waivers if necessary.
However, our expectation of future operating results and continued compliance
with our debt covenants cannot be ensured, as we do not control our lender's
actions. If our projections are not achieved and our debt is placed in default,
we would experience a material adverse impact on our reported financial position
and results of operations.
We have entered into an interest rate swap agreement with a total notional
amount of $50.0 million that fixes the LIBOR-based variable rate in our senior
credit facility at 2.24% (before the applicable margin). The swap agreement
terminates on March 21, 2005. The swap is being accounted for as cash flow hedge
under SFAS No. 133. Accordingly, the difference between the interest received
and interest paid is reflected as an adjustment to interest expense. Under the
terms of the swap agreement, the next settlement amount is not due until
September of 2003. At June 30, 2003, the swap agreement is reflected in the
25
accompanying consolidated balance sheet in other accrued liabilities at its fair
value of $0.8 million. The unrealized loss on the fair value of the swap
agreement is reflected, net of taxes, in other comprehensive loss.
Consistent with the Company's business strategy, we currently intend to retain
earnings to finance the growth and development of our business, and we do not
anticipate paying cash dividends in the near future. Any payment of cash
dividends in the future will depend upon our financial condition, capital
requirements and earnings as well as other factors the Board of Directors may
deem relevant. Our long-term revolving credit facility with commercial lenders
restricts the amount of dividends we can pay to our stockholders.
Our capital budget for 2003 is approximately $23.2 million, of which $8.0
million was expended during the six-month period ended June 30, 2003 The capital
budget includes $4.2 million for a new slitter at one of our existing facilities
in Hickman, Arkansas, $3.0 million to integrate our enterprise resource planning
system into the tubular division of The LTV Corporation and $1.5 million for the
construction of a new coiled tubing service center in Red Deer Canada. The
remaining $14.5 million of our capital budget will be used to acquire new
equipment for our existing manufacturing facilities, and to continue full
integration of our recent acquisitions. 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.
CRITICAL ACCOUNTING ESTIMATES
- --------------------------------------------------------------------------------
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 valuation of goodwill, the collectibility of accounts receivable, valuation
of the note receivable for the sale of the discontinued operations, income tax
matters and the pension plan.
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 of Financial
Condition and Results of Operations" and the financial statements and notes
contained in this report provide a meaningful and fair perspective of the
Company.
The Company's critical accounting policies and estimates are more fully
described in our Annual Report on Form 10-K for the year ended December 31,
2002, beginning on page 25. The Company's critical accounting policies and
estimates did not change during the second quarter of 2003. 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 condition.
PROSPECTIVE ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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.
Implementation of this standard did not have a material impact.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -
26
Transition and Disclosure - an amendment of FASB Statement No. 123," which
provides alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions relating to
interim periods are effective for internal periods beginning after December 15,
2002. We currently intend to continue to account for stock-based compensation
under the intrinsic value method and to provide pro forma disclosure of the
impact of the fair value method on reported net income.
Effective January 1, 2003, the Company adopted Financial Accounting Standards
Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN
45). The interpretation requires disclosure of all guarantee arrangements and
requires guarantees issued or revised after December 31, 2002, to be recognized
at fair value in the financial statements.
The Company has entered into debt guarantee agreements, related to the sale of
the operating assets of its Cold Drawn Tubular Business ("DOM"), which could
obligate the Company to make future payments if the primary entity fails to
perform under its contractual obligation. Should the Company be required to make
any payments pursuant to these guarantees, the Company has a security interest
in the underlying assets conveyed to the buyer. At June 30, 2003, these debt
guarantees total approximately $1.5 million.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" (FIN 46). A variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that does not have equity investors with
voting rights, or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns, or both. The
Company will adopt FIN 46 in the third quarter of fiscal 2003 and believes the
impact of adopting this standard will not have a material impact on the
Company's financial statements.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Interest Rate Risk
- ------------------
We are subject to interest rate risk to the extent we borrow against our
revolving credit facility with variable interest rates. However, we utilize an
interest rate swap agreement to moderate a portion of our exposure. We do not
use derivative financial instruments for trading or other speculative purposes.
Assuming the current level of borrowings and a two-percentage-point change in
the average interest rates under these borrowings and taking into account the
swap agreement in place, it is estimated that our interest expense for the
quarter ended June 30, 2003 would have increased by approximately $0.1 million.
In the event of an adverse change in interest rates, management would likely
take further actions, in addition to the swap agreement currently in place, that
would mitigate our exposure to interest rate risk; however, due to the
uncertainty of the further 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.
Steel Commodity Risk
- --------------------
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. See
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Pricing and Costs of Our Products."
Foreign Currency Risk
- ---------------------
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
- --------------------------------------------------------------------------------
The Company's management, under the supervision and with the participation of
our chief executive officer and chief financial officer have reviewed and
evaluated the Company's disclosure controls and procedures as of June 30, 2003.
Based on such review and evaluation, our chief executive officer and chief
financial officer have concluded that the disclosure controls and procedures are
effective 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 (b) is accumulated and
communicated to the Company's management, including the officers, as appropriate
to allow timely decisions regarding required disclosure. That there have been no
significant changes in the Company's internal controls over financial reporting
that have materially affected, or reasonably likely to materially affect, the
Company's internal controls over financial reporting.
28
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------------------------------------
On June 9, 2003, we issued and sold $100,000,000 aggregate principal amount of
our 4.00% Convertible Senior Subordinated Notes due 2033 (the "Notes") in a
private placement to J.P. Morgan Securities Inc., Jefferies & Co., Inc. and
Raymond James & Associates, Inc. (collectively, the "Initial Purchasers"). On
June 20, 2003, we issued and sold an additional $20,000,000 aggregate principal
amount of the Notes in connection with the exercise by the Initial Purchasers of
their option to purchase additional Notes. Both offerings were exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof. We have been advised by the
Initial Purchasers that the Notes were subsequently issued only to "qualified
institutional buyers" in reliance on Rule 144A promulgated under the Securities
Act. The Notes were issued at 100% of the principal amount thereof, plus accrued
interest. The Initial Purchasers purchased the Notes from us at 97% of the
principal amount thereof, plus accrued interest.
The Notes are convertible by holders into shares of our common stock at an
initial conversion rate of 34.2583 shares of our common stock per $1,000
principal amount of notes (subject to adjustment in certain events), which is
equal to an initial conversion price of $29.19 per share, under the following
circumstances:
o during any calendar quarter if the last reported sale price of our common
stock for at least 20 trading days during the period of 30 consecutive
trading days ending on the last day of the previous calendar quarter is
greater than or equal to 120% of the conversion price per share of our
common stock on such last trading day;
o during the five business day period after any five consecutive trading day
period in which the trading price for the notes for each day of that period
was less than 98.0% of the product of the closing price of our common stock
and the number of shares of common stock issuable upon conversion of $1,000
principal amount of notes;
o if, during any period that the notes are rated by either Moody's Investors
Service, Inc. or Standard & Poor's Rating Group, the rating assigned to the
notes by either such rating agency is reduced by two or more rating levels
from the level initially assigned, however, we have no obligation to have
the notes rated;
o if we call the notes for redemption; or upon the occurrence of specified
corporate transactions.
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
(a) The annual meeting of the Stockholders of the Company was held on May 5,
2003. Of the 41,681,192 shares entitled to vote (39,227,276 common stock
and 2,453,916 exchangeable shares) at such meeting, 37,287,864 shares were
present at the meeting in person or by proxy.
(b) The individuals listed below were elected as directors of the Company, and
with respect to each director, the number of shares voted for and withheld
were as follows:
Number of Shares Voted
Name of Nominees For Withheld
---------------------------------------------------------------------------
Gregg Eisenberg................................... 36,540,081 747,783
C. Robert Bunch................................... 35,520,523 1,767,341
David H. Kennedy.................................. 35,524,409 1,763,455
Wayne P. Mang..................................... 35,519,409 1,768,455
Paul McDermott.................................... 36,781,479 506,385
C. Adams Moore.................................... 36,746,454 541,410
J. Donald Wilson.................................. 36,754,779 533,085
(c) The Board of Directors' adoption of the Maverick Tube Corporation 2003
Employee Stock Option Plan was not approved with 17,769,527 shares voting
for the proposal, 19,192,122 shares voting against the proposal and 326,215
shares abstained.
There were no brokers' non-votes.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibit No. Description
10.1 First Amendment to Amended and Restated Credit Agreement dated as of
February 28, 2003 among Registrant and its subsidiaries, on the one
hand, and the Senior Lenders, on the other hand.
10.2 Second Amendment to Amended and Restated Credit Agreement dated as of
June 2, 2003 among Registrant and its subsidiaries, on the one hand,
and the Senior Lenders, on the other hand.
15.1 Letter re: Unaudited Interim Financial Information
31.1 Chief Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On April 17, 2003, the Company filed a Report on Form 8-K containing the
announcement of its first quarter 2003 results.
On June 3, 2003, the Company filed a Report on Form 8-K containing the
announcement of the Company's intent to offer $100 million of contingent
convertible senior subordinated notes and the Company's earnings
expectations for the quarter ended June 30, 2003.
On June 4, 2003, the Company filed a Report on Form 8-K containing the
announcement of the pricing of the $100 million contingent convertible
senior subordinated notes.
On June 20, 2003, the Company filed a Report on Form 8-K containing the
announcement of the issuance of an additional $20 million contingent
convertible senior subordinated notes.
31
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: August 11, 2003 /s/ Gregg Eisenberg
----------------------------------------------
Gregg Eisenberg, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2003 /s/ Pamela G. Boone
----------------------------------------------
Pamela G. Boone, Vice President - Finance
and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
32
EXHIBIT INDEX
Exhibit No. Description
- --------------------------------------------------------------------------------
10.1 First Amendment to Amended and Restated Credit
Agreement dated as of February 28, 2003 among
Registrant and its subsidiaries, on the one hand,
and the Senior Lenders, on the other hand.
10.2 Second Amendment to Amended and Restated Credit
Agreement dated as of June 2, 2003 among Registrant
and its subsidiaries, on the one hand, and the
Senior Lenders, on the other hand.
15.1 Letter re: Unaudited Interim Financial Information.
31.1 Chief Executive Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
33