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NWPX > SEC Filings for NWPX > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for NORTHWEST PIPE CO

Form 10-Q for NORTHWEST PIPE CO


5-Nov-2013

Quarterly Report


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 2012 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 six manufacturing facilities located in Portland, Oregon; Denver, Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas; and Monterrey, Mexico. Our Water Transmission Group accounted for approximately 50.9% of net sales in the first nine months of 2013.

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, although increased infrastructure needs and drought-related projects in Texas will help offset the effects of strained municipal budgets in other parts of the United States.

Our Tubular Products Group manufactures other welded steel products in three facilities: Atchison, Kansas; Houston, Texas; and Bossier City, Louisiana. 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 49.1% of net sales in the first nine months of 2013.

We believe the greatest long-term potential for significant sales growth in our Tubular Products Group is through our energy products. We are currently exploring strategic alternatives for the Oil Country Tubular Goods ("OCTG") portion of our energy business, which could include potential acquisitions, divestitures and joint-ventures. Significant foreign imports of energy products have continued to place downward pressure on our energy sales. A trade case was filed in July 2013 for an investigation of imports of OCTG, particularly casing and tubing, from nine countries and possible imposition of anti-dumping duties. A preliminary determination of harm was found in August 2013, with a final determination expected in the second quarter of 2014. However, in the near term, we do not expect a significant improvement in either selling prices or volumes in the fourth quarter of 2013. Ad valorem taxes due for inventory on hand at December 31, 2013 in Texas, our biggest market, may delay improvement in selling volumes to the first quarter of 2014. Drilling activity, as represented by rig counts, has declined since the end of 2012 but has remained steady during the first nine months of 2013 and is expected to remain steady during the remainder of 2013.


Table of Contents

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 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 consolidated financial statements is set forth in our 2012 Form 10-K.

Recent Accounting Pronouncements

See Note 2 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.



                                               Three months ended                   Three months ended
                                               September 30, 2013                   September 30, 2012
                                                               % of                                 % of
                                              $              Net Sales             $              Net Sales
Net sales
Water Transmission                        $   46,835               45.5 %      $   63,487               55.2 %
Tubular Products                              56,187               54.5            51,612               44.8

Total net sales                              103,022              100.0           115,099              100.0
Cost of sales                                 94,210               91.4           103,499               89.9

Gross profit                                   8,812                8.6            11,600               10.1
Selling, general and administrative
expense                                        5,972                5.8             7,571                6.6

Operating income                               2,840                2.8             4,029                3.5
Other expense                                    242                0.2                49                0.0
Interest income                                 (141 )             (0.1 )             (35 )             (0.0 )
Interest expense                                 977                0.9             1,305                1.1

Income before income taxes                     1,762                1.8             2,710                2.4
Provision for income taxes                       746                0.7              (686 )             (0.6 )

Net income                                $    1,016                1.1 %      $    3,396                3.0 %


Gross profit as a percentage of
segment net sales:
Water Transmission                                                 16.9 %                               15.2 %
Tubular Products                                                    1.6                                  3.7


Table of Contents
                                                Nine months ended                  Nine months ended
                                                September 30, 2013                 September 30, 2012
                                                               % of                               % of
                                               $             Net Sales            $             Net Sales
Net sales
Water Transmission                         $  183,596              50.9 %     $  180,968              46.6 %
Tubular Products                              176,761              49.1          207,347              53.4

Total net sales                               360,357             100.0          388,315             100.0
Cost of sales                                 314,673              87.3          346,638              89.3

Gross profit                                   45,684              12.7           41,677              10.7
Selling, general and administrative
expense                                        18,644               5.2           21,499               5.5

Operating income                               27,040               7.5           20,178               5.2
Other expense                                     279               0.1               51               0.0
Interest income                                  (384 )            (0.1 )           (122 )            (0.0 )
Interest expense                                2,982               0.8            4,471               1.2

Income before income taxes                     24,163               6.7           15,778               4.0
Provision for income taxes                      8,080               2.2            4,044               1.0

Net income                                 $   16,083               4.5 %     $   11,734               3.0 %


Gross profit as a percentage of segment
net sales:
Water Transmission                                                 21.7 %                             15.2 %
Tubular Products                                                    3.3                                6.8

Three Months and Nine Months Ended September 30, 2013 Compared to Three Months and Nine Months Ended September 30, 2012

Net sales. Net sales decreased 10.5% to $103.0 million for the third quarter of 2013 compared to $115.1 million for the third quarter of 2012 and decreased 7.2% to $360.4 million for the first nine months of 2013 compared to $388.3 million in the same period of 2012. No single customer accounted for more than 10% of total net sales in the third quarter of 2013. One customer in the Water Transmission segment accounted for 14.0% of total net sales in the first nine months of 2013. One customer in the Water Transmission segment accounted for 16.3% of total net sales in the third quarter of 2012. No single customer accounted for more than 10% of total net sales in the first nine months of 2012.

Water Transmission sales decreased by 26.2% to $46.8 million in the third quarter of 2013 from $63.5 million in the third quarter of 2012 and increased 1.5% to $183.6 million in the first nine months of 2013 from $181.0 million in the first nine months of 2012. The decrease in sales in the third quarter of 2013 compared to the third quarter of 2012 was due to a 60% decrease in tons produced, partially offset by downstream fabrication services on pipe produced in prior periods. The decrease in tons produced was impacted by continued weakness in municipal markets. In addition, we started the largest project in our history in the third quarter of 2012, and did not have a similar-sized project in the third quarter of 2013. This was partially offset by positive impacts due to the timing of production and mix of projects produced during the quarter, as well as a 54% increase in materials costs per ton including steel. The increase in sales in the first nine months of 2013 compared to the first nine months of 2012 was due to a 27% increase in average selling price per ton, partially offset by a 20% decrease in tons produced due to continued weakness in municipal markets. The increase in average selling prices per ton in the first nine months of 2013 was due to product mix as well as a 16% 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 increased 8.9% to $56.2 million in the third quarter of 2013 from $51.6 million in the third quarter of 2012 and decreased 14.8% to $176.8 million in the first nine months of 2013 from $207.3 million in the first nine months of 2012. The sales increase in the third quarter of 2013 as compared to the third quarter of 2012 was due to a 20% increase in tons sold, offset by a 9% decrease in the average selling price per ton. We sold 51,400 tons in the third quarter of 2013 as compared to 42,900 tons in the third quarter of 2012. Energy pipe sales represent 76% of our tons sold, and increased 33% from 29,500 tons in the third quarter of 2012 to 39,200 tons in the third quarter of 2013 primarily due to increased sales of line pipe partially offset by decreased sales of OCTG products. The decrease in average selling price for the third quarter of 2013 as compared to the third quarter of 2012 was due to continued downward pricing pressure from imported pipe. The sales decrease in the first nine months of 2013 compared to the same period in 2012 was due to a 5% decrease in tons sold from 166,800 tons to 158,100 tons and a 10% decrease in the average selling price per ton. The decrease in average selling price for the first nine months of 2013 as compared to the first nine months of 2012 was due to a 9% decrease in steel cost per ton along with the downward pricing pressure from imported pipe. Increased imports of energy pipe, decreases in rig counts from 2012, low natural gas prices, and volatility of steel prices have negatively impacted sales volumes and selling prices, particularly in energy pipe. The selling price for energy pipe decreased 12% in the first nine months of 2013 from the first nine months of 2012.


Table of Contents

Gross profit. Gross profit decreased 24.0% to $8.8 million (8.6% of total net sales) in the third quarter of 2013 from $11.6 million (10.1% of total net sales) in the third quarter of 2012 and increased 9.6% to $45.7 million (12.7% of total net sales) in the first nine months of 2013 from $41.7 million (10.7% of total net sales) in the first nine months of 2012.

Water Transmission gross profit decreased $1.7 million, or 18.1%, to $7.9 million (16.9% of segment net sales) in the third quarter of 2013 from $9.7 million (15.2% of segment net sales) in the third quarter of 2012. Water Transmission gross profit increased $12.4 million, or 45.0%, to $39.9 million (21.7% of segment net sales) in the first nine months of 2013 compared to the same period in the prior year when gross profit was $27.5 million (15.2% of segment net sales). The decrease in gross profit for the third quarter of 2013 was primarily driven by the decrease in tons produced, which was partially offset by the downstream fabrication services discussed above. The increase in gross profit in the first nine months of 2013 was primarily due to the increase in selling price per ton, offset by the decrease in tons produced as discussed above. The increase in gross profit as a percentage of net sales in the third quarter of 2013 and the first nine months of 2013 was driven by a favorable project mix, including the production of the Lake Texoma project, the largest project in our history. This project was produced from the third quarter of 2012 through the second quarter of 2013. The increase in gross profit as a percentage of net sales in the third quarter of 2013 and the first nine months of 2013 was also the result of cost reduction initiatives which have reduced overhead costs and man hours per ton, as well as improvements in quality.

Gross profit from Tubular Products decreased $1.0 million, or 54.1%, to $0.9 million (1.6% of segment net sales) in the third quarter of 2013 from $1.9 million (3.7% of segment net sales) in the third quarter of 2012 and decreased $8.4 million, or 59.3%, to $5.8 million (3.3% of segment net sales) in the first nine months of 2013 from $14.1 million (6.8% of segment net sales) in the first nine months of 2012. As noted above, sales of our Tubular Products increased during the third quarter of 2013, particularly in our energy products, which had sales revenue of $39.3 million in the third quarter of 2012 and increased 18% to $46.2 million in the third quarter of 2013. This was partially offset by negative impacts of increased materials cost per ton discussed above and a lower of cost or market inventory adjustment of $0.8 million. The decrease in gross profit in the first nine months of 2013 compared to the first nine months of 2012 was the result of overall decreases in our energy pipe sales, which decreased 13% from $164.1 million in the first nine months of 2012 to $142.7 million in the first nine months of 2013. The lower sales volume in our energy products had a significant negative impact on the fixed portion of our cost of goods sold as a percent of net sales. In addition, we recorded a $2.0 million lower of cost or market inventory adjustment during the first nine months of 2013. This was partially offset by lower material costs per ton, which decreased 4% in the first nine months of 2013 compared to the first nine months of 2012. The decrease in gross profit was also partially offset by a $1.2 million refundable state tax credit recognized during the first nine months of 2013.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 21.1% to $6.0 million (5.8% of total net sales) in the third quarter of 2013 from $7.6 million (6.6% of total net sales) in the third quarter of 2012 and decreased 13.3% to $18.6 million (5.2% of total net sales) in the first nine months of 2013 from $21.5 million (5.5% of total net sales) in the first nine months of 2012. The decrease in the third quarter of 2013 as compared to the third quarter of 2012 was due to a $0.9 million decrease in outside services and other administrative expenses, a $0.2 million decrease in bonus expense, a $0.2 million decrease in wages, and a $0.1 million decrease in stock based compensation expense. The decrease in the first nine months of 2013 as compared to the first nine months of 2012 was due to a decrease of $2.2 million in professional fees and outside services primarily due to a reduction in audit related fees, a $0.2 million decrease in wages, and a $0.2 million decrease in stock based compensation expense.

Interest expense. Interest expense was $1.0 million in the third quarter of 2013 and $1.3 million in the third quarter of 2012 and $3.0 million in the first nine months of 2013 and $4.5 million in the first nine months of 2012. Lower average borrowings and lower average interest rates resulted in decreased interest expense in the third quarter of 2013 compared to the third quarter of 2012. Lower average interest rates and a decrease in amortization expense of deferred financing costs following the refinancing of our Credit Agreement during the fourth quarter of 2012 resulted in decreased interest expense in the first nine months of 2013 compared to 2012. This was partially offset by higher borrowings in the first nine months of 2013 compared to 2012.

Income Taxes. The tax provision was $0.7 million in the third quarter of 2013 (an effective tax rate of 42.3%) compared to a tax benefit of $0.7 million in the third quarter of 2012 (an effective tax benefit rate of 25.3%) and $8.1 million in the first nine months of 2013 (an effective tax rate of 33.4%) compared to $4.0 million (an effective tax rate of 26.5%) in the first nine months of 2012. Our effective tax rate in the third quarter of 2013 was greater than our federal statutory rate of 35% primarily due to an increase in the valuation allowance related to an investment in which we are anticipating a future capital loss. Our effective tax rate was less than our federal statutory rate for the first nine months of 2013 primarily due to the favorable impact of the research and development tax credit. During the third quarter of 2012, we performed a research and development tax credit study for fiscal years 2010 and 2011. We recorded a net tax benefit of $1.8 million resulting from this study in the third quarter of 2012. Combined with our operating results for the quarter, our effective rates for the three and nine months ended September 30, 2012 were therefore less than our federal statutory rate of 35%.


Table of Contents

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. Information regarding our cash flows for the nine months ended September 30, 2013 is presented in our Condensed Consolidated Statements of Cash Flows contained in this Form 10-Q, and is further discussed below.

As of September 30, 2013, our working capital (current assets minus current liabilities) was $178.0 million as compared to $167.4 million as of December 31, 2012. The primary reason for the increase in working capital was an increase in accounts receivable and a decrease in accrued liabilities, partially offset by a decrease in costs and estimated earnings in excess of billings.

Net cash provided by operating activities in the first nine months of 2013 was $21.4 million. This was primarily the result of net income, depreciation, and the net increase in working capital as discussed above.

Net cash provided by operating activities in the first nine months of 2012 was $22.2 million. This was primarily the result of net income, depreciation, and fluctuations in working capital including increases in accrued liabilities, partially offset by an increase in costs and estimated earnings in excess of billings on uncompleted contracts.

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 used in investing activities in the first nine months of 2013 was $26.3 million, primarily related to capital expenditures for previously disclosed strategic investment projects and funds disbursed under a notes receivable arrangement of $5.7 million. Capital expenditures in 2013 are expected to be approximately $26 million to $30 million for standard capital replacement and recently announced strategic investment projects. These projects include the installation of an additional horizontal accumulator and hydrotester, and the replacement of the existing front end of the 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 nine months of 2013 included $4.0 million for the replacement of the existing front end of the 16 inch mill and $1.4 million for a new hydrotester at our Atchison plant, and $8.6 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 in investing activities in the first nine months of 2012 was $11.2 million, primarily for capital expenditures for storm water upgrades at our Portland, Oregon facility and planned capacity expansion in our Tubular Products plants.

Net cash provided by financing activities in the first nine months of 2013 was $4.9 million, which resulted primarily from borrowings under our Credit Agreement totaling $139.0 million, partially offset by repayments under our Credit Agreement and Note Purchase Agreement totaling $130.8 million.

Net cash used in financing activities in the first nine months of 2012 was $11.1 million, which resulted primarily from repayments under our Credit Agreement and Note Purchase Agreement totaling $117.3 million, partially offset by net borrowings of $109.3 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 foreseeable 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 2013. 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 September 30, 2013: a . . .

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