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NORTHWEST PIPE CO - Quarter Report: 2014 March (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2014

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.)

5721 SE Columbia Way

Suite 200

Vancouver, Washington 98661

(Address of principal executive offices and zip code)

360-397-6250

(Registrant’s telephone number including area code)

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

Common Stock, par value $.01 per share   9,508,917
(Class)   (Shares outstanding at May 6, 2014)

 

 

 


Table of Contents

NORTHWEST PIPE COMPANY

FORM 10-Q

INDEX

 

     Page  

PART I - FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited):

  

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013

     2   

Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013

     3   

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March  31, 2014 and 2013

     4   

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013

     5   

Notes to Condensed Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     20   

Item 4. Controls and Procedures

     20   

PART II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     20   

Item 1A. Risk Factors

     20   

Item 6. Exhibits

     21   

Signatures

     22   

 

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Table of Contents

NORTHWEST PIPE COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

     March 31,
2014
    December 31,
2013
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 49      $ 588   

Trade and other receivables, less allowance for doubtful accounts of $473 and $685

     57,482        72,470   

Costs and estimated earnings in excess of billings on uncompleted contracts

     44,328        50,468   

Inventories

     62,974        110,392   

Refundable income taxes

     11,474        1,073   

Deferred income taxes

     4,137        6,208   

Prepaid expenses and other

     2,156        2,381   
  

 

 

   

 

 

 

Total current assets

     182,600        243,580   

Property and equipment, net

     133,303        143,061   

Goodwill

     21,348        25,760   

Other assets

     25,345        21,058   
  

 

 

   

 

 

 

Total assets

   $ 362,596      $ 433,459   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 3,571      $ 5,714   

Current portion of capital lease obligations

     950        2,216   

Accounts payable

     20,924        21,731   

Accrued liabilities

     12,192        15,194   

Billings in excess of costs and estimated earnings on uncompleted contracts

     18,215        3,368   
  

 

 

   

 

 

 

Total current liabilities

     55,852        48,223   

Note payable to financial institution

     25,191        87,919   

Long-term debt, less current portion

     —          643   

Capital lease obligations, less current portion

     1,357        5,679   

Deferred income taxes

     12,879        11,842   

Pension and other long-term liabilities

     16,219        17,303   
  

 

 

   

 

 

 

Total liabilities

     111,498        171,609   

Commitments and contingencies (Note 6)

    

Stockholders’ equity:

    

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding

     —          —     

Common stock, $.01 par value, 15,000,000 shares authorized, 9,508,917 and 9,449,299 shares issued and outstanding

     95        94   

Additional paid-in-capital

     113,630        114,559   

Retained earnings

     138,568        148,458   

Accumulated other comprehensive loss

     (1,195     (1,261
  

 

 

   

 

 

 

Total stockholders’ equity

     251,098        261,850   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 362,596      $ 433,459   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NORTHWEST PIPE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

     Three Months Ended March 31,  
     2014     2013  

Net sales

   $ 82,647      $ 107,335   

Cost of sales

     78,333        84,416   
  

 

 

   

 

 

 

Gross profit

     4,314        22,919   

Selling, general and administrative expense

     5,440        6,030   
  

 

 

   

 

 

 

Operating income (loss)

     (1,126     16,889   

Other expense

     63        41   

Interest income

     (81     (183

Interest expense

     770        957   
  

 

 

   

 

 

 

Income (loss) before income taxes

     (1,878     16,074   

Provision for (benefit from) income taxes

     (667     5,098   
  

 

 

   

 

 

 

Net income from continuing operations

     (1,211     10,976   

Discontinued operations:

    

Loss from discontinued operations

     (2,662     (2,160

Loss on sale of business

     (12,083     —     

Benefit from income taxes

     (6,066     (690
  

 

 

   

 

 

 

Net loss from discontinued operations

     (8,679     (1,470
  

 

 

   

 

 

 

Net income (loss)

   $ (9,890   $ 9,506   
  

 

 

   

 

 

 

Basic earnings (loss) per share:

    

Continuing operations

   $ (0.13   $ 1.16   

Discontinued operations

   $ (0.91   $ (0.15
  

 

 

   

 

 

 

Total

   $ (1.04   $ 1.01   
  

 

 

   

 

 

 

Diluted earnings (loss) per share:

    

Continuing operations

   $ (0.13   $ 1.16   

Discontinued operations

   $ (0.91   $ (0.16
  

 

 

   

 

 

 

Total

   $ (1.04   $ 1.00   
  

 

 

   

 

 

 

Shares used in per share calculations:

    

Basic

     9,508        9,437   
  

 

 

   

 

 

 

Diluted

     9,508        9,484   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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NORTHWEST PIPE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

     Three Months Ended March 31,  
     2014     2013  

Net income (loss)

   $ (9,890   $ 9,506   

Other comprehensive income:

    

Pension liability adjustment, net of tax

     64        65   

Deferred gain on cash flow derivatives, net of tax

     2        111   
  

 

 

   

 

 

 

Other comprehensive income

     66        176   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ (9,824   $ 9,682   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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NORTHWEST PIPE COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

     Three Months Ended March 31,  
     2014     2013  

Cash Flows From Operating Activities:

    

Net income (loss)

   $ (9,890   $ 9,506   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     3,166        3,865   

Amortization of intangible assets

     131        —     

Provision for doubtful accounts

     (212     51   

Amortization of debt issuance costs

     134        158   

Loss on impairment

     25        —     

Deferred income taxes

     3,108        649   

Gain on disposal of property and equipment

     —          (177

Loss on sale of business

     12,083        —     

Stock based compensation expense

     354        526   

Unrealized gain on foreign currency forward contracts

     (36     (94

Changes in operating assets and liabilities:

    

Trade and other receivables, net

     9,725        (23,968

Costs and estimated earnings in excess of billings on uncompleted contracts, net

     20,987        (390

Inventories

     14,477        4,085   

Refundable income taxes

     (10,401     —     

Prepaid expenses and other assets

     (2     387   

Accounts payable

     577        10,728   

Accrued and other liabilities

     (4,087     (1,482
  

 

 

   

 

 

 

Net cash provided by operating activities

     40,139        3,844   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Additions to property and equipment

     (4,964     (9,781

Proceeds from sale of business

     31,609        —     

Proceeds from the sale of property and equipment

     —          1,669   

Restricted cash

     —          —     

Other investing activities

     13        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     26,658        (8,112
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Tax withholdings related to net share settlements of restricted stock awards and performance shares

     (1,283     (802

Payments on long-term debt

     (2,786     (2,786

Borrowings under note payable to financial institution

     23,831        37,471   

Payments on note payable to financial institution

     (86,559     (28,768

Payments on capital lease obligations

     (539     (846
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (67,336     4,269   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (539     1   

Cash and cash equivalents, beginning of period

     588        46   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 49      $ 47   
  

 

 

   

 

 

 

Non-Cash Investing Activity:

    

Escrow account related to capital lease financing

   $ —        $ 898   

Accrued property and equipment purchases

     1,127        4,605   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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NORTHWEST PIPE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of Northwest Pipe Company (the “Company”) and its subsidiaries in which the Company exercises control as of the financial statement date. Intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The financial information as of December 31, 2013 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). Certain information or footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair statement of the results of the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2013 Form 10-K.

On March 30, 2014 the Company completed the sale of substantially all of the assets and liabilities associated with the oil country tubular goods (“OCTG”) business. See Note 2, “Acquisitions and Disposals” for further information regarding the sale. The Company’s results of operations for its disposed OCTG business have been presented as discontinued operations for all periods presented within the condensed consolidated statements of operations.

Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2014.

 

2. Acquisitions and Disposals

Disposal of OCTG Business

On March 30, 2014 the Company completed the sale of substantially all of the assets and liabilities associated with the OCTG business conducted by the Company at its manufacturing facilities in Bossier City, Louisiana and Houston, Texas, excluding the real property located in Houston, Texas. These facilities were previously included within the Company’s Tubular Products Group. Total consideration of $42.7 million was paid by the buyer, resulting in a loss on sale of $12.1 million. The calculation of the loss on sale included a writedown of $4.4 million of goodwill. Of the proceeds received, $4.3 million was placed in escrow to secure the Company’s indemnification obligations under the purchase agreement, $5.0 million was used to repay capital leases related to and secured by certain assets at the Bossier City, Louisiana manufacturing facility, and $1.8 million was used to pay for transaction costs, resulting in net proceeds paid to the Company at closing of $31.6 million. A purchase price adjustment related to working capital is expected to occur by June 30, 2014. In connection with the sale, the Company and the purchaser entered into a six month lease of the real property located in Houston, Texas and the Company granted the purchaser an option to purchase the property under certain circumstances.

 

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The table below presents the components of the balance sheet accounts associated with the OCTG business as of December 31, 2013, in thousands. All assets and liabilities were transferred to the buyer as of March 30, 2014.

 

     December 31,
2013
 

Assets:

  

Trade and other receivables, net

   $ 11,673   

Inventories

     44,668   

Prepaid expenses and other

     206   
  

 

 

 

Total current assets

     56,547   

Property and equipment, net

     11,509   
  

 

 

 

Total assets

     68,056   
  

 

 

 

Liabilities:

  

Current portion of capital lease obligations

     1,289   

Accounts payable

     3,013   

Accrued liabilities

     1,466   

Deferred revenue

     4,505   
  

 

 

 

Total current liabilities

     10,273   

Capital lease obligations, less current portion

     4,075   
  

 

 

 

Total liabilities

   $ 14,348   
  

 

 

 

The table below presents the operating results for the Company’s discontinued operations (in thousands). These operating results for the three months ended March 31, 2014 do not necessarily reflect what they would have been had the OCTG business not been classified as a discontinued operation.

 

     Three Months Ended March 31,  
     2014     2013  

Net sales

   $ 22,225      $ 33,261   

Cost of sales

     24,393        34,976   
  

 

 

   

 

 

 

Gross loss

     (2,167     (1,715

Selling, general and administrative expense

     396        353   
  

 

 

   

 

 

 

Operating loss

     (2,563     (2,068

Interest expense

     99        92   

Loss on sale of discontinued operations

     12,083        —     
  

 

 

   

 

 

 

Loss before income taxes

     (14,745     (2,160

Benefit from income taxes

     (6,066     (690
  

 

 

   

 

 

 

Net loss from discontinued operations

   $ (8,679   $ (1,470
  

 

 

   

 

 

 

Acquisition of Permalok Corporation

On December 30, 2013 the Company acquired 100% of the outstanding shares of capital stock of Permalok Corporation (“Permalok”), a fabricator of steel piping utilizing the Permalok interlocking pipe joining system. Total consideration (net of cash received) of $15.7 million was paid to the owners of the business, resulting in the recording of $5.3 million of goodwill, none of which is expected to be deductible for tax purposes. Contingent consideration of $1.4 million and $3.1 million is recorded in accrued liabilities and other long-term liabilities as of March 31, 2014, respectively. Contingent consideration was estimated based on the present value of the probability weighted revenue projections for the three fiscal years following the acquisition date.

 

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3. Inventories

Inventories are stated at the lower of cost or market and consist of the following (in thousands):

 

     March 31,
2014
     December 31,
2013
 

Short-term inventories:

     

Raw materials

   $ 43,061       $ 52,598   

Work-in-process

     3,261         4,902   

Finished goods

     14,364         49,351   

Supplies

     2,288         3,541   
  

 

 

    

 

 

 
     62,974         110,392   

Long-term inventories:

     

Finished goods

     1,208         1,249   
  

 

 

    

 

 

 

Total inventories

   $ 64,182       $ 111,641   
  

 

 

    

 

 

 

Long-term inventories are recorded in other assets.

 

4. Fair Value Measurements

The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.

The authoritative guidance establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. These levels are: Level 1 (inputs are quoted prices in active markets for identical assets or liabilities); Level 2 (inputs are other than quoted prices that are observable, either directly or indirectly through corroboration with observable market data); and Level 3 (inputs are unobservable, with little or no market data that exists, such as internal financial forecasts). The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following table summarizes information regarding the Company’s financial assets and financial liabilities that are measured at fair value (in thousands):

 

Description    Balance at
   March 31,   

2014
    Level 1      Level 2     Level 3  

Financial Assets

         

Non-qualified retirement savings plan assets

   $ 6,102      $ 4,975       $ 1,127      $ —     

Derivatives

     107        —           107        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ 6,209      $ 4,975       $ 1,234      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Financial Liabilities

         

Contingent consideration

   $ (4,486   $ —         $ —        $ (4,486

Derivatives

     (68     —           (68     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities

   $ (4,554   $ —         $ (68   $ (4,486
  

 

 

   

 

 

    

 

 

   

 

 

 

 

Description    Balance at
December 31,
2013
    Level 1      Level 2     Level 3  

Financial Assets

         

Non-qualified retirement savings plan assets

   $ 6,000      $ 4,944       $ 1,056      $ —     

Derivatives

     1        —           1        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

   $ 6,001      $ 4,944       $ 1,057      $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Financial Liabilities

         

Contingent consideration

   $ (4,425   $ —         $ —        $ (4,425

Derivatives

     (1     —           (1     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities

   $ (4,426   $ —         $ (1   $ (4,425
  

 

 

   

 

 

    

 

 

   

 

 

 

The non-qualified retirement savings plan assets consist of cash and several publicly traded stock and bond mutual funds, valued using quoted market prices in active markets classified as Level 1 within the fair value hierarchy, as well as securities that are not actively traded on major exchanges, valued using the NAV of the underlying investments classified as Level 2 within the fair value hierarchy.

 

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The Company’s derivatives consist of foreign currency forward contracts, which are accounted for as cash flow hedges, and are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company.

The fair value of contingent consideration was estimated based on the present value of the probability weighted revenue projections for the three fiscal years following the acquisition date of Permalok. The inputs used to measure contingent consideration are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal revenue forecasts. The discount rate used in the analysis was 5.3%. Changes in the fair value of the contingent consideration payment are reflected in earnings during the period which the change in the estimated fair value is calculated.

The net carrying amounts of cash and cash equivalents, trade and other receivables, accounts payable, accrued liabilities and note payable to financial institution approximate fair value due to the short-term nature of these instruments. The fair value of our debt is calculated using a coupon rate on borrowings with similar maturities, current remaining average life to maturity, borrower credit quality, and current market conditions, all of which are classified as Level 2 within the valuation hierarchy. The fair value of the Company’s long-term debt, including the current portion, was $3.5 million and the carrying value was $3.6 million at March 31, 2014, and $6.3 million with a carrying value of $6.4 million at December 31, 2013.

 

5. Derivative Instruments and Hedging Activities

The Company conducts business in various foreign countries and, from time to time, settles transactions in foreign currencies. The Company has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures, typically arising from sales contracts denominated in Canadian currency. Instruments that do not qualify for cash flow hedge accounting treatment are remeasured at fair value on each balance sheet date and resulting gains and losses are recognized in net income. As of March 31, 2014, all derivative contracts were designated as hedges. As of December 31, 2013 the total notional amount of the derivative contracts not designated as hedges was $0.1 million (CAD$0.1 million). As of March 31, 2014 and December 31, 2013, the total notional amount of the derivative contracts designated as hedges was $5.4 million (CAD$6.0 million) and $3.8 million (CAD$4.1 million), respectively. Derivative assets are included within prepaid expenses and other and derivative liabilities are included within accrued liabilities in the condensed consolidated balance sheets. All of the Company’s foreign currency forward contracts are subject to an enforceable master netting arrangement. The Company presents its foreign currency forward contract assets and liabilities within the condensed consolidated balance sheets at their gross fair values.

For each derivative contract entered into in which the Company seeks to obtain cash flow hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific firm commitments or forecasted transactions and designating the derivatives as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative contracts that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective portion of these hedged items is reflected in other comprehensive income in stockholders’ equity. If it is determined that a derivative contract is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative contract prospectively.

All of the Company’s Canadian forward contracts have maturities not longer than 12 months as of March 31, 2014.

For the three months ended March 31, 2014 and March 31, 2013, gains (losses) from derivative contracts not designated as hedging instruments recognized in net sales were $0.1 million and ($0.1) million, respectively. At March 31, 2014, there is $0.1 million of unrealized pretax gain on outstanding derivatives accumulated in other comprehensive loss, substantially all of which is expected to be reclassified to net sales within the next 12 months as a result of underlying hedged transactions also being recorded in net sales. See Note 11, “Accumulated Other Comprehensive Income (Loss)” for additional quantitative information regarding derivative gains and losses.

 

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6. Commitments and Contingencies

Portland Harbor Superfund

On December 1, 2000, a section of the lower Willamette River known as the Portland Harbor was included on the National Priorities List at the request of the United States Environmental Protection Agency (the “EPA”). While the Company’s Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facility’s stormwater system drains into a neighboring property’s privately owned stormwater system and slip. Since the listing of the site, the Company was notified by the EPA and the Oregon Department of Environmental Quality (the “ODEQ”) of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). In 2008, the Company was asked to file information disclosure reports with the EPA (CERCLA 104 (e) information request). By agreement with the EPA, the ODEQ is responsible for overseeing remedial investigation and source control activities for all upland sites to investigate sources and prevent future contamination to the river. A remedial investigation and feasibility study (“RI/FS”) of the Portland Harbor has been directed by a group of 14 potentially responsible parties known as the Lower Willamette Group (the “LWG”) under agreement with the EPA. The Company made a payment of $175,000 to the LWG in June 2007 as part of an interim settlement, and is under no obligation to make any further payment. The final draft remedial investigation (“RI”) was submitted to the EPA by the LWG in fall of 2011 and the draft feasibility study (“FS”) was submitted by the LWG to the EPA in March 2012. The draft FS identifies ten possible remedial alternatives which range in estimated cost from approximately $169 million to $1.76 billion and estimates a range of two to 28 years to implement the remedial work, depending on the selected alternative. The report does not determine who is responsible for the costs of cleanup or how the cleanup costs will be allocated among the potentially responsible parties. As of the date of this filing, the final RI and the revised FS are pending submittal to the EPA.

In 2001, groundwater containing elevated volatile organic compounds (“VOCs”) was identified in one localized area of leased property adjacent to the Portland facility furthest from the river. Assessment work in 2002 and 2003 to further characterize the groundwater was consistent with the initial conclusion that the source of the VOCs is located off of Company-owned property. In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (the “Agreement”) with the ODEQ. The Company is one of many Upland Source Control Sites working with the ODEQ on Source Control and is considered a “medium” priority site by the ODEQ indicating more investigation was recommended. The Company performed RI work required under the Agreement and submitted a draft RI/Source Control Evaluation Report (“SCE”) in December 2005 and a revised draft RI/SCE Report in January 2014 (2014 RI/SCE Report). The conclusions of the report include: (1) the VOCs found in the groundwater do not present an unacceptable risk to human or ecological receptors in the Willamette River; (2) there is no evidence at this time showing a connection between detected VOCs in groundwater and Willamette River sediments. (3) the interim remedial measure to conduct a limited excavation of soil and complete paving the site was completed; (4) a state-of-the art- stormwater treatment system was installed; and (5) an area of stained soil was characterized and remediated.

During the localized soil excavation in 2011, additional stained soil was discovered. At the request of the ODEQ, the Company developed an additional Work Plan to characterize the nature and extent of soil and/or groundwater impacts from the staining. The Company began implementing this Work Plan in the second quarter of 2012 and submitted sampling results to the ODEQ in the third quarter of 2012. Comments from the ODEQ were received in November 2012. In February 2013, the ODEQ clarified its comments from November 2012, and the Company has completed its second round of groundwater sampling for the Stained Soil Investigation Area in May and November 2013. The results were reported to ODEQ in January 2014 in the RI/SCE Report.

The Company anticipates having to spend less than $0.1 million for further Source Control work in 2014.

Concurrent with the activities of the EPA and the ODEQ, the Portland Harbor Natural Resources Trustee Council (“Trustees”) sent some or all of the same parties, including the Company, a notice of intent to perform a Natural Resource Damage Assessment (“NRDA”) for the Portland Harbor Site to determine the nature and extent of natural resource damages under CERCLA section 107. The Trustees for the Portland Harbor Site consist of representatives from several Northwest Indian Tribes, three federal agencies and one state agency. The Trustees act independently of the EPA and the ODEQ. The Trustees have encouraged potentially responsible parties to voluntarily participate in the funding of their injury assessments and several of those parties have agreed to do so. The Company has not assumed any payment obligation or liability related to this request.

 

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The Company’s potential liability is a portion of the costs of the remedy the EPA will select for the entire Portland Harbor Superfund site. The cost of that remedy is expected to be allocated among more than 100 potentially responsible parties. Because of the large number of responsible parties and the variability in the range of remediation alternatives, the Company is unable to estimate an amount or an amount within a range of costs for its obligation with respect to the Portland Harbor matters, and no further adjustment to the condensed consolidated financial statements has been recorded as of the date of this filing. The Company has insurance policies for defense costs, as well indemnification policies it believes will provide reimbursement for any share of the remediation assessed. However, the Company can provide no assurance that those policies will cover all of the costs which the Company may incur.

Houston Environmental Cleanup

In connection with the Company’s review of strategic direction concerning its OCTG assets, a Limited Phase II Environmental Site Assessment was conducted at the Houston, Texas plant and completed in March 2014 which revealed the presence of VOCs in the groundwater and certain metals in the soil. On April 9, 2014, the Company applied for admission into the Texas Commission on Environmental Quality (“TCEQ”) Voluntary Cleanup Program to address these issues and obtain a Certificate of Completion from TCEQ. The cost of any potential cleanup will not be covered by insurance. However, any costs incurred will be reimbursed by the purchaser of the OCTG business discussed in Note 2, “Acquisitions and Disposals” if the purchaser of the OCTG business exercises its option to purchase the property under certain circumstances after the Certificate of Completion is obtained. As the Company is in the early stages of this process, no adjustment to the condensed consolidated financial statements has been recorded as of the date of this filing.

All Sites

The Company operates its facilities under numerous governmental permits and licenses relating to air emissions, storm water run-off, and other environmental matters. The Company’s 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 there under which, among other requirements, establish noise and dust standards. The Company believes it is in material compliance with its permits and licenses and these laws and regulations, and the Company does not believe that future compliance with such laws and regulations will have a material adverse effect on its financial position, results of operations or cash flows.

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of its business. The Company maintains insurance coverage against potential claims in amounts that are believed to be adequate. The Company believes that it is not presently a party to any other litigation, the outcome of which would have a material adverse effect on its business, financial condition, results of operations or cash flows.

Guarantees

The Company has entered into certain stand-by letters of credit that total $3.1 million at March 31, 2014. The stand-by letters of credit relate to workers’ compensation insurance and equipment financing.

 

7. Segment Information

The Company’s operations are organized in two reportable segments, the Water Transmission Group and the Tubular Products Group, which are based on the nature of the products and the manufacturing process. The Water Transmission Group manufactures large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, primarily related to drinking water systems. These products are also used for hydroelectric power systems, wastewater systems and other applications. In addition, the Water Transmission Group makes products for industrial plant piping systems and certain structural applications. The Tubular Products Group manufactures and markets smaller diameter, electric resistance welded steel pipe used in a wide range of applications, including energy, construction, agriculture and industrial systems. These two segments represent distinct business activities, which management evaluates based on segment gross profit and operating income. Transfers between segments in the periods presented were not material.

 

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The Tubular Products Group also manufactured and marketed OCTG products through March 30, 2014. The operating results of the OCTG business have been classified as discontinued operations and are not included in the operating results presented below.

 

     Three months ended March 31,  
     2014     2013  
     (in thousands)  

Net sales:

    

Water transmission

   $ 42,999      $ 78,613   

Tubular products

     39,648        28,722   
  

 

 

   

 

 

 

Total

   $ 82,647      $ 107,335   
  

 

 

   

 

 

 

Gross profit:

    

Water transmission

   $ 1,668      $ 19,870   

Tubular products

     2,646        3,049   
  

 

 

   

 

 

 

Total

   $ 4,314      $ 22,919   
  

 

 

   

 

 

 

Operating income (loss):

    

Water transmission

   $ (299   $ 18,033   

Tubular products

     2,294        2,735   

Corporate

     (3,121     (3,879
  

 

 

   

 

 

 

Total

   $ (1,126   $ 16,889   
  

 

 

   

 

 

 

 

8. Share-based Compensation

The Company has one active stock incentive plan for employees and directors, the 2007 Stock Incentive Plan, which provides for awards of stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units (RSUs) and performance share awards (PSAs). In addition, the Company has one inactive stock option plan, the 1995 Stock Option Plan for Nonemployee Directors, under which previously granted options remain outstanding.

The Company recognizes compensation cost as service is rendered based on the fair value of the awards. The following summarizes share-based compensation expense recorded (in thousands):

 

     Three months ended March 31,  
     2014      2013  

Cost of sales

   $ 11       $ 128   

Selling, general and administrative expenses

     343         398   
  

 

 

    

 

 

 

Total

   $ 354       $ 526   
  

 

 

    

 

 

 

As of March 31, 2014, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $3.1 million which is expected to be recognized over a weighted average period of 1.6 years.

 

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Stock Option Awards

A summary of the status of the Company’s stock options as of March 31, 2014 and changes during the three months then ended is presented below:

 

     Options
Outstanding
     Weighted
Average
Exercise Price
per Share
     Weighted
Average
Remaining
Contractual
Life
     Aggregate
Intrinsic Value
 
                          (In thousands)  

Balance, January 1, 2014

     40,000       $ 25.44         

Options granted

     —           —           

Options exercised or exchanged

     —           —           

Options canceled

     —           —           
  

 

 

          

Balance, March 31, 2014

     40,000         25.44         4.40       $ 429   
  

 

 

          

 

 

 

Exercisable, March 31, 2014

     40,000         25.44         4.40       $ 429   
  

 

 

          

 

 

 

Restricted Stock Units and Performance Awards

A summary of the status of the Company’s RSUs and PSAs as of March 31, 2014 and changes during the three months then ended is presented below:

 

     Number of RSUs
and PSAs
    Weighted Average
Grant Date Fair Value
 

Unvested RSUs and PSAs at January 1, 2014

     257,087      $ 30.69   

RSUs and PSAs granted

     —          —     

RSUs and PSAs vested

     (80,469     25.82   

RSUs and PSAs canceled

     (21,625     31.47   
  

 

 

   

Unvested RSUs and PSAs at March 31, 2014

     154,993        33.12   
  

 

 

   

RSUs and PSAs are measured at the estimated fair value on the date of grant. RSUs are service-based awards and vest according to vesting schedules, which range from immediate to ratably over a three-year period. PSAs are service-based awards with a market-based vesting condition. Vesting of the market-based PSAs is dependent upon the performance of the market price of the Company’s stock relative to a peer group of companies and ranges from two to three years. The unvested balance of RSUs and PSAs at March 31, 2014 includes approximately 129,000 PSAs at a target level of performance; the actual number of common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 200%.

 

9. Income Taxes

The Company files income tax returns in the United States Federal jurisdiction, in a limited number of foreign jurisdictions, and in many state jurisdictions. Internal Revenue Service examinations have been completed for years prior to 2011, and with few exceptions, the Company is no longer subject to U.S. Federal, state or foreign income tax examinations for years before 2009.

The Company had $2.9 million and $6.2 million of unrecognized tax benefits at March 31, 2014 and December 31, 2013, respectively. The Company believes it is reasonably possible that the total amounts of unrecognized tax benefits will decrease in the following twelve months due to statute requirements; however, actual results could differ from those currently expected. Of the balance of unrecognized tax benefits, $2.4 million would affect the Company’s effective tax rate if recognized at some point in the future.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company provided for income taxes from continuing operations at estimated effective tax rates of 35.5% and 31.7% for the three month periods ended March 31, 2014 and March 31, 2013, respectively.

 

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10. Earnings per Share

Earnings per basic and diluted weighted average common share outstanding for continuing and discontinued operations were calculated as follows for the three months ended March 31, 2014 and 2013 (in thousands, except per share data):

 

     Three Months Ended March 31,  
     2014     2013  

Net income (loss) from continuing operations

   $ (1,211   $ 10,976   

Net loss from discontinued operations

     (8,679     (1,470
  

 

 

   

 

 

 

Net income (loss)

   $ (9,890   $ 9,506   
  

 

 

   

 

 

 

Basic weighted-average common shares outstanding

     9,508        9,437   

Effect of potentially dilutive common shares(1)

     —          47   
  

 

 

   

 

 

 

Diluted weighted-average common shares outstanding

     9,508        9,484   
  

 

 

   

 

 

 

Earnings (loss) per basic common share

    

Continuing operations

     (0.13     1.16   

Discontinued operations

     (0.91     (0.15
  

 

 

   

 

 

 

Total

   $ (1.04   $ 1.01   
  

 

 

   

 

 

 

Earnings (loss) per diluted common share

    

Continuing operations

     (0.13     1.16   

Discontinued operations

     (0.91     (0.16
  

 

 

   

 

 

 

Total

   $ (1.04   $ 1.00   
  

 

 

   

 

 

 

Antidilutive shares not included in diluted common share calculation

     —          10   

 

(1) Represents the effect of the assumed exercise of stock options and the vesting of restricted stock units and performance stock awards, based on the treasury stock method.

 

11. Accumulated Other Comprehensive Income (Loss)

The following table summarizes changes in the components of accumulated other comprehensive income (loss) during the three months ended March 31, 2014 (in thousands). All amounts are net of tax:

 

     Defined Benefit
Pension Items
    Gains (Losses) on
Cash Flow
Hedges
    Total  

Balance, December 31, 2013

   $ (1,275   $ 14      $ (1,261
  

 

 

   

 

 

   

 

 

 

Other comprehensive income before reclassifications

     36        9        45   

Amounts reclassified from accumulated other comprehensive income (loss)

     28        (7     21   
  

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income

     64        2        66   
  

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

   $ (1,211   $ 16      $ (1,195
  

 

 

   

 

 

   

 

 

 

 

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The following table provides additional detail about accumulated other comprehensive income (loss) components which were reclassified to the condensed consolidated statement of operations during the three months ended March 31, 2014 and 2013 (in thousands):

 

    Three Months Ended March 31,      
    2014     2013      

Details about Accumulated Other

Comprehensive Income (Loss) Components

  Amount reclassified from Accumulated
Other Comprehensive Income (Loss)
   

Affected line item in the
Condensed Consolidated
Statement of Operations

Pension liability adjustment

     

Net periodic pension cost

  $ (43   $ (98   Cost of sales
    15        33      Tax benefit
 

 

 

   

 

 

   
  $ (28   $ (65   Net of tax
 

 

 

   

 

 

   

Deferred gain on cash flow derivatives

     

Gain on cash flow derivatives

  $ 11      $ 26      Net sales
    (4     (10   Tax expense
 

 

 

   

 

 

   
  $ 7      $ 16      Net of tax
 

 

 

   

 

 

   
     
 

 

 

   

 

 

   

Total reclassifications for the period

  $ (21   $ (49  
 

 

 

   

 

 

   

 

12. Recent Accounting and Reporting Developments

In April 2014, the FASB issued ASU 2014-08, which changes the criteria for when the disposal of a component of an entity may be presented as discontinued operations. The guidance requires that the disposal be considered strategic shift (such as the disposal of a major geographical area, a major line of business, a major equity method investment, or other major part of an entity) which will have a major effect on a reporting entity’s operating and financial results in order to be presented as discontinued operations. Disposals that do qualify for discontinued operations presentation will require expanded disclosures. The guidance is effective for disposals which occur during annual periods beginning on or after December 15, 2014.

In July 2013, the FASB issued ASU 2013-11, which clarified guidance on the presentation of unrecognized tax benefits. The guidance requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. This guidance is effective for interim and annual periods beginning after December 15, 2013. The Company adopted this guidance on January 1, 2014 as required.

 

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Item 2. 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 and Section 21E of the Exchange Act 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,” “forecasts,” “should,” “could”, 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 as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include changes in demand and market prices for our products, product mix, bidding activity, the timing of customer orders and deliveries, production schedules, the price and availability of raw materials, excess or shortage of production capacity, international trade policy and regulations and other risks discussed in our 2013 Form 10-K and from time to time in our other SEC filings and reports. 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

We are a leading North American manufacturer of large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, primarily related to drinking water systems, and we also manufacture other welded steel pipe products for use in a wide range of applications, including energy, construction, agriculture, and industrial systems. Our pipeline systems are also used for hydroelectric power systems, wastewater systems and other applications, and we also make products for industrial plant piping systems and certain structural applications. These pipeline systems are produced by our Water Transmission Group from eight manufacturing facilities located in Portland, Oregon; Denver, Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas; St Louis, Missouri; Salt Lake City, Utah; and Monterrey, Mexico. Our Water Transmission Group accounted for approximately 52.0% of net sales from continuing operations in the first three months of 2014.

Our water infrastructure products are generally sold to installation contractors, who include our products in their bids to municipal agencies or privately-owned water companies for specific projects. Within the total pipeline system, our products best fit the larger-diameter, higher-pressure applications. We believe our sales are substantially driven by spending on new water infrastructure with additional spending on water infrastructure upgrades, replacements, and repairs. Pricing of our water infrastructure products is largely determined by the competitive environment in each regional market, and the regional markets generally operate independently of each other. We operate our Water Transmission business with a long-term time horizon. Projects are often planned for many years in advance and are sometimes part of fifty-year build out plans. In the near-term, we expect strained municipal budgets will continue to impact the Water Transmission Group.

Our Tubular Products Group manufactures other welded steel products in Atchison, Kansas. The OCTG division of our business, previously operated out of Houston, Texas; and Bossier City, Louisiana, was sold on March 30, 2014 and has been classified as discontinued operations. We produce a range of products used in several different markets, including energy, construction, agriculture, and industrial systems, which are sold to distributors and used in many different applications. Our Tubular Products Group’s sales volume is typically driven by energy spending, non-residential construction spending, and general economic conditions. Our Tubular Products Group generated approximately 48.0% of net sales from continuing operations in the first three months of 2014.

Purchased steel represents a substantial portion of our cost of sales, and changes in our selling prices often correlate directly to changes in steel costs. This correlation is the greatest in our Tubular Products Group as its margins are highly sensitive to changes in steel costs, although the amounts of margins are also influenced by the current level of demand in the marketplace.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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. We evaluate our estimates on an on-going basis. 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. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our condensed consolidated financial statements is set forth in our 2013 Form 10-K.

 

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Recent Accounting Pronouncements

See Note 12 of the condensed consolidated financial statements in Part I—Item I, “Financial Statements” for a description of recent accounting pronouncements, including the dates of adoption and estimated effects on financial position, results of operations and cash flows.

Results of Operations

The following tables set forth, for the period indicated, certain financial information regarding costs and expenses expressed as a percentage of total net sales and net sales of our business segments from continuing operations. The results of our OCTG business have been classified as discontinued operations and have been excluded from the table below.

 

     Three months ended March 31, 2014     Three months ended March 31, 2013  
     $     % of Net Sales     $     % of Net Sales  

Net sales

        

Water Transmission

   $ 42,999        52.0   $ 78,613        73.2

Tubular Products

     39,648        48.0        28,722        26.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     82,647        100.0        107,335        100.0   

Cost of sales

     78,333        94.8        84,416        78.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     4,314        5.2        22,919        21.4   

Selling, general and administrative expense

     5,440        6.6        6,030        5.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (1,126     (1.4     16,889        15.8   

Other expense

     63        0.1        41        0.0   

Interest income

     (81     (0.1     (183     (0.2

Interest expense

     770        0.9        957        0.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes from continuing operations

     (1,878     (2.3     16,074        15.1   

Provision for (benefit from) income taxes

     (667     (0.8     5,098        4.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

   $ (1,211     (1.5 )%    $ 10,976        10.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit as a percentage of segment net sales:

        

Water Transmission

       3.9       25.3

Tubular Products

       6.7          10.6   

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net sales. Net sales from continuing operations decreased 23.0% to $82.6 million for the first quarter of 2014 compared to $107.3 million for the first quarter of 2013. Two customers in the Tubular Products segment accounted for 13.1% and 11.4%, respectively, of total net sales from continuing operations in the first quarter of 2014. One customer in the Water Transmission segment accounted for 27.2% of total net sales from continuing operations in the first quarter of 2013.

Water Transmission sales from continuing operations decreased by 45.3% to $43.0 million in the first quarter of 2014 from $78.6 million in the first quarter of 2013. The decrease in sales in the first quarter of 2014 compared to the first quarter of 2013 was due to a 53% decrease in tons produced, partially offset by a 15% increase in selling prices per ton. The decrease in tons produced was due to historically low bidding activity during the summer of 2013 and the completion of significant projects during 2013, including Lake Texoma, which were not replaced by similarly sized projects during the first quarter of 2014. The increase in selling prices per ton in the first quarter of 2014 was due to a 15% increase in material costs per ton including steel. Bidding activity, backlog and production levels may vary significantly from period to period affecting sales volumes.

Tubular Products sales from continuing operations increased 38.0% to $39.6 million in the first quarter of 2014 from $28.7 million in the first quarter of 2013. The sales increase in the first quarter of 2014 as compared to the first quarter of 2013 was due to a 41% increase in tons sold offset by a 2% decrease in selling price per ton. We sold 39,000 tons in the first quarter of 2014 as compared to 27,600 tons in the first quarter of 2013. The increase in tons sold was primarily due to pipe shipped during the first quarter of 2014 on the Double H Pipeline project, the largest line pipe project in Company history. The decrease in selling price per ton was due to continued pricing pressures from imported pipe.

Gross profit. Gross profit decreased 81.2% to $4.3 million (5.2% of total net sales from continuing operations) in the first quarter of 2014 from $22.9 million (21.4% of total net sales from continuing operations) in the first quarter of 2013.

Water Transmission gross profit decreased $18.2 million, or 91.6%, to $1.7 million (3.9% of segment net sales from continuing operations) in the first quarter of 2014 from $19.9 million (25.3% of segment net sales from continuing operations) in the first quarter of 2013. The most significant factor in the reduction in gross profit was the lower volume described above, which had a negative

 

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impact on the fixed portion of our cost of goods sold as a percent of sales. Margins were also negatively impacted by higher materials cost per ton as discussed above. The mix of projects produced also contributed to the decrease in gross profit as well as $1.5 million from non-cash inventory purchase adjustments and intangible asset amortization related to our acquisition of Permalok.

Gross profit from Tubular Products decreased $0.4 million, or 12.8%, to $2.6 million (6.7% of segment net sales from continuing operations) in the first quarter of 2014 from $3.0 million (10.6% of segment net sales from continuing operations) in the first quarter of 2013. Margins were negatively impacted by planned downtime for the replacement of the existing front end of our 16 inch mill at our Atchison facility in March 2014. This was partially offset by a 2% decrease in materials cost per ton including steel in the first quarter of 2014 compared to the first quarter of 2013 which resulted from improved yields and efficiencies related to the increase in production discussed above.

Selling, general and administrative expenses. Selling, general and administrative expenses were $5.4 million (6.7% of total net sales from continuing operations) in the first quarter of 2014 and $6.0 million (5.6% of total net sales from continuing operations) in the first quarter of 2013. The decrease in the first quarter of 2014 as compared to the first quarter of 2013 was primarily due to a decrease of $0.6 million in bonus expense.

Interest expense. Interest expense from continuing operations was $0.8 million in the first quarter of 2014 and $1.0 million in the first quarter of 2013. The decrease in interest expense was a result of lower average interest rates offset by higher average borrowings during the first quarter of 2014 as compared with the first quarter of 2013.

Income Taxes. The tax benefit from continuing operations was $0.7 million in the first quarter of 2014 (an effective tax benefit rate of 35.5%) compared to $5.1 million in the first quarter of 2013 (an effective tax expense rate of 31.7%). When pre-tax earnings move between loss and income positions, the effective income tax rate can change significantly depending on the relationship of permanent income tax deductions and tax credits to estimated pre-tax income or loss. Accordingly, the comparison of effective rates between periods is not meaningful in those situations.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal sources of liquidity generally include operating cash flows and our bank credit agreement. Our principal uses of liquidity generally include capital expenditures, working capital and debt service. The condensed consolidated statements of cash flows include the impacts from discontinued operations.

As of March 31, 2014, our working capital (current assets minus current liabilities) was $126.7 million as compared to $195.4 million as of December 31, 2013. The primary reason for the decrease in working capital was the sale of substantially all of the assets and liabilities associated with the OCTG business conducted by the Company at our previously owned manufacturing facilities in Bossier City, Louisiana and Houston, Texas.

Net cash provided by operating activities in the first three months of 2014 was $40.1 million, including net cash provided by discontinued operations of $13.9 million. This was primarily the result of a $12.1 million loss on the sale of our OCTG business and fluctuations in working capital accounts including an increase in billings in excess of cost on uncompleted contracts and a decrease in inventories, partially offset by increases in refundable income taxes and prepaid and other expense and a decrease in deferred revenue.

Net cash provided by operating activities in the first three months of 2013 was $3.8 million, including net cash used in discontinued operations of $1.8 million. This was primarily the result of fluctuations in working capital accounts including a decrease in inventories and an increase in accounts payable, partially offset by an increase in accounts receivable.

Fluctuations in our working capital accounts result from timing differences between production, shipment and invoicing of our products, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we are generally obligated to pay for goods and services early in the project while cash is not received until much later in the project. Our revenues in the Water Transmission segment are recognized on a percentage-of-completion method; therefore, there is little correlation between revenue and cash receipts and the elapsed time can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary from period to period.

Net cash provided by investing activities in the first three months of 2014 was $26.7 million, primarily due to net proceeds of $31.6 million received from the sale of substantially all of the assets and liabilities associated with the OCTG business, partially offset by capital expenditures of $5.0 million. Capital expenditures during the first quarter of 2014 included $1.7 million for the replacement of the existing front end of our 16 inch mill at our Atchison plant. This project was substantially completed during March 2014. Net cash used for investing activities for discontinued operations in the first three months of 2014 was not material. Capital expenditures in 2014 are expected to be approximately $14 million to $20 million.

 

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Net cash used in investing activities in the first three months of 2013 was $8.1 million, primarily for capital expenditures of $9.8 million related to the installation of an additional horizontal accumulator and hydrotester, and the replacement of the existing front end of our 16 inch mill at our Atchison plant, as well as expansion at our Saginaw plant, which will enable production of pipe up to 126 inches in diameter as well as increase overall capacity. Expenditures for these strategic investments during the first quarter of 2013 included $1.6 million for the replacement of the existing front end of our 16 inch mill at our Atchison plant and $4.4 million for expansion projects at our Saginaw plant. This was partially offset by proceeds received from the sale of property and equipment of $1.7 million. Net cash used for investing activities for discontinued operations in the first three months of 2013 was $0.7 million.

Net cash used for financing activities in the first three months of 2014 was $67.3 million, which resulted primarily from net repayments under our line of credit and long-term debt totaling $65.5 million. Net cash used for financing activities for discontinued operations in the first three months of 2014 was $0.3 million.

Net cash provided by financing activities in the first three months of 2013 was $4.3 million, which resulted primarily from net borrowings under our line of credit of $8.7 million, partially offset by long-term debt payments of $2.8 million. Net cash used for financing activities for discontinued operations in the first three months of 2013 was $0.3 million.

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under our credit agreements will be adequate to fund our working capital and capital requirements for the forseeable future. We also expect to continue to rely on cash generated from operations or funds available from our line of credit to make required principal payments on our long-term debt during 2014. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, 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 or other sources of funding.

Line of Credit and Long-Term Debt

We had the following significant components of debt at March 31, 2014: a $165.0 million Credit Agreement, under which $25.2 million was outstanding; $1.5 million of a Series B Term Note, $1.5 million of a Series C Term Note and $0.6 million of a Series D Term Note.

The Credit Agreement bears interest at rates related to LIBOR plus 1.75% to 2.75%, or the lending institution’s prime rate, plus 0.75% to 1.75%. We were able to borrow at LIBOR plus 2.5% under the Credit Agreement at March 31, 2014. Borrowings under the Credit Agreement are collateralized by substantially all of our personal property. The Credit Agreement will expire on October 24, 2017. At March 31, 2014 we had $75.9 million available under the Credit Agreement while remaining in compliance with our financial covenants, net of outstanding letters of credit. The Credit Agreement bears interest at a weighted average rate of 2.32% at March 31, 2014. Borrowings under the Credit Agreement are collateralized by substantially all of our personal property.

The Series B Term Note in the principal amount of $1.5 million matures on June 21, 2014 and requires annual payments in the amount of $1.5 million plus interest of 10.22% paid quarterly on March 21 and June 21. The Series C Term Note in the principal amount of $1.5 million matures on October 26, 2014 and requires annual payments of $1.4 million plus interest of 9.11% paid quarterly on January 26, April 26, July 26 and October 26. The Series D Term Note in the principal amount of $0.6 million matures on January 24, 2015 and requires annual payments in the amount of $643,000 plus interest of 9.07% paid quarterly on January 24, April 24, July 24 and October 24. The Series B Term Note, the Series C Term Note, and the Series D Term Note (together, the “Term Notes”) are collateralized by accounts receivable, inventory and certain equipment.

We had a total of $2.3 million in capital lease obligations outstanding at March 31, 2014. The weighted average interest rate on all of our capital leases is 9.88%. Our capital leases are for certain equipment used in the manufacturing process.

The Credit Agreement and the Term Notes place various restrictions on our ability to, among other things, incur certain additional indebtedness, create liens or other encumbrances on assets, and incur additional capital expenditures. The Credit Agreement and the Term Notes require us to be in compliance with certain financial covenants. The results of our financial covenants as of March 31, 2014 are below.

 

    The Consolidated Total Leverage Ratio must not be greater than 3.5:1.0. Our ratio as of March 31, 2014 is 1.01:1.0.

 

    The Consolidated Tangible Net Worth must be greater than $210.3 million. Our Tangible Net Worth as of March 31, 2014 is $225.9 million.

 

    The Consolidated Fixed Charge Coverage Ratio must not be less than 1.25:1.0. Our ratio at March 31, 2014 is 1.31:1.0

As of March 31, 2014, we are in compliance with all financial covenants.

 

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Based on our business plan and forecasts of operations, we believe we will remain in compliance with our covenants for the next twelve months.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

For a discussion of the Company’s market risk associated with foreign currencies and interest rates, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in Part II of the Company’s 2013 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. As a result of the assessment, our CEO and CFO have concluded that, as of March 31, 2014, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

Information required by this Item 1 is contained in Note 6 to the condensed consolidated financial statements, Part I—Item 1, “Financial Statements” of this report, under the caption “Commitments and Contingencies.” The text under such caption is incorporated by reference into this Item 1.

Item 1A. Risk Factors

In addition to the other information set forth in this report, the factors discussed in Part I—Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 could materially affect our business, financial condition or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, that may also materially adversely affect our business, financial condition, or operating results.

 

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Item 6. Exhibits

(a) The exhibits filed as part of this Report are listed below:

 

Exhibit

Number

  

Description

    2.1    Asset Purchase Agreement by and between Northwest Pipe Company and Centric Pipe, LLC, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 1, 2014
  10.1    Northwest Pipe Company 2014 Short Term Incentive Plan, incorporated by reference to the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 17, 2014*
  10.2    Executive Employment Agreement between Northwest Pipe Company and Gary A. Stokes, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 4, 2014*
  31.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Document
101.DEF    XBRL Taxonomy Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* This exhibit constitutes a management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 9, 2014

 

NORTHWEST PIPE COMPANY
By:  

/s/ SCOTT MONTROSS

  Scott Montross
  Director, President and Chief Executive Officer
By:  

/s/ ROBIN GANTT

  Robin Gantt
  Senior Vice President, Chief Financial Officer and Assistant Secretary
  (Principal Financial Officer)

 

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