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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 001-10651
MAVERICK TUBE CORPORATION
(Exact name of registrant as specified in its charter)
[MAVERICK LOGO]
----------------
TUBE CORPORATION
DELAWARE 43-1455766
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
16401 SWINGLEY RIDGE ROAD, SEVENTH FLOOR 63017
CHESTERFIELD, MISSOURI (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (636) 733-1600
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 [X] No [ ]
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Common stock, $0.01 par value - 42,887,410 shares as of May 3, 2005.
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets - March 31, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income - Three Months Ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Report of Independent Registered Public Accounting Firm 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 6. Exhibits 22
SIGNATURES 23
EXHIBIT INDEX 24
2
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2005 2004
(UNAUDITED) (AUDITED)
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,636 $ 14,721
Short-term investments - 19,965
Accounts receivable, less allowances of $6,634 and $6,641 on March 31, 2005 and
December 31, 2004, respectively 189,698 160,240
Inventories 459,490 447,080
Deferred income taxes 9,502 9,488
Prepaid expenses and other current assets 8,698 8,404
----------- ------------
Total current assets 674,024 659,898
Property, plant and equipment, net of accumulated depreciation 215,885 211,534
Goodwill 82,469 85,984
Other acquired intangibles, net of accumulated amortization 34,406 34,522
Other assets 10,571 10,499
----------- ------------
$ 1,017,355 $ 1,002,437
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 78,823 $ 98,957
Accrued expenses and other liabilities 38,740 42,809
Deferred revenue 12,410 14,387
Income taxes payable 14,246 29,364
Current maturities of long-term debt 831 3,298
----------- ------------
Total current liabilities 145,050 188,815
Long-term debt, less current maturities 2,637 2,981
Convertible senior subordinated notes 120,000 120,000
Revolving credit facility 81,593 54,660
Other liabilities 21,195 21,387
Deferred income taxes 16,188 18,930
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 authorized shares; 1 share issued and outstanding - -
Common stock, $0.01 par value; 80,000,000 authorized shares; 42,900,274 and 42,645,309
shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively 429 426
Additional paid-in capital 244,375 238,895
Unamortized value of restricted stock (2,767) (1,416)
Treasury stock, 12,864 shares (222) (222)
Retained earnings 387,203 355,988
Accumulated other comprehensive income 1,674 1,993
----------- ------------
630,692 595,664
----------- ------------
$ 1,017,355 $ 1,002,437
=========== ============
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,
2005 2004
----------- ------------
Net sales $ 446,484 $ 311,298
Cost of goods sold 376,655 240,758
----------- ------------
Gross profit 69,829 70,540
Selling, general and administrative 17,890 17,219
Sales commissions 2,873 2,422
----------- ------------
Income from operations 49,066 50,899
Interest expense 2,493 2,618
----------- ------------
Income before income taxes and cumulative effect of accounting change 46,573 48,281
Provision for income taxes 15,358 17,956
----------- ------------
Income before cumulative effect of accounting change 31,215 30,325
Cumulative effect of accounting change (net of income tax benefit of $951) - (1,584)
----------- ------------
Net income $ 31,215 $ 28,741
=========== ============
Basic earnings (loss) per share
Income before cumulative effect of accounting change $ 0.73 $ 0.72
Cumulative effect of accounting change - (0.04)
----------- ------------
Net income $ 0.73 $ 0.68
=========== ============
Diluted earnings (loss) per share
Income before cumulative effect of accounting change $ 0.72 $ 0.72
Cumulative effect of accounting change - (0.04)
----------- ------------
Net income $ 0.72 $ 0.68
=========== ============
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,
2005 2004
----------- ------------
OPERATING ACTIVITIES
Net income $ 31,215 $ 28,741
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of an accounting change - 1,584
Depreciation 6,883 5,590
Amortization 652 686
Share-based compensation expense 396 -
Deferred income taxes 722 1,053
Provision for losses on accounts receivable 312 766
Gain (loss) on sale of equipment 10 (60)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable (30,023) (39,606)
Inventories (12,904) (12,586)
Prepaid expenses and other current assets (305) 1,958
Other assets (560) (2,327)
Accounts payable (20,119) 15,217
Accrued expenses and other liabilities (15,214) 19,057
Deferred revenue (1,977) (3,188)
----------- ------------
Cash provided (used) by operating activities (40,912) 16,885
INVESTING ACTIVITIES
Proceeds from sale of investments 19,965 -
Expenditures for property, plant and equipment (13,326) (5,571)
Proceeds from disposal of equipment 84 60
----------- ------------
Cash provided (used) by investing activities 6,723 (5,511)
FINANCING ACTIVITIES
Net borrowings on revolving credit facility 26,057 217
Principal payments on long-term borrowings and notes (2,811) (3,160)
Deferred debt costs (75) (103)
Principal payments on long-term note receivable - 239
Proceeds from exercise of stock options 2,921 3,051
----------- ------------
Cash provided by financing activities 26,092 244
Effect of exchange rate changes on cash and cash equivalents 12 (231)
----------- ------------
Increase (decrease) in cash and cash equivalents (8,085) 11,387
Cash and cash equivalents at beginning of period 14,721 29,202
----------- ------------
Cash and cash equivalents at end of period $ 6,636 $ 40,589
=========== ============
Supplemental disclosures of cash flow information:
Noncash investing and financing activities:
Net assets consolidated from a cumulative effect of an accounting change $ - $ 11,492
See accompanying notes to condensed consolidated financial statements.
5
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, its direct and indirect wholly-owned subsidiaries,
a joint venture under the control of Maverick Tube Corporation, and a variable
interest entity, all of which are separate legal entities (collectively referred
to as "Maverick" or "Company"). All significant intercompany accounts and
transactions have been eliminated.
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, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year-ended December 31, 2004.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SHARE-BASED PAYMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (R), "Share-Based
Payment," which is a revision of SFAS No. 123, "Accounting for Stock Based
Compensation," supersedes Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of
Cash Flows." Among other items, SFAS No. 123 (R) eliminates the use of the
intrinsic value method of accounting under APB No. 25 and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant-date fair value of those awards, in the
financial statements.
SFAS No. 123 (R) is effective for the first fiscal year beginning after June 15,
2005. Therefore, for the Company, SFAS No. 123 (R) will be effective as of
January 1, 2006, although early adoption is allowed. SFAS No. 123 (R) permits
companies to adopt its requirements using either a "modified prospective" method
or a "modified retrospective" method. Under the "modified prospective" method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS No. 123 (R) for all
share-based payments granted after that date and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS
No. 123 (R). The "modified retrospective" method requirements are the same as
under the "modified prospective" method, but also permit entities to restate
financial statements of previous periods based on pro forma disclosures made in
accordance with SFAS No. 123.
The Company currently plans to adopt SFAS No. 123 (R) on January 1, 2006, using
the modified prospective method. This change in accounting principle is not
expected to materially impact the Company's financial statements. However,
because the Company currently accounts for share-based payments to its employees
using the intrinsic value method under APB No. 25, its results of operations
have not included the recognition of compensation expense for the issuance of
stock option awards.
SFAS No. 123 (R) also requires the benefits associated with the tax deductions
in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other things, when
employees exercise stock options.
INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies that abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage) should be recognized as current-period
charges and requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The guidance is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Earlier application is permitted for inventory costs incurred during
fiscal years beginning after November 23, 2004. The Company does not expect SFAS
No. 151 to materially impact the financial statements upon adoption.
6
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INCOME TAXES
On December 21, 2004, the FASB issued two FASB Statements of Position ("FSP")
regarding the accounting implications of the American Jobs Creation Act of 2004.
FSP No. 109-1, "Application of FASB Statement No. 109 `Accounting for Income
Taxes' to the Tax Deduction on Qualified Production Activities Provided by the
American Job Creation Act of 2004," is not expected to have an effect on the
Company's effective tax rate until fiscal 2006. FSP No. 109-2, "Accounting and
Disclosure Guidance for the Foreign Provision Within the American Jobs Creation
Act of 2004," is effective for fiscal year 2004 and is not expected to have an
effect on the Company's effective tax rate until it becomes apparent the Company
will repatriate foreign earnings. At that time, a one-time tax change to the
Company's consolidated statements of income could occur.
3. INVENTORIES
Inventories at March 31, 2005 and December 31, 2004 consist of the following (in
thousands):
2005 2004
---------- ----------
Finished goods $ 206,623 $ 207,194
Work-in-process 55,389 44,380
Raw materials 113,588 113,007
In-transit materials 71,881 70,760
Storeroom parts 12,009 11,739
---------- ----------
$ 459,490 $ 447,080
========== ==========
4. GOODWILL
The changes in the carrying amount of goodwill for the three months ended March
31, 2005 are as follows (in thousands):
Balance at December 31, 2004 $ 85,984
Reclassifications (3,515)
------------
Balance at March 31, 2005 $ 82,469
============
Reclassifications represent opening balance adjustments between goodwill and
deferred taxes, which had no impact on earnings.
5. SENIOR CREDIT FACILITY
The Company has a senior credit facility providing for $185,000,000 revolving
line of credit. The Company has letters of credit outstanding under this
facility of $7,462,000 at March 31, 2005. Interest is payable monthly at U.S. or
Canadian Prime, Banker's Acceptance Rates or 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 available borrowings
under the senior credit facility were approximately $85,718,000 as of March 31,
2005. 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 limits capital expenditures to
$30,000,000 per year (excluding the new Republic Conduit facility in Louisville,
Kentucky and the plant expansion at Precision Tube) 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.
7
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. DEFINED BENEFIT PLAN
Prudential Steel Ltd. ("Prudential"), a Canadian subsidiary, sponsors two
pension plans, one for its hourly employees and one for its salaried employees,
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,
2005 (in thousands) are as follows:
PENSION
BENEFITS POSTRETIREMENT
AND SERP BENEFIT PLAN
-------- --------------
Contributions required by funding regulations or laws $ 2,978 $ -
Additional discretionary contributions 1,367 75
-------- --------------
$ 4,345 $ 75
======== ==============
Net periodic benefit costs consist of the following for the three months ended
March 31, 2005 and 2004 (in thousands):
2005 2004
--------- -------
Pension benefit costs:
Service cost $ 503 $ 391
Interest cost 848 720
Expected return on plan assets (830) (639)
Amortization of prior service cost 122 112
Amortization of transition asset (169) (156)
Recognized net actuarial gain 149 89
--------- -------
Net periodic benefit cost $ 623 $ 517
========= =======
2005 2004
--------- ------
Postretirement benefit plan costs:
Service cost $ 29 $ 15
Interest cost 51 31
Recognized net actuarial loss 31 14
--------- ------
Net periodic benefit cost $ 111 $ 60
========= ======
7. SEGMENT INFORMATION
The Company operates through five business units that have been aggregated into
two segments because of their similar economic characteristics and because the
long-term financial performance of these business units is affected by similar
economic conditions. The consolidated results are evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
Within each segment, the business units operate in the same markets and have
substantially the same customers. The Company evaluates the performance of the
energy and industrial segments based on their segment profit (loss), which is
defined as income (loss) from operations before income taxes, and interest
income and expense.
Certain reclassifications have been made to prior year balances to conform to
the current year presentation, including reclassifying certain corporate
expenses into the "Corporate" column.
8
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized financial information is shown in the following table (in thousands)
for each of the three months ended March 31, 2005 and 2004, regarding the
reportable industry segments of the Company. The "Corporate" column includes
corporate-related items and, as it relates to segment profit (loss), income and
expense not allocated to the other segments. 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, 2005
Net sales $ 333,588 $ 112,896 $ - $ 446,484
Income (loss) from operations 43,842 16,087 (10,863) 49,066
Identifiable assets 707,525 256,320 53,510 1,017,355
THREE MONTHS ENDED MARCH 31, 2004
Net sales $ 209,984 $ 101,314 $ - $ 311,298
Income (loss) from operations 37,658 23,304 (10,063) 50,899
Identifiable assets 459,629 200,684 76,414 736,727
8. STOCK-BASED COMPENSATION
The Company has two employee stock option plans (the "1990 Plan" and the "1994
Plan") that allow for the grant of incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs"). The Company also has two stock option
plans for eligible directors (the "1994 Director Plan" and the "1999 Director
Plan") that allow for grants of NQSOs and an equity compensation plan for
non-employee directors (the "2004 Director Plan") pursuant to which stock
options and shares of restricted stock may be granted. In addition, the Company
sponsors a combined employee and director stock option plan (the "Prudential
Plan") that allows for the grant of ISOs and NQSOs. No additional awards may be
granted under the 1990 Plan, the 1994 Plan, the 1994 Director Plan, the 1999
Director Plan or the Prudential Plan.
The Company also has an employee incentive plan (the "2004 Omnibus Plan")
pursuant to which ISOs, NQSOs, restricted stock, restricted stock units, stock
appreciation rights, performance awards, other stock-based awards and cash-bonus
awards may be granted to certain employees of the Company. 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 APB Opinion No. 25 and
related interpretations. 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. Compensation expense is recognized in net earnings for restricted
stock grants.
Pursuant to the disclosure requirements of SFAS No. 123, 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 for the three months ended March 31, 2005 and
2004 (in thousands, except per share information):
2005 2004
---------- -----------
Net income, as reported $ 31,215 $ 28,741
Add: total stock-based employee compensation expense included
in reported net earnings, net of related tax effects 267 -
Deduct: total stock-based employee compensation expense
determined under fair value-based method for
all awards, net of related tax effects (507) (177)
---------- -----------
Pro forma net income $ 30,975 $ 28,564
========== ===========
Basic earnings per share
Net income - as reported $ 0.73 $ 0.68
Net income - pro forma $ 0.73 $ 0.68
Diluted earnings per share
Net income - as reported $ 0.72 $ 0.68
Net income - pro forma $ 0.71 $ 0.67
SFAS No. 123 requires the use of option pricing models that were not developed
for use in valuing employee stock options. Further, option pricing models
require the input of highly subjective assumptions, including the options'
expected life and price volatility of the underlying stock. Thus, in the opinion
of management, existing option pricing models do not necessarily provide a
reliable measure of the fair value of employee stock options.
The compensation expense associated with the fair value of the options
calculated for the three months ended March 31, 2005 and 2004, is not
necessarily representative of the potential effects on reported net income in
future years. The fair value of each option grant is estimated on the date of
the grant by use of the Black-Scholes option pricing model.
9
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pursuant to the 2004 Omnibus Plan, a restricted stock grantee is entitled to
cash dividends and voting rights relating to his or her grant. Restrictions
placed on shares of restricted stock granted pursuant to the 2004 Omnibus Plan
limit the sale or transfer of these shares during a vesting period whereby the
restrictions lapse at the end of the third or fifth year. Upon issuance of stock
under the 2004 Omnibus Plan, unearned compensation equivalent to the market
value at the date of the grant is charged to stockholders' equity and
subsequently amortized to expense over the eight-year restriction period. During
the quarter ended March 31, 2005, net shares of restricted stock granted were
45,406. Compensation expense related to these shares was $182,000 for the three
months ended March 31, 2005.
Under the Company's 2004 Omnibus Plan, restricted stock units may be granted to
certain officers and key employees. If certain financial goals are met, common
stock may be awarded at the end of the performance period at no cost to certain
officers and key employees, in exchange for such restricted stock units.
Compensation expense related to restricted stock units is recorded over the
performance period based on the anticipated number of shares to be awarded.
Compensation expense for restricted stock units was $214,000 for the three
months ended March 31, 2005.
9. 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 shares of 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.
10
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER COMMON SHARE
In June 2003, the Company issued $120,000,000 of contingently convertible senior
subordinated notes ("the Old Notes"). In December 2004, the Company completed an
offer to exchange new contingently convertible senior subordinated notes ("the
New Notes") with terms identical to those applicable to the Old Notes, except
for a net share settlement upon conversion provision and a public acquirer
change of control provision.
The reconciliation of the numerator and denominator used to calculate basic and
diluted earnings per share of common stock ("EPS") is as follows for the three
months ended March 31, 2005 and 2004 (in thousands):
2005 2004
---------- -----------
NUMERATOR FOR BASIC AND DILUTED EPS
Income before cumulative effect of accounting change $ 31,215 $ 30,325
Cumulative effect of accounting change, net of benefit for income
taxes - (1,584)
---------- -----------
Numerator for basic EPS 31,215 28,741
Interest on the Old Notes 30 28
========== ===========
Numerator for diluted EPS $ 31,245 $ 28,769
========== ===========
The reconciliation for diluted earnings per share is as follows for the three
months ended March 31, 2005 and 2004 (in thousands):
2005 2004
---------- -----------
DENOMINATOR FOR BASIC EPS
Average shares outstanding - basic 42,650 42,064
=========== ===========
DENOMINATOR FOR DILUTED EPS 42,650 42,064
Dilutive effect of unvested restricted stock and outstanding stock
options 234 193
Dilutive effect of the Old Notes 156 156
Dilutive effect of the New Notes 441 -
----------- -----------
Average shares deemed outstanding - diluted 43,481 42,413
=========== ===========
Basic earnings per share include the exchangeable shares (as further described
in Note 9) from the business combination with Prudential on an as-if exchanged
basis.
11. COMPREHENSIVE INCOME
The following table summarizes the components of other comprehensive income for
the three months ended March 31, 2005 and 2004 (in thousands):
2005 2004
---------- -----------
Net income $ 31,215 $ 28,741
Change in fair value of cash flow hedges 13 61
Foreign currency translation adjustment (347) (802)
Minimum pension liability adjustment 15 18
---------- -----------
Comprehensive income $ 30,896 $ 28,018
========== ===========
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Maverick Tube Corporation
We have reviewed the condensed consolidated balance sheet of Maverick Tube
Corporation and Subsidiaries as of March 31, 2005, and the related condensed
consolidated statements of income and cash flows for the three-month periods
ended March 31, 2005 and 2004. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United
States), the objective of which is the expression of 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 condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Maverick Tube Corporation and Subsidiaries as of December 31, 2004, 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
March 2, 2005, 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, 2004, 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
May 3, 2005
12
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended, provide a safe harbor for
forward-looking statements made by or on behalf of the Company. The Company and
its representatives may from time to time make written or oral statements that
are "forward-looking," including statements contained in this report and other
filings with the Securities and Exchange Commission (SEC) and in our reports to
stockholders. 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 natural 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. Uncertainty
also continues to exist as to the future replacement cost of steel (our
principal raw material, representing approximately two-thirds of cost of goods
sold).
Although we believe the expectations reflected in our forward-looking statements
are based upon reasonable assumptions, 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 made on the basis of management's assumptions and analyses, as of the
time the statements are made, in light of their experience and perception of
historical conditions, expected future developments and other factors believed
to be appropriate under the circumstances. Further information concerning
important factors that could cause actual events or results to be materially
different from the forward-looking statements can be found in the "Risk Factors"
section of our annual report on Form 10-K for the year ended December 31, 2004.
In addition, certain market data and other statistical information used
throughout this report are based on independent industry publications,
government publications, reports by market research firms or other published
independent sources. Although we believe these sources to be reliable, we have
not independently verified the information and cannot guarantee the accuracy and
completeness of such sources.
Except as otherwise required by the federal securities laws, we disclaim any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this quarterly report on Form 10-Q to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Maverick Tube Corporation, its direct and indirect wholly-owned subsidiaries and
other required consolidated entities are collectively referred to as "the
Company." Also, unless the context otherwise required, the terms "we," "us," or
"our" refer to the Company.
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations," commonly referred to as MD&A, is intended to help the
reader understand the Company, our operations, and our business environment.
MD&A is provided as a supplement to, and should be read in conjunction with, our
condensed consolidated financial statements and the accompanying notes. The MD&A
includes the following sections:
- Our Business -- a general description of the key drivers that affect
our business and the industries in which we operate.
- Our Business Strategy -- a description of the strategic initiatives
on which we focus and the goals we seek to achieve.
- Results of Operations -- an analysis of our Company's results of
operations for the periods presented in our condensed consolidated
financial statements.
- Liquidity and Capital Resources -- an analysis of cash flows and
sources and uses of cash.
- Critical Accounting Estimates -- a description of accounting
estimates that require critical judgments and estimates.
13
OUR BUSINESS
We believe there are certain key drivers and industry factors that are critical
to understanding our business. For instance, the general driver of demand for
our energy products is the level of end-user exploration, drilling, development
and production of oil and natural gas. The general driver of demand for our
industrial products is the general level of economic activity in North America.
For both our energy and industrial products, the cost of steel is one of the
primary factors that can affect our profitability in any given year. In order to
gain a deeper understanding of our business, however, we are providing an
analysis of drivers and factors that are directly linked to the primary products
we produce.
DEMAND-RELATED DRIVERS AND FACTORS
Energy Products
Our energy products generally depend upon similar demand drivers, primarily
North American drilling activity. However, our acquisitions during 2003 and 2004
have brought new product lines, and therefore, new opportunities into our energy
business, which are discussed below. Our significant energy product types are
oil country tubular goods ("OCTG"), line pipe, coiled products, and couplings.
OCTG
We manufacture production casing, surface casing, and production tubing, which
are used in new oil and natural gas wells. As a result, we believe that the
level of oil and natural gas drilling activity in North America is the primary
driver of our OCTG business. The indicator we use to measure drilling activity
is the number of oil and natural gas drilling rigs that are active, commonly
known as rig count, prepared by Baker Hughes Incorporated. We believe the Baker
Hughes rig count is widely accepted within the energy industry as a reliable
indicator of drilling activity levels.
The level of drilling activity is largely a function of current prices for oil
and natural gas and the industry's future price expectations. Changes in prices
drive the amount of resources our end-users commit to the exploration and
production of oil and natural gas. Accordingly, increases and decreases in
prices have a direct effect on the demand for our OCTG products.
The amount of imports from foreign competitors also significantly affects the
North American OCTG market. High levels of imports reduce the volume sold by
North American producers and tend to suppress selling prices. We believe import
levels of OCTG are affected by North American and overall world demand for OCTG
and the relative value of the U.S. and Canadian dollars.
Another item which impacts demand for our energy products in the U.S. is
inventory levels maintained by manufacturers, distributors and end-users and
whether these inventory levels are being increased, reduced, or maintained.
Inventory levels in Canada are less meaningful because Canadian end-users and
distributors do not generally hold significant amounts of inventory.
14
The following table illustrates these demand-related drivers and factors for the
three months ended March 31, 2005 and 2004:
2005 2004
----------- ----------
U.S. MARKET ACTIVITY:
Average rig count 1,279 1,119
========== ==========
Average U.S. energy prices:
Oil per barrel (West Texas Intermediate) $ 49.65 $ 34.96
========== ==========
Natural gas per U.S. $ per MCF (Average U.S.) $ 6.42 $ 5.30
========== ==========
OCTG CONSUMPTION: (in thousands of tons)
U.S. producer shipments 579 624
Imports 305 216
Inventory (increase)/decrease (63) (57)
---------- ----------
Total U.S. Consumption 821 783
========== ==========
CANADIAN MARKET ACTIVITY:
Average rig count 521 528
========== ==========
Average Canadian energy prices:
Natural gas per U.S. $ per MCF (Average Alberta spot price) $ 5.49 $ 4.70
========== ==========
CANADIAN OCTG CONSUMPTION:
(in thousands of tons)
Canadian producer shipments 194 197
Imports 153 108
Inventory (increase)/decrease (28) 1
---------- ----------
Total Canadian Consumption 319 306
========== ==========
The U.S. rig count in the table is based on weekly rig count reporting
from Baker Hughes, Incorporated. 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. 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 calculated
based on the components listed above.
The Canadian rig count in the table is based on weekly rig count reporting
from Baker Hughes, Incorporated. Energy prices in the table are the
average Alberta natural gas spot price as reported by Nickles Energy
Group. 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.
U.S. oil and natural gas prices were higher on average for the first quarter of
2005 by 42.0% and 21.1%, respectively, compared to the first quarter of 2004 as
relatively low oil and natural gas supply and geopolitical instability, coupled
with continued strong energy demand, maintained upward pressure on pricing.
These factors prompted an increase in U.S. oil and natural gas drilling during
the first quarter of 2005 of 14.3% and 11.7%, respectively, over the prior year
quarter. As a result, we experienced continued strong demand for our products
during the first quarter of 2005. We expect demand for our energy products to
continue to remain strong throughout 2005 as both oil and natural gas prices are
expected to sustain the number of active drilling rigs. U.S. oil and natural gas
rigs at March 31, 2005 were 2.1% and 2.4% higher, respectively, than the average
rig counts during the quarter. Canadian rigs decreased slightly from the prior
year quarter.
Line Pipe
Our line pipe products are primarily used to transport oil and natural gas to
refining or storage facilities that are adjacent to active oil and natural gas
wells. Accordingly, as with OCTG, drilling activity is a key driver of our line
pipe business. Line pipe is used later in the energy cycle, however, and so the
impact to our line pipe business lags six to twelve months behind drilling
activity changes.
15
Similar to OCTG, we analyze the demand for our line pipe products by focusing on
the Baker Hughes rig count, the impact of changes in the price of oil and
natural gas, the effect of imports, and industry inventory levels. In addition
to the OCTG drivers and factors, our line pipe sales are also influenced by the
level of pipe line construction activity, line pipe replacement requirements,
new residential construction and utility purchasing programs.
As we mentioned in our OCTG discussion, the North American rig count increased
as prices for oil and natural gas increased from the first quarter of 2004 to
the first quarter of 2005. In analyzing the Baker Hughes rig count, it appears
that U.S. demand for line pipe (under 16") decreased during the first quarter of
2005 by an estimated 9.4% while Canadian demand increased by 1.4%, respectively,
from the prior year quarter. For U.S. sales, domestic shipments decreased by
14.8% in the first quarter of 2005 over the prior year quarter as market share
of domestic sales decreased by 12.4% due to aggressive import activity. For
Canadian sales, domestic shipments increased by 9.5% in the first quarter of
2005 over the prior year quarter while our import market share increased by 5.0%
over the same time period as we were successful in securing several line pipe
projects.
Coiled Products
We manufacture three types of coiled products: tubing, line pipe, and umbilical
tubing. Coiled tubing is used down-hole as production tubing and to "workover"
wells, which means to service existing oil and natural gas wells by
reestablishing well production and extending well life. For this reason, the
number of wells being worked over is the primary driver of our coiled tubing
business. We believe the Baker Hughes workover rig count is a reliable indicator
for this type of activity. The factors that impact the Baker Hughes workover rig
count are similar to those that affect the rig count that drives OCTG. North
American workover rigs averaged 2,031 during the first quarter of 2005, a 9.3%
increase compared to the first quarter of 2004.
Coiled line pipe is used in subsea flow line applications where the use of
continuous reels of our premium coated steel line pipe reduces both mobilization
and installation costs. Demand for this product has been further enhanced by the
role liquefied natural gas is expected to play in the natural gas supply in the
future. Umbilical tubing is used in subsea control systems that connect the
wellhead on the sea floor with surface production installations. The primary
driver of coiled line pipe demand and umbilical tubing demand is offshore
spending, both in the Gulf of Mexico and international offshore drilling.
According to Spears and Associates, global offshore spending for the year of
2005 is forecast to reach $42.6 billion, an increase of 12.1% over 2004.
Couplings
We manufacture couplings in both carbon and alloy steel grades and have the
capability to provide a full range of American Petroleum Institute ("API")
couplings from 2 3/8" to 20" in nominal sizes. Our API couplings are
manufactured, inspected and tested to ensure that they meet or exceed API
specifications. We also manufacture a full range of premium couplings through
various licensing agreements. Premium couplings are made to customer
specification and offer superior performance for a wide range of complex
applications.
Industrial Products
Our industrial products are used in numerous applications. Consequently, the
sources of demand for these products are diverse. However, we believe the
primary demand driver for our industrial products is the general level of
economic activity in the construction, transportation, agricultural, material
handling and recreational market segments. Our significant industrial product
types are steel electrical conduit, hollow structural sections, or HSS, standard
pipe, pipe piling and mechanical tubing.
Steel Electrical Conduit
The primary application for steel electrical conduit is sheathing for electrical
and communications wiring in industrial, commercial and institutional
construction, which are typically referred to collectively as nonresidential
construction. As such, steel electrical conduit demand is primarily influenced
by changes in spending on nonresidential construction. During the first quarter
of 2005, nonresidential spending was down as manufacturers drew down inventory
rather than purchase new products. We estimate that the corresponding reduction
in previously built inventory levels resulted in a decrease in U.S. demand for
steel electrical conduit of the types we produce of approximately 22.9% during
the first quarter 2005 as compared to the prior year period. Published forecasts
for U.S. nonresidential construction activity for the calendar year 2005 predict
a 2.7% increase in construction starts, compared to a modest increase of 0.9%
experienced in 2004.
We are one of four producers that account for most of the steel electrical
conduit consumed in the U.S. We estimate our domestic market share decreased
from 38.1% to 32.3%, due to our efforts to maintain higher selling prices.
16
HSS
We estimate domestic consumption of HSS during the first quarters of 2005 and
2004 was 511,688 tons and 536,560 tons, respectively. In addition, we estimate
the U.S. demand for HSS of the type we produce decreased by 4.6% in the first
quarter of 2005 as compared the prior year quarter, and total U.S. producer
shipments decreased by 15.7%, as imports captured 9.0% more market share over
the prior year quarter, bringing the import market share to 31.8% at March 31,
2005. We estimate our domestic market share decreased from 9.8% in the first
quarter of 2004 to 7.8% in the current year quarter. We believe this is due to
our continued focus on maintaining our existing selling prices.
In 2003, the Canadian International Trade Tribunal ruled that imports from the
Republic of South Korea, the Republic of Turkey, and the Republic of South
Africa had been dumped in Canada at significant margins. As a result, imports
from these countries are subject to an administrative process of determining
normal values or import prices are advanced by a 67% duty. These administrative
procedures will apply to all imports of HSS from these countries through August
2008.
Standard Pipe
Standard pipe is primarily used in construction applications for transporting
gases and fluids. The most significant drivers of demand for standard pipe are
general economic activity and nonresidential construction expenditures. We
estimate domestic consumption of standard pipe during the first quarters of 2005
and 2004 was 674,822 tons and 698,264 tons, respectively. According to published
reports and management estimates, preliminary numbers indicate U.S. standard
pipe demand for the first quarter of 2005 decreased from the prior year period
by 3.4%. While domestic shipments decreased 25.3%, the import market share
increased to 44.3% in the first quarter of 2005 from 29.5% in the first quarter
of 2004.
SELLING PRICES OF OUR PRODUCTS
Our average selling price for OCTG, line pipe, steel electrical conduit, HSS and
standard pipe in the first quarter of 2005 increased by 66.4%, 70.2%, 75.3%,
40.7% and 36.2% over the average selling price in the prior year period,
respectively. Similarly, our average selling price for our Canadian energy
products and industrial products from the first quarter of 2004 to the current
year quarter increased by 63.0% and 53.5%, respectively. Our Canadian pricing in
2005 was further impacted by a 7.5% increase in the exchange rate. These selling
price increases were driven by additional demand for our products and steel
price increases.
STEEL COSTS OF OUR PRODUCTS
The steel component of our costs of goods sold represents approximately
two-thirds of our total costs of good sold. Accordingly, we believe another key
driver of our profitability is the cost of steel and our ability to pass that
cost onto our customers.
Because we value our inventory using an average cost methodology, our steel
component of our cost of goods sold lags steel price changes by approximately
four to six months. Therefore, our average steel component of cost of goods sold
reached $778 per ton for the first quarter of 2005 which represents an increase
of 115.5% over the average cost of steel per ton in the first quarter of 2004.
While steel prices for the first quarter of 2005 are higher compared to the
prior year quarter, we expect steel prices to decrease throughout 2005. In
addition, we will begin to see the benefit of lower cost steel in our income
statement in the second quarter of 2005.
OUR BUSINESS STRATEGY
We have developed a business strategy that is focused on the following strategic
initiatives:
Generate Profitable Organic and Strategic Growth - We are committed to being a
growth company. Our growth has positioned us, we believe, as the North American
market share leader in oilfield tubing and casing, coiled tubing, line pipe,
coiled line pipe, couplings, and other custom-engineered pipe products used in
oil and natural gas exploration, production, and transmission. In 2004, we
acquired Texas Arai, the North American market share leader in API and premium
couplings. We have committed $63 million in 2005 towards the consolidation of
our Republic Conduit facilities in Louisville, Kentucky to be completed in the
first quarter of 2006. In addition, we are investing approximately $12 million
to increase the manufacturing capacity of Precision Tube, our coiled tubing
business, by 50%.
17
Expand Geographic Reach and Portfolio of Value-Added Oil Service Products - We
are focused on broadening our geographic reach and adding complementary products
to our portfolio. To that end, we continually seek opportunities for strategic
growth through acquisitions as we did with the expansion into coiled tubing and
subsea umbilicals in 2002 and 2003, respectively. While the nature and timing of
such activities cannot be predicted, we are confident in our ability to continue
to identify, acquire and assimilate attractive investment opportunities that
satisfy our return on investment criteria.
Achieve the Best Safety Record in the Oil Service Industry - We continue to make
solid strides in our safety performance. By implementing training programs,
engineering safer work stations and rewarding safe practices, we have reduced
our safety index. Efforts by all employees, at all levels, have been critical to
produce these spectacular improvements.
Generate Superior Returns on Capital Employed in All Business Units - We remain
committed to generating superior returns on capital employed in each of our
business units. In early 2005, we restructured the Company along business unit
lines to provide a management structure conducive to future growth, as well as
allowing us to better focus our attention and energies on our increasingly
diverse products and constituencies. Further, it provides the mechanism to
monitor return on net assets to ascertain which business units continue to
provide shareholder value.
RESULTS OF OPERATIONS
OVERALL COMPANY
We experienced strong market conditions in the first quarter of 2005 that drove
our overall operations. We also aggressively priced most of our products based
upon market demand and to absorb the unusually high steel costs we incurred.
The following table illustrates the operating results and tons shipped for the
three-month periods ended March 31, 2005 and 2004 (in millions, except per share
data and tons shipped):
2005 VS. 2004
-------------------------
2005 2004 CHANGE % CHANGE
----------- ----------- ----------- -----------
Energy tons shipped 241,596 260,444 (18,848) (7.2%)
Industrial tons shipped 78,673 118,847 (40,174) (33.8%)
----------- ----------- ----------- -----------
Total tons shipped 320,269 379,291 (59,022) (15.6%)
Net sales $ 446.5 $ 311.3 $ 135.2 43.4%
Cost of goods sold 376.7 240.8 135.9 56.4%
----------- ----------- ----------- -----------
Gross profit 69.8 70.5 (0.7) (1.0%)
Income from operations 49.1 50.9 (1.8) (3.5%)
Income before income taxes 46.6 48.3 (1.7) (3.5%)
Income before cumulative effect of
accounting change 31.2 30.3 0.9 3.0%
Net income 31.2 28.7 2.5 8.7%
Diluted earnings per share before
cumulative effect of an accounting
change 0.72 0.72 - -
Diluted earnings per share 0.72 0.68 0.04 5.9%
Net sales for the first quarter of 2005 increased 43.4% to $446.5 million,
compared to the first quarter 2004. These results were primarily attributable to
a 69.8% increase in overall average net selling prices to $1,394 per ton. We
increased our prices based upon additional product demand and to offset
increases in the cost of steel implemented by our major steel suppliers. Because
of our aggressive price increases, we experienced a 15.6% decrease in total
product shipments.
Cost of goods sold for the first quarter of 2005 increased by 56.4% to $376.7
million, compared to the prior year quarter. Overall average unit cost per ton
of products sold increased 85.2% to $1,176 per ton. Costs increased primarily
due to an increase in the cost of steel experienced for the first quarter of
2005 compared to the prior year quarter.
18
Gross profit for the first quarter of 2005 decreased by 1.0% to $69.8 million as
compared to the same quarter of the prior year. Gross profit per ton for the
first quarter of 2005 was $218 per ton, as compared to $186 per ton for the same
prior year period. Gross profit per ton increased primarily due to the strong
market conditions in our energy products lines and higher selling prices in our
energy and industrial product lines during the first quarter of 2005 compared to
the first quarter of 2004. Gross profit as a percentage of net sales was 15.6%
for the current year first quarter, as compared to 22.6% for the same quarter of
the prior year. While our steel costs for the first quarter of 2005 are higher
compared to the prior year quarter, we expect steel prices to decrease
throughout 2005. We expect these lower costs to be expensed during the remainder
of 2005 as the first quarter of 2005 should be our highest steel cost period.
Selling, general and administrative expenses increased 3.5%, to $17.8 million
during the first quarter of 2005 compared to the prior year quarter. The
increase resulted primarily from stock-based employee compensation expense, and
additional depreciation and amortization from enhancements to our information
systems. Selling, general and administrative expenses as a percentage of net
sales during the first quarter of 2005 were 4.0% compared to 5.5% for the prior
year quarter. The decrease resulted primarily from the increase in net sales as
described above.
Sales commissions increased 20.8% to $2.9 million during the first quarter of
2005 compared to the prior year quarter. The increase resulted primarily from
the increase in industrial sales.
Interest expense decreased 3.8%, to $2.5 million for the three months ended
March 31, 2005 compared to the first quarter of 2004. The decrease was primarily
due to a prepayment of a subordinated note payable in the amount of $2.5 million
during the first quarter of 2005.
The provision for income taxes was $15.4 million for the first quarter of 2005,
compared to the prior year first quarter provision of $18.0 million. The
decrease in our tax provision was due partially to lower income from operations
in the first quarter of 2005, compared to the prior year quarter. In addition,
our effective tax rate decreased from 37.2% during the first quarter of 2004 to
33.0% during the first quarter of 2005. The decrease was attributable primarily
to reduced taxes on foreign earnings, the utilization of foreign tax credits in
the prior year and the impact of the new domestic manufacturing deduction.
As a result of the foregoing, we generated net income of $31.2 million, or $0.72
diluted income per share in the first quarter of 2005. As with our gross profit,
we expect to begin realizing the benefit of lower cost steel in our financial
statements in the second quarter of 2005.
ENERGY PRODUCTS SEGMENT
Energy products sales for the first quarter of 2005 increased 58.9% to $333.6
million compared to the first quarter of 2004. While average U.S. rig counts
increased by 14.3% for the first quarter of 2005, our energy products shipments
decreased by 7.2% during the same period, as compared to the first quarter of
2004, as we raised our prices more aggressively than our competitors. Average
Canadian rig count decreased slightly by 1.3% over the same time period. The
increase in sales was primarily due to a 71.3% increase in overall average net
selling prices for energy products for the first quarter of 2005 to an average
of $1,381 per ton as compared to the first quarter of 2004. The increase in
selling prices was primarily driven by additional demand for our energy
products.
Energy products cost of goods sold increased 70.5%, to $284.5 million for the
first quarter of 2005 compared to the first quarter of 2004. The increase was
due primarily to increased steel costs implemented by our suppliers during 2004.
Gross profit for energy products was $49.1 million for the first quarter of 2005
compared to $43.1 million for the same period of the prior year. Gross profit
was $203 per ton at March 31, 2005 compared to $165 per ton for the same period
in the prior year, reflecting stronger selling prices. Energy product gross
profit margin percentage was 14.7% for the first quarter of 2005, compared to a
gross profit margin percentage of 20.5% for the prior year quarter. While our
steel costs for the first quarter of 2005 are higher compared to the prior year
quarter, we expect steel prices to decrease throughout 2005. We expect these
lower costs to be expensed during the remainder of 2005 as the first quarter of
2005 should be our highest steel cost period.
INDUSTRIAL PRODUCTS SEGMENT
Industrial products sales increased 11.5% to $112.9 million for the first
quarter of 2005 compared to the first quarter of 2004, while industrial product
shipments decreased 33.8% over the same period. Overall average net selling
price for the Company's industrial products increased 68.4% from the first
quarter of 2004 to the current year quarter average of $1,435 per ton. This
increase in industrial products sales resulted from higher selling prices which
were driven by tight steel availability and higher steel costs. Industrial
product shipments decreased due to lower than expected construction activity in
the first quarter of 2005 compared to the first quarter of 2004, excess HSS
inventories in the field, our continued focus on maintaining existing selling
prices.
19
Industrial products cost of goods sold increased 24.8%, to $92.2 million, for
the first quarter of 2005 compared to the first quarter of 2004. The increase
was due primarily to higher costs of steel. Gross profit for industrial products
was $20.7 million for the first quarter of 2005, compared to $27.4 million for
the prior year quarter. Gross profit was $263 per ton for the first quarter of
2005, as compared to $231 per ton for the three months ended March 31, 2004,
primarily reflecting increased selling prices. Industrial products gross profit
margin percentage was 18.3% for the first quarter of 2005 compared to 27.0% for
the first quarter of 2004. Gross profit per ton decreased primarily due to the
sale of lower cost inventory at higher selling prices during the first quarter
of 2004. During the fourth quarter of 2004, we experienced an increase in the
cost of steel flowing through cost of goods sold. While our steel costs for the
first quarter of 2005 are higher compared to the prior year quarter, we expect
steel prices to decrease throughout 2005. We expect these lower costs to be
expensed during the remainder of 2005 as the first quarter of 2005 should be our
highest steel cost period.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
We operate in a capital intensive business and access to various financing
resources is vital to our continued financial strength. In the past, we have
been successful in obtaining financing from a variety of sources on terms we
consider attractive. We expect to continue to maintain access to capital sources
in the future, because we exhibit certain characteristics we believe are
considered important by credit rating agencies and financial markets in
determining our access to attractive financing alternatives. These
characteristics include the essential nature of the services we provide, our
large and diverse customer base, our liquidity profile, our asset base, and our
commitment to maintaining a moderate financial profile and disciplined capital
allocation.
We continually monitor our actual and forecasted cash flows, our liquidity, and
our capital resources, enabling us to plan for our present needs and fund
unbudgeted business activities that may arise during the year as a result of
changing business conditions or new opportunities. In addition to our working
capital needs, we have committed cash requirements for the construction and
expansion of our operating facilities.
Consistent with our business strategy, we currently intend to retain earnings to
finance the growth and development of our business and 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 we may deem relevant. In addition, our long-term revolving
credit facility with commercial lenders restricts the amount of dividends we can
pay to our stockholders.
DEBT
We have a senior credit facility providing for up to $185 million of revolving
credit. The amount we can borrow is based on a percentage of eligible accounts
receivable, eligible inventory and property, plant and equipment reduced by
outstanding letters of credit. At March 31, 2005, we had an outstanding balance
of $81.6 million and outstanding letters of credit under this agreement of $7.5
million. Interest is payable at U.S. or Canadian Prime, Banker's Acceptance
Rates or the LIBOR rate adjusted by an interest margin, depending upon certain
financial measurements. The additional available borrowing under the senior
credit facility was approximately $85.7 million as of March 31, 2005. The senior
credit facility includes a financial covenant relating to maintaining a minimum
fixed charge coverage ratio if availability falls below $30 million. Also, the
senior credit facility is structured to give our senior lenders dominion over
our cash if availability falls below $50 million. If this occurs, the full
amount outstanding would be classified as a current liability. The senior credit
facility also limits capital expenditures to $30 million per year (excluding the
new Republic Conduit facility in Louisville, Kentucky and the plant expansion at
Precision Tube) and limits our ability to pay dividends, create liens, sell
assets or enter into transactions with affiliates without the consent of the
lenders.
We have $120 million outstanding of convertible senior subordinated notes due
June 15, 2033. The Company pays interest semiannually on the convertible senior
subordinated 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 senior subordinated notes equals or exceeds 130.0% of the principal
amount of the convertible senior subordinated notes during a specified period
prior to such six-month interest period. The Convertible Notes are general
unsecured obligations and are subordinated to our senior indebtedness referred
to above.
20
Our net debt to capitalization ratio (the sum of our current and long-term debt,
net of cash, cash equivalents and short-term investments compared to the sum of
our stockholders' equity and our current and long-term debt, net of cash, cash
equivalents and short-term investments) increased from 19.7% at December 31,
2004, to 23.9% at March 31, 2005. This ratio is a measure of our long-term
liquidity and is an indicator of financial flexibility.
SUMMARY OF CASH FLOW ACTIVITY
The following is a summary of our cash flows for the three months ended March
31, 2005 and 2004 (in thousands):
2005 2004
---------- ---------
Net cash provided (used) by operating activities $ (40,912) $ 16,885
Net cash provided (used) by investing activities $ 6,723 $ (5,511)
Net cash provided by financing activities $ 26,092 $ 244
Net Cash Provided (Used) by Operating Activities - During the first quarter of
2005, cash used by operations was impacted by a $30.0 million increase in
accounts receivable, a $12.9 million increase in inventories, a $20.1 million
decrease in accounts payable, and a $15.2 million decrease in accrued expenses
and other liabilities compared to December 31, 2004. The primary reason for the
increase in accounts receivable was an increase in selling prices during the
first quarter of 2005 and an increase in shipments during the first quarter of
2005 compared to the fourth quarter of 2004. We raised our selling prices in
response to strong demand for our products and to offset increases in steel
cost. Inventory increased primarily as we built inventory for one of our product
lines ahead of an anticipated raw material price increase to take advantage of
lower steel costs. During the first quarter of 2004, cash generated from
operations was impacted primarily by a $39.6 million increase in accounts
receivable as our shipment levels and selling prices increased during the first
quarter of 2004.
Net Cash Provided (Used) by Investing Activities - The primary source for the
net cash provided by investing activities during the first quarter of 2005 was
the sale of our short-term investments in the amount of $20.0 million, offset by
expenditures for property, plant and equipment. Of our capital expenditures,
$5.7 million is attributable to the construction of our new conduit facility in
Louisville, Kentucky. The primary purpose for the net cash used by investing
activities during the first quarter of 2004 was capital expenditures on
machinery and equipment.
Net Cash Provided by Financing Activities - The primary source for the net cash
provided by financing activities during the first quarter of 2005 was an
increase in our borrowings under the revolving line of credit. The primary
source for the net cash provided by financing activities during the first
quarter of 2004 was proceeds from the exercise of stock options offset by
payments on long-term borrowings.
Our capital expenditure budget for 2005 is approximately $92.8 million. Our
capital expenditure budget will be primarily used to construct the new
state-of-the-art Republic Conduit facility for $63 million, expand our existing
facility at Precision Tube for $12 million and acquire new equipment for our
other existing manufacturing facilities. In addition, our capital expenditure
for enhancing our information technology systems and to complete integration
efforts with recent acquisitions is approximately $6.3 million for 2005. 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. However, this budget could be
reduced to help manage liquidity needs.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting issues require management estimates and judgments for the
preparation of financial statements. We believe that the estimates, assumptions
and judgments described in our annual report on Form 10-K relating to valuation
of goodwill and other intangible assets, the collectibility of accounts
receivable, collectibility of notes receivable, income tax matters and the
pension plans have the greatest potential impact on our financial statements.
Therefore, we consider these to be our critical accounting estimates. Our
management has discussed the development and selection of these critical
accounting estimates with the Audit Committee of our Board of Directors, and the
Audit Committee has reviewed the disclosure relating to these estimates in the
MD&A.
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,
2004. The Company's critical accounting policies and estimates did not change
during the first quarter of 2005. 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.
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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 which has variable interest rates. However, until
March 21, 2005, we utilized an interest rate swap agreement to mitigate 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, it is estimated our interest expense for the quarter
ended March 31, 2005, would not have changed by a material amount. In the event
of an adverse change in interest rates, we would likely take actions 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.
STEEL COMMODITY RISK
We are also subject to commodity price risk with respect to purchases of steel.
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,
significantly affects our business. We expect our current replacement cost of
steel to flow through our cost of goods sold over the next two quarters. In
addition, we depend on a few suppliers for a significant portion of our steel.
The loss of one of our significant steel suppliers or the inability to obtain
the necessary amount of steel could have a temporary adverse effect on our
ability to produce the quantity of products necessary to sustain our market
share, thus impacting our results of operations.
FOREIGN CURRENCY RISK
The Company's reported cash flows related to its Canadian operations are based
on cash flows measured in Canadian dollars translated to the U.S. dollar
equivalent based on published exchange rates for the period reported. The
Company believes its current risk exposure to the exchange rate movements, based
on net cash flows, to be immaterial.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our chief
executive officer and principal financial officer, has reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures as of
March 31, 2005. Based on such review and evaluation, our chief executive officer
and principal financial officer have concluded that the disclosure controls and
procedures were effective at the reasonable assurance level as of March 31,
2005, 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 reports 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.
During the quarter ended March 31, 2005, there was no change in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
The exhibits required to be filed as part of this quarterly report on Form 10-Q
are listed in the attached Index to the exhibits.
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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 9, 2005 /s/ C. Robert Bunch
----------------------------------------
C. Robert Bunch
Chairman, Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 2005 /s/ Pamela G. Boone
----------------------------------------
Pamela G. Boone
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------
10.1 Ninth Amendment to Amended and Restated Credit Agreement dated March
14, 2005 among Registrant and its subsidiaries, on the one hand, and
the Senior Lenders, on the other hand.
10.2 Tenth Amendment to Amended and Restated Credit Agreement dated March
31, 2005 among Registrant and its subsidiaries, on the one hand, and
the Senior Lenders, on the other hand.
15.1 Letter re: Unaudited Interim Financial Information.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2 Certification of principal financial officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
32.1 Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002) of Chief Executive
Officer.
32.2 Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002) of principal
financial officer.
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