UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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 checkmark 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 checkmark 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 - 41,957,544 shares as of November 12, 2003
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets - September 30, 2003
and December 31, 2002 3
Condensed Consolidated Statements of Income - Three
and Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 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 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
EXHIBIT INDEX 31
2
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
September 30,December 31,
2003 2002
(Unaudited)
-------------------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $36,459 $2,551
Accounts receivable, less allowance of $5,067
and $5,188 on September 30, 2003 and
December 31, 2002, respectively.................. 98,705 73,660
Inventories........................................ 176,394 210,207
Deferred income taxes.............................. 4,072 11,338
Income taxes refundable............................ 2,667 637
Prepaid expenses and other......................... 8,435 10,375
-------------------------
Total current assets................................... 326,732 308,768
Property, plant and equipment, less accumulated
depreciation of $146,380 and $117,412 on
September 30, 2003 and December 31, 2002,
respectively......................................... 185,381 179,244
Goodwill and intangibles............................... 112,910 93,184
Deferred income taxes.................................. 972 -
Note receivable........................................ 6,627 6,877
Other assets........................................... 11,031 7,810
-------------------------
$643,653 $595,883
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $43,172 $78,457
Accrued expenses and other liabilities............. 37,199 23,531
Deferred revenue................................... 5,295 2,608
Current maturities of long-term debt............... 4,241 2,977
-------------------------
Total current liabilities.............................. 89,907 107,573
Long-term debt, less current maturities................ 4,311 2,742
Convertible senior subordinated notes.................. 120,000 -
Revolving credit facility.............................. 50,207 132,927
Other liabilities...................................... 10,356 7,640
Deferred income taxes.................................. - 6,715
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000
authorized shares; 1 share issued and
outstanding at September 30, 2003 and
December 31, 2002, respectively...................... - -
Common stock, $0.01 par value; 80,000,000
authorized shares; 41,956,544 and
40,942,976 shares issued and outstanding
at September 30, 2003 and December 31,
2002, respectively................................... 420 409
Additional paid-in capital............................. 227,510 212,361
Retained earnings...................................... 149,217 139,235
Accumulated other comprehensive loss................... (8,275) (13,719)
-------------------------
368,872 338,286
-------------------------
$643,653 $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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------------------------
Net sales...................... $226,753 $117,696 $641,116 $328,073
Cost of goods sold............. 196,988 106,640 580,796 293,163
-------------------------------------------------
Gross profit................... 29,765 11,056 60,320 34,910
Selling, general and
administrative................ 15,716 8,910 39,814 25,799
Restructuring charges.......... - - - 369
Partial trade case relief...... (950) - (950) -
-------------------------------------------------
Income from operations......... 14,999 2,146 21,456 8,742
Interest expense............... 2,711 908 7,153 2,763
-------------------------------------------------
Income from continuing
operations before income taxes 12,288 1,238 14,303 5,979
Provision for income taxes..... 3,611 602 4,321 2,524
-------------------------------------------------
Income from continuing
operations.................... 8,677 636 9,982 3,455
Gain on disposal of DOM
facility, net of income taxes. - - - 518
-------------------------------------------------
Net income..................... $8,677 $636 $9,982 $3,973
=================================================
Basic earnings per share
Income from continuing
operations.................. $0.21 $0.02 $0.24 $0.09
Gain on disposal of DOM
facility.................... - - - 0.01
-------------------------------------------------
Net income................... $0.21 $0.02 $0.24 $0.11
=================================================
Diluted earnings per share
Income from continuing
operations.................. $0.21 $0.02 $0.24 $0.09
Gain on disposal of DOM
facility.................... - - - 0.01
-------------------------------------------------
Net income................... $0.21 $0.02 $0.24 $0.11
=================================================
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)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
2003 2002
-------------------------
OPERATING ACTIVITIES
Income from continuing operations...................... $9,982 $3,455
Adjustments to reconcile income from continuing
operations to net cash provided (used) by operating
activities:
Depreciation and amortization.......................... 16,733 14,137
Deferred income taxes.................................. 221 810
Provision for losses on accounts receivable............ 609 93
(Gain) loss on sale of equipment....................... (1) 10
Changes in operating assets and liabilities:
Accounts receivable................................. (23,857) (15,117)
Inventories......................................... 45,128 (7,920)
Prepaid expenses and other.......................... 2,224 (210)
Other assets........................................ 794 (1,501)
Accounts payable.................................... (40,098) 39,834
Accrued expenses and other liabilities.............. 8,480 (15,657)
Deferred revenue.................................... 2,687 1,443
-------------------------
Cash provided by continuing operating activities....... 22,902 19,377
INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash received....... (4,000) (56,823)
Expenditures for property, plant and equipment......... (13,046) (17,945)
Proceeds from disposal of equipment.................... 63 63
-------------------------
Cash used by investing activities...................... (16,983) (74,705)
FINANCING ACTIVITIES
Net repayments on revolving credit facility............ (88,192) (50,894)
Proceeds from convertible senior subordinated notes.... 120,000 -
Principal payments on long-term borrowings and notes... (2,167) (1,446)
Deferred debt costs.................................... (4,494) -
Principal payments on long-term note receivable........ 250 -
Proceeds from sale of common stock..................... - 90,370
Proceeds from sale of treasury stock................... - 15,853
Proceeds from exercise of stock options................ 1,902 907
-------------------------
Cash provided by financing activities.................. 27,299 54,790
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................ 690 (483)
-------------------------
Increase (decrease) in cash and cash equivalents....... 33,908 (149)
Cash and cash equivalents at beginning of period....... 2,551 1,940
-------------------------
Cash and cash equivalents at end of period............. $36,459 $1,791
=========================
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Note receivable for sale of discontinued operations $- $8,115
Stock issued for acquisitions...................... $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 nine months
ended September 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 acquisition 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 $54,604,000, 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
business.
7
SeaCAT Corporation
- ------------------
On February 28, 2003, the Company completed its acquisition 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) (6,258) (898)
-------------------------------------
(9,039) (12,688) (2,226)
Net assets acquired...................... 19,835 67,402 6,592
-------------------------------------
Goodwill................................... $43,131 $54,604 $15,175
=====================================
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" during 2002. 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, the employment of all 124 employees at the
facility was terminated as of September 30, 2002. Restructuring costs recorded
in the consolidated statement of income during the nine months ended September
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 September 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, September 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 its working capital requirements. The facility is secured by all of the
Company's accounts receivable, inventories, equipment and real estate, and
matures in March 2006. The senior credit facility bears interest at the U.S. or
Canadian prime rate, 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 and other reserves.
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 September 30, 2003, the applicable interest rate on this credit facility
was 3.9% per annum and the additional available borrowing amount under the
senior credit facility was approximately $123,564,000.
(6) CONVERTIBLE SENIOR SUBORDINATED NOTES
- --------------------------------------------------------------------------------
In June 2003, the Company issued $120,000,000 of contingent convertible senior
subordinated notes (the "Convertible Notes") due June 15, 2033. The Company pays
interest semi-annually on the Convertible Notes at the rate of 4.0% per annum.
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 the Convertible Notes equals or exceeds 130.0% of the
principal amount of the Convertible Notes during a specified period prior to
such six-month interest period. The embedded derivative related to this
contingent interest feature is required to be valued separately from the
Convertible Note 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 September 30,
2003.
9
The Convertible Notes are general unsecured obligations of the Company and are
subordinated to the Company's present and future senior indebtedness. Also, the
Convertible 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 the
Convertible Notes, representing a conversion price of $29.19 per common share.
The Company has the right to redeem the Convertible Notes after June 15, 2008 at
a redemption price equal to par plus accrued interest, if any. Prior to June 15,
2011, the Company may redeem the Convertible Notes only 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 Convertible Notes at any time.
Holders of the Convertible Notes have the right to require the Company to
repurchase all or some of their Convertible 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 Convertible Notes also have the right to require the
Company to purchase all or some of their Convertible Notes at a price equal to
par plus accrued interest, if any, if certain change of control events 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
September 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
Interest rate swaps.................... 626 (219) 407
Foreign currency hedges................ 318 (115) 203
-------------------------------------
Balance at September 30, 2003.............. $944 $(334) $610
=====================================
The unrealized loss related to the interest rate swaps as of September 30, 2003
reflects the Company's use of these swaps to convert variable rate debt to fixed
rate debt and the decline in interest rates from the inception date of the
derivative contracts. 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 unrealized loss related to the foreign currency hedges as of September 30,
2003 reflects the Company's use of forward contracts to hedge the variability of
nonfunctional currency denominated, fixed rate borrowings and the change in the
exchange rate between the Canadian dollar and the U.S. dollar from the inception
date of the derivative contracts. The accumulated other comprehensive loss
(along with the corresponding hedge liability) will be adjusted as the exchange
rates between the Canadian dollar and the U.S. dollar change over the remaining
life of the hedge.
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 and currency exchange rates,
the Company, as an end user, enters into various interest rate and foreign
currency hedge transactions in the over-the-counter markets, with other
financial institutions acting as principal counterparties. 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.
To ensure both appropriate use as a hedge and hedge accounting treatment, the
interest rate swap derivative was designated according to a hedge objective
against the revolving credit facility. The Company's
10
primary hedge objectives include the conversion of variable rate debt to fixed
rates. To ensure both appropriate use as a hedge and hedge accounting treatment,
the foreign currency hedge derivative was designated according to a hedge
objective against the revolving credit facility. The Company's primary hedge
objectives include the conversion of foreign currency denominated debt to
functional currency debt.
The following table presents the Company's derivatives by class and the
corresponding hedge objectives at September 30, 2003 (in thousands):
Qualifying Cash Flow Hedges Notional Amount Description
- --------------------------------------------------------------------------------
Interest rate swaps $50,000 Effectively converts the
(floating to fixed rate swaps) interest rate on an
equivalent amount of
variable rate borrowings
to a fixed rate
Foreign currency hedges $30,000 Effectively hedges the
(floating to fixed exchange rates) variability in forecasted
cash flows due to the
foreign currency risk
associated with the
settlement of
nonfunctional currency
denominated debt
(8) INVENTORIES
- --------------------------------------------------------------------------------
Inventories at September 30, 2003 and December 31, 2002 consist of the following
(in thousands):
2003 2002
-------------------------
Finished goods......................................... $95,713 $109,878
Work-in-process........................................ 9,890 7,982
Raw materials.......................................... 58,724 80,480
Storeroom parts........................................ 12,067 11,867
-------------------------
$176,394 $210,207
=========================
Inventories are principally valued at the lower of average cost or market.
11
(9) SEGMENT INFORMATION
- --------------------------------------------------------------------------------
On January 1, 2003, the Company revised its segments into two new segments.
Energy Products and Industrial Products. The Energy Products segment includes
revenue and operating expenses associated with those products and services 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 following table sets forth data (in thousands) for the three and nine months
ended September 30, 2003 and 2002, regarding the continuing reportable industry
segments 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 September 30, 2003
- -------------------------------------
Net sales...................... $159,101 $67,652 $- $226,753
Income from operations......... 13,389 1,610 - 14,999
Identifiable assets............ 410,694 149,718 83,241 643,653
Nine Months Ended September 30, 2003
- ------------------------------------
Net sales...................... $442,710 $198,406 $- $641,116
Income from operations......... 20,812 644 - 21,456
Identifiable assets............ 410,694 149,718 83,241 643,653
Three Months Ended September 30, 2002
- -------------------------------------
Net sales...................... $98,204 $19,492 $- $117,696
Income from operations......... 1,310 836 - 2,146
Identifiable assets............ 331,443 69,468 43,461 444,372
Nine Months Ended September 30, 2002
- ------------------------------------
Net sales...................... $268,228 $59,845 $- $328,073
Income (loss) from operations.. 9,279 (537) - 8,742
Identifiable assets............ 331,443 69,468 43,461 444,372
The two new segments are designed to improve the alignment of strategies and
objectives among 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 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).
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 continue 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------------------------
Net income, as reported........ $8,677 $636 $9,982 $3,973
Deduct: total stock-based
employee compensation expense
determined under fair value-
based method for all awards,
net of related tax effects.... (621) (340) (1,615) (836)
-------------------------------------------------
Pro forma net income........... $8,056 $296 $8,367 $3,137
=================================================
Basic earnings per share
Net income - as reported..... $0.21 $0.02 $0.24 $0.11
Net income - pro forma....... $0.19 $0.01 $0.20 $0.08
Diluted earnings per share
Net income - as reported..... $0.21 $0.02 $0.24 $0.11
Net income - pro forma....... $0.19 $0.01 $0.20 $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 nine months ended September 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 Maverick's acquisition of Prudential in 2000, Prudential
shareholders received exchangeable shares issued by Maverick Tube (Canada) Inc.,
a wholly-owned Canadian subsidiary of the Company. Also, 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 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.
The exchangeable shares have the same voting rights, dividend and distribution
entitlements, and other attributes as shares of the Company's common stock, and
are exchangeable at each stockholder's option, for the Company's common stock on
a one-for-one basis. For financial statement purposes,
13
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.
As long as any exchangeable shares 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 and cancelled and, therefore, will
become an authorized but unissued and undesignated preferred share of the
Company.
(12) EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Basic earnings per share exclude any dilutive effects of options and the effect
of the conversion of the Convertible Notes 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, but
exclude the effect of the conversion of the Convertible Notes so long as the
Convertible Notes are not convertible by their terms (as further discussed in
Note 6).
The reconciliation for diluted earnings per share for the three and nine months
ended September 30, 2003 and 2002, is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------------------------
Average shares outstanding..... 41,936 40,875 41,669 37,205
Dilutive effect of outstanding
stock options................. 318 274 367 373
-------------------------------------------------
Average shares deemed
outstanding................... 42,254 41,149 42,036 37,578
=================================================
Net income used in the
calculation of basic and
diluted earnings per share.... $8,677 $636 $9,982 $3,973
=================================================
(13) COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------
The following table sets forth the components of other comprehensive income for
the three and nine months ended September 30, 2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------------------------
Net income..................... $8,677 $636 $9,982 $3,973
Change in fair value of
derivative qualifying as a
cash flow hedge............... 94 - (407) -
Change in fair value of
derivative qualifying as a
foreign currency hedge........ (204) - (204) -
Foreign currency translation
adjustment.................... 283 (1,484) 6,351 789
Minimum pension liability
adjustment.................... (20) 29 (296) (2)
-------------------------------------------------
Comprehensive income (loss).... $8,830 $(819) $15,426 $4,760
=================================================
14
Independent Accountants' Review Report
The Board of Directors and Stockholders
Maverick Tube Corporation
We have reviewed the accompanying condensed consolidated balance sheets of
Maverick Tube Corporation and Subsidiaries (the Company) as of September 30,
2003 and 2002, and the related condensed consolidated statements of income for
the three-month and nine-month periods ended September 30, 2003 and 2002, and
the condensed consolidated statements of cash flows for the nine-month periods
ended September 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
November 7, 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
(our principal raw material, representing approximately two-thirds of cost of
goods sold).
It is not possible to foresee or identify all factors that could have a material
and negative impact on the future financial performance of the Company. The
forward-looking statements in this report are based on certain assumptions and
analyses we have made in light of our experience and perception of historical
conditions, expected future developments and other factors we believe
appropriate under the circumstances. Further information covering issues that
could materially affect our financial performance is contained in the "Risk
Factors" section of our Annual Report on Form 10-K for the year ended December
31, 2002, filed with the Securities and Exchange Commission on March 28, 2003.
This information can be found on the Company's Web site 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 matters 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 dollar amounts are expressed in U.S. currency 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 (sometimes referred to as OCTG) and line pipe products for
use in newly drilled oil and gas wells and for transporting oil and natural gas.
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
16
internationally. OCTG, line pipe 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.
For the nine months ended September 30, 2003, energy products accounted for
approximately 69% 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
September 30,
2003 2002
-------------------------
U.S. Market Activity:
Average rig count...................................... 1,088 853
=========================
Average U.S. energy prices
Oil per barrel (West Texas Intermediate)............. $30.26 $28.52
=========================
Natural gas per MCF (Average U.S.)................... $4.73 $3.06
=========================
U.S. OCTG Consumption:
(in thousands of tons)
U.S. producer shipments.............................. 490 453
Imports.............................................. 195 123
Inventory (increase)/decrease........................ (10) (52)
Used pipe............................................ 20 23
-------------------------
Total U.S. Consumption 695 547
=========================
Canadian Market Activity:
Average rig count...................................... 383 249
=========================
Average Canadian energy prices
Natural gas per U.S. $ per MCF
(Average Alberta spot price)......................... $4.71 $2.14
=========================
Canadian OCTG Consumption:
(in thousands of tons)
Canadian producer shipments.......................... 129 112
Imports.............................................. 67 47
Inventory (increase)/decrease........................ 26 (10)
-------------------------
Total Canadian Consumption.......................... 222 149
=========================
The U.S. rig count in the table is based on weekly rig count reporting from
Baker Hughes, Inc. Energy prices in the table are monthly average period
prices as reported by Spears and Associates for West Texas Intermediate
grade crude oil and the average U.S. monthly natural gas cash price as
reported by Natural Gas Week. Imports are as reported by Duane Murphy and
Associates in "The OCTG Situation Report." Inventory (increase)/decrease is
our estimate based upon independent research by Duane Murphy and
Associates. Used pipe quantities are calculated by multiplying 8.3
recoverable tubing and casing tons by the number of abandoned oil and gas
wells. U.S. consumption of OCTG is our estimate based on estimated per rig
consumption of OCTG multiplied by the Baker Hughes rig count. U.S. producer
shipments are our estimates based on the components listed above.
The Canadian rig count in the table is based on weekly rig count reporting
from Baker Hughes, Inc. Energy prices in the table are the average Alberta
natural gas spot price. Imports are as reported by Statistics Canada.
Inventory (increase)/decrease is our estimate based upon data reported by
Statistics Canada. Canadian producer shipments are reported by Statistics
Canada Steel Pipe and Tube Report.
According to published industry reports, average U.S. drilling for the third
quarter of 2003 was approximately 1,088 rigs, representing an increase of 27.5%
compared to the third quarter of 2002. Natural gas drilling increased by 28.6%,
while oil-related drilling increased by 20.5%. The higher drilling levels for
both oil and natural gas were primarily attributable to increases in oil and
natural gas prices, up by 6.1% and 54.6%, respectively. Also, drilling levels
remained stable throughout the third quarter of 2003 as the rig count at the end
of the quarter was only 0.5% higher than the average rig count during the
quarter.
According to published industry reports, average Canadian drilling for the third
quarter of 2003 was approximately 383 rigs, representing an increase of 53.8%
compared to the third quarter of 2002. The higher drilling levels were primarily
attributable to significant increases in natural gas prices, up by 120.1% from
the third quarter 2002. However, the rig count at the end of the quarter was
approximately 9.1% lower than the average rig count during the quarter due to
wet weather conditions during the last several weeks of the third quarter which
made drilling more difficult.
Imports into the U.S. increased by 58.5%, with import market share increasing
from 22.5% during the third
18
quarter of 2002 to 28.1% during the third quarter of 2003. In contrast, during
the third quarter of 2003, U.S. producer shipments of OCTG increased by only
8.2% as compared to the comparable prior year period. During the third quarter
of 2003, U.S. producer shipments were positively impacted by industry inventory
build-ups that resulted in an additional 1.4% of consumption. During the third
quarter of 2002, U.S. producer shipments were positively impacted by industry
inventory build-ups that supplied an additional 9.5% of consumption. Management
believes that at September 30, 2003, industry inventories were below historical
levels in relation to demand, as inventory months of supply decreased 23.4%,
from 6.4 months at September 30, 2002 to 4.9 months at September 30, 2003.
As a result of the increased drilling activity, we estimate total U.S.
consumption increased by 27.1% in the third quarter of 2003 compared to the
prior year quarter. Over the same periods, our domestic shipments of OCTG
increased 33.2%, and our export sales, primarily to Canada, increased by 165.6%.
We estimate our domestic OCTG market share increased from 15.1% during the
quarter ended September 30, 2002 to 19.1% during the quarter ended September 30,
2003. The 19.1% market share we captured during the quarter ended September 30,
2003 was slightly higher than the market share we have captured historically.
Imports into Canada increased 42.6%, although import market share decreased from
31.5% during the third quarter of 2002 to 30.2% during the third quarter of
2003. During the third quarter of 2003, Canadian producer shipments of OCTG
increased by 15.2%. Overall, Canadian shipments in the third quarter of 2003
were positively impacted by higher commodity energy prices that led to stronger
drilling activity than experienced during the third quarter of 2002.
As a result of the increased drilling activity, we estimate total Canadian
consumption increased by 49.0% in the third quarter of 2003 compared to the
prior year quarter. Over the same periods, our Canadian shipments of OCTG
increased 41.9%. However, we estimate our Canadian OCTG market share of domestic
shipments decreased from 40.0% during the quarter ended September 30, 2002 to
38.2% during the quarter ended September 30, 2003.
Line Pipe
Published information suggests U.S. demand for line pipe (under 16") increased
during the third quarter of 2003 by an estimated 28.0%, and domestic shipments
increased by 23.9%, but the import market share increased from 45.5% to 47.2%.
Canadian demand for line pipe (under 16") increased during the third quarter by
an estimated 59.7%, and domestic shipments increased by 130.9% due to more
project work than in the third quarter of 2002. Import volumes in Canada
increased by 46.0%, although the import market share decreased from 54.8% to
50.1%.
Coiled Tubing
Coiled tubing is continuously milled steel tubing used in four primary
applications: down-hole well servicing, production tubing, line pipe and
umbilical lines for controlling subsea wellheads. Accordingly, 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. We expect that
increased activity in the energy industry as a whole will occur in the remainder
of 2003 and we believe this will positively influence demand for coiled tubing
in each of its applications.
19
Industrial Products Demand and Consumption
- ------------------------------------------
Given the numerous applications for industrial products, sources of demand for
these products are diverse. 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 the U.S. demand for structural tube products of the type we produce
increased 19.9% during the third quarter of 2003 over the prior year period.
Total U.S. producer shipments increased 25.5% during the third quarter of 2003
over the prior year period as import market share decreased from 23.9% to 20.4%.
Imports decreased due to a weaker Canadian presence in the structural tube
market due to a weaker U.S. dollar.
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 the U.S. demand for electrical
conduit of the types we produce decreased by 6.3% during the third quarter of
2003 as compared to the prior year period, bringing the total year-to-date
decrease in demand to 13.4%. Maverick and three other domestic producers
manufacture most of the electrical conduit consumed in the U.S. The import and
export markets for electrical 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 and other similar gases and fluids. 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 U.S. standard pipe demand in the third
quarter was down from last year by about 1.9%. Import market share decreased
from 34.9% to 33.0%, resulting in an increase in domestic shipments of about
0.9%.
Pricing and Costs of Our Products
- ---------------------------------
Pricing of our products was mixed during the third quarter of 2003. Pricing of
our U.S. energy products was up 2.6% compared to the prior year quarter. Pricing
of our U.S. industrial products, excluding electrical conduit and mechanical
tubing, was down 8.0% compared to the prior year quarter. This pricing decrease
was primarily due to decreased 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 32.7%. These
products are more value-added and thus sell for a higher price. Pricing of
Canadian energy products was up 14.3% and pricing of industrial products was
down 12.5%, respectively, compared to the prior year quarter. Canadian prices
were impacted by a 13.2% increase in the exchange rate.
Average steel costs included in cost of goods sold decreased during the third
quarter of 2003 over the third quarter of 2002 by $8 per ton, or 2.3%. 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 $60 per ton. Replacement cost of hot
rolled steel is approximately 1.2% above the average cost of goods sold per unit
experienced during the quarter ended September 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 adversely 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, primarily the increase in drilling
activity, impacted our operations and our competitors significantly during the
third quarter of 2003 as sales returned to levels consistent with historical
market conditions. 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, line pipe (under 16") and electrical
conduit. 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%. The Section 201
trade case was reviewed in September 2003 by the International Trade Commission.
The International Trade Commission recommend that the President reduce the
existing tariffs. The President may continue, adjust or eliminate the tariffs
based upon the results of this review. On November 10, 2003, the World Trade
Organization found the Section 201 trade case illegal. As a result of this
decision, the European Union and other complaining countries could impose
retaliatory measures. The impact on the Company's business is unknown at this
time.
While some of our products benefited from the U.S. Section 201 plan, it also
resulted in an increase in the cost of foreign imported hot rolled steel and
steel products, which 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.
In August 2002, the Canadian International Trade Tribunal found injury in a
safeguard case on the part of all imported steel products except hot rolled
products. In September 2003, the Canadian government rejected the Tribunals
findings; thus, no additional duties will be imposed and no further trade action
has been taken.
In October 2003, the Canada Customs and Revenue Agency ("CCRA") initiated an
inquiry into imports of HSS into Canada. Imports of HSS into Canada can affect
our Canadian HSS selling prices and volumes.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overall Company
- ---------------
Net sales of $226.8 million recorded for the third quarter of 2003 represent an
increase of $109.1 million, or 92.7%, compared to the prior year period. These
results were primarily attributable to a 76.2% increase in total product
shipments, from 182,203 tons in the third quarter of 2002 to 321,037 tons in the
third quarter of 2003. Also, overall average net selling prices increased from
the comparable quarter of the prior year by 9.3%, from an average of $646 per
ton to $706 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 of SeaCAT, as neither of these acquisitions
contributed to our operations during the second quarter of 2002, and
strengthening energy market conditions. See "Overview."
Net sales of $641.1 million recorded for the nine months ended September 30,
2003 represent an increase
21
of $313.0 million, or 95.4%, compared to the prior year period. These results
were primarily attributable to a 72.5% increase in total product shipments, from
546,057 tons in the nine months ended September 30, 2002 to 941,741 tons in the
nine months ended September 30, 2003. Also, overall average net selling prices
increased from the comparable quarter of the prior year by 13.3%, from an
average of $601 per ton to $681 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
strengthening energy market conditions. The tubular division of The LTV
Corporation and SeaCAT acquisitions did not contribute to our operations during
the nine months ended September 30, 2002 and the Precision acquisition only
contributed to our operations for the six months ended September 30, 2002. See
"Overview."
Cost of goods sold of $197.0 million recorded for the third quarter of 2003
represents an increase of $90.4 million, or 84.8%, compared to the prior year
period. Overall unit cost per ton of products sold increased 5.0% from the
comparable quarter of the prior year, from an average of $585 per ton to $614
per ton. Costs increased as a result of our recent acquisitions of the tubular
division of The LTV Corporation and of SeaCAT because neither of these
acquisitions contributed to our operations during the third quarter of 2002. The
product lines of these entities are more value added and thus have higher steel
and conversion costs associated with them. The increase was partially offset by
a net decrease in steel cost. See "Overview."
Cost of goods sold of $580.8 million recorded for the nine months ended
September 30, 2003 represents an increase of $287.6 million, or 98.1%, compared
to the prior year period. Overall unit cost per ton of products sold increased
14.9% from the comparable period of the prior year, from an average of $537 per
ton to $617 per ton. Costs increased as a result of our recent acquisitions of
Precision, the tubular division of The LTV Corporation and SeaCAT. The product
lines of these entities 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 nine months ended September 30, 2002 and the Precision acquisition
only contributed to our operations during the six months ended September 30,
2002. The increase was also partially due to a net increase in steel cost over
the comparable nine months period. See "Overview."
The Company earned a gross profit of $29.8 million during the third quarter of
2003, compared to a gross profit of $11.1 million in the prior year period.
Gross profit per ton was $93 per ton as compared to $61 per ton in the
comparable prior year period. Gross profit per ton increased due to higher
selling prices and lower steel costs experienced by the Company. Accordingly,
gross profit, as a percentage of net sales, was 13.1% for the three-month period
ended September 30, 2003 compared to 9.4% for the comparable prior year period.
The Company earned a gross profit of $60.3 million during the nine months ended
September 30, 2003, compared to a gross profit of $34.9 million in the prior
year period. Gross profit per ton was $64 per ton for the current and prior year
period. Gross profit, as a percentage of net sales, was 9.4% for the nine months
ended September 30, 2003 compared to 10.6% for the comparable prior year period.
Selling, general and administrative expenses increased $6.8 million, or 76.4%,
from $8.9 million in the third quarter of 2002 to $15.7 million in the third
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
third quarter of 2003 were 6.9% compared to 7.6% for the comparable prior year
period. The decrease was due to the higher shipment levels in the third quarter
of 2003 compared to the third quarter of 2002.
Selling, general and administrative expenses increased $14.0 million, or 54.3%,
from $25.8 million for the nine months ended September 30, 2002 to $39.8 million
for the nine months ended September 30, 2003. This increase resulted primarily
from the additional expenses associated with the acquisitions of Precision,
SeaCAT and the tubular division of The LTV Corporation businesses. See
"Overview." Selling, general and administrative expenses as a percentage of net
sales for the nine months ended September 30, 2003
22
were 6.2% compared to 7.9% for the comparable prior year period. The decrease
was due to the higher shipment levels in the nine months ended September 30,
2003 compared to the nine months ended September 30, 2002.
The Company recorded a $1.0 million partial recovery for the trade case
outstanding with the Department of Commerce during the quarter ended September
30, 2003. Payments will be made to various companies, including the Company,
under The Continued Dumping and Subsidy Offset Act of 2000 and will be made to
cover certain expenses, including investment in manufacturing facilities and
acquisition of technology, incurred after the imposition of antidumping and
anti-subsidy measures. Because these expenses were included in operating income
in previous years, we recorded the recovery as a separate line item included in
operating income to consistently reflect the effect of this payment on
operations.
Interest expense increased $1.8 million, or 200.0%, from $0.9 million in the
third quarter of 2002 to $2.7 million in the third quarter of 2003. This
increase was due to higher average borrowings (primarily as a 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) partially offset by lower average interest rates during the third
quarter of 2003 compared to the third quarter of 2002. Our debt to
capitalization ratio increased from 29.1% at December 31, 2002 to 32.6% at
September 30, 2003.
Interest expense increased $4.4 million, or 157.1%, from $2.8 million in the
nine months ended September 30, 2002 to $7.2 million in the nine months ended
September 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) partially offset by lower
average interest rates during the nine months ended September 30, 2003 compared
to the nine months ended September 30, 2002.
The provision for income taxes was $3.6 million for the third quarter of 2003
compared to the prior year's provision of $0.6 million. The provision for income
taxes increased due to the generation of pre-tax income of $12.3 million for the
third quarter of 2003 compared to the pre-tax income in the third quarter of
2002 of $1.2 million. The effective tax rate for the quarter was positively
impacted by the generation of a greater proportion of earnings from foreign
operations and the resolution of various unresolved tax matters.
The provision for income taxes was $4.3 million for the nine months ended
September 30, 2003 compared to the prior year's provision of $2.5 million. This
change is attributable to the generation of pre-tax income of $14.3 million for
the nine months ended September 30, 2003 compared to the pre-tax income in the
nine months ended September 30, 2002 of $6.0 million. The effective tax rate for
the nine months ended September 30, 2003 was positively impacted by the
generation of a greater proportion of earnings from foreign operations and the
resolution of various unresolved tax matters.
Net income of $8.7 million was generated in the third quarter of 2003, an
increase of $8.1 million from the comparable prior year period. Net income of
$10.0 million was generated in the nine months ended September 30, 2003, an
increase of $6.0 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.
Energy Products Segment
- -----------------------
Energy product sales of $159.1 million for the third quarter of 2003 represent
an increase of $60.9 million, or 62.0%, compared to the prior year period.
Energy product shipments increased 70,595 tons, or 48.6%, from 145,339 tons to
215,934 tons over the same period, respectively. Energy product shipments
primarily increased due to the U.S. and Canadian rig counts increasing from 853
and 249 active rigs, respectively, for the third quarter of 2002, to 1,088 and
383 active rigs, respectively, for the third quarter of 2003. Overall
23
average net selling prices for energy products increased 9.0% from the
comparable quarter of the prior year, from an average of $676 per ton to $737
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 $442.7 million for the nine months ended September 30,
2003 represent an increase of $174.5 million, or 65.1%, compared to the prior
year period. Energy product shipments increased 221,749 tons, or 53.4%, from
415,542 tons to 637,291 tons over the same period, respectively. Energy product
shipments primarily increased due to the U.S. and Canadian rig counts increasing
from 826 and 260 active rigs, respectively, for the nine months ended September
30, 2002 to 1,006 and 360 active rigs, respectively, for the nine months ended
September 30, 2003. Overall average net selling prices for energy products
increased 7.8% from the comparable period of the prior year, from an average of
$645 per ton to $695 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 $135.7 million for the third quarter of
2003 represent an increase of $46.4 million, or 52.0%, compared with the prior
year period. The increase was primarily due to increased product shipments
partially offset by lower steel costs. See "Overview." Gross profit for energy
products of $23.4 million for the quarter ended September 30, 2003 compared to a
gross profit of $8.9 million for the prior year period. See "Overview." Gross
profit was $108 per ton as compared to $61 per ton in the comparable prior year
period, reflecting stronger selling prices, higher fixed cost absorption and
lower steel prices. Energy product gross profit margin percentage was 14.7% for
the quarter ended September 30, 2003, compared to a gross profit margin
percentage of 9.1% for the prior year period.
Energy product cost of goods sold of $395.5 million for the nine months ended
September 30, 2003 represent an increase of $157.9 million, or 66.5%, 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 $47.2 million for the nine months ended September 30, 2003 compared
to a gross profit of $30.6 million for the prior year period. See "Overview."
Gross profit remained flat at $74 per ton. Energy product gross profit margin
percentage was 10.7% for the nine months ended September 30, 2003, compared to a
gross profit margin percentage of 11.4% for the prior year period.
Industrial Products Segment
- ---------------------------
Industrial product sales of $67.7 million for the third quarter of 2003
represent an increase of $48.2 million, or 247.2%, compared with the prior year
period. Industrial product shipments increased 68,239 tons, or 185.1%, from
36,864 tons to 105,103 tons over the same periods, respectively. This increase
in industrial product sales and shipments resulted from the additional $44.4
million in sales and 56,885 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 21.7% from the comparable
quarter of the prior year from an average of $529 per ton to $644 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 32.7%. These products are more
value-added and thus sell for a higher price.
Industrial product sales of $198.4 million for the nine months ended September
30, 2003 represent an increase of $138.5 million, or 231.2%, compared with the
prior year period. Industrial product shipments increased 173,935 tons, or
133.3%, from 130,515 tons to 304,450 tons over the same periods, respectively.
This increase in industrial product sales and shipments resulted from the
additional $136.5 million in sales and 175,452 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
42.0% from the comparable period of the prior year from an average of $459 per
ton to $652 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 40.6%. These
products are more value-added and thus sell for a higher price.
24
Industrial product cost of goods sold of $61.3 million in the third quarter of
2003 represents an increase of $44.0 million, or 254.3%, from the prior year
period. The increase was primarily due to increased product shipments, partially
offset by lower steel costs. See "Overview." Gross profit for industrial
products of $6.4 million for the quarter ended September 30, 2003 compared to a
gross profit of $2.2 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 $61 per ton
as compared to $60 per ton in the comparable prior year period, reflecting
stronger selling prices and lower steel costs. Industrial product gross profit
margin percentage was 9.5% for the quarter ended September 30, 2003, compared to
11.3% gross profit margin during the prior year period.
Industrial product cost of goods sold of $185.3 million in the nine months ended
September 30, 2003 represents an increase of $129.7 million, or 233.3%, 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
$13.1 million for the nine months ended September 30, 2003 compared to a gross
profit of $4.3 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 $43 per ton as
compared to $33 per ton in the comparable prior year period, reflecting stronger
selling prices, partially offset by higher steel prices. Industrial product
gross profit margin percentage was 6.6% for the nine months ended September 30,
2003, compared to 7.2% gross profit margin during the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Working capital at September 30, 2003 was $236.8 million, and the ratio of
current assets to current liabilities was 3.6 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 nine months
ended September 30, 2003 was primarily due to a $33.9 million increase in cash
and cash equivalents, a $25.1 million increase in accounts receivable, and a
$35.3 million decrease in accounts payable offset by a $33.8 million decrease in
inventory (primarily as a result of lower-costing raw materials), a $7.3 million
decrease in deferred income taxes and a $13.7 million increase in accrued
liabilities. The primary reason for the increase in cash and cash equivalents
and the decrease in accounts payable was the issuance of convertible senior
subordinated notes in June 2003. Cash provided by operating activities was $22.9
million for the nine months ended September 30, 2003.
Cash used by investing activities was $17.0 million for the nine months ended
September 30, 2003 and was attributable primarily to cash paid in connection
with the acquisition of SeaCAT ($4.0 million, net of cash received) and $13.0
million for expenditures on property, plant and equipment.
Cash provided by financing activities was $27.3 million for the nine months
ended September 30, 2003.
We have a senior credit facility providing a revolving line of credit for up to
a $185.0 million. In addition, we have outstanding letters of credit under this
agreement representing an additional $1.8 million at September 30, 2003.
Interest is payable monthly either at the U.S. or Canadian prime rate, the
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 are approximately $123.6 million as
of September 30, 2003. The senior credit facility includes a restrictive
covenant requiring 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.
In June 2003, the Company issued $120.0 million of contingent convertible,
senior subordinated notes (the "Convertible Notes") due June 15, 2033. The
Company pays interest semi-annually on the Convertible
25
Notes at the rate of 4.0% per annum. 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 the
Convertible Notes equals or exceeds 130.0% of the principal amount of the
Convertible Notes during a specified period prior to such six-month interest
period. The Convertible Notes are general unsecured obligations of the Company
and are subordinated to the Company's present and future senior indebtedness. We
applied approximately $73.0 million of the net proceeds of the offering to pay
down our borrowings under our senior credit facility. After application of this
amount, our borrowings was just above $50.0 million, which preserved our
interest rate swap agreement described under Item 3 of this Form 10-Q. We
initially applied the remaining net proceeds to cash, and thereafter, applied
approximately $30.0 million of cash to pay various trade vendors who were
offering discounts for early payment.
We anticipate we will comply with the covenants in 2003 and beyond. We believe
our projections for 2003 are based on reasonable assumptions and it is unlikely
we would default absent a material negative event affecting us, or our industry
and the economy as a whole. However, if our operations are less than projected,
we could be in default under our senior credit facility. 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 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 a 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 December of 2003. At September 30, 2003, the swap agreement is reflected
in the accompanying consolidated balance sheet in other accrued liabilities at
its fair value of $0.6 million. The unrealized loss on the fair value of the
swap agreement is reflected, net of taxes, in other comprehensive loss.
We have entered into a foreign currency hedge agreement with a total notional
amount of $30.0 million that fixes the purchase of Canadian dollars into U.S.
dollars on January 23, 2004 at an exchange rate of 1.4139. The settlement date
for the hedge agreement is January 23, 2004. The swap is being accounted for as
a cash flow hedge under SFAS No. 133. Accordingly, the difference between the
spot rate at the inception of the contract and the forward rate is reflected as
an adjustment to interest expense during the duration of the contract. At
September 30, 2003, the hedge agreement is reflected in the accompanying
consolidated balance sheet in other accrued liabilities at its fair value of
$1.3 million. The unrealized loss on the fair value of the hedge agreement is
reflected 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 $13.0
million was expended during the nine-month period ended September 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
26
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 third 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
- --------------------------------------------------------------------------------
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 obligor 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 September 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 believes Pennsylvania Cold Drawn, the maker of the note receivable on
the Cold Drawn Tubular Business may be considered a variable interest entity.
The Company will adopt FIN 46 in the fourth quarter of fiscal 2003 and believes
the impact of adopting this standard, including the consolidation of
Pennsylvania Cold Drawn, 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 September 30, 2003 would not have changed by a material amount. 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 - Overview -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 U.S. dollar equivalents
based on published exchange rates for the period reported. In addition, the
Company's Canadian operations have U.S. denominated debt outstanding as of
September 30, 2003. However, we utilize a foreign currency hedge contract to
moderate a portion of our exposure related to our Canadian operations' foreign
currency denominated debt. We do not use derivative financial instruments for
trading or other speculative purposes. 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 September 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. There have been no
significant changes in the Company's internal controls over financial reporting
that occurred during the quarter ended September 30, 2003 that have materially
affected or are reasonably likely to materially affect the Company's internal
controls over financial reporting.
28
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibit No. Description
10.1 Third Amendment to Amended and Restated Credit Agreement dated as of
September 19, 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.
None
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Maverick Tube Corporation
----------------------------------------------
(Registrant)
Date: November 13, 2003 /s/ Gregg Eisenberg
----------------------------------------------
Gregg Eisenberg, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2003 /s/ Pamela G. Boone
----------------------------------------------
Pamela G. Boone, Vice President - Finance
and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
30
EXHIBIT INDEX
Exhibit No. Description
- --------------------------------------------------------------------------------
10.1 Third Amendment to Amended and Restated Credit
Agreement dated as of September 19, 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.
31