| MAVERICK TUBE CORP ITEM 1A Risk Factors You should carefully consider the following risk factors and other information contained or incorporated by reference in this annual report on Form 10-K when evaluating our business and financial condition |
| Additional risks not presently known to us and risks that we currently deem immaterial may also impair our business operations |
| Our energy business is highly cyclical |
| Because our energy business is highly cyclical, our historical financial results have been, and our future financial results are expected to be, subject to fluctuations |
| Our industry is characterized by intense competition |
| We compete against a number of companies in each of our principal business lines |
| Some of our competitors are larger than we are and have greater financial and marketing resources and business diversification |
| These companies may be better able than us to successfully endure downturns in either the energy or electrical products sector |
| We also are subject to competition from imports of lower-cost products from a number of foreign countries |
| The steel electrical conduit and portions of our energy products markets are largely commodity-based in nature and, as a result, price competition is of particular importance |
| In periods of reduced demand for or increased supply of our products, we can either choose to maintain market share by reducing our selling prices to meet competition or maintain selling prices, which would likely sacrifice market share |
| Revenues and overall profitability would be reduced under either scenario |
| A material decline in oil and natural gas drilling activity could reduce demand for our energy products, which would cause our revenues to decrease |
| OCTG, line pipe, couplings and coiled tubing are our principal energy products and represent our most significant revenue source |
| Demand for these products depends primarily on the number of oil and natural gas wells being drilled, completed and worked over in the US, Canada and Latin America and the depth and drilling 8 _________________________________________________________________ [64]Table of Contents conditions of these wells |
| The level of these activities primarily depends on the economics of the exploration and production of oil and natural gas |
| Many factors, such as the supply and demand for oil and natural gas, general economic conditions, global weather patterns and global conflicts, affect these economics |
| Increases in steel prices, which would increase our costs of manufacturing our products, could decrease our operating profits |
| As such, changes in the cost of steel can affect our business both positively and negatively |
| Numerous factors, most of which are beyond our control, drive the cycles of the steel industry and influence steel prices |
| Some of these factors are: • general economic conditions, • industry capacity utilization, • import duties, and • other trade restrictions and currency exchange rates |
| If steel prices increase and we are unable to increase our selling prices by a similar amount, our operating profits would decrease |
| We depend on a few suppliers for a significant portion of our steel and other important raw materials |
| Historically, we have purchased a significant portion of our steel and other important raw materials from a small number of suppliers |
| The loss of any of these suppliers or interruption of production at one or more of these suppliers could adversely affect our ability to obtain steel and other important raw materials |
| In such a case, our cost of purchasing steel or other important raw materials from alternate sources could be higher or we may encounter delays in getting necessary quantities of steel or other important raw materials to our plants |
| Such delays may affect our ability to produce sufficient quantities of our products necessary to sustain our market share, thus negatively impacting our results of operations |
| Industry supply levels of our products can affect our pricing and shipment volumes |
| Industry inventory levels of our products, particularly OCTG, can change significantly from period to period |
| These changes can have a direct adverse effect on the demand for new production of energy and electrical products when customers draw from inventory rather than purchase new products |
| Reduced demand, in turn, would likely result in reduced revenue volume and pricing and, therefore, overall profitability |
| Revenue volume and pricing are also affected by the level of imports into North America |
| As pricing and levels of imports change, our pricing and shipment volumes are affected |
| The likely result of significant increases in imports without an equivalent increase in demand would be decreased revenues and reduced overall profitability |
| Our plans to consolidate our conduit operations into one facility may not be successful |
| We are in the process of consolidating our conduit operations into a new facility located in Louisville, Kentucky |
| In connection with our consolidation, we expect to spend a total of approximately dlra74 million, which includes the purchase of land, construction costs, new equipment purchases and upgrades to existing equipment to improve the efficiency and productivity of our conduit operations |
| The consolidation of our conduit operations may expose us to certain risks such as severance and plant abandonment costs, potential unforeseen or higher than expected costs and risks associated with operating difficulties |
| Any of these risks could adversely affect or prevent the success of our efforts to consolidate our conduit operations |
| 9 _________________________________________________________________ [65]Table of Contents If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our growth strategy could be adversely impacted |
| An important element of our growth strategy has been and continues to be the acquisitions of other businesses that either expand or complement our existing product lines |
| For example, in May 2005, we acquired all of the equity of TuboCaribe, a controlling interest in Colmena and all of the equity of Advance |
| Integrating businesses, however, involves a number of special risks, including: • the possibility that management may be distracted from regular business concerns by the need to integrate operations, • unforeseen difficulties in integrating operations and systems, • problems relating to assimilating and retaining the employees of the acquired business, • accounting issues that arise in connection with the acquisition, • challenges in retaining customers, and • potential adverse short-term effects on operating results |
| In addition, we may incur debt to finance future acquisitions and we may issue securities in connection with future acquisitions that may dilute the holdings of our current or future stockholders |
| If we are unable to successfully complete and integrate acquisitions in a timely manner, our growth strategy could be adversely impacted |
| If we have to write off a significant amount of goodwill and other intangible assets, our earnings will be negatively affected |
| As of December 31, 2005, goodwill and other intangible assets represented approximately 18prca of our total assets |
| We have recorded goodwill because we paid more for some of our businesses than the fair market value of the tangible and separately measurable intangible net assets of those businesses |
| Current accounting standards require a periodic review of goodwill for impairment in value and a non-cash charge against earnings with a corresponding decrease in stockholders’ equity if circumstances indicate that the carrying amount will not be recoverable |
| A significant write-off of goodwill or intangible assets will negatively affect our earnings |
| The operations of the end-users of our products expose us to potential product liability claims |
| Oil and natural gas drilling and transmission activities are subject to inherent risks, including risks relating to failures, leaks and fires |
| Actual or claimed defects in our products could give rise to claims, liabilities, costs and expenses, including but not limited to: • loss of life, • personal injury, • property damage, • damage to equipment and facilities, • pollution, and • loss of production or suspension of operations |
| Product liability claims occur infrequently in our business, but when they happen, they can be material |
| We maintain insurance coverage against potential product liability claims, other than pollution, with per occurrence deductibles and total claim limits that we believe is adequate |
| However, in the future we may incur product liability claims in excess of our insurance coverage or that are subject to substantial deductibles or that result in uninsured product liability costs |
| These liabilities and costs could have a material adverse effect on our business, results of operations and financial condition |
| 10 _________________________________________________________________ [66]Table of Contents Our level of indebtedness could make us vulnerable to down-turns in the energy market |
| As of December 31, 2005 we had dlra25dtta5 million of indebtedness under our senior revolving credit facility, dlra370 million of indebtedness under convertible senior subordinated notes and a dlra50dtta0 million bank loan in Colombia |
| If our debt level increases or our profitability declines due to a cyclical decline or other factors, our operations and financial condition may be adversely affected in several ways, including but not limited to: • a greater percentage of our cash flow would be required to be used to service our indebtedness, • we may not be able to generate sufficient cash flow from operations to enable us to meet our debt service and other fixed-charge requirements, • we may not be able to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate and other purposes, • our flexibility in planning for, or reacting to changes in, our businesses and the industries in which we compete may be limited, and • we may be put at a possible competitive disadvantage with respect to our competitors that have relatively less indebtedness |
| Covenant restrictions in our senior revolving credit facility could limit our ability to operate our business |
| Our senior revolving credit facility limits our ability to pay dividends, create liens, sell assets or enter into transactions with our affiliates without the consent of the lenders |
| Borrowing availability is based on a percentage of eligible accounts receivable, eligible inventory and property, plant and equipment, reduced by outstanding letters of credit |
| If our borrowing availability under the senior revolving credit facility falls below dlra75 million, we are limited to dlra40 million of capital expenditures per year |
| If availability falls below dlra50 million, we become subject to certain restrictive covenants including, but not limited to, the maintenance of a minimum fixed charge coverage ratio |
| If this occurs, the full amount outstanding would be classified as current |
| As of December 31, 2005, we had additional borrowing availability of approximately dlra282dtta3 million |
| Any one of these covenants could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise |
| Adverse economic or political conditions in Colombia may decrease our revenues |
| Our TuboCaribe and Colmena manufacturing facilities are both located in Colombia |
| This exposes us to adverse economic and political conditions in Colombia, including the risks of changes in foreign currency exchange rates, interest rates, inflation, governmental spending, social instability, political unrest, regulatory and taxation changes and other political, economic or social developments, which could adversely affect our financial condition and results of operations |
| Colombia has experienced several periods of criminal violence, primarily due to the activities of drug cartels and left-wing guerrilla groups |
| In response, the government has implemented various security measures and has strengthened its military and police forces |
| Nevertheless, drug-related crime and guerrilla activity continue to exist in some areas of the country |
| These violent activities and their possible escalation may have a negative impact on our business in Colombia |
| Compliance with and changes in environmental, health and safety laws regulating the operation of our business could increase the costs of producing our products and expose us to environmental claims |
| Our businesses are subject to numerous local, state, provincial and federal laws and regulations concerning environmental, health and safety matters, including those relating to air emissions, wastewater discharges and the generation, handling, storage, transportation, treatment and disposal of hazardous wastes |
| Violations of those laws and regulations could lead to substantial fines and penalties |
| Also, there are costs associated with compliance with those laws and regulations and risks of additional costs and liabilities relating to the investigation and remediation of past or present contamination, at current as well as former properties utilized by us and at third-party disposal sites, regardless of fault or the legality of the original activities that led to such contamination |
| Moreover, future developments, such as changes in laws and regulations, more stringent enforcement or interpretation thereof and 11 _________________________________________________________________ [67]Table of Contents claims for property damage or personal injury could cause us to incur substantial losses or expenditures |
| Although we believe we are in substantial compliance with all applicable current laws and regulations, any new or modified laws or regulations could increase the cost of producing our products, and thereby reduce our profits |
| Certain of our operations are subject to collective bargaining agreements that could subject us to additional labor costs |
| Employees at five of our plant locations are covered by collective bargaining agreements |
| As of December 31, 2005, these agreements cover approximately 15prca of our total workforce |
| These agreements expire in November 2006, December 2006, January 2008, November 2008 and one that covers employees at our Ferndale, Michigan plant |
| Our Ferndale plant has ceased production and plans to ship all remaining inventory by the end of the first quarter of 2006 |
| The collective bargaining agreement that covers employees at this plant was extended to cover any remaining employees |
| Our failure to renew or negotiate new collective bargaining agreements with substantially similar terms could result in labor disruptions and increased labor costs, thereby increasing the costs of producing our products |
| If we are unable to successfully complete new collective bargaining agreements prior to the expiration of any of these agreements, we could experience a work stoppage or labor disruption at one or more of these plants |
| Depending on the duration, the plant and the number of employees involved, a work stoppage or labor disruption could adversely impact our operations |
| We have defined benefit pension plans, which could result in charges against our earnings |
| Our Prudential subsidiary sponsors two pension plans and a post-retirement benefit plan for substantially all of its Canadian employees and a supplemental executive retirement plan for certain key Prudential executives |
| At December 31, 2005, certain of these plans were under-funded in the aggregate by approximately dlra24dtta1 million |
| In addition, if these plans fail to achieve an investment return equal to the estimated rate for a particular fiscal year, such deficiency could result in a charge against earnings for that and subsequent years |
| Effective internal controls over financial reporting provide only a reasonable assurance as to the preparation and fair presentation of financial statements |
| Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to prevent fraud |
| However, because of the inherent limitations with any system of controls, including the possibility of human error, the circumvention or overriding of controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements |
| Moreover, projections of the effectiveness of internal control over financial reporting in future periods are subject to the risk that the control may become inadequate because of changes in condition or that the degree of compliance with the policies or procedures may deteriorate |
| If we fail to maintain the adequacy of our controls, fail to implement new or improved controls, or if we experience difficulties in implementing these controls, our business and operating results could be affected, we could fail to meet our reporting obligations and there could be a material adverse effect on our stock price |
| Due to the international nature of our business we are susceptible to fluctuations in foreign currency rates |
| We have transactional foreign currency exposure arising from some of our international sales and international payables |
| The amount of such exposure is generally limited to our Canadian operations as our other operations transact business primarily in US Dollars |
| Movements in the exchange rate of the US dollar against the Canadian dollar can have a significant impact on our results and financial condition |
| Our translational foreign currency exposure arises primarily from our Canadian operations |
| We believe that implementing a hedging policy to mitigate this risk could be difficult and could have negative implications with governing bodies |