UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended
JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From TO
COMMISSION FILE NUMBER 0-30146
MAVERICK TUBE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 43-1455766
(State or other jurisdiction of (I.RS. Employer
incorporation or organization) Identification No.)
16401 Swingley Ridge Road
Seventh Floor
Chesterfield, Missouri 63017
(Address of principal executive offices) (Zip Code)
(636) 733-1600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value -- 15,437,474 shares as of August 16, 1999
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets - June 30, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Operations -- Three
and Nine month periods ended June 30 , 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -- Nine
month periods ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<TABLE>
<CAPTION>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, September 30,
1999 1998
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $485 $748
Accounts receivable, less allowances of $713 and
$391 on June 30, 1999 and September 30, 1998,
respectively..............................................15,200 15,515
Inventories (see Note 2)..................................46,024 61,685
Deferred income taxes......................................1,725 1,827
Income taxes refundable....................................3,138 5,078
Prepaid expenses and other current assets..................1,739 1,200
Total current assets..................................68,311 86,053
PROPERTY, PLANT, AND EQUIPMENT
Less accumulated depreciation (June 30, 1999 - $37,272;
September 30, 1998 - $31,893).............................76,475 69,879
OTHER ASSETS.................................................604 953
TOTAL ASSETS............................................$145,390 $156,885
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.........................................$20,731 $12,301
Accrued expenses and other liabilities.....................6,969 9,153
Deferred revenue ..........................................2,205 3,584
Current maturities of long-term debt.........................694 653
Total current liabilities.............................30,599 25,691
LONG-TERM DEBT, less current maturities....................7,669 8,226
REVOLVING CREDIT FACILITY ................................22,300 27,400
DEFERRED INCOME TAXES .....................................3,447 5,505
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
5,000,000 shares authorized..............................-- --
Common stock, $.01 par value;
40,000,000 authorized shares,
15,437,474 shares issued and outstanding................154 154
Additional paid-in capital...............................44,216 44,216
Retained earnings........................................37,005 45,693
Total stockholders' equity...........................81,375 90,063
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............$145,390 $156,885
<FN>
Note: The condensed consolidated balance sheet at September 30, 1998, has been
derived from the audited consolidated financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three months ended Nine months ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES.................................$42,896 $56,590 $118,410 $213,617
COSTS and EXPENSES
Cost of goods sold.........................42,423 50,919 118,047 183,843
Selling, general and administrative.........3,557 3,294 10,528 9,335
Start-up costs................................825 -- 2,496 --
Income (loss) from operations .............(3,909) 2,377 (12,661) 20,439
OTHER INCOME (EXPENSE)
Interest expense.............................(468) (453) (1,261) (1,274)
Other income (expense) .......................257 (9) 360 61
Income (loss) before income taxes..........(4,120) 1,915 (13,562) 19,226
(BENEFIT FROM) PROVISION FOR INCOME TAXES..(1,483) 585 (4,874) 6,619
NET INCOME (LOSS).........................($2,637) $1,330 ($8,688) $12,607
AVERAGE SHARES 15,437,474 15,437,474 15,437,474 15,436,737
BASIC EARNINGS (LOSS) PER SHARE ($0.17) $0.09 ($0.56) $0.82
DILUTED EARNINGS (LOSS) PER SHARE ($0.17) $0.09 ($0.56) $0.81
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended
June 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...............................................($8,688) $12,607
Adjustments to reconcile net income (loss)
to net cash provided
(used) by operating activities:
Depreciation and amortization...................................5,471 4,313
Deferred income taxes..........................................(1,956) 165
Provision for accounts receivable allowances......................322 (132)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........................(7) 10,849
(Increase) decrease in inventories............................15,661 3,250
(Increase) decrease in prepaid expenses and other assets.......1,659 (379)
(Decrease) increase in accounts payable........................8,430 (13,545)
(Decrease) increase in deferred revenue ......................(1,379) (11,639)
(Decrease) increase in accrued expenses and other liabilities.(2,184) (6,176)
Cash provided (used) by operating activities................17,329 (687)
INVESTING ACTIVITIES
Purchases of property, plant and equipment......................(11,976) (8,053)
FINANCING ACTIVITIES
Proceeds from borrowings.........................................33,100 81,751
Principal payments on borrowings................................(38,716) (75,228)
(5,616) 6,523
Net proceeds from sale of common stock ..............................-- 162
Cash provided (used) by financing activities................(5,616) 6,685
Increase (decrease) in cash and cash equivalents...................(263) (2,055)
Cash and cash equivalents at beginning of period......................748 2,886
Cash and cash equivalents at end of period...........................$485 $831
<FN>
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest....................................................$1,198 $1,257
Income taxes................................................(5,277) 5,824
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Maverick Tube Corporation (the "Company") and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended June 30, 1999, are not necessarily indicative of the results that
may be expected for the year ended September 30, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended September 30, 1998.
(2) INVENTORIES
The components of inventories consisted of the following:
June 30, September 30,
1999 1998
(In thousands)
Finished goods $25,409 $34,674
Work-in-process 1,830 2,868
Raw materials 9,702 12,042
In-transit materials 4,210 7,003
Storeroom parts 4,873 5,098
$46,024 $61,685
Inventories are principally valued at the lower of average cost or
market.
(3) START-UP COSTS
During September 1998, the Company acquired assets to be used in the
production of cold drawn tubular products at a production facility in Beaver
Falls, Pennsylvania. The Company incurred net costs of $825,000 in the third
quarter of fiscal 1999 and $2,496,000 in the first nine months of fiscal 1999
related to the commencement of operations at this facility. These costs are
comprised primarily of salary and related costs for the production, sales and
administrative personnel prior to the fully integrated operation of the
facility.
(4) EARNINGS (LOSS) PER SHARE
Dilutive earnings per share was computed based upon the net income
(loss) of the Company and the weighted average number of shares of common stock
including the net effect of stock options. Total shares utilized in this calcu-
lation were 15,437,474 for the quarter ended and for the nine months ended
June 30, 1999 and 15,606,420 and 15,635,379 for the quarter ended and for the
nine months ended June 30, 1998, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding matters that are not
historical facts (including statements as to the beliefs or expectations of the
Company) are forward-looking statements. 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
prices and their effect on drilling levels and demand for the Company's
energy-related products, the future impact of industry-wide draw downs of
inventories and future import levels. Uncertainty also exists as to the trend
and direction of both product pricing and purchased steel costs. Reference is
made to the "Risk Factors" discussed in Exhibit 99.1 of the Company's Annual
Report on Form 10-K for its fiscal year ended September 30, 1998.
OVERVIEW
The Company's products consist of electrical resistance welded ("ERW") tubular
products sold primarily for energy and industrial applications in North America.
The Company's energy segment includes Oil Country Tubular Goods (OCTG) and line
pipe which are sold primarily to distributors that supply end users in the
energy industry. The Company's industrial products segment consists of
structural tubing and standard pipe which are sold primarily to service centers
that supply end users in construction, transportation, agriculture and other
industries. Also, during the second quarter of fiscal 1999, the Company began
the production of cold drawn mechanical tubing, which is included in its
industrial products segment. At June 30, 1999, sales of cold drawn mechanical
tubing had not reached material levels.
Demand for the Company's energy-related products depends primarily upon the
number of oil and natural gas wells being drilled in the United States and
Canada, the depth and drilling conditions of these wells and the number of well
completions, which are in turn primarily dependent on oil and natural gas
prices. Domestic consumption of OCTG is supplied by domestic and foreign pipe
products.
According to published industry reports, domestic drilling activity fell by 39%
for the quarter ended June 30, 1999, as compared to the same quarter of the
previous year. Natural gas drilling decreased by 32%, while oil related
drilling decreased by 54%. Gas and oil drilling decreased due to the significant
drop in oil prices in 1998 and its impact on producers' cash flows and out-
look for drilling in general. Both oil and gas prices increased significantly
during the quarter, which has resulted in an increase in drilling activity.
Drilling at the end of the third quarter of fiscal 1999 was 7% higher than the
average drilling level for the quarter.
Shipments of domestic OCTG decreased by 12% during the third quarter ended June
30, 1999 from the comparable prior year period. Import penetration of the
domestic OCTG market decreased to an estimated 7% during the quarter, as
compared to 23% during the same quarter last year. Domestic consumption of OCTG
decreased 23% during the same period. The domestic OCTG business was also
impacted by an estimated 54% decrease in exports from the comparable prior year
period, with exports accounting for an estimated 13% of domestic production
during the quarter. The Company's energy related shipments decreased by 9% from
the same quarter last year and its exports to Canada increased 270% from 1,615
tons to 5,976 tons. Although the Canadian rig count decreased 42% during this
time frame, management believes that the increase in shipments to Canada re-
flects anticipated drilling activity arising from the improved oil and natural
gas price environment. Industry inventory draw down accounted for 26% of demand
for OCTG as compared to an industry inventory build-up during the same quarter
last year which created 21% additional demand. At June 30, 1999, the ratio of
OCTG inventories to current consumption rates became more balanced, as months
of supply of inventorty decreased from 8.2 months to 7.5 months from the com-
parable prior period, as drilling activity continued to fall and inventories
were reduced accordingly.
Given the numerous applications for the Company's industrial products, sources
of demand for such products are diversified. Such demand generally depends on
the general level of economic activity in the construction, transportation,
agricultural, material handling and recreational segments, the use of structural
tubing as a substitute for other structural steel forms, such as I-beams and
H-beams, and draw downs of existing customer inventories.
According to published industry reports, total structural tube shipments
remained relatively stable in the quarter ended June 30, 1999 as compared to the
prior year quarter. In addition, imports decreased 11%, decreasing their market
penetration from 25% during the quarter ended June 30, 1998 to 22% during the
quarter ended June 30, 1999. Domestic producers' shipments increased by
approximately 4%, as total shipments remained the same and imports decreased.
Management estimates that inventories of HSS held by steel service centers
remained constant during the quarter. As a result of these market conditions
and intensified competition caused by industry capacity additions, the Company's
industrial products shipments decreased by 10%, with HSS products shipments
decreasing 6% and standard pipe shipments decreasing by 32%.
Pricing of the Company's products declined in all product lines during the third
quarter of fiscal 1999, primarily due to unfavorable market conditions. Pricing
of OCTG, line, structural and standard pipe was down 24%, 20%, 13% and 15%,
respectively, as compared to the prior year quarter.
Steel costs included in cost of goods sold decreased during the third quarter of
fiscal 1999 by $47 per ton, or 14.8%, as compared to the quarter ended June 30,
1998 and by $13 per ton, or 4.5%, as compared to the quarter ended March 31,
1999. The Company's major supplier of steel has announced four price increases
since December 1998. These price changes will increase the Company's replacement
cost modestly through the end of December, 1999. The Company estimates that
these cost increases will not be reflected in cost of goods sold until the
fourth quarter of fiscal 1999 and first quarter of fiscal 2000.
The supply of steel in the United States increased significantly during calendar
1998, primarily due to previous capacity additions and increased import levels.
The Company anticipates that these market conditions should help keep steel
costs relatively low during fiscal 1999. However, steel trade cases filed with
the International Trade Commission in September, 1998 have been a contributing
factor to the recent steel cost increases and could have additional impact on
future replacement costs.
RESULTS OF OPERATIONS
OVERALL COMPANY
Net sales of $42.9 million decreased $13.7 million, or 24.2%, during the third
quarter of fiscal 1999 as compared to the prior year quarter. These results
were attributable primarily to a decrease of 7.1% in total product shipments,
from 92,983 tons in the third quarter of fiscal 1998 to 86,391 tons in the
current year quarter, and an overall decrease of 18.4% in the average selling
prices of the Company's products. Net sales of $118.4 million decreased $95.2
million, or 44.6%, during the nine months ended June 30, 1999 as compared to the
same period of the previous year. These results were attributable primarily to
a decrease of 31.6% in total product shipments, from 338,310 tons in the first
nine months of fiscal 1998 to 231,494 tons in the current year, and an overall
decrease of 19.0% in the average selling prices of the Company's products.
Cost of goods sold of $42.4 million decreased $8.5 million, or 16.7%, during the
third quarter of fiscal 1999 over the comparable prior year period. The overall
decrease was due primarily to decreased product shipments. However, the overall
unit cost per ton of products sold decreased 10.3% (from an average of $548 to
$491 per ton) in the third quarter of fiscal 1999 as compared with the same
period in fiscal 1998. This decrease was due to a decrease in steel costs of $47
per ton, or 14.8%, partially offset by an increase in conversion costs from less
favorable fixed cost absorption due to lower production. See "Overview."
Cost of goods sold of $118.0 million decreased $65.8 million, or 35.8%, during
the nine months ended June 30, 1999 as compared to the same period of the
previous year. Again, the overall decrease was due primarily to decreased ship-
ments and lower unit costs as compared to the nine months ended June 30, 1998.
The Company experienced a gross profit of $473,000 during the third quarter of
fiscal 1999 compared to a gross profit of $5.7 million in the prior year period.
Gross profit, as a percentage of net sales was 1.1% for the three month period
ended June 30, 1999 as compared to 10.0% for the prior year period. The gross
profit of $363,000 during the nine months ended June 30, 1999 compares to a
gross profit of $29.8 million during the nine months ended June 30, 1998. The
gross profit, as a percentage of net sales was 0.3% for the nine month period
ended June 30, 1999 as compared to 3.9% for the prior year period. The change
in the gross profit for both the three and nine month periods ended June 30,
1999 is due to the factors discussed above.
During September 1998, the Company acquired assets that are being utilized in
the production of cold drawn tubular products at a facility in Beaver Falls,
Pennsylvania. The Company incurred costs of $825,000 during the quarter and
$2.5 million in the first nine months of fiscal 1999 related to the commencement
of operations at this facility. These costs are comprised primarily of salary
and related costs for the production, sales and administrative personnel prior
to the fully integrated operation of the facility.
Selling, general and administrative expenses increased by $263,000, or 8.0%, in
the third quarter of fiscal 1999 over the prior year period. Selling, general
and administrative expenses were primarily impacted by general wage increases
granted as of the beginning of the 1999 fiscal year. The increases were
partially offset by decreased selling commissions on sales of industrial
products. Selling, general and administrative expenses increased by $1.2
million, or 12.8%, in the first nine months of fiscal 1999 over the prior year
period. These costs were impacted by an increase in the allowance for doubtful
accounts (which reflects the deterioration of a specific accounts receivable
balance) and wage increases, partially offset by a decrease in industrial
products selling commissions. Also, due to the significant decline in net sales
revenue caused by the market conditions discussed above, selling, general and
administrative expenses as a percentage of net sales in the third quarter and
first nine months of fiscal 1999 were 8.3% and 8.9%, respectively, as compared
to 5.8% and 4.4%, respectively, for the comparable prior year periods.
Interest expense remained relatively flat in the third quarter of fiscal 1999
and in the first nine months of fiscal 1999 as compared to the comparable prior
year periods. The Company's long-term debt to capitalization ratio improved
from 28.3% to 26.0% during this time frame.
The benefit from income taxes was $1.5 million for the third quarter and $4.9
million for the nine months ended June 30, 1999, as compared to the prior year
periods when the Company recorded provisions of $585,000 and $6.6 million,
respectively. This change is attributable to the generation of pre-tax losses
by the Company of $4.1 million and $13.6 million in the third quarter and first
nine months of fiscal 1999, respectively. The Company recorded pre-tax income
in the third quarter and first nine months of fiscal 1998 of $1.9 million and
$19.2 million, respectively.
As a result of the decreased gross profit and the other factors discussed above,
the Company generated net losses of $2.6 million and $8.7 million in the third
quarter and first nine months of fiscal 1999, respectively, a decrease of $4.0
million and $21.3 million from the comparable prior year periods.
ENERGY PRODUCTS SEGMENT
Energy product sales of $25.1 million decreased $11.6 million, or 31.7%, for the
third quarter of fiscal 1999 as compared with the prior year period. Energy
product shipments decreased 4,436 tons, or 8.6%, from 51,849 tons to 47,413
tons. The Company's domestic shipments of OCTG fell 17.5% from the quarter ended
June 30, 1998 due to excessive levels of industry inventory and a declining rig
count (from 862 active rigs to 524 active rigs). The Company's export shipments,
primarily to Canada, increased 270.0%, from 1,615 tons in the quarter ended June
30, 1998 to 5,976 tons in the quarter ended June 30, 1999, even though the
level of average Canadian drilling fell 42.4% from 177 active rigs to 102 active
rigs. Management belives that the increase in shipments to Canada reflects
anticipated drilling activity arising from the improved oil price environment.
Line pipe shipments increased by 23.4% principally due to reduced import pene-
tration. The average net selling price for energy products was $529 per ton, a
decrease of $179 per ton. The decrease was due primarily to the market condi-
tions discussed above and a change in mix to lower priced products. See "Over-
view."
Energy products sales of $66.8 million decreased $86.5 million, or 56.4%, for
the first nine months of fiscal 1999, compared with the prior year period.
Energy product shipments decreased 97,360 tons, or 45.1%, from 215,656 tons to
118,296 tons. The average net selling price for energy products was $565 per
ton, a decrease of $146 per ton. These decreases were a result of the same
market conditions discussed above.
Energy products cost of goods sold of $26.0 million decreased $7.0 million, or
21.3%, for the third quarter of fiscal 1999, compared with the prior year
period. The gross loss for energy products of $900,000 for the quarter ended
June 30, 1999 compares to a gross profit of $3.7 million for the prior year
period. Energy products gross loss percentage was 3.6% for the quarter ended
June 30, 1999 as compared to a gross profit margin percentage of 10.1% for the
prior year period.
Energy products cost of goods sold of $70.7 million decreased $60.8 million, or
46.2% for the first nine months of fiscal 1999, compared with the prior year
period. The gross loss for energy products of $3.9 million for the nine month
period ended June 30, 1999 compares to a gross profit of $21.7 million for the
nine months ended June 30, 1998. Energy products gross loss percentage was 5.9%
for the first nine months of fiscal 1999 as compared to a gross profit margin
percentage of 14.2% for the prior year period.
Continued downward pressure on energy selling prices could require the Company
to further reduce the carrying value of its inventory. While the Company
believes that its inventory is now in line with its anticipated future sales
levels, any significant decrease in prices would have a negative impact on con-
version costs recorded in cost of goods sold.
INDUSTRIAL PRODUCTS SEGMENT
Industrial products sales of $17.8 million decreased $2.1 million, or 10.4%, for
the third quarter as compared with the prior year period. Industrial products
shipments decreased 2,156 tons, or 5.2%, from 41,434 tons to 38,978 tons.
Intensified competitive pressures due to capacity additions contributed to the
decrease in sales and shipments of industrial products. The average net selling
price for industrial products during the third quarter of fiscal 1999 was $457,
down $26 per ton as compared to the same period of the prior year. This decrease
for the third quarter was due primarily to declining steel prices.
Industrial products sales of $51.6 million decreased $8.7 million, or 14.6%, for
the first nine months of fiscal 1999 as compared with the prior year period.
Industrial product shipments decreased 9,456 tons, or 7.7%, from 122,654 to
113,198 tons. The average selling price for industrial products for the nine
months ended June 30, 1999 was $456 per ton, a decrease of $36 per ton from the
prior year. These decreases were a result of the same market conditions
discussed above.
Cost of goods sold of $16.4 million decreased $1.5 million, or 8.3%, in the
third quarter of fiscal 1999 from the prior year period of fiscal 1998. Gross
profit for industrial products of $1.4 million decreased $584,000, or 29.9%. The
decreased gross profits were due to lower selling prices and reduced operating
efficiencies, partially offset by lower steel costs. Industrial gross profit
margin percentage declined to 7.7% during the quarter ended June 30, 1999 from
9.9% during the prior year period.
Cost of goods sold of $47.0 million decreased $5.2 million, or 10.0%, for the
first nine months of fiscal 1999 as compared with the prior year period. Gross
profit for industrial products of $4.6 million decreased $3.4 million, or 42.9%.
Industrial products gross profit percentage was 8.9% for the first nine months
of fiscal 1999 as compared to 13.3% for the first nine months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1999 was $37.7 million and the ratio of current
assets to current liabilities was 2.2 to 1.0, as compared to September 30, 1998
when working capital was $60.4 million and the ratio of current assets to
current liabilities was 3.3 to 1.0. The decrease in working capital was due
principally to a $15.7 million decrease in inventory and an $8.4 million
increase in accounts payable, partially offset by a $1.4 million decrease in
deferred revenue and a $2.2 million decrease in accrued expenses and other
liabilities. The above changes in inventory and deferred revenue are due
primarily to the decreased volume of energy business. The change in accounts
payable is due to the recent increase in steel purchasing activity. Cash
provided by operating activities was $17.3 million for the nine months ended
June 30, 1999.
Cash used by financing activities was $5.6 million for the nine months ended
June 30, 1999. Outstanding borrowings on the Company's Revolving Credit
Facility decreased $5.1 million primarily due to the reduction in inventory.
The Company's other long-term indebtedness, including current maturities, was
reduced by approximately $516,000.
The Company's capital budget for fiscal 1999 has been reduced to approximately
$13 million, of which $12.0 million was expended during the nine months ended
June 30, 1999. Such amount includes progress payments of $2.6 million related
to a new furnace for the Company's cold drawn mechanical tube facility. Because
the Company will lease the furnace, these progress payments will be reimbursed
to the Company prior to fiscal year end. In addition to completing the Company's
cold drawn mechancial tube facility, the budgeted funds are also being utilized
principally to acquire equipment for the Company's other manufacturing facili-
ties and to purchase and install a new enterprise resource planning system. As
of June 30, 1999, the Company had an additional $900,000 committed for the pur-
chase of equipment.
The Company expects that it will meet its ongoing working capital and capital
expenditure requirements from a combination of cash flows from operations, which
constitutes its primary source of liquidity, and available borrowings under its
Revolving Credit Facility. The Revolving Credit Facility provides for maximum
borrowings up to the lesser of the eligible borrowing base or $50 million, and
bears interest at either the prevailing prime rate or an adjusted Eurodollar
rate, plus an interest margin, depending upon certain financial measurements.
The Revolving Credit Facility was amended as of March 31, 1999 to revise certain
financial covenants contained therein in order to reflect the current economic
environment in the Company's energy related markets and to provide additional
availability in the Company's borrowing base. The Amended Revolving Credit
Facility is secured by the Company's accounts receivable, inventories and
equipment and will expire on September 30, 2003. As of June 30, 1999, the
applicable interest rate under the Revolving Credit Facility was 7.0 percent per
annum. The Company had $17.5 million in unused availability under the Amended
Revolving Credit Facility and had $485,000 in cash and cash equivalents at June
30, 1999.
YEAR 2000 READINESS DISCLOSURE
The Company is in the implementation phase of its conversion to a new Year 2000
compliant enterprise resource planning system which will replace and upgrade
many of the Company's older information systems, some of which are not year 2000
compliant. The integrated information provided by this new system will enhance
the Company's ability to make more informed decisions regarding sales and
inventory, optimize inventory levels and minimize costs. Implementation is now
expected to be fully completed by the Company's first fiscal quarter of 2000.
The total cost of the system implementation, including the cost of software and
related internal cost, is expected to be $5.0 million, of which approximately
$3.9 million has been expended through June 30, 1999. In addition, the Company
is performing a separate evaluation of its other systems for Year 2000
compliance and is contacting its significant customers, suppliers and vendors to
determine their Year 2000 compliance. Business interruption caused by these
suppliers could negatively impact the Company's operations. These evaluations
and the conversion of these systems (if necessary) are also expected to be fully
completed in the same time frame as the implementation of the Company's new
enterprise resource planning system and the cost of these activities is not
expected to be material.
Although the Company believes that the plans described above will address its
Year 2000 issues and as a result, the Company will not be significantly impacted
by the Year 2000, the Company has established a contingency plan to address non-
compliance issues. This plan involves the utilization of various manual proce-
dures that bypass computer applications and may be utilized in the event of a
significant system shutdown or if the Company faces problems with its customers,
suppliers or vendors. If the Company is required to implement its contingency
plan, such action could have an adverse effect on its operations, liquidity and
financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
10 Amended Revolving Credit Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the three
month period ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Maverick Tube Corporation
(Registrant)
Date: August 16, 1999 /s/ Gregg Eisenberg
Gregg Eisenberg
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 1999 /s/ Barry Pearl
Barry Pearl
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10 Amended Revolving Credit Agreement
27 Financial Data Schedule
MAVERICK TUBE CORPORATION
SECOND AMENDMENT TO SECURED CREDIT AGREEMENT
Harris Trust and Savings Bank
Chicago, Illinois
Mercantile Bank National Association
St. Louis, Missouri
Ladies and Gentlemen:
Reference is hereby made to that certain Secured Credit Agreement dated as of
September 18, 1998 (as heretofore amended the "Credit Agreement") among the
undersigned, Maverick Tube Corporation, a Delaware corporation (the "Borrower"),
you (the "Banks") and Harris Trust and Savings Bank, as agent for the Banks (the
"Agent"). All defined terms used herein shall have the same meaning as in the
Credit Agreement unless otherwise defined herein.
The Borrower, the Agent and the Banks wish to amend certain financial covenants
contained in the Credit Agreement and to modify certain other terms and condi-
tions of the Credit Agreement, all on the terms and conditions set forth in this
Amendment.
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT.
Upon satisfaction of all of the conditions precedent set forth in Section 2
hereof, the Credit Agreement shall be amended (effective as of March 31, 1999)
as follows:
1.1. Section 1.3(a) of the Credit Agreement shall be amended in its entirety
and as so amended shall be restated to read as follows:
(a) Domestic Rate. Each Domestic Rate Loan shall bear interest (computed on the
basis of a year of 360 days and actual days elapsed) on the unpaid principal
amount thereof from the date such Loan is made until maturity (whether by
acceleration, upon prepayment or otherwise) at a rate per annum equal to the sum
of the Applicable Margin plus the Domestic Rate from time to time in effect,
payable quarterly in arrears on the last day of each calendar quarter,
commencing on June 30, 1999 and at maturity (whether by acceleration, upon
prepayment or otherwise).
1.2 Section 1.3(d) of the Credit Agreement is hereby amended in its entirety
and as so amended shall be restated to read as follows:
(d) Interest Rate and Commitment Fee Margin Adjustments. The Applicable Margin
specified in subsections (a) and (b) hereof shall be subject to reduction
if the Borrower's Total Funded Debt Ratio and Cash Flow Coverage Ratio for any
fiscal quarter and for the preceding fiscal quarter shall have been in a lower
range specified below than that range associated with the interest rate margins
then in effect, and shall be subject to increase if the Borrower's Total Funded
Debt Ratio and Cash Flow Coverage Ratio for any fiscal quarter shall be in a
higher range specified below than the range associated with the interest rate
margins then in effect. The margins from time to time applicable to the
Revolving Credit Loans in accordance herewith are hereinafter referred to as the
"Applicable Margins".
SUMMARY PRICING MATRIX
Level I Total Funded Debt Ratio less than 1.00x and Cash Flow Coverage
Ratio less than 1.50x -- Domestic Rate Margin equal to 0%,
Eurodollar Margin equal to .75% and Commitment Fee equal to .20%.
Level II Total Funded Debt Ratio greater than or equal to 1.00x and less
than 2.00x and Cash Flow Coverage greater than 1.50x -- Domestic
Rate Margin equal to 0%, Eurodollar Margin equal to 1.00% and
Commitment Fee equal to .25%.
Level III Total Funded Debt Ratio greater than or equal to 2.00x and less
than 2.50x and Cash Flow Coverage Ratio greater than 1.50x --
Domestic Rate Margin equal to 0%, Eurodollar Margin equal to
1.25% and Commitment Fee equal to .25%.
Level IV Total Funded Debt Ratio greater than or equal to 2.50x and less
than 3.0x and Cash Flow Coverage Ratio greater than 1.50x --
Domestic Rate Margin equal to 0%, Eurodollar Margin equal to
1.50% and Commitment Fee equal to .375%.
Level V Total Funded Debt Ratio greater than or equal to 3.0X and Cash
Flow Coverage Ratio greater than 1.50 x -- Domestic Rate Margin
equal to 0%, Eurodollar Margin equal to 1.75% and Commitment
Fee equal to .375%.
Not later than ten Business Days after receipt by the Agent of the
financial statements called for by Section 7.4 hereof for the applicable
quarter, the Agent shall determine the Total Funded Debt to Ratio and the Cash
Flow Coverage Ratio for the applicable period and shall promptly notify the
Borrower and each Bank of such determination and of any change in the Applicable
Margins resulting therefrom. Any such change in the Applicable Margins shall be
effective as of the date the Agent so notifies the Borrower with respect to all
Loans outstanding on such date, and such new Applicable Margins shall continue
in effect until the effective date of the next quarterly redetermination in
accordance with this Section 1.3(d). Each determination of the Total Funded Debt
Ratio, Cash Flow Coverage Ratio and Applicable Margins by the Agent in
accordance with this Section be conclusive and binding on the Borrower absent
manifest error or willful misconduct. The Applicable Margins shall first be
adjusted upon receipt of the financial statements for the fiscal quarter ending
June 30, 1999. From the date hereof until the Applicable Margins are first
adjusted pursuant hereto the Applicable Margin for Domestic Rate Loans shall be
0%, the Applicable Margin for Eurodollar Loans shall be 2% and the Commitment
Fee shall be 0.375%. Notwithstanding anything contained herein to the contrary,
at any time the Cash Flow Leverage Ratio is less than or equal to 1.50 to 1.0,
the Applicable Margin for Domestic Rate Loans shall be 0%, the Applicable Margin
for Eurodollar Loans shall be 2% and the Commitment Fee shall 0.375%.
1.3 The definition of "Borrowing Base" appearing in Section 4.1 of the
Credit Agreement is hereby amended in its entirety and as so amended shall be
restated to read as follows: "Borrowing Base", as determined on the basis of the
information contained in the most recent Borrowing Base Certificate, shall mean
an amount equal to:
(a) 85% of the amount of Eligible Receivables of the Borrower, plus
(b) 55% of the Value of Eligible Bill and Hold Receivables, plus
(c) 55% of the Value of Eligible Inventory of the Borrower, provided
that in no event shall such amount exceed the greater of (i) an
amount equal to 60% of the sum of the amounts determined pur-
suant to clauses (a), (b) and (c) of this definition from time
to time and (ii) $17,500,000, plus
(d) the Fixed Asset Value.
1.4 Section 4.1 of the Credit Agreement shall be amended by adding
thereto the following new definitions:
"Capital Expenditures" for any period means Capital Expenditures of the
Borrower and its Subsidiaries during such period as defined and classified in
accordance with Generally accepted accounting principles consistently applied.
"Cash Flow Coverage Ratio" shall mean, at any time the same is to be determined,
the ratio of (a) the sum of (i) Consolidated EBITDA, for the four most recently
completed fiscal quarters of the Borrower plus (ii) operating lease expenses of
the Borrower for the same four fiscal quarters of the Borrower, to (b) the sum
of (i) Fixed Charges, for the same four fiscal quarters of the Borrower plus
(ii) operating lease expenses of the Borrower for the same four fiscal quarters
of the Borrower. "Current Ratio" means, at any time the same is to be
determined, the ratio of current assets of the Borrower and its Subsidiaries to
current liabilities (including Revolving Credit Loans outstanding hereunder) of
the Borrower and its Subsidiaries, all as determined on a consolidated basis in
accordance with Generally accepted accounting principles consistently applied.
"EBIT" means, with reference to any period, Net Income for such period plus all
amounts deducted in arriving at such Net Income amount in respect of (i)
Interest Expense for such period, plus (ii) federal, state and local income
taxes for such period.
"Fixed Asset Value" means (i) for the Borrower's fiscal quarter ending June 30,
1999, an amount equal to $8,000,000, and (ii) for each fiscal quarter of the
Borrower ending thereafter, an amount equal to the Fixed Asset Value for the
immediately preceding fiscal quarter less $480,000.
"Fixed Charges" means, at any time the sum is to be determined, the sum of (i)
Interest Expense for the four fiscal quarters of the Borrower then ended plus
(ii) current maturities of all indebtedness for borrowed money other than the
Revolving Credit Loans paid in cash during the same four fiscal quarters then
ended.
"Interest Expense" means, with reference to any period, the sum of all interest
charges (including imputed interest charges with respect to Capitalized Lease
Obligations and all amortization of debt discount and expense) of the Borrower
and its Subsidiaries for such period determined in accordance with generally
accepted accounting principles, consistently applied.
"Net Income" means, with reference to any period, the net income (or
net loss) of the Borrower and its Subsidiaries for such period as
computed on a consolidated basis in accordance with generally accepted
accounting principles, and, without limiting the foregoing, after de-
duction from gross income of all expenses and reserves, including re-
serves for all taxes on or measured by income, but excluding any extra-
ordinary profits and also excluding any taxes on such profits.
1.5 Sections 7.8 and 7.9 of the Credit Agreement shall each be amended
in their entireties and as so amended shall be restated to read as
follows:
Section 7.8. Maximum Total Funded Debt Ratio. At any time following
the Borrower's maintenance of its total Funded Debt Ratio at or below
3.00 to 1.00 for any two consecutive fiscal quarters, the Borrower will
not permit its Total Funded Debt Ratio to exceed 3.25 to 1.
Section 7.9. Current Ratio. The Borrower will not permit the Current
Ratio to be less than 1.15 to 1.0 at any time.
1.6. Section 7.12 of the Credit Agreement shall be amended in its
entirety and as amended shall be restated to read as follows:
Minimum Cash Flow Coverage Ratio. The Borrower, as of the close of
each fiscal quarter of the Borrower specified below, will not permit
its Cash Flow Coverage ratio to be less than (i) 1.0 to 1 for the
Borrower's fiscal quarter ended June 30, 2000, (ii) 1.50 to 1 for the
Borrower's fiscal quarter ended September 30, 2000, (iii) 2.00 to 1
for the Borrower's fiscal quarter ended December 31, 2000 and (iv)
2.25 to 1 for each fiscal quarter of the Borrower ending thereafter.
1.7 The Credit Agreement is hereby amended by adding thereto the
following new Sections
7.26, and 7.27:
Section 7.26. Capital Expenditures. The Borrower will not, and will not permit
any Subsidiary to, expend or become obligated for capital expenditures (as
defined and classified in accordance with Generally accepted accounting
principles consistently applied but in any event including the liability of the
Borrower and its Subsidiaries in respect of Capitalized Leases) in any fiscal
year in an amount in the aggregate for the Borrower and all of its Subsidiaries
in excess of (i) $13,000,000 for the Borrowers fiscal year ended September 30,
1999 and (ii) $8,000,000 for each fiscal year of the Borrower thereafter.
Section 7.27. Minimum EBIT. The Borrower shall not, as of the last day of each
fiscal quarter of the Borrower specified below, permit its EBIT for the fiscal
quarter of the Borrower then ended to be less than:
FISCAL QUARTER ENDED EBIT SHALL NOT BE LESS THAN:
June 30, 1999 ($4,000,000)
September 30, 1999 ($2,500,000)
December 31, 1999 ($1,000,000)
March 31, 2000 and each fiscal quarter
ending thereunder $0
1.8. Schedule I to the Compliance Certificate of the Credit Agreement
shall be amended in its entirety and as so amended shall be restated to read as
set forth on Exhibit A hereto.
SECTION 2. CONDITIONS PRECEDENT.
The effectiveness of this Amendment is subject to the satisfaction of all of the
following conditions precedent:
2.1. The Borrower, the Agent and the Banks shall have executed this
Amendment (such execution may be in several counterparts and the several
parties hereto may execute on separate counterparts). 2.2. A Guarantor's
Consent for the benefit of the Banks shall have been executed and
delivered by each Guarantor to the Agent, a form of which is attached
hereto. 2.3 The Borrower and each Guarantor shall have executed and
delivered to the Agent an amendment to Security Agreement (the "First
Amendment to Security Agreement") in form and substance satisfactory to
the Banks and their counsel.
2.4. Copies certified by the Secretary or Assistant Secretary of the
Borrower, of resolutions regarding the transactions contemplated by this
Amendment, duly adopted by the Board of Directors of the Borrower and
satisfactory in form and substance to the Banks. 2.5. The Borrower and
each Guarantor shall have executed and delivered to the Agent
appropriate forms of UCC Financing Statements necessary to perfect the
Liens granted to the Agent under the First Amendment to Security
Agreement, in form and substance satisfactory to the Agent. 2.6. The
Borrower shall be in full compliance with all of the terms and
conditions of the Loan Documents and no Event of Default or Potential
Default shall have occurred and be continuing thereunder or shall result
after giving effect to this Amendment.
2.7. Legal matters incident to the execution and delivery of this
Amendment shall be satisfactory to each of the Banks and their legal
counsel. 2.8. The Agent shall have received payment by the Borrower of
an amendment fee in the amount of $62,500 for the ratable benefit of the
Banks.
Upon satisfaction of all of the foregoing conditions precedent, this Amendment
shall take effect as of March 31, 1999.
SECTION 3. REPRESENTATIONS AND WARRANTIES.
The Borrower, by its execution of this Amendment, hereby certifies and warrants
the following:
(a) each of the representations and warranties set forth in Section
5 of the Credit Agreement is true and correct as of the date
hereof as if made on the date hereof, except that the represen-
tations and warranties made under Section 5.2 shall be deemed to
refer to the most recent annual report furnished to the Banks by
the Borrower; and
(b) the Borrower is in full compliance with all of the terms and
conditions of the Credit Agreement and no Event of Default or
Potential Default has occurred and is continuing thereunder.
SECTION 4. MISCELLANEOUS.
4.1. The Borrower has heretofore executed and delivered to the Agent the
Security Agreement and the Borrower hereby agrees that notwithstanding the
execution and delivery hereof, such Security Agreement shall be and remain in
full force and effect and that any rights and remedies of the Agent thereunder,
obligations of the Borrower thereunder and any liens or security interests
created or provided for thereunder shall be and remain in full force and effect,
shall not be affected, impaired or discharged thereby and shall secure all of
its indebtedness, obligations and liabilities to the Agent and the Banks under
the Credit Agreement as amended hereby. Nothing herein contained shall in any
manner affect or impair the priority of the liens and security interests created
and provided for by the Security Agreement as to the indebtedness which would be
secured thereby prior to giving effect hereto.
4.2. Reference to this specific Amendment need not be made in any
note, document, letter, certificate, any security agreement, or any communica-
tion issued or made pursuant to or with respect to the Credit Agreement, any
reference to the Credit Agreement being sufficient to refer to the Credit
Agreement as amended hereby.
4.3. This Amendment may be executed in any number of counterparts,
and by the different parties on different counterparts, all of which taken
together shall constitute one and the same agreement. Any of the parties hereby
may execute this agreement by signing any such counterpart and each of such
counterparts shall for all purposes be deemed to be an original. This agreement
shall be governed by the internal laws of the State of Illinois.
4.4. The Borrower agrees to pay all reasonable costs and expenses,
including without limitation attorneys fees, incurred by the Agent and each of
the Banks in connection with the preparation, negotiation, execution and
delivery of this Amendment and the other documents contemplated hereby.
Upon acceptance hereof by the Agent and the Banks in the manner hereinafter set
forth, this Amendment shall be a contract between us for the purposes
hereinabove set forth. Dated as of June ___, 1999.
MAVERICK TUBE CORPORATION
By /s/ Gregg Eisenberg
Its President
Accepted and agreed to as of the day and year last above written.
HARRIS TRUST AND SAVINGS BANK,
individually and as Agent
By /s/ Bonnie Ogden
Its Vice President
MERCANTILE BANK NATIONAL ASSOCIATION
By /s/ David Higbee
Its Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the Maverick
Tube Corporation Quarterly Report on Form
10-Q for the Quarterly period ended June
30, 1999 and is qualified in its entirety
by reference to such repot.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 485
<SECURITIES> 0
<RECEIVABLES> 15,913
<ALLOWANCES> 713
<INVENTORY> 46,024
<CURRENT-ASSETS> 68,311
<PP&E> 113,747
<DEPRECIATION> 37,272
<TOTAL-ASSETS> 145,390
<CURRENT-LIABILITIES> 30,599
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 145,390
<SALES> 116,697
<TOTAL-REVENUES> 118,410
<CGS> 118,047
<TOTAL-COSTS> 10,528
<OTHER-EXPENSES> 2,496
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,261
<INCOME-PRETAX> (13,562)
<INCOME-TAX> (4,874)
<INCOME-CONTINUING> (8,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,688)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
