NORTHWEST PIPE CO - Quarter Report: 2015 September (Form 10-Q)

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		September 30, 2015				December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	635			$	527
Trade and other receivables, less allowance for doubtful accounts of $555 and $755			35,422				58,310
Costs and estimated earnings in excess of billings on uncompleted contracts			38,700				45,847
Inventories			49,161				72,779
Refundable income taxes			8,208				5,031
Deferred income taxes			4,900				5,487
Prepaid expenses and other			1,642				7,258
Total current assets			138,668				195,239
Property and equipment, less accumulated depreciation and amortization of $84,460 and $84,224			132,640				132,595
Goodwill			-				5,282
Other assets			12,111				18,766
Total assets		$	283,419			$	351,882
Liabilities and Stockholders’ Equity
Current liabilities:
Borrowings on line of credit		$	6,552			$	-
Current portion of capital lease obligations			171				2,170
Accounts payable			10,463				15,480
Accrued liabilities			9,213				9,071
Billings in excess of costs and estimated earnings on uncompleted contracts			695				2,835
Total current liabilities			27,094				29,556
Borrowings on line of credit			-				45,587
Capital lease obligations, less current portion			112				225
Deferred income taxes			11,012				14,015
Pension and other long-term liabilities			14,379				16,864
Total liabilities			52,597				106,247
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, 9,564,752 and 9,520,067 shares issued and outstanding			96				95
Additional paid-in-capital			117,372				116,802
Retained earnings			114,876				130,571
Accumulated other comprehensive loss			(1,522	)			(1,833	)
Total stockholders’ equity			230,822				245,635
Total liabilities and stockholders’ equity		$	283,419			$	351,882

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net sales		$	52,335			$	116,505			$	191,046			$	301,140
Cost of sales			54,846				100,685				192,259				269,689
Gross profit (loss)			(2,511	)			15,820				(1,213	)			31,451
Selling, general and administrative expense			4,773				6,489				17,199				17,847
Impairment of Water Transmission goodwill			-				-				5,282				-
Operating income (loss)			(7,284	)			9,331				(23,694	)			13,604
Other income			24				39				82				2
Interest income			10				220				173				383
Interest expense			(195	)			(457	)			(898	)			(1,796	)
Income (loss) before income taxes			(7,445	)			9,133				(24,337	)			12,193
Income tax expense (benefit)			(5,930	)			3,275				(8,642	)			4,364
Income (loss) from continuing operations			(1,515	)			5,858				(15,695	)			7,829
Discontinued operations:
Income (loss) from operations of discontinued business			-				46				-				(2,601	)
Loss on sale of business			-				(1,414	)			-				(13,497	)
Income tax benefit			-				(531	)			-				(4,378	)
Loss on discontinued operations			-				(837	)			-				(11,720	)
Net income (loss)		$	(1,515	)		$	5,021			$	(15,695	)		$	(3,891	)
Basic income (loss) per share
Continuing operations		$	(0.16	)		$	0.62			$	(1.64	)		$	0.82
Discontinued operations			-				(0.09	)			-				(1.23	)
Total		$	(0.16	)		$	0.53			$	(1.64	)		$	(0.41	)
Diluted income (loss) per share
Continuing operations		$	(0.16	)		$	0.61			$	(1.64	)		$	0.82
Discontinued operations			-				(0.09	)			-				(1.23	)
Total		$	(0.16	)		$	0.52			$	(1.64	)		$	(0.41	)
Shares used in per share calculations:
Basic			9,565				9,519				9,558				9,513
Diluted			9,565				9,616				9,558				9,595

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Net income (loss)		$	(1,515	)		$	5,021			$	(15,695	)		$	(3,891	)
Other comprehensive income (loss):
Pension liability adjustment, net of tax			109				63				327				191
Deferred gain (loss) on cash flow derivatives, net of tax			15				45				(16	)			-
Other comprehensive income			124				108				311				191
Comprehensive income (loss)		$	(1,391	)		$	5,129			$	(15,384	)		$	(3,700	)

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		Nine Months Ended September 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(15,695	)		$	(3,891	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation			6,664				10,098
Impairment of goodwill			5,282				-
Amortization of intangible assets			410				409
Provision for doubtful accounts			(200	)			(294	)
Amortization of debt issuance costs			203				305
Deferred income taxes			(2,415	)			1,144
Loss on sale of business			-				13,497
Stock based compensation expense			1,340				2,067
Unrealized gain on foreign currency forward contracts			(173	)			(23	)
Adjustments to contingent consideration			276				(1,736	)
Other, net			31				25
Changes in operating assets and liabilities:
Trade and other receivables, net			19,121				19,113
Insurance settlements			2,625				-
Costs and estimated earnings in excess of billings on uncompleted contracts, net			5,007				(7,362	)
Inventories			23,946				1,435
Refundable income taxes			(3,523	)			(2,815	)
Prepaid expenses and other assets			1,321				1,524
Accounts payable			(4,129	)			2,246
Accrued and other liabilities			(2,287	)			(4,576	)
Net cash provided by operating activities			37,804				31,166
Cash flows from investing activities:
Additions to property and equipment			(7,704	)			(11,619	)
Proceeds from sale of business			4,300				29,791
Proceeds from sale of property & equipment			55				8
Collections on notes receivable			7,219				47
Other investing activities			-				(25	)
Net cash provided by investing activities			3,870				18,202
Cash flows from financing activities:
Tax withholdings related to net share settlements of restricted stock and performance stock awards			(423	)			(1,283	)
Payments on long-term debt			-				(6,357	)
Borrowings on line of credit			77,750				184,081
Repayments on line of credit			(116,785	)			(225,351	)
Payments on capital lease obligations			(2,127	)			(1,002	)
Other financing activities			19				28
Net cash used in financing activities			(41,566	)			(49,884	)
Change in cash and cash equivalents			108				(516	)
Cash and cash equivalents, beginning of period			527				588
Cash and cash equivalents, end of period		$	635			$	72
Non-Cash Investing Activity:
Accrued property and equipment purchases		$	356			$	222

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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, 2014 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, 2014 (the “2014 Form 10-K”). Certain information and 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 2014 Form 10-K.

 

On March 30, 2014 the Company completed the sale of substantially all of the assets and liabilities associated with its oil country tubular goods (“OCTG”) business. See Note 2, “Disposition of OCTG Business” 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.

 

Certain amounts from the prior year financial statements have been reclassified in order to conform to the current year presentation.

 

Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2015.

 

2.	Disposition of OCTG Business

 

On March 30, 2014 the Company completed the sale of substantially all of the assets and liabilities associated with its OCTG business, which was 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 $13.5 million ($12.1 million of which was recorded in the first quarter of 2014 and $1.4 million of which was recorded in the third quarter of 2014). The calculation of the loss on sale included a write down 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, $1.8 million was used to pay for transaction costs and $1.8 million was used to pay a net working capital adjustment made in September 2014, resulting in net proceeds of $29.8 million. In April 2015, the $4.3 million escrow was released to the Company.

 

 

 

The table below presents the operating results for the Company’s discontinued operations (in thousands). The operating results for the three and nine months ended September 30, 2014 do not necessarily reflect what they would have been had the OCTG business not been classified as a discontinued operation.

     

 

3.	Inventories

 

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

   

 

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 that 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):

  

   

 

The deferred compensation 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 Net Asset Value (“NAV”) of the underlying investments classified as Level 2 within the fair value hierarchy.

 

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 contingent consideration liability is associated with the acquisition of Permalok® Corporation in December 2013 and represents the probability weighted average contingent payment as a percentage of high, mid, and low revenue projections. 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. Changes in the fair value of the contingent consideration obligation will be reflected in cost of sales during the period the change occurs.

 

If required as part of its annual goodwill impairment assessment, the Company calculates the business enterprise value of applicable reporting units. This calculation uses a weighted average of income and market approaches, and is classified as Level 3 in the valuation hierarchy. The income approach is primarily driven by inputs from the Company’s internal financial forecasts. The market approach incorporates inputs from market participant data, as well as inputs derived from Company assumptions. In the second quarter of 2015, this analysis resulted in the impairment of Water Transmission goodwill of $5.3 million.

 

The net carrying amounts of cash and cash equivalents, trade and other receivables, accounts payable, accrued liabilities and borrowings on line of credit approximate fair value due to the short-term nature of these instruments.

 

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 income. As of September 30, 2015 and December 31, 2014, all derivative contracts held by the Company were designated as hedges. As of September 30, 2015 and December 31, 2014, the total notional amount of the derivative contracts designated as hedges was $3.4 million (CAD$4.6 million) and $1.3 million (CAD$1.5 million), respectively. Derivative assets are included within prepaid expenses and other current assets 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 the assets and liabilities associated with its foreign currency forward contracts at their gross fair values within the condensed consolidated balance sheets.

 

 

 

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 September 30, 2015.

 

For both the three and nine months ended September 30, 2015, gains from derivative contracts not designated as hedging instruments recognized in net sales totaled $0.2 million. For the three and nine months ended September 30, 2014, gains from derivative contracts not designated as hedging instruments recognized in net sales were $0.2 million and $0.1 million, respectively. At September 30, 2015 and September 30, 2014, there was $18,000 of unrealized pretax gain on outstanding derivatives in accumulated other comprehensive loss. Substantially all of the amount in accumulated other comprehensive loss at September 30, 2015 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 Loss” for additional quantitative information regarding derivative gains and losses.

 

6.	Commitments and Contingencies

 

Portland Harbor Superfund

 

On December 1, 2000, a section of the lower Willamette River known as the Portland Harbor Site 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 (“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, 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 Site 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 $0.2 million 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 2015 draft FS identifies six possible remedial alternatives which range in estimated cost from approximately $790 million to $2.5 billion and estimates it will take up to 18 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 approval of 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 ODEQ. The Company is one of many Upland Source Control Sites working with ODEQ on Source Control and is considered a “medium” priority site by 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, a revised draft RI/SCE Report in January 2014, and a further revised RI/SCE Report in March 2015. 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 full paving of 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. In May 2015, and subsequently in August and October 2015, the Company received the EPA’s and ODEQ’s comments, respectively, requesting additional information and modifications to the revised RI/SCE Report. The Company is working with consultants to address the comments and questions from the EPA and ODEQ.     

 

 

 

During the limited soil excavation, additional stained soil was discovered. At the request of 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 ODEQ in the third quarter of 2012. Comments from ODEQ were received in November 2012. In February 2013, ODEQ clarified its comments from November 2012, and the Company 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 the January 2014 and March 2015 RI/SCE Reports.

 

The Company spent $0.1 million for further Source Control work in 2014, and anticipates having to spend less than $0.2 million in 2015.

 

Concurrent with the activities of the EPA and 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 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. In June 2014, the Company agreed to participate in the injury assessment process, which included funding $0.4 million of the assessment; of this amount, $0.2 million was paid in July 2014 and the remainder was paid in January 2015. The Company has not assumed any additional payment obligations or liabilities with the participation with the NRDA.

 

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 Site matters, and no further adjustment to the consolidated financial statements has been recorded as of the date of this filing. The Company has insurance policies for defense costs, as well as 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.

 

In December 2014, a federal district court approved settlements between the Company and two of its insurance carriers. The Company released its interests in the related insurance policies, and received $2.6 million in January 2015 for reimbursement of past indemnification and defense costs incurred by the Company associated with the Portland Harbor Site, substantially all of which reduced cost of sales in 2014. Notwithstanding these settlements, the Company continues to have insurance coverage for indemnification and defense costs related to the Portland Harbor Site as described above.

 

Houston Environmental Issue

 

In connection with the Company’s sale of its OCTG business, 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. In June 2014, the Company was accepted into the Texas Commission on Environmental Quality (“TCEQ”) Voluntary Cleanup Program (“VCP”) 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, “Disposition of OCTG Business” if the purchaser of the OCTG business exercises its option to purchase the property under certain circumstances after the Certificate of Completion is obtained.

 

While the final remediation approach has not yet been determined, the Company has completed an initial assessment and currently estimates the future costs associated with the VCP to be between $0.2 million and $2.4 million. At September 30, 2015, the Company has a $0.3 million accrual for remediation costs based on the low-end estimate of future costs using a probability-weighted analysis of remediation approaches and estimates closure of the issue to occur between the first quarter of 2017 and the third quarter of 2018.

 

The proposed remediation approach includes a municipal ordinance to prevent consumption of shallow groundwater from beneath the property, thereby eliminating the need for more costly remediation measures. Site assessment and monitoring activities are currently underway to satisfy the requirements of the City of Houston and TCEQ for implementation of the municipal ordinance.

 

 

 

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. To the extent that insurance does not cover legal, defense, and indemnification costs associated with a loss contingency, such costs will be expensed as incurred. 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 $2.1 million at September 30, 2015. The stand-by letters of credit relate to workers’ compensation insurance.

 

7.	Segment Information

 

The Company’s business is the manufacturing of welded steel pipe. Within this business, the Company’s operations are organized into two reportable segments: the Water Transmission Group and the Tubular Products Group. These reportable segments are based on the nature of the products and the manufacturing process. The 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.

 

The Water Transmission Group manufactures large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, which are 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. 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.

    

 

(1)     Operating loss for the Water Transmission Group for the nine months ended September 30, 2015 includes the write-off of Water Transmission goodwill of $5.3 million in the second quarter of 2015.

 

 

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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 table summarizes share-based compensation expense recorded (in thousands):

    

  

As of September 30, 2015, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $1.7 million, which is expected to be recognized over a weighted average period of 1.1 years.

 

 Stock Option Awards

 

A summary of the status of the Company’s stock options as of September 30, 2015 and changes during the nine months then ended is presented below:

   

 

 

 

Restricted Stock Units and Performance Stock Awards

 

A summary of the status of the Company’s RSUs and PSAs as of September 30, 2015 and changes during the nine months then ended is presented below:

  

    

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 that vest over a three-year period and have a market-based payout 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. The unvested balance of RSUs and PSAs at September 30, 2015 includes approximately 113,000 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%.

 

Stock Awards

 

For the nine months ended September 30, 2015 and 2014, stock awards of 10,464 and 9,150 shares, respectively, were granted to non-employee directors, which vested immediately upon issuance. The Company recorded compensation expense based on the fair market value per share of the awards on the grant date of $21.02 and $36.07 in 2015 and 2014, respectively. 

 

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. With few exceptions, the Company is no longer subject to U.S. Federal, state or foreign income tax examinations for years before 2011. The Company is currently under Colorado income tax audit for the years 2009 to 2013. It is reasonably possible that the Company will close the audit within the next 12-month period. Such resolution is not anticipated to have a significant impact on our results of operations. There are no other income tax audits in progress.

 

The Company had $4.7 million and $2.3 million of unrecognized tax benefits at September 30, 2015 and December 31, 2014, 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 the expiration of certain statues of limitations; however, actual results could differ from those currently expected. Effectively all the unrecognized tax benefits 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 an estimated effective tax rate of 79.7% and 35.5% for the three and nine months ended September 30, 2015, and an estimated effective tax rate of 35.9% and 35.8% for the three and nine months ended September 30, 2014, respectively. 

 

The Company completed a research and development (R&D) tax credit study for 2014 in the third quarter of 2015, resulting in a significantly higher credit than previously estimated; therefore, a discrete benefit of $2.5 million was recorded, which affected the Company’s effective tax benefit rate in the third quarter of 2015. In the first nine months ended September 30, 2015, after considering the guidance for accounting for income taxes, and weighing the positive and negative evidence including the Company’s recent history of cumulative losses, the Company recorded a $1.9 million valuation allowance on a portion of its deferred tax assets, primarily related to state net operating loss carry forwards and state credits.

 

The effective tax rate for the nine months ended September 30, 2015 includes the impact of the recognition of R&D tax credits (which increased the effective benefit rate) as well as the non-deductibility of expense related to the impairment of goodwill and the valuation allowance recorded (both of which decreased the effective benefit rate).

 

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10.	Income (loss) per Share

 

Income (loss) per basic and diluted weighted average common share outstanding for continuing and discontinued operations were calculated as follows for the three and nine months ended September 30, 2015 and 2014 (in thousands, except per share data):

      

 

(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.

 

Due to the Company’s loss from continuing operations in the three and nine month periods ended September 30, 2015, the assumed exercise of stock options and the vesting of restricted stock units and performance stock awards using the treasury stock method would have had an antidilutive effect and were therefore excluded from the computation of diluted loss per share. The weighted average number of such antidilutive shares not included in the computation of diluted loss per share was 163,000 and 185,000 for the three and nine month periods ended September 30, 2015, respectively.

 

In both the three and nine month periods ended September 30, 2014, there were 65,000 shares from the assumed exercise of stock options and the vesting of restricted stock units and performance stock awards using the treasury stock method that were excluded from the calculation of diluted earnings per share because to include these shares would have had an antidilutive effect.

 

11.	Accumulated Other Comprehensive Loss

 

The following tables summarize changes in the components of accumulated other comprehensive loss during the nine months ended September 30, 2015 and September 30, 2014 (in thousands). All amounts are net of tax:

   

 

 

   

 

The following table provides additional detail about accumulated other comprehensive income (loss) components that were reclassified to the condensed consolidated statement of operations during the nine months ended September 30, 2015 and 2014 (in thousands):

      

   

12.	Recent Accounting and Reporting Developments

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which will replace most existing revenue recognition guidance in accordance with U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning January 1, 2018, including interim periods in 2018, and allows for both retrospective and prospective methods of adoption. The effective dates listed above reflect the FASB’s final decision made in July 2015 to delay implementation of the ASU by one year. The Company is still evaluating the effect this standard will have on the Company’s financial position, results of operations or cash flows from adoption of this guidance.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern.” This Update requires management to evaluate for each annual and interim reporting period whether it is probable that the reporting entity will not be able to meet its obligations as they become due within one year after the date that the financial statements are issued. If the entity is in such a position, the standard provides for certain disclosures depending on whether or not the entity will be able to successfully mitigate its going concern status. This guidance is effective for annual periods ending after December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. Early application is permitted. The Company does not expect a material impact to the Company’s financial position, results of operations or cash flows from the adoption of this guidance.

 

 

 

In February 2015, the FASB issued ASU No. 2015-02, “Amendments to the Consolidation Analysis.” The changes in this Update revise consolidation analysis and affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The changes become effective for the Company on January 1, 2016. The Company has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This update simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the update. The ASU will be effective for the Company beginning January 1, 2016 including interim periods in 2016. When implemented by the Company, the balance of debt issuance costs related to term debt will be netted against the Company’s term debt included in long-term liabilities. Debt issuance costs related to the Company’s revolving line of credit will continue to be classified as a deferred charge and amortized over the term of the revolving line of credit arrangement. The Company currently does not have any term debt. Implementation will be on a retrospective basis, wherein the balance sheet of each individual period presented will be adjusted to reflect the period-specific effects of applying the new guidance. The Company does not expect a material impact to the Company’s financial position, results of operations or cash flows from adoption of this guidance.

 

In April 2015, the FASB issued ASU 2015-04, “Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.” For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. It also provides a similar practical expedient for significant events that happens in an interim period that would otherwise require a re-measurement. The amendments in this update permits using the month-end that is closest to the date of the significant event. The ASU will be effective for the Company beginning January 1, 2016. The Company does not expect a material impact to the Company’s financial position, results of operations or cash flows from adoption of this guidance.

 

In May 2015, the FASB issued ASU 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” The amendments in this Update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU will be effective for the Company beginning January 1, 2016. The Company does not expect a material impact to the Company’s financial position, results of operations or cash flows from adoption of this guidance.

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory.” As a result of this Update, companies will be required to measure inventory at the lower of cost and net realizable value. This is a change from the prior requirement to value inventory at the lower of cost or market. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory valued using the LIFO or retail inventory method is exempt from this Update. The ASU will be effective for the Company beginning January 1, 2017. The Company is in the process of evaluating the Update to determine its expected future effect on the Company’s financial position, results of operations or cash flows from adoption of this guidance.

 

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments.” This update eliminates the requirement to restate prior period financial statements for measurement period adjustments in a business combination. The new guidance requires that the cumulative impact of a measurement adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The ASU will be effective for the Company beginning January 1, 2016. The Company does not expect a material impact to the Company’s financial position, results of operations or cash flows from adoption of this guidance.

 

13.	Restructuring

 

In April 2015, the Company initiated a production curtailment at its Atchison, Kansas facility within the Tubular Products Group. Severance related restructuring costs associated with the production curtailment were approximately $0.5 million. The entire amount was incurred and paid during the second quarter of 2015, and is included in Cost of sales for that period.

 

14.

Goodwill

 

At December 31, 2014, the Company’s Goodwill of $5.3 million related entirely to its Water Transmission Group reporting unit. GAAP requires that goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

 

 

 

Due to Water Transmission market conditions, the Company determined that its Water Transmission Group goodwill may have been impaired at June 30, 2015, and completed the first step of the two-step quantitative goodwill impairment test. In the first step, business enterprise value of the reporting unit was calculated by using a combination of income and market approaches, and compared to the carrying value. As the carrying value of the Water Transmission Group reporting unit exceeded the calculated enterprise value, the Company determined it was appropriate to proceed to the second step of the quantitative impairment test.

 

As a result of the analysis performed at that date, the Company’s best estimate of the ultimate result of the second step of the goodwill quantitative impairment test was that all of the Water Transmission Group goodwill was impaired. Therefore, the Water Transmission Group goodwill was completely written off as of June 30, 2015. There was no adjustment to that estimate upon completion of the measurement of the impairment loss in the three month period ending September 30, 2015.

 

15.	Related Party Transaction

 

In the second quarter of 2015, the Company engaged Raymond James & Associates, an affiliate of Eagle Asset Management, to provide investment banking services related to a possible disposition of the Company’s Tubular Products business. Eagle Asset Management was a substantial stockholder of the Company (owning more than 10 percent of the Company’s common stock) until September 30, 2015, when Eagle Asset Management reported that it then owned less than 5 percent of the Company’s common stock.

 

Approximately $17,000 of reimbursable expenses was incurred by Raymond James during the nine month period ended September 30, 2015, of which $12,000 was paid by September 30, 2015. Professional fees payable to Raymond James will be contingent upon completion of a future transaction, which may or may not occur.

  

16.	Subsequent Event

 

On October 26, 2015, the Company entered into a Loan and Security Agreement (the “Agreement”) with Bank of America, N.A. The Agreement provides for revolving loans and letters of credit in the aggregate amount of up to $60 million, subject to a borrowing base. The borrowing base is calculated by applying various advance rates to eligible accounts receivable, costs and expected earnings in excess of billings, inventories, and fixed assets, subject to various exclusions, adjustments, and sublimits. 

 

Borrowings under the Agreement will bear interest at rates related to LIBOR plus 1.75% to 2.25%, or at Bank of America’s prime rate plus 0.75% to 1.25%. The Agreement will expire on October 25, 2018. Borrowings under the Agreement are secured by substantially all of the Company’s assets.

 

As of October 26, 2015, the Company had no outstanding borrowings under the Agreement, but did have two outstanding letters of credit issued under the Agreement, in the aggregate amount of $2.1 million. A copy of the 2015 Credit Agreement was filed as an exhibit to the Form 8-K the Company filed on October 29, 2015.

 

In conjunction with entering into the Loan and Security Agreement, the Company terminated the Second Amended and Restated Credit Agreement dated as of October 24, 2012. The Company expects to incur incremental interest expense of approximately $0.4 million during the fourth quarter of 2015 related to the write-off of unamortized financing costs associated with the terminated agreement.

 

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