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 March 31, 2004
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 001-10651
-----------
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 - 42,327,042 shares as of May 3, 2004
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
INDEX
- --------------------------------------------------------------------------------
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets - March 31, 2004
and December 31, 2003 3
Condensed Consolidated Statements of Income - Three
Months Ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2004 and 2003 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 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX 30
2
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
- --------------------------------------------------------------------------------
March 31, December 31,
2004 2003
(Unaudited)
-------------------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $40,589 $29,202
Accounts receivable, less allowances of
$6,390 and $5,414 on March 31, 2004 and
December 31, 2003, respectively.................. 155,705 117,115
Inventories........................................ 197,928 184,025
Deferred income taxes.............................. 6,500 5,534
Income taxes refundable............................ 591 590
Prepaid expenses and other current assets.......... 4,478 6,267
-------------------------
Total current assets................................... 405,791 342,733
Property, plant and equipment, net of accumulated
depreciation of $156,189 and $151,331 on
March 31, 2004 and December 31, 2003,
respectively......................................... 196,832 189,434
Goodwill............................................... 85,984 82,982
Other acquired intangibles, net of accumulated
amortization......................................... 35,109 35,304
Note receivable........................................ - 9,500
Other assets........................................... 13,011 10,773
-------------------------
$736,727 $670,726
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $63,969 $47,557
Accrued expenses and other liabilities............. 38,689 34,391
Deferred revenue................................... 198 3,386
Income taxes payable............................... 14,741 203
Current maturities of long-term debt............... 3,488 3,533
-------------------------
Total current liabilities 121,085 89,070
Long-term debt, less current maturities................ 3,371 4,209
Convertible senior subordinated notes.................. 120,000 120,000
Revolving credit facility.............................. 50,000 50,213
Other liabilities...................................... 16,348 16,436
Deferred income taxes.................................. 8,953 6,000
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000
authorized shares; 1 share issued and
outstanding at March 31, 2004 and
December 31, 2003.................................... - -
Common stock, $0.01 par value; 80,000,000
authorized shares; 42,287,789 and
42,001,662 shares issued and outstanding
at March 31, 2004 and December 31, 2003,
respectively......................................... 423 420
Additional paid-in capital............................. 231,199 227,048
Retained earnings...................................... 190,933 162,192
Accumulated other comprehensive loss................... (5,585) (4,862)
-------------------------
416,970 384,798
-------------------------
$736,727 670,726
=========================
See accompanying notes to condensed consolidated financial statements.
3
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2004 2003
-------------------------
Net sales.............................................. $311,298 $219,438
Cost of goods sold..................................... 240,758 204,529
-------------------------
Gross profit........................................... 70,540 14,909
Selling, general and administrative.................... 19,641 12,313
-------------------------
Income from operations................................. 50,899 2,596
Interest expense....................................... 2,618 2,235
-------------------------
Income before income taxes............................. 48,281 361
Provision for income taxes............................. 17,956 119
-------------------------
Income before cumulative effect of
an accounting change................................. 30,325 242
Cumulative effect of an accounting
change (net of benefit for income
taxes of $951)....................................... (1,584) -
-------------------------
Net income............................................. $28,741 $242
=========================
Basic earnings (loss) per share
Income before cumulative effect of
an accounting change................................. $0.72 $0.01
Cumulative effect of an accounting change............ (0.04) -
-------------------------
Net income $0.68 $0.01
=========================
Diluted earnings (loss) per share
Income before cumulative effect of
an accounting change................................. $0.72 $0.01
Cumulative effect of an accounting change............ (0.04) -
-------------------------
Net income........................................... $0.68 $0.01
=========================
See accompanying notes to condensed consolidated financial statements.
4
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2004 2003
-------------------------
OPERATING ACTIVITIES
Net income............................................. $28,741 $242
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of an accounting change.............. 1,584 -
Depreciation........................................... 5,590 5,077
Amortization........................................... 686 298
Deferred income taxes.................................. 1,053 288
Provision for losses on accounts receivable............ 766 (1,028)
Gain on sale of equipment.............................. (60) -
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable................................. (39,606) (25,229)
Inventories......................................... (12,586) 39,069
Prepaid expenses and other current assets........... 1,958 1,401
Other assets........................................ (2,327) 94
Accounts payable.................................... 15,217 (11,646)
Accrued expenses and other liabilities.............. 19,057 4,909
Deferred revenue.................................... (3,188) 906
-------------------------
Cash provided by operating activities.................. 16,885 14,381
INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash received....... - (4,000)
Expenditures for property, plant and equipment......... (5,571) (2,692)
Proceeds from disposal of equipment.................... 60 -
-------------------------
Cash used by investing activities...................... (5,511) (6,692)
FINANCING ACTIVITIES
Net (repayments) borrowings on revolving
credit facility...................................... 217 (5,679)
Principal payments on long-term borrowings and notes... (3,160) (540)
Deferred debt costs.................................... (103) (456)
Principal payments on long-term note receivable........ 239 150
Proceeds from exercise of stock options................ 3,051 110
-------------------------
Cash provided (used) by financing activities........... 244 (6,415)
Effect of exchange rate changes on cash................ (231) 333
-------------------------
Increase in cash and cash equivalents.................. 11,387 1,607
Cash and cash equivalents at beginning of period....... 29,202 2,551
-------------------------
Cash and cash equivalents at end of period............. $40,589 $4,158
=========================
5
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Net assets consolidated from a cumulative
effect of an accounting change................... $11,492 $-
Note receivable for sale of discontinued operations $- $954
Stock issued for acquisitions...................... $- $12,104
Debt issued for acquisitions....................... $- $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"), Precision Tube Holding Corporation
("Precision"), Republic Conduit 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 three months
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report in the 2003 Form 10-K.
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
(2) RECENT ACCOUNTING PRONOUNCMENTS
- --------------------------------------------------------------------------------
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51," which was revised in December 2003. FIN 46
requires an investor who receives the majority of the expected losses, the
expected residual returns, or both ("primary beneficiary") of a variable
interest entity ("VIE") to consolidate the assets, liabilities and results of
operations of the entity. A variable interest entity is an entity in which the
equity investors do not have a controlling interest or the equity investment at
risk is insufficient to finance the entity's activities without receiving
additional subordinated financial support from other parties. FIN 46, as
amended, is applicable: (a) immediately for all variable interest entities
created after January 31, 2003; or (b) in the first fiscal year or interim
period ending after December 15, 2003 for those created before February 1, 2003,
so long as the Company has not issued financial statements reporting that VIE in
accordance with FIN 46.
On March 29, 2002, pursuant to an asset purchase agreement dated March 21, 2002,
the Company completed the sale of the Cold Drawn Tubular Business ("DOM")
business to Pennsylvania Cold Drawn, LLC ("PCD") for $8,115,000, consisting of
$1,238,000 cash and the buyer's nine-year secured promissory note for
$6,877,000. In November 2003, the Company restructured the buyer's promissory
note in exchange for the release of its guarantee of certain payment obligations
and obtained additional security including the buyer's personal guarantee and
increased the outstanding note obligation. As of March 31, 2004, the Company
holds three PCD notes receivable totaling $10,152,000 and accounts receivable of
$1,297,000.
During the first quarter of 2004, the Company adopted the provisions of FIN 46
with respect to PCD, which is a VIE as defined under FIN 46. As the Company was
deemed the primary beneficiary it was required to consolidate PCD as of March
31, 2004. As a result, the Company recognized a non-cash accounting charge
adjustment of $1,584,000 (net of benefit for income taxes of $951,000),
reflecting the
7
cumulative losses of PCD from the time of the sale on March 29, 2002, as a
cumulative effect of an accounting change in the accompanying Condensed
Consolidated Statements of Income. The third party creditors of PCD have no
recourse to the general credit of the Company.
The unaudited pro forma amounts below reflect the retroactive application of FIN
46 as if the Company had adopted the standard on January 1, 2003 and the
corresponding elimination of the cumulative effect of an accounting change (in
thousands, except per share amounts):
Three Months Ended
March 31,
2004 2003
-------------------------
Net income (loss....................................... $30,237 ($630)
Basic earnings (loss) per share........................ $0.72 ($0.02)
Diluted earnings (loss) per share...................... $0.71 ($0.02)
The above pro forma results include adjustments to give effect of intercompany
transactions and are not necessarily indicative of the operating results that
would have occurred nor are they necessarily indicative of future operating
results.
(3) BUSINESS ACQUISITIONS
- --------------------------------------------------------------------------------
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 could be further increased by up to an
additional $500,000 if SeaCAT achieves certain performance targets through 2005.
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 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 $10,200,000 and intangible
assets of $8,100,000, neither of which is 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
(in thousands):
SeaCAT
---------
Purchase price (including transaction costs........................ $21,807
Assets acquired:
Cash............................................................. 35
Accounts receivable.............................................. 187
Inventory........................................................ 2,563
Property, plant and equipment.................................... 5,706
Other assets..................................................... 327
Other acquired intangibles....................................... 8,100
---------
16,918
Liabilities acquired:
Accounts payable................................................. (1,328)
Other accruals................................................... (3,983)
---------
(5,311)
Net assets acquired................................................ 11,607
---------
Goodwill........................................................... $10,200
=========
8
(4) INVENTORIES
- --------------------------------------------------------------------------------
Inventories at March 31, 2004 and December 31, 2003 consist of the following (in
thousands):
2004 2003
-------------------------
Finished goods......................................... $96,542 $98,575
Work-in-process........................................ 16,655 10,252
Raw materials.......................................... 72,976 63,023
Storeroom parts........................................ 11,755 12,175
-------------------------
$197,928 $184,025
=========================
Inventories are principally valued at the lower of average cost or market.
(5) SENIOR CREDIT FACILITY
- --------------------------------------------------------------------------------
The Company has a senior credit facility providing for an $185,000,000 revolving
line of credit. In addition, the Company has letters of credit outstanding under
this agreement of $1,788,000 at March 31, 2004. Interest is payable monthly at
the LIBOR rate adjusted by an interest margin, depending upon certain financial
measurements. Under the senior credit facility, the Company can borrow an amount
based on a percentage of eligible accounts receivable, eligible inventory and
property, plant and equipment, reduced by outstanding letters of credit. The
additional available borrowings under the senior credit facility were
approximately $133,000,000 and the applicable interest rate was 3.4% per annum
as of March 31, 2004. The senior credit facility includes restrictive covenants
relating to maintaining a minimum fixed charge coverage ratio if availability
falls below $30,000,000. Also, if availability falls below $50,000,000, the debt
will be classified as current. The senior credit facility also limits capital
expenditures to $30,000,000 per year and limits the Company's ability to pay
dividends, create liens, sell assets or enter into transactions with affiliates
without the consent of the lenders.
(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 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. However, the fair value of this derivative is
not material at March 31, 2004.
The Convertible Notes are general unsecured obligations of the Company and are
subordinated to the Company's present and any 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.
9
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) DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
- --------------------------------------------------------------------------------
Derivative Instruments and Hedging Activities
Certain activities of the Company expose it to market risks, including the
effects of changes in foreign currency exchange rates and interest rates. The
financial exposures are monitored and managed by the Company as an integral part
of its overall risk management program. The Company's risk management program
seeks to reduce the potentially adverse effects that the volatility of the
markets may have on its operating results.
The Company maintains an interest rate risk management strategy that may, from
time to time, use derivative instruments to minimize significant, unanticipated
earnings fluctuations caused by interest rate volatility.
The Company maintains a foreign currency risk management strategy that uses
derivative instruments to protect its interests from unanticipated fluctuations
in earnings and cash flows caused by volatility in currency exchange rates. The
Company does not hold or issue financial instruments for trading purposes, nor
does it hold or issue leveraged derivative instruments.
The Company generally uses cash flow hedging strategies to reduce the
potentially adverse effects that market volatility may have on its operating
results. Cash flow hedges are hedges of forecasted transactions or of the
variability of cash flows to be received or paid related to a recognized asset
or liability. The Company enters into foreign exchange forward contracts
generally expiring within six months with the objective of converting U.S.
denominated debt held by Prudential into its functional currency. These
contracts are entered into to protect against the risk the eventual cash flows
resulting from such transactions will be adversely affected by changes in
exchange rates. The Company also uses interest rate swaps to convert a portion
of its variable rate revolving credit facility to fixed rates, which generally
expire in eleven months.
Accounting for Derivatives and Hedging Activities
The Company formally documents at inception all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedged items. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives used in hedging transactions are highly effective in offsetting
changes in fair value or cash flows of the hedged items. Changes in the fair
value of a derivative that is highly effective as, and that is designated and
qualifies as, a cash flow hedge are recorded in other comprehensive earnings,
until the underlying transactions occur. When it is determined a derivative is
not highly effective as a hedge or it has ceased to be a highly effective hedge,
the Company discontinues hedge accounting prospectively.
10
The following table summarizes the notional transaction amounts and fair values
for the Company's outstanding derivatives, by risk category and instrument type,
at March 31, 2004.
Notional Fair Value
Qualifying Cash Flow Hedges Amount Asset/(Liability) Description
- --------------------------------------------------------------------------------
Interest rate swaps $50,000 $(471) Effectively converts
(floating to the interest rate on
fixed rate swaps) an equivalent amount
of variable rate
borrowings to a
fixed rate
Foreign currency hedges $30,000 $(306) Effectively hedges the
(floating to variability in
fixed exchange rates) forecasted cash flows
due to the foreign
currency risk
associated with the
settlement of
nonfunctional
currency denominated
debt
The ineffective portion of these hedges was immaterial as of March 31, 2004 and
the Company expects the hedge to remain highly effective.
(8) DEFINED BENEFIT PLANS
- --------------------------------------------------------------------------------
Prudential sponsors two pension plans and a postretirement benefit plan for
substantially all of its Canadian employees and a supplemental executive
retirement plan ("SERP") for certain former key Prudential executives. Expected
contributions for the year ended December 31, 2004 (in thousands) are as
follows:
Pension
Benefits Postretirement
and SERP Benefit Plan
---------------------------------
Contributions required by funding
regulations or laws.......................... $1,259 $-
Additional discretionary contributions......... 845 55
---------------------------------
$2,104 $55
=================================
Benefit costs consist of the following for the three months ended March 31, 2004
and 2003 (in thousands):
2004 2003
-------------------------
Pension benefit costs:
Service cost........................................... $391 $377
Interest cost.......................................... 720 634
Expected return on plan assets......................... (639) (564)
Amortization of prior service cost..................... 112 60
Amortization of transition asset....................... (156) (158)
Recognized net actuarial gain.......................... 89 171
-------------------------
$517 $520
=========================
2004 2003
-------------------------
Postretirement benefit plan costs:
Service cost........................................... $15 $15
Interest cost.......................................... 31 29
Recognized net actuarial loss.......................... 14 14
-------------------------
$60 $58
=========================
(9) SEGMENT INFORMATION
- --------------------------------------------------------------------------------
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.
11
The following table sets forth data (in thousands) for the three months ended
March 31, 2004 and 2003, regarding the 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 March 31, 2004
- ---------------------------------
Net sales...................... $209,984 $101,314 $- $311,298
Income from operations......... 30,491 20,408 - 50,899
Identifiable assets............ 459,629 200,684 76,414 736,727
Three Months Ended March 31, 2003
- ---------------------------------
Net sales...................... $152,413 $67,025 $- $219,438
Income (loss) from operations.. 3,279 (683) - 2,596
Identifiable assets............ 408,161 162,270 43,608 614,039
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).
The assets of PCD are included in the identifiable assets of the industrial
segment at March 31, 2004. The operations of PCD were not included in the
operating results of Maverick during three months ended March 31, 2004.
(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
March 31,
2004 2003
-------------------------
Net income, as reported.................................... $28,741 $242
Deduct: total stock-based employee
compensation expense determined under fair
value-based method for all awards, net of
related tax effects...................................... 177 430
-------------------------
Pro forma net income (loss)................................ $28,564 $(188)
=========================
Basic earnings per share
Net income - as reported................................. $0.68 $0.01
Net income (loss) - pro forma............................ $0.68 ($0.00)
Diluted earnings per share
Net income - as reported................................. $0.68 $0.01
Net income (loss) - pro forma............................ $0.67 ($0.00)
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
12
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 ended March 31, 2004 and 2003 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
- --------------------------------------------------------------------------------
On June 11, 2000, Maverick and Prudential entered into a Business Combination
Agreement providing for the combination of Prudential with Maverick. The
transaction was completed on September 22, 2000.
Under the terms of the transaction, Prudential stockholders received 0.52 of an
exchangeable share, issued by Maverick Tube (Canada) Inc., a wholly-owned
Canadian subsidiary of the Company, for each Prudential common share.
Consequently, Prudential stockholders received a total of 15,813,088
exchangeable shares. The exchangeable shares are Canadian securities that began
trading on The Toronto Stock Exchange on September 27, 2000. These 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. The
transaction was accounted for as a pooling of interests.
In conjunction with the Prudential transaction, the Company's Board of Directors
designated one share of the Company's authorized preferred stock as Special
Voting Stock. The Special Voting Stock is entitled to a number of votes equal to
the number of outstanding exchangeable shares of Maverick Tube (Canada) Inc., on
all matters presented to the common stockholders of the Company. The one share
of Special Voting Stock is issued to CIBC Mellon Trust Company, as trustee
pursuant to the Voting and Exchange Trust Agreement among the Company, Maverick
Tube (Canada) Inc. and CIBC Mellon Trust Company, for the benefit of the holders
of the exchangeable shares of Maverick Tube (Canada) Inc. For financial
statement purposes, the exchangeable shares that have not been exchanged for
shares of the Company's common stock have been treated as if they had been
exchanged and are included in the Company's outstanding shares of common stock.
As long as any exchangeable shares of Maverick Tube (Canada) Inc. are
outstanding, the Special Voting Stock may not be redeemed, the number of shares
comprising the Special Voting Stock shall not be increased or decreased and no
other term of the Special Voting Stock shall be amended, except upon the
unanimous approval of all common stockholders of the Company. If the Special
Voting Stock is purchased or otherwise acquired by the Company, it shall be
deemed retired and cancelled. Thereafter, it 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 described 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.
13
The reconciliation for diluted earnings per share for the three months ended
March 31, 2004 and 2003, is as follows (in thousands):
Three Months Ended
March 31,
2004 2003
-------------------------
Average shares outstanding............................. 42,064 41,207
Dilutive effect of outstanding stock
options.............................................. 293 354
-------------------------
Average shares deemed outstanding...................... 42,357 41,561
=========================
Income before cumulative effect of an
accounting change used in the calculation
of basic and diluted earnings per share.............. $30,325 $242
Cumulative effect of an accounting change
used in the calculation of basic and
diluted earnings per share........................... (1,584) -
-------------------------
Net income used in the calculation
of basic and diluted earnings
per share............................................ $28,741 $242
=========================
(13) COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The following table sets forth the components of other comprehensive income for
the three months ended March 31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
2004 2003
---------------------
Net income................................................. $28,741 $242
Change in fair value of cash flow hedges................... 61 (374)
Foreign currency translation adjustment.................... (802) 2,676
Minimum pension liability adjustment....................... 18 (125)
---------------------
Comprehensive income $28,018 $2,419
=====================
(14) SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On April 23, 2004, the Company consummated the acquisition of substantially all
of the assets and certain liabilities of Texas Arai, Inc., a subsidiary of Grant
Prideco, Inc., a publicly held, Houston based, oilfield service manufacturer,
for a purchase price of $20,500,000 cash (subject to finalization of the working
capital adjustment). Texas Arai is the largest independent provider of American
Petroleum Institute and premium-grade couplings used to connect tubing and
casing in oil and gas wells.
14
Independent Accountants' Review Report
The Board of Directors and Stockholders
Maverick Tube Corporation
We have reviewed the accompanying condensed consolidated balance sheet of
Maverick Tube Corporation and subsidiaries as of March 31, 2004, and the related
condensed consolidated statements of income and cash flows for the three-month
periods ended March 31, 2004 and 2003. 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, 2003, 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 6, 2004,
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, 2003, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
St. Louis, Missouri
April 30, 2004
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," whereas
"Maverick" refers to the Company exclusive of its operating subsidiaries:
Prudential Steel Ltd. ("Prudential"), Precision Tube Holding Corporation
("Precision"), the tubular division of the former LTV Corporation ("Republic
Conduit"), SeaCAT Corporation ("SeaCAT") and Pennsylvania Cold Drawn ("PCD").
Also, unless the context otherwise requires, the terms "we," "us" or "our" refer
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 the price of steel (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, 2003, filed with the Securities and Exchange Commission on March 8, 2004.
This information can be found on the Company's web site at www.mavericktube.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
2003 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,
and 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
- --------------------------------------------------------------------------------
Maverick Tube Corporation is 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
16
our business into coiled tubing products with our acquisitions of Precision and
SeaCAT. Coiled tubing products are used primarily to maintain existing wells and
to complete new wells. We sell coiled tubing to customers throughout North
America and internationally. OCTG, line pipe and coiled tubing products comprise
our energy product line. For the three months ended March 31, 2004, energy
products accounted for approximately 67% of our total revenues.
We also manufacture structural tubing, which is generally referred to 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 Republic
Conduit. 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.
Business Acquisitions
- ---------------------
On March 29, 2002, we completed the purchase of all the common stock of
Precision, a then privately held, Houston based, coiled tubular goods
manufacturer, in exchange for $60.7 million cash and 200,000 of our common
stock.
On December 31, 2002, we acquired the assets and certain liabilities of Republic
Conduit for $119.9 million cash. In February 2003, we announced the closure of
the Youngstown, Ohio, operating facility and the divisional headquarters of
Republic Conduit also located in Youngstown, Ohio. As a result, we recorded exit
costs of $2.8 million in 2003 as part of the purchase price allocation of
Republic Conduit.
On February 28, 2003, we completed the acquisition of SeaCAT, a then 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 could be further increased by
up to an additional $0.5 million if SeaCAT achieves certain performance targets
through 2005.
On April 23, 2004, the Company consummated the acquisition of substantially all
of the assets and certain liabilities of Texas Arai, Inc., a subsidiary of Grant
Prideco, Inc., a publicly held, Houston based, oilfield service manufacturer,
for a purchase price of $20,500,000 cash (subject to finalization of the working
capital adjustment). Texas Arai is the largest independent provider of American
Petroleum Institute and premium-grade couplings used to connect tubing and
casing in oil and gas wells.
Energy Products Demand and Consumption
- --------------------------------------
OCTG
Demand for our energy-related products depends primarily upon the number of oil
and natural gas wells being drilled, completed and worked over in the U.S. and
Canada and the depth and drilling conditions of these wells. The levels of these
activities are primarily dependent on oil and natural gas prices. Many factors,
such as the supply and demand for oil and natural gas, general economic
conditions and global weather patterns influence, these prices. As a result, the
future level and volatility of oil and natural gas prices are uncertain. In
addition, seasonal fluctuations impact our customers and the demand for our
products to some extent. For instance, weather conditions during the first half
of the year make drilling more difficult in the U.S., while the second and third
quarters are more difficult in western Canada. Consequently, drilling activity
and the corresponding demand for our products are lower at these times in these
respective regions.
U.S. end-users obtain OCTG from domestic and foreign pipe producers and from
draw-downs of inventory held by the end-user, distributors or mills. Industry
inventories of our products can change significantly from period to period. This
can have a direct effect on demand for our products when customers draw-down
from inventory rather than purchasing our products. Canadian distributors do not
generally hold
17
significant amounts of inventories.
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
March 31,
2004 2003
-------------------------
U.S. Market Activity:
Average rig count...................................... 1,118 901
=========================
Average U.S. energy prices:
Oil per barrel (West Texas Intermediate)........... $34.96 $34.18
=========================
Natural gas per MCF (Average U.S.)................. $5.30 $6.59
=========================
U.S. OCTG Consumption:
(in thousands of tons)
U.S. producer shipments............................ 493 417
Imports............................................ 223 130
Inventory (increase)/decrease...................... (57) 38
Used pipe.......................................... 89 23
-------------------------
Total U.S. Consumption......................... 748 608
=========================
Canadian Market Activity:
Average rig count...................................... 528 494
=========================
Average Canadian energy prices:
Natural gas per U.S. $ per MCF
(Average Alberta spot price)....................... $5.29 $5.41
=========================
Canadian OCTG Consumption:
(in thousands of tons)
Canadian producer shipments........................ 183 114
Imports............................................ 106 70
Inventory (increase)/decrease...................... (47) 53
-------------------------
Total Canadian Consumption..................... 242 237
=========================
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 first
quarter of 2004 was approximately 1,118 rigs, representing an increase of 24.1%
compared to the first quarter of 2003. Oil-related drilling increased by 4.6%,
primarily attributable to an increase in oil prices of 2.3%. Natural gas
drilling levels increased 29.5% as natural gas prices continue to be well above
historical prices. Also, drilling levels remained stable throughout the first
quarter of 2004, as the rig count at the end of the quarter was only 1.5% higher
than the average rig count during the quarter.
According to published industry reports, average Canadian drilling for the first
quarter of 2004 was approximately 528 rigs, representing an increase of 6.9%
compared to the first quarter of 2003. Natural gas drilling levels remained
strong as natural gas prices continue to be well above historical prices. The
rig count at the end of the quarter was approximately 12.5% lower than the
average rig count during the quarter due to wet weather conditions during the
last several weeks of the first quarter which made drilling more difficult.
18
Imports into the U.S. increased by 71.5%, with import market share increasing
from 21.4% during the first quarter of 2003 to 29.8% during the first quarter of
2004. During the first quarter of 2004, U.S. producer shipments of OCTG
increased by 18.2% as compared to the comparable prior year period. During that
period, U.S. producer shipments were positively impacted by industry inventory
build-ups that resulted in a 7.6% increase in consumption. During the first
quarter of 2003, U.S. producer shipments were negatively impacted by industry
inventory draw-downs that resulted in an additional 6.3% of consumption.
Management believes that at March 31, 2004, industry inventories were below
historical levels in relation to demand, as inventory months of supply remained
a stable 4.8 months for the first quarter of 2004 as compared to the prior year
quarter.
As a result of the increased drilling activity, we estimate total U.S.
consumption increased by 23.0% in the first quarter of 2004 compared to the
prior year quarter. Over the same periods, our domestic shipments of OCTG
increased 36.8%, and our export sales, primarily to Canada, decreased by 45.5%.
We estimate our domestic OCTG market share increased from 21.2% during the
quarter ended March 31, 2003 to 24.7% during the quarter ended March 31, 2004.
The 24.7% market share we captured during the quarter ended March 31, 2004 was
higher than the market share we have captured historically but comparable to the
last half of 2003. We captured a higher percent of the market share in the first
quarter of 2004 compared to the first quarter of 2003 primarily as a result of
our ability to source steel in a tight steel market, our inventories on hand
entering 2004 and a higher ERW market share captured.
Imports into Canada increased 51.4%, as import market share increased from 29.5%
during the first quarter of 2003 to 43.8% during the first quarter of 2004. The
increase in imports was primarily due to North American holding companies of the
Canadian OCTG producers importing more in the first quarter of 2004 compared to
the first quarter of 2003. During the first quarter of 2004, Canadian producer
shipments of OCTG increased by 60.5%. Overall, Canadian shipments in the first
quarter of 2004 were positively impacted by above average commodity energy
prices that led to stronger drilling activity than experienced during the first
quarter of 2003.
As a result of the increased drilling activity, we estimate total Canadian
consumption increased by 2.1% in the first quarter of 2004 compared to the prior
year quarter. Over the same periods, our Canadian shipments of OCTG decreased
1.8%. Also, we estimate our Canadian OCTG market share of domestic shipments
decreased from 38.8% during the quarter ended March 31, 2003 to 29.9% during the
quarter ended March 31, 2004. We lost market share in Canada as we pushed
pricing higher than our largest competitor in Canada.
Line Pipe
Published information suggests U.S. demand for line pipe (under 16") increased
during the first quarter of 2004 by an estimated 94.0%, and domestic shipments
increased by 112.3%, as the import market share decreased from 87.1% to 50.4%.
Canadian demand for line pipe (under 16") decreased during the first quarter by
an estimated 16.7%, and domestic shipments increased by 2.2%. Import volumes in
Canada increased by 22.5%, as the import market share increased from 24.5% to
36.0%.
Coiled Tubing
Coiled down-hole tubing is primarily used to service existing oil and gas wells
to reestablish well production and extend well life. Commodity pricing and
industry cash flow are primary drivers of well service work and demand for
coiled down-hole tubing. Industry cash flows decreased by an estimated 12.8% to
$44.1 billion in first quarter 2004 from $50.6 billion in the prior year
quarter, primarily due to lower natural gas prices. U.S. well service and
work-over expenditures were up 5.0% in the first quarter of 2004 compared with
the prior year quarter. For 2004, U.S. well service and work-over spending is
forecasted to rise another 5.0%, with rig activity up by 1.0% and jobs up
incrementally to 508,700.
19
Canadian workover rig activity was up 91% from the first quarter of 2003.
Forecasts for 2004 indicate expenditures will be up 8.2%, with rig activity and
jobs up only 3.1% and 3.4%, respectively. Canadian service and work-over
revenues should follow expenditures up at least 8.0% in 2004.
Coiled line pipe and umbilical tubing are primarily used in offshore, sub-sea
applications where continuous lengths of steel line pipe are used as flow lines
and umbilical tubing is used as sheathing for sub-sea well controls. Coiled line
pipe is a more cost-effective application compared to traditional jointed line
pipe as it allows for much more rapid installation, which reduces overall
installed costs. Forecasts for U.S. offshore spending indicate expenditures will
be down 2.8% for 2004. Published reports indicate that U.S. offshore spending
was flat in the first quarter of 2004 as compared to the prior year quarter as
many offshore projects continue to be deferred. Forecasts for international
offshore spending indicate that expenditures will increase by 2.0% for 2004 over
2003, and rig activity is expected to increase by 6.5%. Published reports
indicate that international offshore spending increased by 0.8% for the first
quarter of 2004 as compared to the prior year quarter. We expect this will
continue to impact 2004 sales in this segment.
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 7.4% during the first quarter of 2004 over the prior year period.
Total U.S. producer shipments increased 6.5% during the first quarter of 2004
over the prior year period as import market share increased from 23.4% to 24.1%.
On December 31, 2002, we acquired Republic Conduit 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. Published forecasts for
non-residential construction activity in 2004 show an increase of 0.2% compared
to a 5.0% decrease experienced in 2003. We estimate the U.S. demand for
electrical conduit of the types we produce decreased by 3.0% during the first
quarter of 2004 as compared to the prior year period. 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 is 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 first
quarter was down from last year by about 8.5%. Import market share increased
from 34.3% to 36.8%, resulting in a decrease in domestic shipments of about
11.9%.
Pricing and Costs of Our Products
- ---------------------------------
Pricing of our products was up during the first quarter of 2004 compared to the
first quarter of 2003. Pricing of our U.S. OCTG, line pipe, standard product and
structural product pricing increased by 28.7%, 39.5%, 38.7% and 46.0%,
respectively. The average price of our conduit product increased from the first
quarter of 2003 to the first quarter of 2004 by 18.6%. Pricing of our Canadian
energy products and industrial products was up 14.3% and 24.4%, respectively,
compared to the prior year quarter. Canadian prices were impacted by a 14.5%
increase in the exchange rate.
20
Since December 2003, we raised prices in order to pass along to the end-users
the steel surcharges and base price increases instituted by our steel vendors on
all our U.S. shipments. We are attempting to raise base prices on our Canadian
energy products even as our primary competitor has resisted such selling price
increases. These price increases across our entire product line are designed to
absorb the anticipated increase in the cost of steel, our principal raw
material. Given the mix of our U.S. alliance sales and volume of our Canadian
OCTG business, the timing and the extent to which our price increases can be
realized, are uncertain. No assurance can be given that we will be successful in
implementing price increases sufficient to fully absorb the anticipated steel
cost increases described below.
Average steel costs included in cost of goods sold decreased during the first
quarter of 2004 over the first quarter of 2003 by $6 per ton, or 1.6%. We expect
our replacement cost of steel will continue to rise sharply in both the U.S. and
Canada as steel vendors have implemented base price increases and surcharges up
approximately 95.0% since the quarter ended December 31, 2003 due to the cost of
scrap, their principal raw materials and tight supplies. In December 2003, our
steel suppliers implemented an unprecedented scrap surcharge based upon the
American Metal Market's Consumer Buying Price for No. 1 Busheling. The surcharge
has fluctuated monthly based on scrap prices. The surcharges for January,
February, March, April, May, and June 2004 are $20 per ton, $60 per ton, $100
per ton, $125 per ton, $95 per ton, and $70 per ton, respectively. During the
second quarter of 2004, we may see increases in cost of goods sold of about
18.0% in the U.S., and 25.0% in Canada. We expect cost will escalate an
additional 37.0% during the third quarter 2004, with the increase being limited
by expected surcharge decreases. In Canada, costs will begin to rise in the
third quarter by 19.0%. We expect the replacement cost of steel to remain
volatile throughout 2004. However, the magnitude and timing of further steel
costs changes are unknown at this time.
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 had a significant impact on the margin
levels of our energy products because energy product pricing has historically
been driven by OCTG and line pipe demand. As steel costs have escalated so
dramatically, OCTG and line pipe producers have had to push steel cost increases
through to their end users customers in the form of steel surcharges and base
price increases. 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 impacted our operations and our
competitors significantly during the three months ended March 31, 2004, as sales
remained above normal levels throughout the first quarter due to the increase in
drilling activity. The increase in drilling levels and steel surcharges during
the first quarter resulted in higher sales. Industry-wide inventory levels
increased and thus, had a positive impact on domestic shipments. As our recent
experience indicates, oil and gas prices are volatile and can have a substantial
effect on drilling levels and resulting demand for our energy-related products.
Uncertainty also exists as to the future demand and pricing for our electrical
conduit, HSS and other industrial-related products.
Trade Cases
- -----------
U.S. Line Pipe - The three-year tariff rate quota on welded line pipe 16-inch
and under imposed in March 2000 under Section 201 expired on March 1, 2003. In
early March 2004, an antidumping petition was filed with the U.S. government
covering line pipe from China, Republic of South Korea and Mexico. In April
2004, the U.S. International Trade Commission ruled unanimously that imports of
line pipe under 16-inch outside diameter from the three named countries are
allegedly being sold in the United States at less than fair value. As a result
of the Commission's affirmative determinations, the U.S. Department of Commerce
21
will continue to conduct its antidumping investigations of imports of certain
circular welded carbon quality line pipe from China, Republic of South Korea,
and Mexico, with its preliminary antidumping determinations due on or about
August 10, 2004.
In October 2003, the Canada Customs and Revenue Agency initiated an inquiry into
imports of HSS into Canada from the Republic of South Korea, Republic of Turkey,
and the Republic of South Africa. Imports of HSS into Canada can affect our
Canadian HSS selling prices and volumes. The newly named Canadian Border
Security Agency (formerly Canada Customs and Revenue Agency) completed its
review and determined that imports from the three named countries were dumped
into Canada at unfair prices. The Canadian International Trade Commission
reviewed the case and interim duties were assessed against all three countries
on December 23, 2003. Dumping margins were assessed ranging from 44.0% on all
South Korean manufactured goods, 22.6% on South African goods, and rates ranging
from 4.5% to 11.7% on goods manufactured in Turkey. These dumping margins will
apply on all imports of HSS from the named countries for the next five years.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overall Company
- ---------------
The following table illustrates the operating results and tons shipped for the
three-month periods ended March 31, 2004 and 2003 (in millions, except per share
data and tons shipped):
2004 vs. 2003
2004 2003 Change % Change
-------------------------------------------------
Energy tons shipped............ 260,444 226,851 33,593 14.8%
Industrial tons shipped........ 118,847 99,820 19,027 19.1%
-------------------------------------------------
Total tons shipped............. 379,291 326,671 52,620 16.1%
Net sales...................... $311.3 $219.4 $91.9 41.9%
Cost of goods sold............. 240.8 204.5 36.3 17.8%
-------------------------------------------------
Gross profit................... 70.5 14.9 55.6 373.2%
Income from operations......... 50.9 2.6 48.3 NM
Income before income taxes..... 48.3 0.4 47.9 NM
Income before cumulative
effect of an accounting
change....................... 30.3 0.2 30.1 NM
Net income..................... 28.7 0.2 28.5 NM
Diluted earnings per share
before cumulative effect of
an accounting change......... 0.72 0.01 0.71 NM
Diluted earnings per share..... 0.68 0.01 0.67 NM
NM Not meaningful
Net sales of $311.3 million recorded for the first quarter of 2004 represent an
increase of $91.9 million, or 41.9%, compared to the prior year period. These
results were primarily attributable to a 16.1% increase in total product
shipments, from 326,671 tons in the first quarter of 2003 to 379,291 tons in the
first quarter of 2004. Also, overall average net selling prices increased from
the comparable quarter of the prior year by 22.2%, from an average of $672 per
ton to $821 per ton. The increase we experienced in shipments and average net
selling prices primarily resulted from strengthening energy market conditions
and steel surcharges charged to our customers to offset steel cost increases
implemented during the first quarter of 2004 by our major suppliers. See
"Overview."
Cost of goods sold of $240.8 million recorded for the first quarter of 2004
represents an increase of $36.3 million, or 17.8%, compared to the prior year
period. Overall unit cost per ton of products sold increased only 1.4% from the
comparable quarter of the prior year, from an average of $626 per ton to $635
per ton. Costs increased due primarily due to an increase in shipment levels
offset by a slight decrease in steel costs. We expect our current replacement
cost of steel to flow through our cost of goods sold over the next two
22
quarters. See "Overview."
The Company earned a gross profit of $70.5 million during the first quarter of
2004, compared to a gross profit of $14.9 million in the prior year period.
Gross profit per ton was $186 per ton as compared to $46 per ton in the
comparable prior year period. Gross profit per ton primarily increased due to
higher selling prices primarily due to the steel surcharges and slightly lower
steel costs as lower costing steel inventory flowed into our cost of goods sold.
Accordingly, gross profit, as a percentage of net sales, was 22.6% for the
three-month period ended March 31, 2004 compared to 6.8% for the comparable
prior year period.
Selling, general and administrative expenses increased $7.3 million, or 59.3%,
from $12.3 million in the first quarter of 2003 to $19.6 million in the first
quarter of 2004. Selling, general and administrative expenses as a percentage of
net sales in the first quarter of 2004 were 6.3% compared to 5.6% for the
comparable prior year period. The increase resulted primarily from the
additional commission expense, additional reserves for allowance for doubtful
accounts, expensing of an standard cost project that was not completed and
incentive compensation.
Interest expense increased $0.4 million, or 18.2%, from $2.2 million in the
first quarter of 2003 to $2.6 million in the first quarter of 2004. This
increase was due to the issuance of the senior subordinated notes in June of
2003 and to higher average borrowings (primarily as a result of the acquisition
of the SeaCAT Corporation) partially offset by lower average interest rates
during the first quarter of 2004 compared to the first quarter of 2003. Our net
debt to capitalization ratio (the sum of our current and long-term debt, net of
cash and cash equivalents compared to the sum of our stockholders' equity and
our current and long-term debt, net of cash and cash equivalents) decreased from
27.9% at December 31, 2003 to 24.6% at March 31, 2004. This ratio is a measure
of our long-term liquidity and is an indicator of our financial flexibility.
The results of our operations resulted in generation of pre-tax income of $48.3
million for the first quarter of 2004 compared to pre-tax income in the first
quarter of 2003 of $0.4 million. Accordingly, the provision for income taxes was
$18.0 million for the first quarter of 2004 compared to the prior year's
provision of $119,000. Also, the effective tax rate for the quarter was
negatively impacted by the generation of more pre-tax income and a greater
proportion of that income derived from U.S. operations.
The Company adopted Financial Accounting Standards Board ("FASB") Interpretation
No. 46, "Consolidation of Variable Interest Entities," on March 31, 2004, which
resulted in the consolidation of PCD as of March 31, 2004. As a result, we
recorded a $1.6 million (net of benefit for income taxes of $1.0 million)
non-cash cumulative charge to recognize the prior losses of PCD.
Net income of $28.7 million was generated in the first quarter of 2004, an
increase of $28.5 million from the comparable prior year period.
Segment Information
- -------------------
The Company's two segments are the Energy Products segment and the Industrial
Products segment.
Energy Products Segment
- -----------------------
Energy product sales of $210.0 million for the first quarter of 2004 represent
an increase of $57.6 million, or 37.8%, compared to the prior year period.
Energy product shipments increased 33,593 tons, or 14.8%, from 226,851 tons to
260,444 tons over the same period, respectively. Energy product shipments
primarily increased due to the U.S. and Canadian rig counts increasing from 901
and 494 active rigs, respectively, for the first quarter of 2003, to 1,118 and
528 active rigs, respectively, for the first quarter of 2004. Overall average
net selling prices for energy products increased 19.9% from the comparable
quarter of the prior year, from an average of $672 per ton to $806 per ton. The
increase in energy product sales and shipments was primarily due to price
increases including steel surcharges and strengthening market conditions. See
"Overview."
23
Energy product cost of goods sold of $166.9 million for the first quarter of
2004 represent an increase of $26.1 million, or 18.5%, compared with the prior
year period. The increase was primarily due to increased product shipments and
lower steel costs. See "Overview." Gross profit for energy products of $43.1
million for the quarter ended March 31, 2004 compared to a gross profit of $11.6
million for the prior year period. Gross profit per ton primarily increased due
to higher selling prices including steel surcharges offset by lower steel costs.
Gross profit was $165 per ton as compared to $51 per ton in the comparable prior
year period, reflecting stronger selling prices including steel surcharges and
higher fixed cost absorption. Energy product gross profit margin percentage was
20.5% for the quarter ended March 31, 2004, compared to a gross profit margin
percentage of 7.6% for the prior year period. We expect our current cost of
steel to flow through our cost of goods sold over the next two quarters.
Industrial Products Segment
- ---------------------------
Industrial product sales of $101.3 million for the first quarter of 2004
represent an increase of $34.3 million, or 51.2%, compared with the prior year
period. Industrial product shipments increased 19,027 tons, or 19.1%, from
99,820 tons to 118,847 tons over the same periods, respectively. Overall average
net selling price for industrial products increased 27.0% from the comparable
quarter of the prior year from an average of $671 per ton to $852 per ton. This
increase in industrial product sales and shipments resulted from strengthening
market conditions, our ability to obtain steel, our inventory levels entering
2004 and higher selling prices including steel surcharges. See "Overview."
Industrial product cost of goods sold of $73.9 million in the first quarter of
2004 represents an increase of $10.2 million, or 16.0%, 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 $27.4
million for the quarter ended March 31, 2004 compared to a gross profit of $3.3
million for the prior year period. Gross profit per ton primarily increased due
to higher selling prices including steel surcharges offset by higher steel
costs. Gross profit was $231 per ton as compared to $33 per ton in the
comparable prior year period, primarily reflecting stronger selling prices
including steel surcharges. Industrial product gross profit margin percentage
was 27.0% for the quarter ended March 31, 2004, compared to 4.9% gross profit
margin during the prior year period. We expect our current cost of steel to flow
through our cost of goods sold over the next two quarters.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Working capital at March 31, 2004 was $284.7 million, and the ratio of current
assets to current liabilities was 3.4 to 1.0. Working capital at December 31,
2003 was $253.7 million, and the ratio of current assets to current liabilities
was 3.8 to 1.0. The increase in working capital for the three months ended March
31, 2004 was primarily due to a $11.4 million increase in cash and cash
equivalents, a $38.6 million increase in accounts receivable, a $13.9 million
increase in inventory offset by a $16.4 million increase in accounts payable, a
$14.5 million increase in income taxes payable and a $4.3 million increase in
accrued liabilities. The primary reason for the increase in accounts receivable
was an increase in shipment levels and increases in selling prices during the
first quarter of 2004. We raised our selling prices to offset increases in steel
cost. Cash provided by operating activities was $17.0 million for the three
months ended March 31, 2004.
Cash used by investing activities was $5.6 million for the three months ended
March 31, 2004, which was attributable to expenditures on property, plant and
equipment.
Cash provided by financing activities was $0.2 million for the three months
ended March 31, 2004 as principal payments on long-term borrowings were offset
by the proceeds from the exercise of stock options.
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 March 31, 2004. Interest is
payable monthly at either 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
24
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 $133.2
million as of March 31, 2004. The senior credit facility includes a restrictive
covenant requiring a minimum fixed charge coverage ratio if availability falls
below $30.0 million. Also, if availability falls below $50.0 million, the debt
will be classified as current. The senior credit facility also limits capital
expenditures to $30.0 million per year and limits our ability to pay dividends,
create liens, sell assets or enter into transactions with affiliates without the
consent of the lenders.
We anticipate we will comply with the covenants in our senior credit facility
and other debt instruments in 2004 and beyond. We believe our projections for
2004 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. If our operations are less than projected, however, 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.
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 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 were
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.
Our capital budget for 2004 is approximately $22.2 million; of which $5.6
million was expended during the three-month period ended March 31, 2004. The
capital budget includes $6.5 million for upgrading one of our mills at
Prudential. The remaining $15.7 million of our capital budget will be used to
acquire new equipment for our existing manufacturing facilities and to continue
full integration of our recent acquisitions. We expect to meet ongoing working
capital and the capital expenditure requirements from a combination of cash flow
from operating activities and available borrowings under our revolving credit
facility.
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.
25
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, income tax
matters and the pension plan.
Management uses experience and all available information to make these judgments
and estimates; however, actual results will inevitably differ from those
estimates and assumptions used to prepare the Company's financial statements at
any given time. Despite these inherent limitations, management believes
"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,
2003, beginning on page 25. The Company's critical accounting policies and
estimates did not change during the first quarter of 2004. Management believes
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.
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 described below 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 at variable rates
and a two-percentage-point change in the average interest rate under these
borrowings and taking into account the swap agreement in place, it is estimated
that our interest expense for the quarter ended March 31, 2004 would not have
changed by a material amount. In the event of an adverse change in interest
rates, we would likely take 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 actions that would be taken and their possible
effects, no such actions have been considered. Further, no consideration has
been given to the effects of the change in the level of overall economic
activity that could exist in such an environment.
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 Statement of Financial Accounting Standards ("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 June 2004. At March 31,
2004, the swap agreement is reflected in the accompanying consolidated balance
sheet in other accrued liabilities at its fair value of $0.5 million. The
unrealized loss on the fair value of the swap agreement is reflected, net of
taxes, in other comprehensive loss.
26
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 business both positively and negatively. We estimate that a $10
per ton change in the price of steel that is not offset by a similar selling
price change could impact diluted earnings per share by a range of $0.10 to
$0.15. We expect our current replacement cost of steel to flow through our cost
of goods sold over the next two quarters. See "Overview - Pricing and Costs of
Our Products." 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
or the inability to obtain the necessary amount of steel could affect our
ability to produce our products and could have a material adverse effect on our
business.
Foreign Currency Risk
- ---------------------
The Company's reported cash flows related to its Canadian operations are based
on cash flows measured in Canadian dollars converted to the U.S. dollar
equivalent based on published exchange rates for the period reported. The
Company believes its current risk exposure to the exchange rate movements, based
on net cash flows, to be immaterial.
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 1.3287. The settlement date
for the hedge agreement is July 21, 2004. The swap is being accounted for as a
cash flow hedge. 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 March 31, 2004, the
hedge agreement is reflected in the accompanying consolidated balance sheet in
other accrued liabilities at its fair value of $0.3 million. The unrealized loss
on the fair value of the hedge agreement is reflected in other comprehensive
loss.
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 March 31, 2004.
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 March 31, 2004 that have materially
affected or are reasonably likely to materially affect the Company's internal
controls over financial reporting.
27
- --------------------------------------------------------------------------------
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibit No. Description
15.1 Letter re: Unaudited Interim Financial Information.
31.1 Chief Executive Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On March 12, 2004, the company filed a Report on Form 8-K containing the
announcement that T. Scott Evans, Senior Vice President - Sales and
Marketing, has entered into a plan for selling shares of the Company's
common stock.
28
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: May 7, 2004 /s/ Gregg Eisenberg
-------------------------------------------------
Gregg Eisenberg, Chairman, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 2004 /s/ Pamela G. Boone
-------------------------------------------------
Pamela G. Boone, Vice President - Finance
and Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
29
EXHIBIT INDEX
Exhibit No. Description
- --------------------------------------------------------------------------------
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.
30