NORTHWEST PIPE CO - Annual Report: 2004 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended: December 31, 2004
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number: 0-27140
NORTHWEST PIPE COMPANY
(Exact name of registrant as specified in its charter)
OREGON |
93-0557988 |
|||||
(State or
other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|||||
200 S. W. Market Street
Portland, Oregon 97201
(Address of principal
executive offices and zip code)
503-946-1200
(Registrant’s telephone number including area
code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
(Title
of Class)
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
[X] No [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.
[X]
Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act): Yes [X] No [ ]
The aggregate market value of the common equity that
was held by non-affiliates of the Registrant was $116,155,867 as of June 30, 2004 based upon the last sales price as reported by
Nasdaq.
The number of shares outstanding of the
Registrant’s Common Stock as of March 2, 2005 was 6,712,792 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Parts II and
III of Form 10-K by reference portions of its Proxy Statement for its 2005 Annual Meeting of Shareholders.
NORTHWEST PIPE COMPANY
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
| Page |
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|---|---|---|---|---|---|---|---|---|---|---|
Part I |
||||||||||
Item
1 |
Business |
1 | ||||||||
Item
2 |
Properties |
4 | ||||||||
Item
3 |
Legal Proceedings |
5 | ||||||||
Item
4 |
Submission of Matters to a Vote of Security Holders |
6 | ||||||||
Part II |
||||||||||
Item
5 |
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
7 | ||||||||
Item
6 |
Selected Financial Data |
7 | ||||||||
Item
7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
8 | ||||||||
Item
7A |
Quantitative and Qualitative Disclosures About Market Risk |
18 | ||||||||
Item
8 |
Financial Statements and Supplementary Data |
18 | ||||||||
Item
9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
18 | ||||||||
Item
9A |
Controls and Procedures |
18 | ||||||||
Item
9B |
Other Information |
19 | ||||||||
Part III |
||||||||||
Item
10 |
Directors and Executive Officers of the Registrant |
20 | ||||||||
Item
11 |
Executive Compensation |
20 | ||||||||
Item
12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
20 | ||||||||
Item
13 |
Certain Relationships and Related Transactions |
20 | ||||||||
Item
14 |
Principal Accountant Fees and Services |
20 | ||||||||
Part IV |
||||||||||
Item
15 |
Exhibits and Financial Statement Schedule |
21 | ||||||||
PART I
| Item 1. | Business |
General
Northwest Pipe Company (the “Company”)
manufactures welded steel pipe in two business segments. In our Water Transmission business (the “Water Transmission” business), we are a
leading supplier in the United States and Canada of large diameter, high-pressure steel pipe used primarily for water transmission. In our Tubular
Products business (the “Tubular Products” business), we manufacture smaller diameter, electric resistance welded (“ERW”) steel pipe
for use in a wide range of construction, agricultural, industrial, and other applications. In addition, we produce propane tanks from our manufacturing
facility in Monterrey, Mexico. In 2004, Water Transmission and Tubular Products revenues represented approximately 61% and 39% of our net sales,
respectively. We are headquartered in Portland, Oregon. Water Transmission products are manufactured in our Portland, Oregon; Denver, Colorado;
Adelanto and Riverside, California; Parkersburg, West Virginia; and Saginaw, Texas facilities. Tubular Products are manufactured in our Portland,
Oregon; Atchison, Kansas; Houston, Texas; Bossier City, Louisiana; and Monterrey, Mexico facilities.
Products
Water Transmission
Products. Water transmission pipe is used for high-pressure applications, typically requiring pipe to withstand
pressures in excess of 150 pounds per square inch, and other industrial and structural applications. Most of our water transmission products are made
to custom specifications. Most of these products are for fully engineered, large diameter, high-pressure water transmission lines. Other uses include
pipe for piling and hydroelectric projects, wastewater transmission and treatment plants. We have the capability to manufacture water transmission pipe
in diameters ranging from 4.5” to 156” with wall thickness of 0.135” to 3.00”. We can coat and line these products with cement
mortar, polyethylene tape, paints, epoxies, Pritec® and coal tar enamel according to the customers’ specifications. We maintain fabrication
facilities that provide installation contractors with custom fabricated sections as well as straight pipe sections.
Tubular
Products. Our Tubular Products range in size from 0.50“ to 16” in diameter with wall thickness from
0.035” to 0.315”, square tubing from 0.75” to 3”, and rectangular tubing from 0.50” x 1” to 3” x 4”. These
products are typically sold to distributors or original equipment manufacturers and are used for a wide variety of applications, including water well
casing, fire protection, fence, traffic sign support, and agricultural products.
Marketing
Water
Transmission. The primary customers for water transmission products are installation contractors for projects funded by
public water agencies. Our plant locations in Oregon, Colorado, California, West Virginia and Texas allow us to efficiently serve customers throughout
the United States, and into Canada and Mexico. Our water transmission marketing strategy emphasizes early identification of potential water projects,
promotion of specifications consistent with our capabilities and close contact with the project designers and owners throughout the design phase. Our
in-house sales force is comprised of sales representatives, engineers and support personnel who work with public water agencies, contractors and
engineering firms, often more than a year in advance of the project being bid, in order to identify and evaluate planned projects. As a public water
agency develops a pipeline project, our professional engineers provide information to the agency or its design engineers promoting the advantages of
coated and lined steel pipe. After an agency completes a design, they publicize the upcoming bid for a water transmission project. We then obtain
detailed plans and develop our estimate for the pipe portion of the project. We typically bid to installation contractors who include our bid in their
proposal to the public water agency. A public water agency generally awards the entire project to the contractor with the lowest responsive
bid.
Because a substantial portion of our water
transmission revenue is derived from sales related to public water transmission projects, our sales could be adversely impacted by a change in the
number of projects planned by public water agencies or by delays in obtaining environmental approvals and right-of-way permits. Additionally,
adjustments in governmental capital spending, budgetary constraints related to capital projects, or the inability of governmental entities to issue
debt to finance projects could adversely affect our water transmission sales.
1
Tubular
Products. Our tubular products are marketed through a network of direct sales force personnel and independent
distributors in the United States, Canada and Mexico. Our tubular products are produced in our plants in Oregon, Kansas, Texas, Louisiana and Mexico.
Our marketing strategy focuses on customer service and customer relationships. For example, we are willing to sell in small lot sizes and are able to
provide mixed truckloads of finished products to our customers. Our tubular products are primarily sold to distributors, although we also sell to
original equipment manufacturers to a lessor extent. Our sales effort emphasizes regular personal contact with current and potential customers. We
supplement this effort with targeted advertising and brochures and participation in trade shows.
Manufacturing
Water
Transmission. Water transmission manufacturing begins with the preparation of engineered drawings of each unique piece
of pipe in a project. These drawings are prepared on our proprietary computer-aided design system and are used as blueprints for the manufacture of the
pipe. After the drawings are completed and approved, manufacturing begins by feeding steel coil continuously at a specified angle into a spiral weld
mill which cold forms the band into a tubular configuration with a spiral seam. Automated arc welders, positioned on both the inside and the outside of
the tube, are used to weld the seam. The welded tube is then cut at the specified length. After completion of the forming and welding phases, the
finished cylinder is tested and inspected in accordance with project specifications, which may include 100% radiographic analysis of the weld seam. The
cylinders are then coated and lined as specified. Possible coatings include coal tar enamel, polyethylene tape, polyurethane paint, epoxies,
Pritec® and cement mortar. Linings may be cement mortar, polyurethane, or epoxies. Following coating and lining, certain pieces may be custom
fabricated as required for the project. This process is performed in our fabrication facilities. The pipe is final inspected and prepared for shipment.
We ship our products to project sites principally by truck and rail.
Tubular
Products. Tubular products are manufactured by the ERW process in diameters ranging from 0.50” to 16”. This
process begins by unrolling and slitting steel coils into narrower bands sized to the circumference of the finished product. Each band is re-coiled and
fed into the material handling equipment at the front end of the ERW mill and fed through a series of rolls that cold-form it into a tubular
configuration. The resultant tube is welded by high-frequency electric resistance welders. Some products are reconfigured into rectangular and square
shapes and then cut into the appropriate lengths. After exiting the mill, the products are straightened, inspected, tested and end-finished. Certain
products are coated.
Technology. Advances in technology help us produce high quality products at competitive prices. Ongoing
investments in technological improvements include an in-house metallurgical laboratory complete with state of the art optics, spectrographic analysis
and impact testing capabilities. This laboratory serves as a tool for accurate process control as well as for research and development of new products
and processes. Finished products also benefit from recent advancements in nondestructive inspection systems, including phased array ultrasonics and
real time imaging enhancement capabilities. In 2004 we executed an exclusive agreement to provide ShawCor Pipe Protection’s Pritec®
polyolefin coating system, a state-of-the-art product. We also commissioned a new mill featuring in-line punching and cutting capabilities, which
enabled us to participate in new markets. To stay current with technological developments in the United States and abroad, we participate in trade
shows, industry associations, research projects and vendor trials of new products.
Quality
Assurance. We have established, documented, implemented and continue to maintain quality management systems for
continual improvement and the assurance of consistently providing product that meets customer and applicable regulatory requirements. The Quality
Assurance department reports directly to the chief executive officer. All of our quality management systems in the United States are certified by the
International Organization for Standardization (ISO). In addition to ISO certification, the American Institute of Steel Construction, American
Petroleum Institute, American Society for Mechanical Engineers, Factory Mutual, National Sanitary Foundation, Steel Plate Fabricators Association and
Underwriters Laboratory, have certified us for specific products or operations. The Quality Assurance department is responsible for monitoring and
measuring characteristics of the product. Inspection capabilities include, but are not limited to, visual, dimensional, liquid penetrant, magnetic
particle, hydrostatic, ultrasonic, phased array ultrasonics, real-time imaging enhancement, real-time radioscopic, base material tensile, yield and
elongation, sand sieve analysis, coal-tar penetration, concrete compression, lining and coating dry film thickness, adhesion, absorption, guided bend,
charpy impact, hardness,
2
metallurgical examinations, chemical analysis, spectrographic analysis and finished product final inspection. Product is not released for shipment to our customers until verification that all product requirements have been met.
Product
Liability. The manufacturing and use of steel pipe involves a variety of risks. Certain losses may result, or be alleged
to result, from defects in our products, thereby subjecting us to claims for damages, including consequential damages. We warrant our products to be
free of certain defects for one year. We maintain insurance coverage against potential product liability claims in the amount of $52 million, which we
believe to be adequate. However, there can be no assurance that product liability claims exceeding our insurance coverage will not be experienced in
the future or that we will be able to maintain such insurance with adequate coverage.
Backlog
Our backlog includes confirmed orders, including the
balance of projects in process, and projects for which we have been notified we are the successful bidder even though a binding agreement has not been
executed. Projects for which a binding contract has not been executed could be canceled. Binding orders received by us may also be subject to
cancellation or postponement; however, cancellation would generally obligate the customer to pay the costs incurred by us. As of December 31, 2004 and
2003, our backlog of orders was approximately $128.9 million and $73.8 million, respectively. Backlog as of December 31, 2004 includes projects having
a value of approximately $26.4 million for which binding contracts had not yet been executed. Backlog as of any particular date may not be indicative
of actual operating results for any fiscal period. There can be no assurance that any amount of backlog ultimately will be realized.
Competition
Water
Transmission. We have several competitors in the water transmission business. Most water transmission projects are
competitively bid and price competition is vigorous. Price competition may reduce the gross margin on sales, which may adversely affect overall
profitability. Other competitive factors include timely delivery, ability to meet customized specifications and high freight costs which may limit the
ability of manufacturers located in other market areas to compete with us. With Water Transmission manufacturing facilities in Oregon, Colorado,
California, West Virginia and Texas, we believe we can more effectively compete throughout the U.S., Canada, and Mexico. Our primary competitors in the
water transmission business in the western United States and southwestern Canada are Ameron International, Inc. and Continental Pipe. East of the Rocky
Mountains, our primary competition includes American Cast Iron Pipe Company, McWane Cast Iron Pipe Company and U.S. Pipe & Foundry Company, all of
which manufacture ductile iron pipe; Price Bros., which manufactures prestressed pipe; and American Spiral Weld Pipe Company which manufactures spiral
welded steel pipe.
Hanson Concrete Products, Inc., which manufactures
concrete cylinder pipe, began manufacturing spiral welded steel pipe in January 2004. No assurance can be given that other new or existing competitors
will not establish new facilities or expand capacity within our market areas. New or expanded facilities or new competitors could have a material
adverse effect on our ability to capture market share and maintain product pricing.
Tubular
Products. The market for tubular products is highly fragmented and diversified with over 100 manufacturers in the United
States and a number of foreign-based manufacturers that export such pipe into the United States. Manufacturers compete with one another primarily on
the basis of price, established business relationships, customer service and delivery. In some of the sectors within the tubular products industry,
competition may be less vigorous due to the existence of a relatively small number of companies with the capabilities to manufacture certain products.
In particular, we operate in a variety of different markets that require pipe with lighter wall thickness in relation to diameter than many of our
competitors can manufacture.
Raw Materials and Supplies
We purchase hot rolled steel coil from a number of
primary domestic and import steel producers including California Steel Industries, Marubeni, Gallatin Steel, International Steel Group, Nucor, Steel
Dynamics and U.S. Steel. We order steel according to our business forecasts for our Tubular Products business. Steel for the Water Transmission
business is normally purchased only after a project has been awarded to us. From time to time, we may purchase additional steel when it is available at
favorable prices. Purchased steel represents a substantial portion of our cost of sales. The steel industry is highly cyclical in nature and steel
prices are influenced by numerous factors
3
beyond our control, including general economic conditions, availability of raw materials, energy costs, import duties, other trade restrictions and currency exchange rates.
We also rely on certain suppliers of coating
materials, lining materials and certain custom fabricated items. We have at least two suppliers for most of our raw materials. We believe our
relationships with our suppliers are positive and have no indication that we will experience shortages of raw materials or components essential to our
production processes or that we will be forced to seek alternative sources of supply. Any shortages of raw materials may result in production delays
and costs, which could have a material adverse effect on our business, financial condition and results of operations.
Employees
As of December 31, 2004, we had 1,091 full-time
employees. Approximately 25% were salaried and approximately 75% were employed on an hourly basis. A union represents all of the hourly employees at
our Monterrey, Mexico facility. All other employees are non-union. We consider our relations with our employees to be good.
Available Information
Our internet website address is www.nwpipe.com. Our
Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 are available through our internet website as soon as reasonably practical after we
electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our internet website and the information contained
therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Additionally, the public may read and copy any
materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at
www.sec.gov.
| Item 2. | Properties |
Portland, Oregon The
Portland, Oregon facilities consist of approximately 300,000 square feet of covered manufacturing space located on approximately 25 acres. This
facility has the capability to manufacture water transmission and tubular products.
Atchison, Kansas The
Atchison, Kansas facility consists of approximately 60,000 square feet of covered manufacturing space located on approximately 40 acres. This facility
has the capability to manufacture tubular products.
Adelanto and Riverside,
California The Adelanto, California facility consists of approximately 85,000 square feet of covered manufacturing space
located on approximately 100 acres. This facility has the capability to manufacture water transmission products. The Riverside, California facility
consists of approximately 65 acres with approximately 46,100 square feet of covered manufacturing space and has the capability to manufacture water
transmission and tubular products. We are currently in the process of consolidating our Riverside facility with our Adelanto facility.
Denver, Colorado The
Denver, Colorado facility consists of approximately 157,000 square feet of covered manufacturing space located on approximately 40 acres. This facility
has the capability to manufacture water transmission products.
Bossier City,
Louisiana The Bossier City facility consists of approximately 138,500 square feet of covered manufacturing space located on
approximately 21 acres. This facility has the capability to manufacture tubular products.
Houston, Texas The
Houston, Texas facility consists of approximately 185,000 square feet of covered manufacturing space located on approximately 15 acres. This facility
has the capability to manufacture tubular products.
4
Parkersburg, West
Virginia The Parkersburg, West Virginia facility consists of approximately 134,000 square feet of covered manufacturing
space, located on approximately 93 acres. This facility has the capability to manufacture water transmission products.
Saginaw, Texas The
Saginaw, Texas facility consists of approximately 170,000 square feet of covered manufacturing space, located on approximately 26 acres at two
facilities. This facility has the capability to manufacture water transmission products.
Monterrey, Mexico The
Monterrey, Mexico facility consists of approximately 25,000 square feet of covered manufacturing space located on approximately five acres. We produce
propane tanks at this facility.
As of December 31, 2004, we owned all of our
facilities, except for one of our Saginaw, Texas facilities, which is under a long-term lease through 2008 and 2019, if all extensions are
exercised.
We have available manufacturing capacity from time
to time at each of our facilities. To take advantage of market opportunities, we may identify capital projects that will allow us to expand our
manufacturing facilities to meet expected growth opportunities.
| Item 3. | Legal Proceedings |
We were a defendant in a suit brought by
Foothill/DeAnza Community College in U.S. District Court for the Northern District of California in July 2000. Two companies that we acquired in 1998
and subsequently merged into us were also named as defendants. DeAnza represented a class of plaintiffs who purchased small diameter, thin walled fire
sprinkler pipe sold as the “Poz-Lok” system that plaintiffs alleged was defectively manufactured and sold by the defendants between the early
1990s and early 2000. DeAnza alleged that the pipe leaked necessitating replacement of the fire sprinkler system and further alleged that the leaks
caused damage to other property as well as loss of use. We answered the complaint, denied liability and specifically denied that class certification
was appropriate. On July 1, 2002, the Court certified a class of facility owners in six states (California, Washington, Arizona, Oregon, Idaho and
Nevada), on claims of breach of express warranty, fraud and unfair trade practices. The Ninth Circuit Court of Appeals denied our petition for review.
We filed a Declaratory Relief action against our insurers seeking defense and indemnification. We also filed an action against the former owner of the
two companies we acquired in 1998, seeking damages for fees and indemnification. We have settled with the plaintiffs, the insurance companies, and the
former owner. Following a hearing on June 7, 2004, the Court entered a final order and judgment, which approved a nationwide opt-out class. The 30-day
appeal period expired on July 7, 2004, and no one appealed. Pursuant to the settlement, we are obligated to pay only those class members who had an
actual qualifying leak in their Poz-Lok systems, supported by documentation of the leak and those who have a qualifying leak in the future, again,
supported by documentation, as well as an inspection report verifying the existence of the leak and lack of alternative cause, such as misuse, improper
installation, or microbiologically influenced corrosion (“MIC”). Class members may make a claim during a fifteen year period measured from
the final effective date of the settlement (July 7, 2004), but any compensation for the leak, between $10 and $30 per foot of necessary pipe to
effectuate repair and any consequential damages, would be reduced on a proportionate basis measured from the date such system was installed.
Alternatively, the class member could receive $500 and receive no further compensation. Our insurance carriers have paid $5.0 million to cover the
initial costs of settlement administration, class notice costs and plaintiff’s attorney fees, with an estimated $2.4 million remaining to pay
claims. Our payment obligations do not begin until the insurance funds are exhausted. During the second year and years four through fifteen, we would
be obligated only to pay qualifying claims and administrative costs up to a limit of $500,000 per year. We have no payment obligations in years one and
three. We also would have no payment obligation in any other year in which there are no qualifying claims. In the event any qualifying claims remain
unpaid after fifteen years, we would have to pay such claims as follows: (1) if the excess claims are between $0 and $1.5 million, we would pay the
amount of the claims; (2) if the excess claims are between $1.5 million and $6.0 million, we would pay $1.5 million; and (3) if the excess claims
exceed $6.0 million, we would pay $1.5 million plus 25 percent of the amount over $6.0 million, up to a cap of $3.0 million; provided, that in no event
would we be obligated to pay any more than $1.0 million in any of years sixteen, seventeen or eighteen. To date, we are aware of seven claims, one of
which has been denied and six of which are pending. Of the six pending claims, one seeks an inspection to determine the extent of any leaks, and the
remaining claims have a total maximum exposure of less than $100,000.
Our manufacturing facilities are subject to many
federal, state, local and foreign laws and regulations related to the protection of the environment. Some of our operations require environmental
permits to control and reduce
5
air and water discharges or manage other environmental matters, which are subject to modification, renewal and revocation by government authorities. We believe that we are in material compliance with all environmental laws, regulations and permits, and we do not anticipate any material expenditures to meet current or pending environmental requirements. However, we could incur operating costs or capital expenditures in complying with future or more stringent environmental requirements or with current requirements if they are applied to our facilities in a way we do not anticipate.
In November 1999, the Oregon Department of
Environmental Quality (DEQ) requested that we perform a preliminary assessment of our plant located at 12005 N. Burgard in Portland, Oregon. The
primary purpose of the assessment is to determine whether the plant has contributed to sediment contamination in the Willamette River. We entered into
a voluntary letter agreement with the department in mid-August 2000. In 2001, groundwater containing elevated volatile organic compounds (VOCs) was
identified in one localized area of the property furthest from the river. Assessment work in 2002 and 2003 to further characterize the groundwater is
consistent with the initial conclusion that the source of the VOCs is located off site. There is no evidence at this time showing a connection between
detected VOCs in groundwater and Willamette River sediments. Also, there is no evidence to date that stormwater from the plant has adversely impacted
Willamette River sediments. However, DEQ is recommending a remedial investigation and feasibility study for further evaluation of both groundwater and
stormwater at the plant. Assessment work is ongoing.
In December 2000, a six-mile section of the lower
Willamette River known as the Portland Harbor was included on the National Priorities List at the request of the EPA. The EPA currently describes the
site as the areal extent of contamination, and all suitable areas in proximity to the contamination necessary for the implementation of the response
action, at, from and to the Portland Harbor Superfund Site Assessment Area from approximately River Mile 3.5 to River Mile 9.2, including uplands
portions of the site that contain sources of contamination to the sediments. Our plant is not located on the Willamette River; it lies in what may be
the upland portion of the site. However, a final determination of the areal extent of the site will not be determined until EPA issues a record of
decision describing the remedial action necessary to address Willamette River sediments. EPA and the Oregon Department of Environmental Quality have
agreed to share responsibility for investigation and cleanup of the site. The Oregon Department of Environmental Quality has the lead responsibility
for conducting the upland work, and EPA is the Support Agency for that work. EPA has the lead responsibility for conducting in-water work, and the
Oregon Department of Environmental Quality is the Support Agency for that work.
Also, in December 2000, EPA notified us and 68 other
parties by general notice letter of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act and the Resource
Conservation and Recovery Act with respect to the Portland Harbor Superfund Site. In its letter, EPA inquired whether parties receiving the letter were
interested in volunteering to enter negotiations to perform a remedial investigation and feasibility study at the site. No action was required by EPA
of recipients of the general notice letter. In the last week of December 2000, we responded to EPA’s inquiry stating that we were working with the
Oregon Department of Environmental Quality to determine whether our plant had any impact on Willamette River sediments or was a current source of
releases to the Willamette River sediments. Therefore, until our work with the Oregon Department of Environmental Quality is completed, it would be
premature for us to enter into any negotiations with EPA.
We operate under numerous governmental permits and
licenses relating to air emissions, stormwater run-off, and other matters. We are not aware of any current material violations or citations relating to
any of these permits or licenses. We have a policy of reducing consumption of hazardous materials in our operations by substituting non-hazardous
materials when possible. Our operations are also governed by many other laws and regulations, including those relating to workplace safety and worker
health, principally the Occupational Safety and Health Act and regulations thereunder which, among other requirements, establish noise and dust
standards. We believe that we are in material compliance with these laws and regulations and do not believe that future compliance with such laws and
regulations will have a material adverse effect on our results of operations or financial condition.
From time to time, we are involved in litigation
relating to claims arising out of our operations in the normal course of our business. We maintain insurance coverage against potential claims in
amounts that we believe to be adequate. Management believes that we are not presently a party to any other litigation, the outcome of which would have
a material adverse effect on our business, financial condition, results of operations or cash flows.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our
shareholders during the quarter ended December 31, 2004.
6
PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is quoted on the Nasdaq National
Market System under the symbol “NWPX.” The high and low sales prices as reported on the Nasdaq National Market System for each quarter in the
years ended December 31, 2004 and 2003 were as follows.
| Low |
High |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
2004 |
||||||||||
First
Quarter |
$ | 13.55 | $ | 15.19 | ||||||
Second
Quarter |
13.81 | 17.98 | ||||||||
Third
Quarter |
16.54 | 18.00 | ||||||||
Fourth
Quarter |
16.52 | 24.95 | ||||||||
2003 |
||||||||||
First
Quarter |
$ | 11.66 | $ | 17.50 | ||||||
Second
Quarter |
8.26 | 14.52 | ||||||||
Third
Quarter |
12.75 | 16.55 | ||||||||
Fourth
Quarter |
11.85 | 15.03 | ||||||||
There were 83 shareholders of record and
approximately 1,350 beneficial shareholders at March 2, 2005. There were no cash dividends declared or paid in fiscal years 2004 or 2003. We do not
anticipate paying cash dividends in the foreseeable future.
Information with respect to equity compensation
plans is included under the caption “Equity Compensation Plan Information” in Northwest Pipe’s definitive proxy statement for its 2005
Annual Meeting of Shareholders and is incorporated by reference herein.
| Item 6. | Selected Financial Data |
| Year Ended December 31, |
|||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2002 |
2001 |
2000 |
|||||||||||||||||||
| In thousands, except per share amount |
|||||||||||||||||||||||
Consolidated Statement of Income Data: |
|||||||||||||||||||||||
Net
sales |
$ | 291,910 | $ | 244,987 | $ | 266,101 | $ | 276,473 | $ | 281,409 | |||||||||||||
Gross
profit |
49,296 | 33,228 | 43,929 | 51,402 | 49,217 | ||||||||||||||||||
Net
income |
12,377 | 3,531 | 9,259 | 11,111 | 10,691 | ||||||||||||||||||
Basic
earnings per share |
1.87 | 0.54 | 1.42 | 1.71 | 1.65 | ||||||||||||||||||
Diluted
earnings per share |
1.83 | 0.53 | 1.37 | 1.67 | 1.62 | ||||||||||||||||||
Consolidated Balance Sheet Data: |
|||||||||||||||||||||||
Working
capital |
$ | 97,932 | $ | 71,023 | $ | 117,879 | $ | 118,273 | $ | 75,760 | |||||||||||||
Total
assets |
335,403 | 280,010 | 286,732 | 266,582 | 283,157 | ||||||||||||||||||
Long-term
debt, less current portion |
59,689 | 35,914 | 75,664 | 59,009 | 70,841 | ||||||||||||||||||
Stockholders’ equity |
144,152 | 131,651 | 127,152 | 118,245 | 107,849 | ||||||||||||||||||
7
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Management’s Discussion and Analysis of
Financial Condition and Results of Operations and other sections of this Report contain forward-looking statements within the meaning of the Securities
Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about our business, management’s beliefs, and
assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “estimates,” “should,” and variations of such words and similar expressions are intended
to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are
difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors including changes in demand for our products, product mix, bidding activity, the timing of customer orders and
deliveries, the price and availability of raw materials, excess or shortage of production capacity, international trade policy and regulations and
other risks discussed below under the caption “risk factors” and from time to time in our other Securities and Exchange Commission filings
and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and
international economic conditions. Such forward-looking statements speak only as of the date on which they are made and we do not undertake any
obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we do update or correct one or
more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or
with respect to other forward-looking statements.
Overview
Our water transmission products are manufactured in
our Portland, Oregon; Denver, Colorado; Adelanto and Riverside, California; Parkersburg, West Virginia; and Saginaw, Texas facilities. Tubular products
are manufactured in our Portland, Oregon; Atchison, Kansas; Houston, Texas; Bossier City, Louisiana; and Monterrey, Mexico facilities.
We believe that the Tubular Products business, in
conjunction with the Water Transmission business, provide a significant degree of market diversification, because the principal factors affecting
demand for Water Transmission products are different from those affecting demand for Tubular Products. Demand for water transmission products is
generally based on population growth and movement, changing water sources and replacement of aging infrastructure. Demand can vary dramatically within
our market area since each population center determines its own waterworks requirements. Demand for tubular products is influenced by construction
activity and general economic conditions.
Critical Accounting Policies
The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States.
Management Estimates:
The preparation of our financial statements requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate all of our estimates, including those related to revenue recognition and allowance for
doubtful accounts. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting
policies and related judgments and estimates affect the preparation of our consolidated financial statements.
Revenue Recognition:
Revenue from construction contracts in our water
transmission segment is recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to the estimated
total costs of each contract. Estimated total costs of each contract are reviewed on a monthly basis by project management and
8
operations personnel for all projects that are fifty percent or more complete except that major projects, usually over $5.0 million, are reviewed earlier if sufficient production has been completed to provide enough information to revise the original estimated total cost of the project. All cost revisions that result in the gross profit as a percent of sales increasing or decreasing by greater than one percent are reviewed by senior management personnel. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Selling, general and administrative costs are charged to expense as incurred. Provisions for losses on uncompleted contracts are made in the period such losses are known. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Historically, actual results have been within management’s estimates. Management has discussed the development and selection of this critical accounting estimate with the audit committee of our board of directors.
Revenue from our tubular products segment is
recognized when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists; delivery has occurred; the price
is fixed or determinable; and collectibility is reasonably assured.
Allowance for Doubtful Accounts:
We maintain allowances for estimated losses
resulting from the inability of our customers to make required payments and from contract disputes. The extension and revision of credit is established
by obtaining credit rating reports or financial information of a potential customer. Trade receivable balances are evaluated at least monthly. If it is
determined that the customer will be unable to meet its financial obligation to us as a result of a bankruptcy filing, deterioration in the
customer’s financial position, contract dispute, product claim or other similar events, a specific allowance is recorded to reduce the related
receivable to the expected recovery amount given all information presently available. A general allowance is recorded for all other customers based on
certain other factors including the length of time the receivables are past due and historical collection experience with individual customers. As of
December 31, 2004, the accounts receivable balance of $53.9 million is reported net of allowances for doubtful accounts of $1.2 million. We believe the
reported allowances at December 31, 2004, are adequate. If the customers’ financial conditions were to deteriorate resulting in their inability to
make payments, additional allowances may need to be recorded, which would result in additional selling, general and administrative expenses being
recorded for the period in which such determination was made. Historically, actual results have been within management’s estimates. Management has
discussed the development and selection of this critical accounting estimate with the audit committee of our board of directors.
Long-Lived Assets:
Property and equipment are reviewed for impairment
in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, “Accounting for the Disposal of Long-Lived Assets.”
We assess impairment of property and equipment whenever changes in circumstances indicate that the carrying values of the assets may not be
recoverable.
Goodwill represents the excess of cost over the
assigned value of the net assets in connection with all acquisitions. Goodwill is reviewed for impairment in accordance with SFAS No. 142
“Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill and intangible assets with indefinite lives are no longer amortized
but are reviewed for impairment annually, or more frequently if impairment indicators arise. As required under SFAS 142, we performed our annual
assessment for impairment of the goodwill as of December 31, 2004; based on our analysis, we believe no impairment of goodwill exists.
If we determine that the carrying value of the
property and equipment or goodwill will not be recoverable, we calculate and record impairment losses using future undiscounted cash flows. We estimate
future undiscounted cash flows using assumptions about the expected future operating performance of the Company. Our estimates of undiscounted cash
flows may differ from actual cash flow due to, among other things, technological changes, economic conditions, or changes to our business
operations.
Inventories:
Inventories are stated at the lower of cost or
market. Finished goods are stated at standard cost, which approximates the first-in, first-out method of accounting. Raw material inventories of steel
coil are stated at cost on a specific identification basis or at standard cost. Raw material inventories of coating and lining materials, as well as
materials and supplies, are stated on an average cost basis.
9
Income Taxes:
We record deferred income tax assets and liabilities
based upon the difference between the financial statement and income tax bases of assets and liabilities using enacted income tax rates. Valuation
allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in net deferred income tax assets and liabilities.
Self Insurance:
We are self-insured for health claims for certain
employees. In addition, we are self-insured for a portion of losses and liabilities associated with workers compensation claims. Losses are accrued
based upon our estimates of the aggregate liability for claims incurred using historical experience and, for workers compensation, certain actuarial
assumptions followed in the insurance industry. The Company has purchased stop-loss coverage in order to limit, to the extent feasible, the aggregate
exposure to claims. There is no assurance that such coverage will adequately protect the Company against liability from all potential
consequences.
Pension Benefits:
We have two defined benefit pension plans that are
frozen. We fund these plans to cover current plan costs plus amortization of the unfunded plan liabilities. To record these obligations, management
uses estimates relating to assumed inflation, investment returns, mortality, employee turnover, and discount rates. Management, along with third-party
actuaries, reviews all of these assumptions on an ongoing basis.
Results of Operations
The following table sets forth, for the periods
indicated, certain financial information regarding costs and expenses expressed as a percentage of total net sales and net sales of our business
segments.
| Year Ended December 31, |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 |
2003 |
2002 |
|||||||||||||
Net
sales: |
|||||||||||||||
Water
transmission |
60.9 | % | 59.7 | % | 65.6 | % | |||||||||
Tubular
products |
39.1 | 40.3 | 34.4 | ||||||||||||
Total net
sales |
100.0 | 100.0 | 100.0 | ||||||||||||
Cost of
sales |
83.1 | 86.4 | 83.5 | ||||||||||||
Gross
profit |
16.9 | 13.6 | 16.5 | ||||||||||||
Selling,
general and administrative expenses |
7.9 | 9.1 | 8.7 | ||||||||||||
Operating
income |
9.0 | 4.5 | 7.8 | ||||||||||||
Interest
expense, net |
2.2 | 2.2 | 2.1 | ||||||||||||
Income before
income taxes |
6.8 | 2.3 | 5.7 | ||||||||||||
Provision for
income taxes |
2.6 | 0.9 | 2.2 | ||||||||||||
Net
income |
4.2 | % | 1.4 | % | 3.5 | % | |||||||||
Segment
gross profit as a percentage of net sales: |
|||||||||||||||
Water
transmission |
19.0 | % | 22.0 | % | 22.0 | % | |||||||||
Tubular
products |
13.5 | 1.1 | 6.1 | ||||||||||||
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net sales. Net
sales increased to $291.9 million in 2004 from $245.0 million in 2003. No single customer accounted for 10% or more of total net sales in 2004 or
2003.
Water Transmission sales increased 21.5% to $177.8
million in 2004 from $146.3 million in 2003. Net sales increased over the same period last year as a result of increased volume, which is attributable
to stronger demand. Our Water Transmission business is impacted by infrastructure improvements; as municipal water agencies initiate improvements, we
generally experience an increase in demand for our products. In addition to increased sales, the stronger demand resulted in an improved backlog at
December 31, 2004 of $128.9, as compared to the backlog
10
of $73.8 million at the beginning of 2004. Bidding activity, backlog and sales resulting from the award of new projects, or the production of current projects, may vary significantly from period to period.
Tubular Products sales increased 15.7% to $114.1
million in 2004 from $98.7 million in 2003. The increase in net sales over the same period last year resulted primarily from our ability to pass on
steel price increases to our customers. During 2004, we raised prices on our Tubular Products in order to pass along to our customers the steel
surcharges and base price increases our steel vendors have included on steel purchased by us. These price increases are designed to absorb the increase
in the cost of steel, our principal raw material. The timing and the extent to which our future prices may be adjusted because of fluctuations in the
steel marketplace are uncertain; therefore, no assurance can be given that we will succeed in maintaining similar growth in 2005.
Gross
profit. Gross profit increased to $49.3 million (16.9% of total net sales) in 2004 from $33.2 million (13.6% of total
net sales) in 2003.
Water Transmission gross profit increased 5.3% to
$33.9 million (19.0% of segment net sales) in 2004 from $32.2 million (22.0% of segment net sales) in 2003. Our Water Transmission projects are
obtained primarily through competitive bidding, which often occurs three to six months in advance of production of the projects. At the time of the
bidding, we attempt to accurately estimate the future price of steel that will be purchased for the project and include that in our bid. Our Water
Transmission gross margin percentage decreased from the same period last year primarily because we experienced significant increases in the price per
ton and the surcharges on steel, which comprises the majority of our cost of goods sold. As this significant component of our cost of sales increases,
our gross margin percentage is necessarily driven down, even if all steel cost increases are passed along to our customers. To some extent, our Water
Transmission gross profit also decreased because we did not fully anticipate nor include in our project bidding the full amount of the increase in the
cost of steel early in the year. Gross profit, however, as a percent of segment net sales is expected to improve in the first part of 2005 as our
production continues to be strong and we are able to take advantage of higher plant utilization, which will drive down our remaining costs of goods
sold.
Gross profit from Tubular Products increased
significantly to $15.4 million (13.5% of segment net sales) in 2004 from $1.1 million (1.1% of segment net sales) in 2003. Tubular Products gross
profit increased over the same period last year primarily as a result of the elimination of sales of low margin products and the sale of generally
lower costing inventory at higher selling prices charged by the Company in response to increasing steel costs. As steel price increases begin to
moderate, our margins should stabilize in the low double digit range.
Selling, general and administrative
expenses. Selling, general and administrative expenses increased 3.7% to $23.1 million (7.9% of total net sales) in 2004
from $22.3 million (9.1% of total net sales) in 2003. The increase was primarily the result of an increase in incentive compensation and professional
fees incurred to meet Sarbanes-Oxley compliance requirements.
Interest
expense. Interest expense increased to $6.3 million in 2004 from $5.2 million in 2003. The increase in interest expense
resulted from an increase in both our outstanding borrowings and the rates on those borrowings.
Income
taxes. Our effective tax rate was approximately 37.6% in 2004 and 38.3% in 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net sales. Net
sales decreased to $245.0 million in 2003 from $266.1 million in 2002. No single customer accounted for 10% or more of total net sales in 2003 or
2002.
Water Transmission sales decreased 16.2% to $146.3
million in 2003 from $174.5 million in 2002. The decrease was primarily a result of lower production levels that resulted from the combination of a low
backlog at the beginning of the year, limited bidding activity through the majority of the first half of the year, and delays in obtaining approval
from customers to produce projects in our backlog.
Tubular Products sales increased 7.8% to $98.7
million in 2003 from $91.6 million in 2002. The increase was primarily the result of improvements in the energy market.
Gross
profit. Gross profit decreased to $33.2 million (13.6% of total net sales) in 2003 from $43.9 million (16.5% of total
net sales) in 2002.
11
Water Transmission gross profit decreased 16.1% to
$32.2 million (22.0% of segment net sales) in 2003 from $38.4 million (22.0% of segment net sales) in 2002. Water Transmission gross profit decreased
as a result of lower volume. Increased competition lowered the overall margins on jobs booked in 2003 and the low production utilization resulted in
higher production costs in the first half of 2003. Even though overall bidding activity improved in the second half of the year and our bookings
increased, the continued unevenness of the bidding activity in the second half of 2003 resulted in less than optimal utilization of plant
capacity.
Gross profit from Tubular Products decreased
significantly to $1.1 million (1.1% of segment net sales) in 2003 from $5.5 million (6.1% of segment net sales) in 2002. Tubular Products gross profit
decreased in 2003 as a result of the inability to fully pass on steel price increases to our customers during the year. Import pricing pressures and
relatively low demand in our key markets kept prices of our products at lower levels than we had historically seen in relation to steel
costs.
Selling, general and administrative
expenses. Selling, general and administrative expenses decreased 3.7% to $22.3 million (9.1% of total net sales) in 2003
from $23.1 million (8.7% of total net sales) in 2002. The decrease was primarily the result of reduction in wages.
Interest
expense. Interest expense decreased to $5.2 million in 2003 from $5.5 million in 2002. The decrease in interest expense
resulted from a lower aggregate interest rate.
Income
taxes. Our effective tax rate was approximately 38.3% in 2003 and 39.2% in 2002.
Liquidity and Capital Resources
We generally finance our operations through cash
flows from operations and available borrowings. At December 31, 2004, we had cash and cash equivalents of $89,000 and available borrowings of $10.1
million.
Net cash used in operating activities in 2004 was
$10.3 million. This was primarily the result of an increase in cost and estimated earnings in excess of billings on uncompleted contracts, inventories,
and trade and other receivables, net of $28.4, $17.0 and $5.3 million, respectively; offset in part by our net income of $12.4 million, an increase in
accounts payable of $20.1 million, and non-cash adjustments for depreciation and amortization of $6.3 million. The increase in cost and estimated
earnings in excess of billings on uncompleted contracts, inventories and trade receivables resulted primarily from the increased production in the
Water Transmission segment of our business and the high cost of steel. The increase in accounts payable can also be attributed to the increased
production, which required additional receipts of steel and other raw materials.
Net cash used in investing activities in 2004 was
$12.0 million, which primarily related to additions of property and equipment. Capital expenditures are expected to be between $9.0 and $11.0 million
in 2005.
Net cash provided by financing activities in 2004
was $22.2 million, which primarily resulted from net new borrowings under our long-term debt agreement.
We had the following significant components of debt
at December 31, 2004: a $38.5 million credit agreement, under which $28.4 million was outstanding; $1.4 million of Series A Senior Notes; $17.1 million
of Series B Senior Notes; $15.0 million of Senior Notes; $15.0 million of Series A Term Note, $10.5 million of Series B Term Notes, $10.0 million of
Series C Term Notes, an Industrial Development Bond of $1.5 million; and capital lease obligations of $905,000.
The credit agreement expires on December 31, 2006.
The balance outstanding under the credit agreement bears interest at rates related to LIBOR plus 2.25% to 3.50% (5.75% at December 31, 2004), or at
prime minus 0.25% to prime plus 1.00% (6.00% at December 31, 2004). We had $28.4 million outstanding under the line of credit, with $10.3 million
bearing interest at 6.00% and $20.0 million bearing interest at 5.625%, partially offset by $1.9 million in cash receipts that had not been applied to
the loan balance. At December 31, 2004 we had an additional net borrowing capacity under the line of credit of $10.1 million.
The Series A Term Note in the principal amount of
$15.0 million matures on February 25, 2014 and requires annual payments in the amount of $2.1 million that begin February 25, 2008 plus interest of
8.75% paid quarterly on February 25, May 25, August 25 and November 25. The Series B Term Notes in the principal amount of $10.5 million mature on June
21, 2014 and require annual payments in the amount of $1.5 million that begin June 21,
12
2008 plus interest of 8.47% paid quarterly on March 21, June 21, September 21 and December 21. The Series C Term Notes in the principal amount of $10.0 million mature on October 26, 2014 and require annual payments of $1.4 million that begin October 26, 2008 plus interest of 7.36% paid quarterly on January 26, April 26, July 26 and October 26. The Series A Senior Notes in the principal amount of $1.4 million mature on April 1, 2005 and require annual payments in the amount of $1.4 million that began April 1, 1999 plus interest at 6.63% paid quarterly on January 1, April 1, July 1 and October 1. The Series B Senior Notes in the principal amount of $17.1 million mature on April 1, 2008 and require annual payments of $4.3 million that began April 1, 2003 plus interest at 6.91% paid quarterly on January 1, April 1, July 1 and October 1. The Senior Notes in the principal amount of $15.0 million mature on November 15, 2007 and require annual payments in the amount of $5.0 million that began November 15, 2001 plus interest of 6.87% paid quarterly on February 15, May 15, August 15, and November 15. The Senior Notes, Series A Senior Notes and Series B Senior Notes (together, the “Notes”) also include supplemental interest from 0.0% to 1.5% (0.75% at December 31, 2004), based on our total minimum net earnings before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense (“EBITDA”) to total debt leverage ratio, which is paid with the required quarterly interest payments. The Notes, the Series A Term Note, the Series B Term Notes, and Series C Term Notes (together, the “Term Notes”) and the credit agreement are collateralized by all accounts receivable, inventory and certain equipment.
The Industrial Development Bond matures on April 15,
2010 and requires annual principal payments of $250,000 and monthly interest payments. The interest rate on the Industrial Development Bond is
variable. It was 2.15% as of December 31, 2004 as compared to 1.35% on December 31, 2003. The Bond is collateralized by property and equipment and
guaranteed by an irrevocable letter of credit.
We lease certain hardware and software related to a
company-wide enterprise resource planning system and other equipment. The aggregated interest rate on the capital leases is 7.7%.
We have operating leases with respect to certain
manufacturing equipment that require us to pay property taxes, insurance and maintenance. Under the terms of certain operating leases, we sold
equipment to an unrelated third party (the “lessor”) who then leased the equipment to us. These leases, along with other debt instruments
already in place, and our credit agreement, best met our near term financing and operating capital requirements compared to other available options at
the time they were entered into.
Certain of our operating lease agreements include
renewals and/or purchase options set to expire at various dates. In addition, certain of our operating lease agreements, primarily manufacturing
equipment leases, with terms of 3 years, contain provisions related to residual value guarantees, which provide that if we do not purchase the leased
equipment from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal to the shortage (if any) between the
proceeds from the sale of the equipment and an agreed value. The maximum potential liability to us under such guarantees is $20.5 million at December
31, 2004 if the proceeds from the sale of terminating equipment leases are zero. Consistent with past experience, management does not expect any
significant payments will be required pursuant to these guarantees, and no amounts have been accrued at December 31, 2004.
The following table sets forth our commitments under
the terms of our debt obligations and operating leases:
| Total |
2005 |
2006/2007 |
2008/2009 |
Thereafter |
||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Credit
Agreement (1) |
$ | 28,412 | $ | 28,412 | $ | — | $ | — | $ | — | ||||||||||||
The
Notes |
33,571 | 10,714 | 18,572 | 4,285 | — | |||||||||||||||||
The Term
Notes |
35,500 | — | — | 10,142 | 25,358 | |||||||||||||||||
Industrial
Development Bond |
1,500 | 250 | 500 | 500 | 250 | |||||||||||||||||
Capital
Leases |
905 | 823 | 82 | — | — | |||||||||||||||||
Operating
Leases |
21,886 | 7,929 | 11,115 | 2,554 | 288 | |||||||||||||||||
Total
Obligations |
$ | 121,774 | $ | 48,128 | $ | 30,269 | $ | 17,481 | $ | 25,896 | ||||||||||||
| (1) | Although the Credit Agreement expires on December 31, 2006, we have included the amount as current due to the subjective acceleration clause included in the Agreement. |
13
We also have entered into stand-by letters of credit
that total approximately $5.3 million as of December 31, 2004. The stand-by letters of credit relate to workers’ compensation, general liability
insurance, and our Industrial Revenue Bond. Due to the nature of these arrangements and our historical experience, we do not expect to make any
significant payments under these arrangements. Therefore, they have been excluded from our aggregate commitments identified above.
The credit agreement, the Notes, the Term Notes and
operating leases all require compliance with the following financial covenants: minimum consolidated tangible net worth; maximum consolidated total
debt to consolidated EBITDA; minimum consolidated fixed charge coverage test and a limitation on credit agreement borrowings based on a borrowing base
formula that includes a certain portion of our accounts receivable, inventory and property and equipment. These and other covenants included in our
financing agreements impose certain requirements with respect to our financial condition and results of operations, and place restrictions on, among
other things, our ability to incur certain additional indebtedness, to create liens or other encumbrances on assets and capital expenditures. A failure
by us to comply with the requirements of these covenants, if not waived or cured, could permit acceleration of the related indebtedness and
acceleration of indebtedness under other instruments that include cross-acceleration or cross-default provisions. At December 31, 2004, we were not in
violation of any of the covenants in our debt agreements.
We expect to continue to rely on cash generated from
operations and other sources of available funds to make required principal payments under the Notes during 2005. We anticipate that our existing cash
and cash equivalents, cash flows expected to be generated by operations and amounts available under our credit agreement will be adequate to fund our
working capital and capital requirements for at least the next twelve months. To the extent necessary, we may also satisfy capital requirements through
additional bank borrowings, senior notes, term notes and capital and operating leases, if such resources are available on satisfactory terms. We have
from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may use a
portion of our working capital or necessitate additional bank borrowings.
Related Party Transactions.
We have ongoing business relationships with certain
affiliates of Wells Fargo & Company (“Wells Fargo”). Wells Fargo, together with certain of its affiliates, is our largest shareholder.
During the year ended December 31, 2004, we made the following payments to affiliates of Wells Fargo: (i) capital and operating lease payments pursuant
to which the Company leases certain equipment from such affiliates, (ii) payments of interest and fees pursuant to letters of credit originated by such
affiliates, (iii) payments of principal and interest on an industrial development bond, and (iv) payments of principal, interest and related fees in
connection with loan agreements between the Company and such affiliates. Payments made by us to Wells Fargo and its affiliates amounted to $3.5
million, $3.9 million and $2.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Balances due to Wells Fargo and its
affiliates were $30.9 million and $33.1 million at December 31, 2004 and 2003, respectively.
Recent Accounting Pronouncements.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs—An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,
“Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling
costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43.
Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We are currently evaluating the effect that the adoption
of SFAS 151 will have on our results of operations or financial position, but do not expect SFAS 151 to have a material effect.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets—An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”).
SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 2l(b) of APB Opinion
No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for
14
exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material effect on our results of operations or financial position.