Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NWPX > SEC Filings for NWPX > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for NORTHWEST PIPE CO

Form 10-Q for NORTHWEST PIPE CO


9-May-2014

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 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.


Table of Contents

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


Table of Contents

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.


Table of Contents

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.


Table of Contents

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.

  Add NWPX to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NWPX - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.