PART I
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 uses. Our pipeline systems are
also used for hydroelectric power systems, wastewater systems and other applications. In addition, we make products for industrial plant piping systems and certain structural applications. With a history that dates back more than 100 years, we have
established a prominent position based on a strong and widely recognized reputation for quality, service and an extensive range of products engineered and manufactured to meet expectations in all categories of performance including highly corrosive
environments.
We manufacture water infrastructure steel pipe products through our Water Transmission Group, which in 2012,
2011 and 2010 generated approximately 51%, 53%, and 57%, respectively, of our net sales. The Water Transmission Group produces large diameter, high pressure, engineered welded steel pipe products for use in water transmission applications. With six
Water Transmission manufacturing facilities, we are ideally located to meet North Americas growing needs for water and wastewater infrastructure. We market our water infrastructure products through an internal sales force. Our sales have
historically been driven by the need for new water infrastructure, which is based primarily on overall population growth and population movement between regions.
We also manufacture smaller diameter electric resistance welded (ERW) steel pipe and other welded steel pipe products through our Tubular Products Group, which in 2012, 2011, and 2010
generated approximately 49%, 47%, and 43%, respectively, of our net sales. Our smaller diameter pipe is used for applications in energy, structural, commercial and industrial uses. We have three centrally located Tubular Products manufacturing
facilities in the United States and we market our products through an internal sales force.
Our Industries
Water Transmission.
The American Society of Civil Engineers 2009 Report Card for Americas Infrastructure estimates
that the United States will need to spend an additional $11 billion annually to replace aging facilities that are near the end of their useful life and to comply with existing and future federal water regulations. Within this market, we focus on
large diameter, engineered welded steel pipeline systems utilized in water, energy, structural and plant piping applications. Our core market is the large diameter, high-pressure portion of a water transmission pipeline that is typically at the
upper end of a pipeline system. This is the portion of the overall water pipeline that generally transports water from the source to a treatment plant or from a treatment plant into the distribution system, rather than the small lines
that deliver water directly into households. We believe the addressable market for the products sold by our Water Transmission Group will total approximately $1.32 billion over the next three years.
A combination of population growth, movement to new population centers, dwindling supplies from developed water sources, substantial
underinvestment in water infrastructure over the past several decades, and an increasingly stringent regulatory environment are driving demand for water infrastructure projects in the United States. These trends are increasing the need for new water
infrastructure as well as the need to upgrade, repair and replace existing water infrastructure. While we believe this offers the potential for increased demand for our water infrastructure products and other products related to water transmission,
we also expect current governmental and public water agency budgetary pressures will impact near-term demand.
The primary
drivers of growth in new water infrastructure installation are population growth and movement as well as dwindling supplies from developed water sources. According to the United States Census Bureau, the
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population of the United States will increase by over 86 million people between 2013 and 2050. The resulting increase in demand will require substantial new infrastructure, as the existing
United States water infrastructure is not equipped to provide water to millions of new residents. In addition, many current water supply sources are in danger of being exhausted. The development of new sources of water at greater distances from
population centers will drive the demand for new water transmission lines. Our six Water Transmission manufacturing facilities are well located to take advantage of the anticipated growth and demand.
Much of the United States water infrastructure is antiquated and many authorities, including the United States Environmental Protection
Agency (the EPA), believe the United States water infrastructure is in critical need of updates, repairs or replacements. The American Society of Civil Engineers has given poor ratings to many aspects of the United States water
infrastructure in their 2009 Report Card for Americas Infrastructure. In its most recent study of current infrastructure, the American Society of Civil Engineers estimates there will be an $84 billion funding gap for water and wastewater
infrastructure by 2020, and a $144 billion gap by 2040.
Increased public awareness of problems with the quality of drinking
water and efficient water usage has resulted in more stringent application of federal and state environmental regulations. The need to comply with these regulations in an environment of heightened public awareness towards water issues is expected to
contribute to demand in the water infrastructure industry over the next several years as water systems will need to be installed, upgraded and replaced.
Tubular Products.
The tubular products industry encompasses a wide variety of products serving a diverse group of end markets. We have been active in several of these markets, including
energy, construction, commercial, and industrial systems. In 2009, the tubular products industry experienced a combination of an oversaturation of imported pipe, a collapse of natural gas prices in a very short time frame, and a decline in
non-residential construction, all of which had a severe negative impact on our entire segment of the industry. However, trade cases limited the importation of some energy pipe, and that segment of the business, including line pipe and oil country
tubular goods (OCTG) products, substantially improved. Beginning in 2010, we redirected the focus of our Houston, Texas plant from mechanical tubing to energy pipe production and began producing it in April 2010. In 2011 we upgraded one
of our mills to produce 2.375 and 2.875 inch tubing capable of being heat treated into alloy grades. These upgrades provided an opportunity to offer products in a new segment of the energy market. We were also able to capitalize on improved market
conditions through an expansion at our Atchison, Kansas facility that increased its production capacity by more than 50%, improved productivity and enabled the facility to produce product with wall thickness up to 0.375 inches.
Our emphasis on energy products reflects what we believe will be steady demand from the energy markets. The price per barrel of crude oil
has steadily increased since 2009 and is currently trading around $95 per barrel. Natural gas production remained at historically high levels during 2012 according to the United States Energy Information Administration. Of the active oil and natural
gas rigs, approximately one quarter of the rigs are drilling for natural gas and the other three quarters are drilling for oil. Although rig counts in the United States are down approximately 12 percent from a year ago, we believe drilling activity
and the demand for energy pipe will remain at relatively strong levels.
Products
Water Transmission.
Water transmission pipe is used for high-pressure applications, typically requiring
pipe to withstand pressures in excess of 150 pounds per square inch. Most of our water transmission products are made to custom specifications for fully engineered, large diameter, high-pressure water infrastructure systems. Other uses include pipe
for piling and hydroelectric projects, wastewater treatment plants and other applications. Our primary manufacturing process has the capability to manufacture water transmission pipe in diameters ranging from 12 inches to 156 inches with wall
thickness of 0.135 inch to 1.00 inch. We also have the ability to manufacture even larger and heavier pipe with other processes. We can coat and/or line these products with cement mortar, polyethylene tape, polyurethane paints, epoxies, Pritec
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, and coal tar enamel according to our
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customers specifications. We maintain fabrication facilities that provide installation contractors with custom fabricated sections as well as straight pipe sections. We typically deliver a
complete pipeline system to the installation contractor.
Tubular Products.
Our tubular products range in size
from 1.315 inches to 16 inches in diameter with wall thickness from 0.035 inch to 0.375 inch. These products are typically sold to distributors or Original Equipment Manufacturers (OEMs) and are used for a wide variety of applications,
including energy, construction, agriculture, and other commercial and industrial uses. The Tubular Products Group also manufactured and marketed welded steel pipe used in traffic signpost applications through June 1, 2011.
Marketing
Water Transmission.
The primary customers for water transmission products are installation contractors for
projects funded by public water agencies. In 2012, Garney Construction accounted for 12% of our total Company net sales. No customer accounted for more than 10% of our total net sales in 2011 or 2010. Our plant locations in Oregon, Colorado,
California, West Virginia, Texas and Mexico allow us to efficiently serve customers throughout the United States, as well as Canada and Mexico. Our Water Transmission marketing strategy emphasizes early identification of potential water projects,
promotion of specifications consistent with our capabilities and close contact with the project designers and owners throughout the design phase. Our in-house sales force is comprised of sales representatives, engineers and support personnel who
work closely with public water agencies, contractors and engineering firms, often years in advance of projects being bid. This allows us to identify and evaluate planned projects at early stages, participate in the engineering and design process,
and ultimately promote the advantages of our systems. After an agency completes a design, they publicize the upcoming bid for a water transmission project. We then obtain detailed plans and develop our estimate for the pipe portion of the project.
We typically bid to installation contractors who include our bid in their proposals to public water agencies. A public water agency generally awards the entire project to the contractor with the lowest responsive bid.
Tubular Products
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Our tubular products are marketed through an in-house sales force. Our tubular product
manufacturing facilities are located in Kansas, Texas, and Louisiana. Our marketing strategy focuses on quality, customer service and customer relationships. Our tubular products are primarily sold to distributors, although to a lesser extent we
also sell to OEMs. Our sales effort emphasizes regular personal contact with current and potential customers. We supplement this effort with targeted advertising, brochures and participation in trade shows. No customers of our Tubular Products
business accounted for more than 10% of our total net sales during 2012, 2011 or 2010.
Manufacturing
Water Transmission.
Water transmission manufacturing begins with the preparation of engineered drawings
of each unique piece of pipe in a project. These drawings are prepared on our proprietary computer-aided design system and are used as blueprints for the manufacture of the pipe. After the drawings are completed and approved, manufacturing begins by
feeding steel coil continuously at a specified angle into a spiral weld mill which cold-forms the band into a tubular configuration with a spiral seam. Automated arc welders, positioned on both the inside and the outside of the tube, are used to
weld the seam. The welded tube is then cut at the specified length. After completion of the forming and welding phases, the finished cylinder is tested and inspected in accordance with project specifications, which may include 100% radiographic
analysis of the weld seam. The cylinders are then coated and lined as specified. Possible coatings include coal tar enamel, polyethylene tape, polyurethane paint, epoxies, Pritec
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and cement mortar. Linings may be cement mortar, polyurethane or epoxies. Following coating and lining, certain pieces may be custom fabricated as required for the
project. This process is performed in our fabrication facilities. Upon final inspection, the pipe is prepared for shipment. We ship our products to project sites principally by truck.
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Tubular Products.
Tubular products are manufactured by an ERW process in
diameters ranging from 1.315 inches to 16 inches. This process begins by unrolling and slitting steel coils into narrower bands sized to the circumference of the finished product. Each band is re-coiled and fed into the material handling
equipment at the front end of the ERW mill and fed through a series of rolls that cold-form it into a tubular configuration. The resultant tube is welded by high-frequency electric resistance welders. After exiting the mill, the products are
straightened, inspected, tested and end-finished. Certain products are coated. With our focus on the OCTG market, we also use the services of third party processors to finish the pipe. These finishing operations include threading, inspecting,
testing and heat treating. Securing adequate finishing capacity is key to the Tubular Product Groups success in the OCTG market.
Technology.
Advances in technology help us produce high quality products at competitive prices. We have invested in modern welding and inspection equipment to improve both productivity and
product quality. To stay current with technological developments in the United States and abroad, we participate in trade shows, industry associations, research projects and vendor trials of new products.
Quality Assurance.
We have quality management systems in place that assure we consistently provide products that meet or
exceed customer and applicable regulatory requirements. The Quality Assurance department reports directly to the Chief Executive Officer. All of our quality management systems in the United States are registered by the International
Organization for Standardization, or ISO, under a multi-site registration. In addition to ISO qualification, the American Institute of Steel Construction, American Petroleum Institute, American Society for Mechanical Engineers, Factory Mutual,
National Sanitation Foundation, and Underwriters Laboratory have certified us for specific products or operations. The Quality Assurance department is responsible for monitoring and measuring characteristics of the product. Inspection capabilities
include, but are not limited to, visual, dimensional, liquid penetrant, magnetic particle, hydrostatic, ultrasonic, phased array ultrasonics, real-time imaging enhancement, real-time radioscopic, base material tensile, yield and elongation, sand
sieve analysis, coal-tar penetration, concrete compression, lining and coating dry film thickness, adhesion, absorption, guided bend, charpy impact, hardness, metallurgical examinations, chemical analysis, spectrographic analysis and finished
product final inspection. Product is not released for shipment to our customers until there is verification that all product requirements have been met.
Product Liability.
The manufacturing and use of our products involves a variety of risks. Certain losses may result, or be alleged to result, from defects in our products, thereby subjecting
us to claims for damages, including consequential damages. We warrant our products to be free of certain defects for one year. We maintain insurance coverage against potential product liability claims in the amount of $52 million, which we believe
to be adequate. Historically, product liability claims against us have not been material. However, there can be no assurance that product liability claims exceeding our insurance coverage will not be experienced in the future or that we will be able
to maintain such insurance with adequate coverage.
Backlog
Our backlog includes confirmed orders, including the balance of projects in process, and projects for which we have been notified that we are the successful bidder even though a binding agreement has not
been executed. Projects for which a binding contract has not been executed could be cancelled. Binding orders received by us may be subject to cancellation or postponement; however, cancellation would generally obligate the customer to pay the costs
incurred by us. As of December 31, 2012, the backlog of orders for our Water Transmission Group was approximately $173 million. Binding contracts had been executed for approximately 92% of the Water Transmission backlog as of February 28,
2013. At December 31, 2011, the backlog of orders for our Water Transmission Group was approximately $138 million. Backlog as of any particular date may not be indicative of actual operating results for any fiscal period. There can be no
assurance that any amount of backlog ultimately will be realized.
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Competition
Water Transmission.
We have several regional competitors in the Water Transmission business. Most water transmission projects are competitively bid and price competition is vigorous. Price
competition may reduce the gross margin on sales, which may adversely affect overall profitability. Other competitive factors include timely delivery, ability to meet customized specifications and high freight costs which may limit the ability of
manufacturers located in other market areas to compete with us. With Water Transmission manufacturing facilities in Oregon, Colorado, California, West Virginia, Texas, and Mexico, we believe we can more effectively compete throughout the United
States, Canada and Mexico. Our primary competitor in the Water Transmission business in the western United States and southwestern Canada is National Oilwell Varco, Inc. East of the Rocky Mountains, our primary competition includes: American Cast
Iron Pipe Company and U.S. Pipe, which manufacture ductile iron pipe; American Spiral Weld Pipe Company, which manufactures spiral welded steel pipe; and Hanson Pipe & Precast, which manufactures concrete pressure pipe and spiral welded
steel pipe.
No assurance can be given that other new or existing competitors will not establish new facilities or expand
capacity within our market areas. New or expanded facilities or new competitors could have a material adverse effect on our ability to capture market share and maintain product pricing.
Tubular Products.
The market for tubular products is highly fragmented and diversified with over 100 manufacturers in the
United States and a number of foreign-based manufacturers that export such pipe into the United States. Manufacturers compete with one another primarily on the basis of price, quality, established business relationships, customer service and
delivery. In some of the sectors within the tubular products industry, competition may be less vigorous due to the existence of a relatively small number of companies with the capabilities to manufacture certain products. In particular, we operate
in a variety of different markets that require pipe with lighter wall thickness in relation to diameter than many of our competitors can manufacture. In our markets, we typically compete with U.S. Steel, TMK Ipsco, Boomerang, Lakeside Steel, Tex
Tube, Tenaris, Evraz, California Steel Industries and JMC Steel Group, as well as foreign competitors.
Additionally, several
companies have announced new plants or the expansion of product lines at existing facilities. New or expanded facilities or new competitors could have a material adverse affect on our ability to capture market share and maintain product pricing.
Raw Materials and Supplies
We purchase hot rolled and galvanized steel coil from both domestic and foreign steel mills. Domestic suppliers include Severstal, ArcelorMittal, ThyssenKrupp Steel USA, Nucor Corporation, SSAB,
California Steel Industries, Gallatin Steel Company, New Process Steel, and Steel Dynamics Inc. Foreign suppliers include Ternium and BlueScope Steel. We order steel according to our business forecasts for our Tubular Products business. Steel for
the Water Transmission business is normally purchased only after a project has been awarded to us. From time to time, we may purchase additional steel when it is available at favorable prices. Purchased steel represents a substantial portion of our
cost of sales. The steel industry is highly cyclical in nature and steel prices are influenced by numerous factors beyond our control, including general economic conditions, availability of raw materials, energy costs, import duties, other trade
restrictions and currency exchange rates.
We also rely on certain suppliers of coating materials, lining materials and
certain custom fabricated items. We have at least two suppliers for most of our raw materials. We believe our relationships with our suppliers are positive and have no indication that we will experience shortages of raw materials or components
essential to our production processes or that we will be forced to seek alternative sources of supply. Any shortages of raw materials may result in production delays and costs, which could have a material adverse effect on our financial position,
results of operations or cash flows.
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Environmental and Occupational Safety and Health Regulation
We are subject to federal, state, local and foreign environmental and occupational safety and health laws and regulations, violation of
which could lead to fines, penalties, other civil sanctions or criminal sanctions. These environmental laws and regulations govern emissions to air; discharges to water (including stormwater); and the generation, handling, storage, transportation,
treatment and disposal of waste materials. We operate under numerous governmental permits and licenses relating to air emissions, stormwater run-off and other environmental matters, and we are also subject to environmental laws requiring the
investigation and cleanup of environmental contamination at properties we presently own or operate and at third-party disposal or treatment facilities to which these sites send or arrange to send hazardous waste. For example, we have been identified
as a potentially responsible party at the Portland Harbor Site discussed in Part IItem 3, Legal proceedings of this 2012 Form 10-K below. We believe we are in material compliance with these laws and regulations and do not currently
believe that future compliance with such laws and regulations will have a material adverse effect on our financial position, results of operations or cash flows.
Based on our assessment of potential liability, we have no reserves for environmental investigations and cleanup. However, estimating liabilities for environmental investigations and cleanup is complex
and dependent upon a number of factors beyond our control which may change dramatically. Accordingly, although we believe maintaining no reserve is appropriate based on current information, we cannot assure you that our future environmental
investigation and cleanup costs and liabilities will not result in a material expense.
Employees
As of December 31, 2012, we had approximately 1,100 full-time employees. Approximately 31% were salaried and approximately 69% were
employed on an hourly basis. A union represents all of the hourly employees at our Monterrey, Mexico facility. All other employees are non-union. We consider our relations with our employees to be good.
Available Information
Our internet website address is www.nwpipe.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish
it to, the Securities and Exchange Commission (SEC). All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is
included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law. Our internet website and the information contained therein or connected thereto are not incorporated
into this 2012 Form 10-K.
Additionally, the public may read and copy any materials we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
You
should carefully consider the following factors, together with all the other information included in this 2012 Form 10-K, in evaluating our Company and our business. If any of the following risks actually occur, our business, financial condition,
results of operations, or cash flows could be materially and adversely affected, and the value of our stock could decline. The risks and uncertainties described below are those that we currently believe may materially affect our Company. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. As such, you should not consider this list to be a complete statement of all potential risks or uncertainties.
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Risks Related to our Business
We operate in highly competitive industries, and increased competition could reduce our gross profit and net income.
We face
significant competition in all of our businesses. We have recently seen new domestic and foreign competitors bidding on projects. Orders in the Water Transmission business are competitively bid, and price competition can be vigorous. Price
competition may reduce the gross margin on sales, which may adversely affect overall profitability. Other competitive factors include timely delivery, ability to meet customized specifications and high freight costs. Although our Water Transmission
manufacturing facilities in Oregon, Colorado, California, West Virginia, Texas, and Mexico allow us to compete throughout the United States, Canada and Mexico, we cannot assure you that new or existing competitors will not establish new facilities
or expand capacity within our market areas. New or expanded facilities or new competitors could have a material adverse effect on our market share and product pricing in our Water Transmission business. There are many competitors in the Tubular
Products business, and price is often a prime consideration for purchase of our products. Price competition may reduce our gross profit, which may adversely affect our net income. Some of our competitors have greater financial, technical and
marketing resources than we do. We cannot assure you that we will be able to compete successfully with our competitors. Failure to compete successfully could reduce our gross profit and net income, as well as have a material adverse effect on our
business, financial position, results of operations or cash flows.
Our Tubular Products business is facing intense
competition from other North American suppliers.
With the increase in energy pipe demand, there have been significant increases in available capacity in North America. Approximately 1.6 million tons of tubular pipe capacity has been added
in the last few years. Approximately 700,000 tons of tubular pipe capacity is currently under construction and another 1.4 million tons has been announced. Increased domestic capacity and production in the United States and Canada could
adversely affect our business, financial position, results of operations or cash flows.
Our exposure to the energy market
is growing.
Products serving the energy market, including line pipe and OCTG products, comprise 74%, 70% and 62% of our tons sold in 2012, 2011, and 2010, respectively, for our Tubular Products Group. Sales of these products are tied to the
exploration, development, and production of natural gas and oil reserves. Factors affecting the profitability of exploration and production of hydrocarbons, such as the price of oil and gas, will have an effect on the market for energy pipe
products. A decline in the levels of exploration and production activity could adversely affect our business, financial position, results of operations, or cash flows.
We depend on third party processors to provide finishing services on certain of our energy market products.
Certain products supplied to the OCTG market require finishing services currently
provided by third parties to finish the pipe to customer specifications. These finishing operations include, but are not limited to, threading, inspection, testing and heat treating. Our dependency on these processors has increased along with our
increased production of OCTG products. Because we cannot perform these processes internally, our inability to secure production time at these processors could negatively impact our revenues from the energy market and puts us at a disadvantage with
our domestic competitors.
Increased levels of imports have and could continue to adversely affect pricing and demand for
our products.
We believe import levels are affected by, among other things, overall worldwide demand, lower cost of production in other countries, the trade practices of foreign governments, government subsidies to foreign producers and
governmentally imposed trade restrictions in the United States. Although certain imported steel products from China have been curtailed by anti-dumping duties, imported products from other countries have increased, notably from Canada, Italy, Korea,
India, and Vietnam, which continue to command significant market share. The level of imports of tubular products has historically impacted the domestic tubular products market and is currently reducing the demand for our energy products. Increased
imports in the United States and Canada which compete with our other tubular product and water transmission products could reduce demand for our products in the future and adversely affect our business, financial position, results of operations or
cash flows.
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We may be unable to develop or successfully market new products or our products might not
obtain necessary approvals or achieve market acceptance, which could adversely affect our growth.
We will continue to actively seek to develop new products and to expand our existing products into new markets, but we cannot assure you that we
will be successful in these efforts. If we are unsuccessful in developing and marketing new products, expanding into new markets, or we do not obtain or maintain requisite approvals for our products, the demand for our products could be adversely
affected, which could affect our business, financial position, results of operations or cash flows.
The success of our
business is affected by general economic conditions, and our business may be adversely affected by an economic slowdown or recession.
Periods of economic slowdown or recession in the United States, or the public perception that one may occur,
have and could further decrease the demand for our products, affect the price of our products and adversely impact our business. We have been impacted in the past by the general slowing of the economy, and the economic slowdown has had an adverse
impact on our business, financial position, results of operations or cash flows. In particular, our Tubular Products Group is exposed to the energy exploration, non-residential construction, and agriculture markets, and a significant downturn in any
one of these markets could cause a reduction in our revenues that could be difficult to offset.
A downturn in government
spending related to public water transmission projects would adversely affect our business.
Our Water Transmission business accounted for approximately 51% of our net sales in 2012. Our Water Transmission business is primarily dependent upon
spending on public water transmission projects, including water infrastructure upgrades, repairs and replacement and new water infrastructure spending, which, in turn, depends on, among other things:
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the need for new or replacement infrastructure;
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the priorities placed on various projects by governmental entities;
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federal, state and local government spending levels, including budgetary constraints related to capital projects and the ability to obtain financing;
and
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the ability of governmental entities to obtain environmental approvals, right-of-way permits and other required approvals and permits.
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Decreases in the number of, or government funding of, public water transmission projects would adversely
affect our business, financial position, results of operations, or cash flows.
Project delays in public water transmission
projects could adversely affect our business.
The public water agencies constructing water transmission projects generally announce the projects well in advance of the bidding and construction process. It is not unusual for projects to be
delayed and rescheduled. Projects are delayed and rescheduled for a number of reasons, including changes in project priorities, difficulties in complying with environmental and other government regulations and additional time required to acquire
rights-of-way or property rights. Delays in public water transmission projects may occur with too little notice to allow us to replace those projects in our manufacturing schedules. As a result, our business, financial position, results of
operations or cash flows may be adversely affected by unplanned downtime.
Fluctuations in steel prices may affect our
future results of operations.
Purchased steel represents a substantial portion of our cost of sales, particularly in our Tubular Products business. The steel industry is highly cyclical in nature, and, at times, pricing can be highly volatile
due to a number of factors beyond our control, including general economic conditions, import duties, other trade restrictions and currency exchange rates. Over the past three years, steel prices have fluctuated significantly. Our cost for a ton of
steel was approximately $663 per ton in 2010, $766 per ton in 2011, and $748 per ton in 2012. In 2012, our monthly average steel purchasing costs ranged from a high of approximately $825 per ton to a low of approximately $690 per ton. This
volatility can significantly affect our gross profit. Although we seek to recover increases in steel prices through price increases in our products, we have not always been completely successful. Any increase in steel prices that
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is not offset by an increase in our prices could have an adverse effect on our business, financial position, results of operations or cash flows.
Operating problems in our business could adversely affect our business, financial position, results of operations or cash flows.
Our manufacturing operations are subject to typical hazards and risks relating to the manufacture of similar products such as:
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explosions, fires, inclement weather and natural disasters;
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loss of process control and quality;
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raw materials quality defects;
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service provider delays or failures;
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transportation delays or failures;
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an inability to obtain or maintain required licenses or permits; and
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environmental hazards such as chemical spills, discharges or releases of toxic or hazardous substances or gases into the environment or workplace.
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The occurrence of any of these operating problems at our facilities may have a material adverse effect on
the productivity and profitability of a particular manufacturing facility or on our operations as a whole, during and after the period of these operating difficulties. These operating problems may also cause personal injury and loss of life, severe
damage to or destruction of property and equipment, and environmental damage. In addition, individuals could seek damages for alleged personal injury or property damage. Furthermore, we could be subject to present and future claims with respect to
workplace injury, exposure to hazardous materials, workers compensation and other matters. Although we maintain property and casualty insurance of the types and in the amounts that we believe are customary for our industries, we cannot assure
you that our insurance coverage will be adequate for liability that may be ultimately incurred or that such coverage will continue to be available to us on commercially reasonable terms. Any claims that result in liability exceeding our insurance
coverage could have an adverse effect on our business, financial position, results of operations or cash flows.
Our Water
Transmission business faces competition from concrete, ductile iron, polyvinyl chloride (PVC) and high density polyethylene (HDPE) pipe manufacturers.
Water transmission pipe is manufactured generally from steel,
concrete, HDPE, PVC or ductile iron. Each pipe material has advantages and disadvantages. Steel and concrete are more common materials for larger diameter water transmission pipelines because ductile iron pipe generally is limited in diameter due to
the manufacturing process. The public agencies and engineers who determine the specifications for water transmission projects analyze these pipe materials for suitability for each project. Individual project circumstances normally dictate the
preferred material. If we experience cost increases in raw materials, labor and overhead specific to our industry or the location of our facilities, while competing products or companies do not experience similar changes, we could experience an
adverse change in the demand, price and profitability of our products, which could have a material adverse effect on our business, financial position, results of operations or cash flows.
Our quarterly results of operations are subject to significant fluctuation.
Our net sales and operating results may fluctuate
significantly from quarter to quarter due to a number of factors, including:
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the commencement, completion or termination of contracts during any particular quarter;
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unplanned down time due to project delays or mechanical failure;
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underutilized capacity or factory productivity;
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the seasonal variation in demand for tubular products;
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adverse weather conditions;
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fluctuations in the cost of steel and other raw materials; and
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Results of operations in any period are not indicative of results for any future period, and comparisons between any two periods may not be meaningful.
We depend on our senior management team, and the loss of any member could adversely affect our operations.
Our success depends on
the management and leadership skills of our senior management team. The loss of any of these individuals, or our inability to attract, retain and maintain additional personnel, could prevent us from fully implementing our business strategy. We
cannot assure you that we will be able to retain our existing senior management personnel or to attract qualified personnel when needed.
We may be subject to claims for damages for defective products, which could adversely affect our business, financial position, results of operations or cash flows.
We warrant our products to be
free of certain defects. We have, from time to time, had claims alleging defects in our products. We cannot assure you that we will not experience material product liability losses in the future or that we will not incur significant costs to defend
such claims. While we currently have product liability insurance, we cannot assure you that our product liability insurance coverage will be adequate for liabilities that may be incurred in the future or that such coverage will continue to be
available to us on commercially reasonable terms. Any claims relating to defective products that result in liabilities exceeding our insurance coverage could have an adverse effect on our business, financial position, results of operations or cash
flows.
We may not be able to recover costs and damages from vendors that supply defective materials.
We may receive
defective materials from our vendors that are incorporated into our products during the manufacturing process. The cost to repair, remake or replace defective products could be greater than the amount that can be recovered from the vendor. Such
excess costs could have an adverse effect on our business, financial position, results of operations or cash flows.
We
have a foreign operation which exposes us to the risks of doing business abroad.
Our fabrication facility in Monterrey, Mexico primarily exports products to the United States. We may operate in additional countries in the future. Any material
changes in the quotas, regulations or duties on imports imposed by the United States government and our agencies or on exports imposed by these foreign governments and their agencies could adversely affect our foreign operations.
We also sell some of our products internationally. Our foreign activities are also subject to various other risks of doing business in a
foreign country, including:
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transportation delays and interruptions;
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political, social and economic instability and disruptions;
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government embargoes or foreign trade restrictions;
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the imposition of duties, tariffs and other trade barriers;
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import and export controls;
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labor unrest and current and changing regulatory environments;
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limitations on our ability to enforce legal rights and remedies; and
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potentially adverse tax consequences.
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No assurance can be given that our operations may not be adversely affected in the future. Any of these events could have an adverse effect on our operations in the future by reducing the demand for our
products and services, decreasing the prices at which we can sell our products or increasing costs such that there would be an adverse effect on our business, financial position, results of operations or cash flows. We cannot assure you that we will
continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject, or that any such regulations or laws will not be modified.
Any failure by us to comply with any such applicable regulations or laws, or any changes in any such regulations or laws could have a material adverse effect on our business, financial position, results of operations or cash flows.
Our use of the percentage-of-completion method of accounting could result in a change to previously recorded revenue and profit.
In particular, revenue from construction contracts in our Water Transmission segment is recognized on the percentage-of-completion method, measured by the costs incurred to date as a percentage of the estimated total costs of each contract (the
cost-to-cost method). Estimated total costs of each contract are reviewed on a monthly basis by project management and operations personnel for all active projects. All cost revisions that result in the gross profit as a percent of sales increasing
or decreasing by more than two percent are reviewed by senior management personnel.
The use of estimated cost to complete
each contract is a significant variable in the process of determining income earned and is a significant factor in the accounting for contracts. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in
the period in which these changes become known. Due to the variability of events affecting our estimates which have a material impact on our contract accounting, actual results could differ from those estimates, which could adversely affect our
financial position, results of operations or cash flows.
Our Water Transmission backlog is subject to reduction and
cancellation.
Backlog represents products or services that our customers have committed to purchase from us and projects for which we have been notified that we are the successful bidder even though a binding agreement has not been executed.
Projects for which a binding contract has not been executed could be cancelled. Our backlog of orders for our Water Transmission segment was approximately $173 million at December 31, 2012. Our backlog is subject to fluctuations; moreover,
cancellations of purchase orders, change orders on contracts, or reductions of product quantities could materially reduce our backlog and, consequently, future revenues. Our failure to replace canceled or reduced backlog could result in lower
revenues, which could adversely affect our business, financial position, results of operations or cash flows.
We are
subject to stringent environmental and health and safety laws, which may require us to incur substantial compliance and remediation costs, thereby reducing our profits.
We are subject to many federal, state, local and foreign environmental and
health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in our manufacturing processes. Compliance with these laws and
regulations is a significant factor in our business. We have incurred, and expect to continue to incur, significant expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws
and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of
pollution control equipment or remedial actions.
We are currently, and may in the future be, required to incur costs relating
to the environmental assessment or environmental remediation of our property, and for addressing environmental conditions, including, but not
12
limited to, the issues associated with our Portland, Oregon facility as discussed in Part IItem 3, Legal Proceedings below. Some environmental laws and regulations impose
liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Consequently, we cannot assure you that
existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.
We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult
to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require capital expenditures and
operating costs. Any increase in these costs, or unanticipated liabilities arising, for example, out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is
no assurance that they will not have a material adverse effect on our business, financial position, results of operations or cash flows.
We face risks in connection with potential acquisitions.
Acquiring businesses that complement or expand our operations has been an important element of our business strategy, and we continue to
evaluate potential acquisitions that may expand and complement our business. We may not be able to successfully identify attractive acquisition candidates or negotiate favorable terms in the future. Furthermore, our ability to effectively integrate
any future acquisitions will depend on, among other things, the adequacy of our implementation plans, the ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired operational
efficiencies. If we are unable to successfully integrate the operations of any businesses that we may acquire in the future, our business, financial position, results of operations or cash flows could be adversely affected.
Sustained increases in fuel costs could have an adverse impact on our profitability.
We have periodically experienced significant
fluctuations in fuel costs primarily as a result of macro-economic factors beyond our control. The price of fuel fluctuates significantly over time, and events beyond our control could adversely affect the supply and cost of fuel. Although we seek
to recover increases in fuel costs through price increases in our products, we have not always been completely successful. Any increase in fuel costs that is not offset by increases in our prices could have an adverse impact on our business,
financial position, results of operations or cash flows.
Risks Related to the Pending SEC Investigation and Pending Litigation
The SECs formal investigation and pending putative securities class action and derivative litigation have
resulted in significant costs and expenses, have diverted resources and could have a material adverse effect on our business, financial condition, results of operations or cash flows
.
As further described in
Part IItem 3, Legal Proceedings of this 2012 Form 10-K, on March 10, 2010 we were advised by the staff of the SEC Enforcement Division that the SEC had commenced a formal investigation. This investigation is
ongoing and we are cooperating fully with the SEC in connection with these matters. We have incurred significant professional fees and other costs in responding to the SEC investigation. If the SEC were to conclude that enforcement action is
appropriate, we could be required to pay large civil penalties and fines. The SEC also could impose other sanctions against us or certain of our current and former directors and officers. Any of these events could have a material adverse effect on
our business, financial condition, results of operations, or cash flows. Additionally, while we believe we have made appropriate judgments in determining the correct adjustments in preparing our restated consolidated financial statements in 2011,
the SEC may disagree with the manner in which we have accounted for and reported these adjustments. Accordingly, there is a risk that we may have to restate our historical consolidated financial statements, amend prior filings with the SEC or take
other actions not currently contemplated.
As also further described in Part IItem 3, Legal Proceedings
of this 2012 Form 10-K, several lawsuits, including two putative shareholder class action complaints (that have since been consolidated into one action)
13
and three putative derivative complaints, have been filed against us and certain of our current and former officers and directors arising out of our announcement of the Audit Committee
investigation and related matters during 2010 which resulted in the restatement of our 2009 financials, as well the restatement of our financials in 2011. We have incurred significant professional fees and other costs defending against the lawsuits.
Pending court approval, a settlement of the class action plaintiffs claims in the amount of $12.5 million has been reached. All of this amount will be paid by the Companys insurers with the exception of $200,000 in retention which was
expensed in the second quarter of 2010 and $200,000 which was expensed in the second quarter of 2012. We expect to incur significant professional fees and other costs if the settlement is not approved by the courts. In addition, our Board of
Directors, management and employees have expended a substantial amount of time on pending litigation, diverting a significant amount of resources and attention that would otherwise be directed toward our operations and implementation of our business
strategy, all of which could materially adversely affect our business, financial condition, results of operations or cash flows.
Our indemnification obligations and limitations of our director and officer liability insurance may have a material adverse effect on our financial condition, results of operations and cash flows.
Under Oregon law, our articles of incorporation and bylaws and certain indemnification agreements to which we are a party, we have an obligation to indemnify, or we have otherwise agreed to indemnify, certain of our current and former directors
and officers with respect to current and future investigations and litigation, including the matters discussed in Part IItem 3, Legal Proceedings. In connection with some of these pending matters, we are required to, or
we have otherwise agreed to, advance, and have advanced, legal fees and related expenses to certain of our current and former directors and officers and expect to continue to do so while these matters are pending. Certain of these obligations may
not be covered matters under our directors and officers liability insurance, or there may be insufficient coverage available. Further, in the event the directors and officers are ultimately determined to not be entitled to
indemnification, we may not be able to recover the amounts we previously advanced to them.
In addition, we have incurred
significant expenses in connection with the pending SEC investigation and litigation. We cannot provide any assurances that pending claims, or claims yet to arise, will not exceed the limits of our insurance policies, that such claims are covered by
the terms of our insurance policies or that our insurance carrier will be able to cover our claims. The insurers also may seek to deny or limit coverage in some or all of these matters. Furthermore, the insurers could become insolvent and unable to
fulfill their obligation to defend, pay or reimburse us for insured claims. Accordingly, we cannot be sure that claims will not arise that are in excess of the limits of our insurance or that are not covered by the terms of our insurance policy. Due
to these coverage limitations, we may incur significant unreimbursed costs to satisfy our indemnification obligations, which may have a material adverse effect on our business, financial condition, results of operations or cash flows.
Negative publicity due to the SEC investigation and shareholder and derivative litigation may have a material adverse effect on our
business, financial condition, results of operations or cash flows.
As a result of the outstanding SEC investigation and the pending settlement of the shareholder and derivative litigation and related matters, we have been the subject of
negative publicity. This negative publicity may adversely affect our stock price and may harm our reputation and our relationships with current and future investors, lenders, customers, suppliers and employees. As a result, our business, financial
condition, results of operations or cash flows may be materially adversely affected.
Risks Related to Our Financial Condition
Our significant debt obligations and the restrictions under which we operate as a result of our debt obligations could
have a material adverse effect on our business, financial condition, results of operations or cash flows.
We have financed our operations through cash flows from operations, available borrowings and other financing arrangements. As of
December 31, 2012, we had approximately $72.1 million of outstanding debt and capital lease obligations.
14
Our debt and our debt service obligations could:
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limit our ability to obtain additional financing for working capital or other purposes in the future;
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reduce the amount of funds available to finance our operations, capital expenditures and other activities;
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increase our vulnerability to economic downturns, illiquid capital markets, and adverse industry conditions;
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limit our flexibility in responding to changing business and economic conditions, including increased competition;
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place us at a disadvantage when compared to our competitors that have less debt; and
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with respect to our borrowings that bear interest at variable rates, cause us to be vulnerable to increases in interest rates.
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Our ability to make scheduled payments on our debt will depend on our future operating performance and cash
flows, which are subject to prevailing economic conditions, prevailing interest rate levels and other financial, competitive and business factors, many of which are beyond our control. Our inability to make scheduled payments on our debt or any of
the foregoing factors would have a material adverse effect on our business, financial condition, results of operations, or cash flows.
We will need to substantially increase working capital as market conditions and customer order levels improve.
As market conditions and customer order levels improve we will have to increase our
working capital substantially, as it will take several months for new orders to be translated into cash receipts. In general, availability under our Amended Credit Agreement while remaining in compliance with our financial covenants is limited to
$90.8 million as of December 31, 2012. We may not have sufficient availability under this agreement to borrow the amounts we need, and other opportunities to borrow additional funds or raise capital in the equity markets may be limited or
nonexistent. A shortage in the availability of working capital would have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Our failure to comply with covenants in our debt instruments could result in our indebtedness being immediately due and payable, which would have a material adverse effect on our business, financial
condition, results of operations or cash flows.
The agreements governing our outstanding debt include financial and other restrictive covenants that impose certain requirements with respect to our financial condition and results of operations
and general business activities. These covenants require us to maintain certain financial ratios and place restrictions on, among other things, our ability to incur certain additional debt and to create liens or other encumbrances on assets.
Our ability to comply with the financial and other covenants under our debt instruments in the future is uncertain and will
be affected by our results of operations and financial condition as well as other events and circumstances beyond our control. If market and other economic conditions do not improve, our ability to comply with these covenants may be impaired. A
failure to comply with the requirements of these covenants, if not waived or cured, could permit acceleration of the related debt and acceleration of debt under other instruments that include cross-acceleration or cross-default provisions. If any of
our debt is accelerated, we cannot assure you that we would have sufficient assets to repay such debt or that we would be able to refinance such debt on commercially reasonable terms or at all. The acceleration of a significant portion of our debt
would have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Disruptions in the financial markets and the general economic slowdown could cause us to be unable to obtain financing and expose us
to risks related to the overall macro-economic environment, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
The United States equity and credit markets have experienced
significant price volatility, dislocations and liquidity
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disruptions, which have caused market prices of many equities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially
impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing, even for companies who are otherwise qualified to obtain financing. These events
may make it less likely that we will be able to obtain additional financing and also may make it more difficult or prohibitively costly for us to raise capital through the issuance of debt or equity securities.
Risks Related to Our Internal Control Over Financial Reporting
We have identified material weaknesses in internal control in prior years.
For the year ended December 31, 2011, material weaknesses in our internal control over financial reporting were
identified. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
consolidated financial statements would not be prevented or detected. We believe these material weaknesses have been remediated as of December 31, 2012. However, we cannot assure you that additional material weaknesses in our internal control
over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could
result in material misstatements in our financial statements. These misstatements could result in a restatement of financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported
financial information, leading to a decline in our stock price.
Risks Related to Our Failure to Timely File Periodic Reports with the SEC
Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to
raise debt or equity capital.
We did not file our 2011 Form 10-K, nor our Form 10-Q for the third quarter of 2011, within the timeframe required by the SEC. Because of our late filings, we may be limited in our ability to access the public
markets to raise debt or equity capital, which could prevent us from pursuing transactions or implementing business strategies that we believe would be beneficial to our business. Until May 2013, twelve months after the month in which we regained
compliance with our SEC reporting obligations, we will be ineligible to use shorter and less costly filings, such as Form S-3, to register our securities for sale. We may use Form S-1 to register a sale of our stock to raise capital or complete
acquisitions, but doing so would likely increase transaction costs and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.
Risks Related to Our Common Stock
The relatively low trading volume of
our common stock may limit your ability to sell your shares.
Although our shares of common stock are listed on the Nasdaq, we have historically experienced a relatively low trading volume. If we have a low trading volume in the future, holders
of our shares may have difficulty selling a large number of shares of our common stock in the manner or at a price that might otherwise be attainable.
The market price of our common stock could be subject to significant fluctuations.
The market price of our common stock has experienced, and may continue to experience, significant volatility.
Among the factors that could affect our stock price are:
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our operating and financial performance and prospects;
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quarterly variations in the rate of growth of our financial indicators, such as earnings per share, net income and sales;
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changes in revenue or earnings estimates or publication of research reports by analysts;
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loss of any member of our senior management team;
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speculation in the press or investment community;
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strategic actions by us or our competitors, such as acquisitions or restructuring;
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sales of our common stock by shareholders;
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relatively low trading volume;
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general market conditions and market expectations for our industry and the financial health of our customers; and
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domestic and international economic, legal and regulatory factors unrelated to our performance.
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The stock markets in general have experienced broad fluctuations that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Certain
provisions of our governing documents and Oregon law could discourage potential acquisition proposals.
Our articles of incorporation contain provisions that:
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classify the board of directors into three classes, each of which serves for a three-year term with one class elected each year;
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provide that directors may be removed by shareholders only for cause and only upon the affirmative vote of 75% of the outstanding shares of common
stock; and
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permit the board of directors to issue preferred stock in one or more series, fix the number of shares constituting any such series and determine the
voting powers and all other rights and preferences of any such series, without any further vote or action by our shareholders.
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In addition, we are subject to the Oregon Business Combination Act, which imposes certain restrictions on business combination transactions and may encourage parties interested in acquiring us to
negotiate in advance with our board of directors. We also have a shareholder rights plan that acts to discourage any person or group from making a tender offer for, or acquiring, more than 15% of our common stock without the approval of our board of
directors. Any of these provisions could discourage potential acquisition proposals, could deter, delay or prevent a change in control that our shareholders consider favorable and could depress the market value of our common stock.
Item 1B.
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Unresolved Staff Comments
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None.
Properties
The following table provides certain information about our nine operating facilities as of December 31, 2012:
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Location
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Manufacturing
Space
(approx.
sq. ft.)
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Property
Size
(approx.
acres)
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Products
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Number and Type of Mills
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Portland, Oregon
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300,000
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25
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Water transmission
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3 spiral mills
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Atchison, Kansas
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106,000
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60
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Tubular products
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2 electric resistance mills
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Adelanto, California
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200,000
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100
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Water transmission
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3 spiral mills
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Denver, Colorado
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182,000
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40
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Water transmission
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2 spiral mills
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Houston, Texas
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175,000
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15
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Tubular products
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3 electric resistance mills
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Parkersburg, West Virginia
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145,000
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90
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Water transmission
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2 spiral mills
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Saginaw, Texas (2 facilities)
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170,000
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50
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Water transmission
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2 spiral mills
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Monterrey, Mexico
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40,000
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5
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Water transmission
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Multiple line fabrication
capability
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Bossier City, Louisiana
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180,000
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25
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Tubular products
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1 electric resistance mill
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As of December 31, 2012, we owned all of our facilities except for one of our Saginaw,
Texas facilities, and property adjacent to our Oregon facility, which are leased. During the first half of 2012, we began shutting down production at our Pleasant Grove, Utah facility and transferring its property and equipment to other
manufacturing locations. Operations have ceased at Pleasant Grove as of December 31, 2012.
Our facilities serve regional
markets, which vary in the number and sizes of projects year-over-year. Consequently, we have excess manufacturing capacity from time to time at each of our facilities. We believe the quality and productive capacity of our facilities are sufficient
to maintain our competitive position for the foreseeable future.
Item 3.
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Legal Proceedings
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Class Action and
Derivative Lawsuits
On November 20, 2009, a complaint against the Company, captioned Richard v. Northwest Pipe Co. et
al., No. C09-5724 RBL (Richard), was filed in the United States District Court for the Western District of Washington. The plaintiff is allegedly a purchaser of the Companys stock. In addition to the Company, Brian W. Dunham, the
Companys former President and Chief Executive Officer, and Stephanie J. Welty, the Companys former Chief Financial Officer, are named as defendants. The complaint alleges that defendants violated Section 10(b) of the Securities
Exchange Act of 1934 by making false or misleading statements between April 23, 2008 and November 11, 2009, subsequently extended to December 22, 2011 (the Class Period). Plaintiff seeks to represent a class of persons who
purchased the Companys stock during the same period, and seeks damages for losses caused by the alleged wrongdoing.
A
similar complaint, captioned Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund v. Northwest Pipe Co. et al., No. C09-5791 RBL (Plumbers), was filed against the Company in the same court on December 22,
2009. In addition to the Company, Brian W. Dunham, Stephanie J. Welty and William R. Tagmyer, the Companys Chairman of the Board, are named as defendants in the Plumbers complaint. In the Plumbers complaint, as in the Richard complaint, the
plaintiff is allegedly a purchaser of the Companys stock and asserts that defendants violated Section 10(b) of the Securities Exchange Act of 1934 by making false or misleading statements during the Class Period. Plaintiff seeks to
represent a class of persons who purchased the Companys stock during that period, and seeks damages for losses caused by the alleged wrongdoing.
The Richard action and the Plumbers action were consolidated on February 25, 2010. Plumbers and Pipefitters Local No. 630 Pension-Annuity Trust Fund was appointed lead plaintiff in the
consolidated action. A consolidated amended complaint was filed by the plaintiff on December 21, 2010, and our motion to dismiss was filed on February 25, 2011, as were similar motions filed by the individual defendants. On August 26,
2011, the Court denied all defendants motions to dismiss, and the Company filed its answer to the consolidated amended complaint on October 24, 2011. The parties participated in an initial settlement mediation on January 30, 2012. On
July 19, 2012 the parties participated in a second settlement mediation at which the parties agreed, subject to court approval, to settle all of the plaintiffs claims for $12.5 million. All of this amount will be paid by the
Companys insurers with the exception of $200,000 in retention which was expensed in the second quarter of 2010 and $200,000 which was expensed in the second quarter of 2012. The full settlement amount has been placed into escrow. On
November 27, 2012, the Court issued an order preliminarily approving the class action settlement and setting a settlement hearing for final approval for March 22, 2013.
On March 3, 2010, the Company was served with a derivative complaint, captioned Ruggles v. Dunham et al., No. C10-5129 RBL
(Ruggles), and filed in the United States District Court for the Western District of Washington. The plaintiff in this action is allegedly a current shareholder of the Company. The Company is a nominal defendant in this litigation.
Plaintiff seeks to assert, on the Companys behalf, claims against Brian W. Dunham, Stephanie J. Welty, William R. Tagmyer, Keith R. Larson, Wayne B. Kingsley, Richard A. Roman, Michael C. Franson and Neil R. Thornton. The asserted basis of the
claims is that defendants breached fiduciary
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duties to the Company by causing the Company to make improper statements between April 23, 2008 and August 7, 2009. Plaintiff seeks to recover, on the Companys behalf, damages for
losses caused by the alleged wrongdoing.
On September 23, 2011, the Company was served with a derivative complaint,
captioned Grivich v. Dunham, et al., No. 11-2-03678-6 (Grivich), and filed in the Superior Court of Washington for Clark County. The plaintiff in this action is allegedly a current shareholder of the Company. The Company is a
nominal defendant in this litigation. Plaintiff seeks to assert, on the Companys behalf, claims against Brian W. Dunham, Stephanie J. Welty, William R. Tagmyer, Keith R. Larson, Wayne B. Kingsley, Richard A. Roman, Michael C. Franson and Neil
R. Thornton. The asserted basis of the claims is that defendants breached fiduciary duties to the Company between April 2, 2007 and the date of the Complaint. Plaintiff seeks to recover, on the Companys behalf, damages for losses caused
by the alleged wrongdoing.
On October 14, 2011, another derivative complaint, captioned Richard v. Dunham, et al.,
No. 11-2-04080-5 (Richard Deriv.), was filed in the Superior Court of Washington for Clark County. The plaintiff in this action is allegedly a current shareholder of the Company. The Company is a nominal defendant in this
litigation. Plaintiff seeks to assert, on the Companys behalf, claims against Brian W. Dunham, Stephanie J. Welty, William R. Tagmyer, Keith R. Larson, Wayne B. Kingsley, Richard A. Roman, Michael C. Franson and Neil R. Thornton. The asserted
basis of the claims is that defendants breached fiduciary duties to the Company between April 2, 2007 and the date of the Complaint. Plaintiff seeks to recover, on the Companys behalf, damages for losses caused by the alleged wrongdoing.
An amended complaint in the Ruggles action was filed on November 10, 2011, and the defendants responded to the complaint
by filing a motion to dismiss. The derivative parties participated in both of the settlement mediations described above. At the mediation on July 19, 2012, the parties agreed, subject to court approval, to settle all of the above derivative
plaintiffs claims in all of the above-described derivative actions, with the Company agreeing to make certain corporate governance modifications and pay plaintiffs the amount of $750,000 for plaintiffs attorneys fees. All of this
amount will be paid by the Companys insurers. The full settlement amount is included in accrued liabilities. The amount that will be paid by the insurers is included in trade and other receivables. On December 19, 2012, the Court issued
an order preliminarily approving the settlement of the derivative actions and setting a settlement hearing for final approval for March 29, 2013.
SEC Investigation
On March 8, 2010, the staff of the Enforcement
Division of the SEC advised our counsel that they had obtained a formal order of investigation with respect to matters related to the Audit Committee investigation. We are cooperating fully with the SEC in connection with these matters. We cannot
predict if, when or how they will be resolved or what, if any, actions we may be required to take as part of any resolution of these matters. Any action by the SEC or other governmental agency could result in civil or criminal sanctions against us
and/or certain of our current and former officers, directors and employees. The investigation is at an early stage and, at this time, it is not possible to predict its outcome. Therefore, we have not accrued any charges related to this
investigation.
Other Matters
Portland Harbor Superfund
On December 1, 2000, a section of the lower Willamette River known as the Portland Harbor was included on the National Priorities
List at the request of the United States Environmental Protection Agency (the EPA). While the Companys Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facilitys stormwater
system drains into a neighboring propertys privately owned stormwater system and slip. Since the listing of the site, the Company was notified by the EPA and the Oregon Department of
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Environmental Quality (the ODEQ) of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). In 2008, the Company was
asked to file information disclosure reports with the EPA (CERCLA 104 (e) information request). By agreement with the EPA, the ODEQ is responsible for overseeing remedial investigation and source control activities for all upland sites to
investigate sources and prevent future contamination to the river. A remedial investigation and feasibility study (RI/FS) of the Portland Harbor has been directed by a group of potentially responsible parties known as the Lower
Willamette Group (the LWG) under agreement with the EPA. The Company made a payment of $175,000 to the LWG in June 2007 as part of an interim settlement, and is under no obligation to make any further payment. The final draft RI was
submitted to the EPA by the LWG in fall of 2011 and the draft FS was submitted by the LWG to the EPA in March 2012. As of the filing of this 2012 Form 10-K, the final RI is scheduled to be submitted to the EPA in the fall of 2013, and the final FS
is scheduled to be submitted to the EPA by November 30, 2013.
In 2001, groundwater containing elevated volatile organic
compounds (VOCs) was identified in one localized area of leased property adjacent to the Portland facility furthest from the river. Assessment work in 2002 and 2003 to further characterize the groundwater was consistent with the initial
conclusion that the source of the VOCs is located off of Company-owned property. In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (the Agreement) with the ODEQ. The
Company is one of many Upland Source Control Sites working with the ODEQ on Source Control and is considered a medium priority site by the ODEQ. The Company performed remedial investigation work required under the Agreement and submitted
a draft Remedial Investigation/Source Control Evaluation Report in December 2005. The conclusions of the report indicated that the VOCs found in the groundwater do not present an unacceptable risk to human or ecological receptors in the Willamette
River. The report also indicated there is no evidence at this time showing a connection between detected VOCs in groundwater and Willamette River sediments. In 2009, the ODEQ requested that the Company revise its Remedial Investigation/Source
Control Evaluation Report from 2005 to include more recent information from focused supplemental sampling at the Portland facility and more recent information that has become available related to nearby properties. The Company submitted the Expanded
Risk Assessment for the VOCs in Groundwater in May 2012, and comments from the ODEQ were received in November 2012. The Company is currently discussing additional sampling requirement with the ODEQ.
Also, based on sampling associated with the Portland facilitys remedial investigation and on sampling and reporting required under
the Portland, Oregon manufacturing facilitys National Pollutant Discharge Elimination System permit for storm water, the Company and the ODEQ have periodically detected low concentrations of polynuclear aromatic hydrocarbons
(PAHs), polychlorinated biphenyls (PCBs), and trace amounts of zinc in storm water. Storm water from the Portland, Oregon manufacturing facility site is discharged into a communal storm water system that ultimately discharges
into the neighboring propertys privately owned slip. The slip was historically used for shipbuilding and subsequently for ship breaking and metal recycling. Studies of the river sediments have revealed trace concentrations of PAHs, PCBs and
zinc, along with other constituents which are common constituents in urban storm water discharges. To minimize the zinc traces in its storm water, the Company painted a substantial part of the Portland facilitys roofs, and zinc has remained
below storm water benchmark levels ever since. In June 2009, under the ODEQ Agreement, the Company submitted a Final Supplemental Work Plan to evaluate and assess soil and storm water, and further assess groundwater risk. In May 2010, the Company
submitted a remediation plan related to soil contamination, which the ODEQ approved in August 2010. The Company has completed the approved remediation plan which has included excavation of a localized soil area to remove soil containing PAHs
(completed in the third quarter of 2011), an upgrade to the fuel and waste storage systems (completed in the fourth quarter of 2011), a storm water filtration system (completed in the first quarter of 2012), and paving of any permeable surfaces
(completed in the second quarter of 2012).
During the localized soil excavation in the third quarter of 2011, additional
stained soil was discovered. At the request of the ODEQ, the Company developed an additional Work Plan to characterize the nature and extent of soil and/or groundwater impacts from the staining. The Company began implementing this Work Plan in the
20
second quarter of 2012 and submitted sampling results to the ODEQ in the third quarter of 2012. Comments from the ODEQ were received in November 2012. The Company is currently discussing
additional sampling requirements with the ODEQ.
The Company has spent approximately $2.5 million in 2012 to complete the
Source Control work specified in the Work Plans, and anticipates having to spend approximately $50,000 for further Source Control work in 2013.
Concurrent with the activities of the EPA and the ODEQ, the Portland Harbor Natural Resources Trustee Council (Trustees) sent some or all of the same parties, including the Company, a notice
of intent to perform a Natural Resource Damage Assessment (NRDA) for the Portland Harbor Site to determine the nature and extent of natural resource damages under CERCLA section 107. The Trustees for the Portland Harbor Site consist of
representatives from several Northwest Indian Tribes, three federal agencies and one state agency. The Trustees act independently of the EPA and the ODEQ. In 2009, the Trustees completed phase one of their three-phase NRDA. Phase one of the NRDA
consisted of environmental studies to fill gaps in the information available from the EPA, and development of a framework for evaluating, quantifying and determining the extent of injuries to the natural resource. Phase two of the NRDA began in 2010
and consists largely of implementing the framework developed in phase one.
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 2009, one of the Tribal Trustees (the Yakima Nation) resigned and has requested funding from the same
parties to support its own assessment. The Company has not assumed any payment obligation or liability related to either request. The extent of the Companys obligation with respect to Portland Harbor matters is not known, and no further
adjustment to the consolidated financial statements has been recorded as of December 31, 2012.
All Sites
We operate our facilities under numerous governmental permits and licenses relating to air emissions, storm water run-off, and other
environmental matters. Our operations are also governed by many other laws and regulations, including those relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations there under which, among
other requirements, establish noise and dust standards. We believe we are in material compliance with our permits and licenses and these laws and regulations, and we do not believe that future compliance with such laws and regulations will have a
material adverse effect on our financial position, results of operations or cash flows.
From time to time, the Company is
involved in litigation relating to claims arising out of its operations in the normal course of its business. The Company maintains insurance coverage against potential claims in amounts that are believed to be adequate. The Company believes that it
is not presently a party to any other litigation, the outcome of which would have a material adverse effect on its business, financial condition, results of operations or cash flows.
Executive Officers of the Registrant
Information regarding the
Companys executive officers is set forth under the caption Directors, Executive Officers and Corporate Governance in Part IIIItem 10 of this 2012 Form 10-K and is incorporated herein by reference.
Item 4.
|
Mine Safety Disclosures
|
Not applicable.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
The Company operates in two business segments, Water Transmission and Tubular Products. We have Water Transmission
manufacturing facilities in Portland, Oregon; Denver, Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas and Monterrey, Mexico. During the second half of 2012, we permanently closed our facility located in Pleasant Grove,
Utah, and have transferred its property and equipment to other manufacturing locations. Tubular Products manufacturing facilities are located in Atchison, Kansas; Houston, Texas; and Bossier City, Louisiana.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on
historical experience and on various assumptions that are believed to be reasonable under the circumstances at that time. On an on-going basis, the Company evaluates all of its estimates, including those related to revenue recognition, allowance for
doubtful accounts, goodwill, long-lived assets, including depreciation and amortization, inventories, income taxes, and litigation and other contingencies. Actual results could differ from those estimates under different assumptions or conditions.
Basis of Consolidation and Presentation
The consolidated financial statements include the accounts of Northwest Pipe Company and its subsidiaries over which the Company exercises
control as of the financial statement date. Intercompany accounts and transactions have been eliminated. Prior period deferred revenue, which was previously reflected within accrued liabilities, has been reclassified (separated) to its own line item
within current assets and net cash provided by (used in) operating activities to conform to current period presentation in the consolidated balance sheets and consolidated statements of cash flows. This reclassification had no impact on cash flows
from operations, income from operations, net income, or total liabilities.
Lucid Energy LLC (Lucid Energy), over
which the Company exercises significant influence but does not control, is accounted for under the equity method of accounting. Lucid Energy is a clean energy company based in Portland, Oregon. At December 31, 2012, we have convertible notes
receivable from Lucid Energy, however the carrying value of our notes receivable and investment is zero.
Northwest Pipe Asia
Pte. Ltd. (NWPA) was previously accounted for under the equity method of accounting and was sold to the controlling owners of the business for $0.8 million on April 1, 2011. The Company previously exercised significant influence but
did not control NWPA. During the year ended December 31, 2011, the Company recorded purchases of property and equipment of $0.2 million, net of eliminations. All proceeds from the sale have been received by the Company and no intercompany
balances remained outstanding at December 31, 2011.
On June 1, 2011, the Company sold all assets of the traffic systems product
line of the Tubular Products facility in Houston, Texas. Assets sold as part of this sale included the (i) raw materials, work-in-process, finished goods and related fuel and supplies inventories, (ii) tangible personal property located at
the Houston facilities or used by the Company in connection with the traffic business, including machinery, equipment, tooling, operating and maintenance manuals, parts and all other tangible assets used in or related to the traffic business,
(iii) receivables, and (iv) other assets. Total consideration of $13.7 million was received, resulting in a gain of $2.9 million recognized in other expense (income), net during the second quarter of 2011. The calculation of the gain on
sale included a write-off of $973,000 of goodwill.
F-8
Out-of-Period Adjustment
In the first quarter of 2012, net sales was increased by $0.8 million for corrected estimates used in the computation of revenue
recognized on the percentage of completion method that should have been recorded in the year ended December 31, 2011. In the third quarter of 2012, cost of sales was decreased by $0.4 million to correct an overstatement of expenses that had
originally been recorded in the year ended December 31, 2011 ($0.1 million), first quarter of 2012 ($0.1 million) and the second quarter of 2012 ($0.2 million). When reviewing these errors in conjunction with other immaterial
uncorrected adjustments impacting prior periods, the Company concluded that the adjustments did not, individually or in the aggregate, result in a material misstatement of the Companys consolidated financial statements for any prior period,
and are not material to the Companys 2012 annual and quarterly financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short term highly liquid investments with remaining maturities of three months or less when
purchased.
Escrow Account
The escrow account, to be used for qualifying project costs under the financing arrangement for the Bossier City facility, is included in other assets. Funds are released from escrow upon the
Companys payment of qualifying project costs. Restricted cash held in the escrow account totaled $0.9 million and $0.9 million at December 31, 2012 and 2011, respectively.
Receivables and Allowance for Doubtful Accounts
Trade receivables are reported on the balance sheet net of any doubtful accounts. The Company maintains allowances for estimated losses
resulting from the inability of its customers to make required payments or from contract disputes. The amounts of such allowances are based on Company history and managements judgment. At least monthly, the Company reviews past due balances to
identify the reasons for non-payment. The Company will write off a receivable account once the account is deemed uncollectible. The Company believes the reported allowances at December 31, 2012 and 2011 are adequate. If the customers
financial conditions were to deteriorate resulting in their inability to make payments, or if contract disputes were to escalate, additional allowances may need to be recorded which would result in additional expenses being recorded for the period
in which such determination was made.
Customer Prepayments
Contractual terms may require prepayment of a portion of a contract value in advance of completing the work. Advanced deposits are recorded in accrued liabilities and are offset by invoices as work is
performed on the contract. Advanced deposits totaled $9.4 million and $2.0 million at December 31, 2012 and 2011, respectively.
Inventories
Inventories are stated at the lower of cost or market. Raw material inventories of steel are stated at cost, either on a specific identification basis or on an average cost basis. All other raw material
inventories, as well as supplies, are stated on an average cost basis. Finished goods are stated at cost using the first-in, first-out method of accounting.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are expensed as incurred, and costs of new equipment and buildings, as
well as costs of expansions or refurbishment of existing equipment and buildings, including interest where applicable, are capitalized. Depreciation and amortization are determined by the units of production method for most equipment and by the
straight-line method for the remaining assets based
F-9
on the estimated useful lives of the related assets. Depreciation expense calculated under the units of production method may be less than, equal to, or greater than depreciation expense
calculated under the straight-line method due to variances in production levels. Upon disposal, costs and related accumulated depreciation of the assets are removed from the accounts and resulting gains or losses are reflected in operating expenses.
The Company leases certain equipment under long-term capital leases, which are being amortized on a straight-line basis over the shorter of its useful life or the lease term.
The Company assesses impairment of property and equipment whenever changes in circumstances indicate that the carrying values of the assets may not be recoverable. The recoverable value of long-lived
assets is determined by estimating future undiscounted cash flows using assumptions about the expected future operating performance of the Company. The estimates of undiscounted cash flows may differ from actual cash flow due to, among other things,
technological changes, economic conditions, or changes to business operations. If the carrying value of the property and equipment is not estimated to be recoverable, an impairment loss is calculated and recorded.
Estimated useful lives by major classes of property and
equipment are as follows:
|
|
|
|
|
|
|
Land improvements
|
|
|
15 30 years
|
|
|
|
Buildings
|
|
|
20 40 years
|
|
|
|
Machinery and equipment
|
|
|
3 30 years
|
|
|
|
Goodwill
Goodwill related to the Companys Tubular Products Group, one of the Companys operating segments and reporting units, of $20.5
million at December 31, 2012 and 2011, represents the excess of purchase price over the assigned value of the net assets in connection with the segments acquisitions. The change in the carrying amount of goodwill for the year ended
December 31, 2011 was due to the sale of all assets of the traffic systems product line of the Tubular Products facility in Houston, Texas. No accumulated impairment charges are included within the Goodwill balance at December 31, 2012.
|
|
|
|
|
|
|
Total
|
|
Goodwill balance, December 31, 2010
|
|
$
|
21,451
|
|
Goodwill written off related to sale of business
|
|
|
(973
|
)
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance, December 31, 2011
|
|
|
20,478
|
|
|
|
|
|
|
Goodwill balance, December 31, 2012
|
|
$
|
20,478
|
|
|
|
|
|
|
Goodwill is reviewed for impairment annually or whenever events occur or circumstances change that would more likely
than not reduce the fair value of the Tubular Products Group below its carrying amount. The Company periodically performs a quantitative analysis, even when the qualitative analysis indicates that fair value of goodwill is above its carrying amount.
The Company conducts its annual impairment testing as of December 31. In accordance with our critical accounting policy, fair value of the Tubular Products Groups goodwill was evaluated under a qualitative approach which took into account
industry and market conditions, cost factors, overall financial performance, and other relevant entity specific events and changes. A quantitative analysis was performed for 2012 given the financial performance of the Tubular Products Group,
specifically the declining margins. Fair value was quantitatively determined with consideration of the income and market approaches as applicable. The income approach is based upon projected future after-tax cash flows (less capital expenditures)
discounted to present value using factors that consider the timing and risk associated with the future after-tax cash flows. The key assumptions in the discounted cash flow analysis are the long-term growth rate, the discount rate, and the annual
free cash flow. The market approach is based upon historical measures using EBITDA. The Company utilizes a weighted average of the income and market approaches, with a heavier weighting on the income approach because of the relatively limited number
of comparable entities for which relevant multiples are available. The Company also utilizes a sensitivity analysis to determine the impact of changes in discount rates and cash flow forecasts on the valuation of the Tubular operating segment.
F-10
The analysis performed concluded that Goodwill is not impaired at December 31, 2012. If
the Companys assumptions about goodwill change as a result of events or circumstances, and management believes the assets may have declined in value, then impairment charges will be recorded, resulting in lower profits. The operations of the
Tubular Products Group are cyclical and its sales and profitability may fluctuate from year to year. In the evaluation of the Companys operating segment, the Company looks at the long-term prospects for the reporting unit and recognizes that
current performance may not be the best indicator of future prospects or value, which requires management judgment.
Workers Compensation Insurance
The Company is self-insured, or maintains high deductible policies, for losses and liabilities associated with workers compensation
claims. Losses are accrued based upon the Companys estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry.
Pension Benefits
The Company has two defined benefit pension plans that have been frozen since 2001. The Company funds these plans to cover current plan
costs plus amortization of the unfunded plan liabilities. To record these obligations, management uses estimates relating to investment returns, mortality, and discount rates. Management reviews all of these assumptions on an annual basis.
Derivative Instruments
The Company conducts business in 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. Foreign currency forward contracts are consistent with the Companys
strategy for financial risk management. The Company utilizes cash flow hedge accounting treatment for qualifying foreign currency forward contracts. Instruments that do not qualify for cash flow hedge accounting treatment are remeasured at fair
value at each balance sheet date and resulting gains and losses are recognized in net income (loss).
Foreign Currency Transactions
Assets and liabilities subject to foreign currency fluctuations are translated into United States dollars at the period-end exchange rate,
and revenue and expenses are translated at exchange rates representing an average for the period. Translation adjustments from designated hedges are included in accumulated other comprehensive loss as a separate component of stockholders
equity. Gains or losses on all other foreign currency transactions are recognized in the statement of operations. The functional currency of the Companys Mexican operations is the United States dollar.
Revenue Recognition
Revenue from construction contracts in the Companys Water Transmission Group is recognized on the percentage-of-completion method. For a majority of contracts, revenue is measured by the costs
incurred to date as a percentage of the estimated total costs of each contract (cost-to-cost method). For a small number of contracts, revenue is measured using units of delivery as progress is best estimated by the number of units delivered under
the contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Selling, general and administrative costs are
charged to expense as incurred. The cost of steel is recognized as a project cost when the steel is introduced into the manufacturing process. Estimated total costs of each contract are reviewed on a monthly basis by project management and
operations personnel for all active projects. All cost revisions that result in the gross profit as a percent of sales increasing or decreasing by more than two percent are reviewed by senior management personnel.
F-11
The Company begins recognizing revenue on a project when persuasive evidence of an
arrangement exists, recoverability is reasonably assured, and project costs are incurred. Costs may be incurred before the Company has persuasive evidence of an arrangement. In those cases, if recoverability from that arrangement is probable, the
project costs are deferred and revenue recognition is delayed.
Provisions for losses on uncompleted contracts are made in the
period such losses are known. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, foreign currency exchange rate movements, changes in raw materials costs, and final
contract settlements may result in revisions to estimates of revenue, costs and income and are recognized in the period in which the revisions are determined.
Revenue from the Companys Tubular Products Group is recognized when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists, the price is fixed or
determinable, delivery has occurred, and collectability is reasonably assured. Deferred revenue is recorded when the manufacturing process is complete and customers are invoiced prior to physical delivery of the product.
Income Taxes
Income taxes are recorded using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Companys financial statements or tax returns. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. The determination of the provision for
income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. The provision for income taxes primarily reflects a combination of income earned and taxed in the various United States
federal and state and, to a lesser extent, foreign jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for unrecognized tax benefits or
valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
The Company records tax reserves for federal, state, local and international exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about
tax issues, potential outcomes and timing, and is a subjective estimate. The Company assesses tax positions and records tax benefits for all years subject to examination based upon managements evaluation of the facts, circumstances, and
information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement
with a tax authority that has full knowledge of all relevant information has been recorded. For those tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial
statements.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes unrealized gains and losses on derivative instruments related to the effective portion of
cash flow hedges and changes in the funded status of the defined benefit pension plans, both net of the related income tax effect.
Accumulated other comprehensive loss consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Pension liability adjustment, net of tax benefit of $1,244 and $1,294
|
|
$
|
(2,188
|
)
|
|
$
|
(2,326
|
)
|
Deferred gain (loss) on cash flow derivatives, net of tax benefit of $50 and expense of $44
|
|
|
(85
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,273
|
)
|
|
$
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
F-12
Earnings (Loss) per Share
Earnings (loss) per basic and diluted weighted average common
shares outstanding was calculated as follows for the years ended December 31 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Net income (loss)
|
|
$
|
16,244
|
|
|
$
|
12,660
|
|
|
$
|
(5,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
9,377
|
|
|
|
9,333
|
|
|
|
9,278
|
|
Effect of potentially dilutive common shares (1)
|
|
|
68
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
9,445
|
|
|
|
9,384
|
|
|
|
9,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per basic common share
|
|
$
|
1.73
|
|
|
$
|
1.36
|
|
|
$
|
(0.59
|
)
|
Earnings (loss) per diluted common share
|
|
|
1.72
|
|
|
|
1.35
|
|
|
|
(0.59
|
)
|
Antidilutive shares excluded from net earnings per diluted common share calculation
|
|
|
92
|
|
|
|
58
|
|
|
|
47
|
|
(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.
|
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables,
derivative contracts, the escrow account and deferred compensation plan assets. Trade receivables generally represent a large number of customers, including municipalities, manufacturers, distributors and contractors, dispersed across a wide
geographic base. At December 31, 2012, no customer had a balance in excess of 10% of total accounts receivable. At December 31, 2011, one customer had a balance which equaled 13% of total accounts receivable. Derivative contracts are with
a financial institution rated A-1 by S&P. The escrow account, which is included in other assets, is held in a money market mutual fund. The Companys deferred compensation plan assets, also included in other assets, are invested in a
diversified portfolio of stock and bond mutual funds.
Share-based Compensation
The Company recognizes the compensation cost of employee and director services received in exchange for awards of equity instruments based
on the grant date estimated fair value of the awards. Share-based compensation cost is recognized over the period during which the employee or director is required to provide service in exchange for the award, and as forfeitures occur, the
associated compensation cost recognized to date is reversed. Share-based compensation cost related to awards with a performance-based condition is recognized based on the probable outcome of the performance conditions, which requires judgment.
The Company estimates the fair value of stock options using the Black-Scholes-Merton option pricing model. The
Black-Scholes-Merton option pricing model requires the Company to estimate key assumptions such as expected term, volatility, risk-free interest rates and dividend yield to determine the fair value of stock options, based on both historical
information and management judgment regarding market factors and trends. The Company estimates the fair value of Restricted Stock Units (RSUs) and Performance Stock Awards (PSAs) using the value of the Companys stock on
the date of grant, with the exception of market-based PSAs, for which a Monte Carlo simulation model is used. The Monte Carlo simulation model calculates many potential outcomes for an award and estimates fair value based on the most likely outcome.
See Note 11, Share-based Compensation Plans for further discussion of the Companys share-based
compensation.
F-13
Recent Accounting and Reporting Developments
Accounting Changes
In
May 2011, the FASB issued ASU 2011-04, which amends the wording used to describe the requirements for measuring fair value and expands fair value disclosure requirements. This guidance is effective for interim and annual periods beginning after
December 15, 2011. The Company adopted this guidance on January 1, 2012 as required. As this guidance only amends disclosure requirements, the adoption did not impact the Companys consolidated financial position, results of
operations or cash flows.
In June 2011, the FASB issued ASU 2011-05, which eliminates the option to present components of
other comprehensive income as part of the Statement of Stockholders Equity. All changes in components of comprehensive income must be presented in (1) a single continuous statement of comprehensive income, which presents the total of
comprehensive income, the components of net income, and the components of comprehensive income, or (2) two separate but consecutive statements. Under either presentation method, reclassification adjustments between other comprehensive income
and net income are required to be presented on the face of the financial statements. In October 2011, the FASB decided to delay the effective date of the requirement to present reclassifications of other comprehensive income on the face of the
income statement. All other guidance in ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and will be applied retrospectively. The Company adopted the effective portions of this guidance on
January 1, 2012 as required. The adoption of this guidance did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income and thus had an impact on
the presentation of comprehensive income in the consolidated financial statements only.
Recent Accounting Standards
In December, 2011, the FASB issued ASU 2011-11 which requires companies to disclose information regarding offsetting and other
arrangements for derivatives and other financial instruments. In January 2013, the FASB issued ASU 2013-01, which limited the scope of the balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending
transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. This guidance is effective for interim and annual periods beginning on or
after January 1, 2013. The adoption of this guidance is not expected to have a significant impact on the Companys consolidated financial position as the new requirements are primarily disclosure related.
In February 2013, the FASB issued ASU 2013-02, which clarified the reclassification requirements of ASU 2011-05 which were previously
delayed by the FASB in October 2011. Reclassification adjustments which are not reclassified from other comprehensive income to net income in their entirety may instead be parenthetically cross referenced to the related footnote on the face of the
financial statements for additional information. This guidance is effective for interim and annual reporting periods beginning after December 15, 2012 and will have an impact on the presentation of comprehensive income in the consolidated
financial statements only.
2.
|
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS AND BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS:
|
The sum of costs and estimated earnings in excess of billings on uncompleted contracts represents revenue earned under
the percentage-of-completion method but not yet billable based on the terms of the contracts. These amounts are billed based on the terms of the contracts, which include achievement of milestones, partial
F-14
shipments or completion of the contracts. Billings in excess of costs and estimated earnings represents amounts billed based on the terms of the contracts in advance of costs incurred and revenue
earned.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Costs incurred on uncompleted contracts
|
|
$
|
211,801
|
|
|
$
|
356,527
|
|
Estimated earnings
|
|
|
32,480
|
|
|
|
56,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,281
|
|
|
|
412,754
|
|
Less billings to date
|
|
|
(177,445
|
)
|
|
|
(382,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,836
|
|
|
$
|
30,215
|
|
|
|
|
|
|
|
|
|
|
Amounts are presented in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
73,314
|
|
|
$
|
38,029
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(6,478
|
)
|
|
|
(7,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
66,836
|
|
|
$
|
30,215
|
|
|
|
|
|
|
|
|
|
|
Inventories are stated at the lower of cost or market and consist
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Short-term inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
56,913
|
|
|
$
|
65,511
|
|
Work-in-process
|
|
|
10,157
|
|
|
|
3,543
|
|
Finished goods
|
|
|
43,374
|
|
|
|
35,000
|
|
Supplies
|
|
|
3,101
|
|
|
|
3,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,545
|
|
|
|
107,169
|
|
Long-term inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
1,608
|
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
115,153
|
|
|
$
|
109,570
|
|
|
|
|
|
|
|
|
|
|
Long-term inventories are recorded in other assets. The lower of cost or market adjustment for all inventories was $3.5
million and $3.4 million at December 31, 2012 and 2011, respectively.
4.
|
PROPERTY AND EQUIPMENT:
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Land and improvements
|
|
$
|
23,651
|
|
|
$
|
20,101
|
|
Buildings
|
|
|
39,834
|
|
|
|
41,319
|
|
Machinery and equipment
|
|
|
155,276
|
|
|
|
147,814
|
|
Equipment under capital lease
|
|
|
21,452
|
|
|
|
21,310
|
|
Construction in progress
|
|
|
9,906
|
|
|
|
9,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,119
|
|
|
|
239,754
|
|
Less accumulated depreciation and amortization
|
|
|
(97,574
|
)
|
|
|
(86,908
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
152,545
|
|
|
$
|
152,846
|
|
|
|
|
|
|
|
|
|
|
F-15
Depreciation and amortization expense was $16.3 million, $14.5 million, and $13.7 million
for the years ended December 31, 2012, 2011, and 2010, respectively. Accumulated amortization associated with property and equipment under capital leases was $8.6 million and $5.4 million at December 31, 2012 and 2011, respectively.
5.
|
NOTE PAYABLE TO FINANCIAL INSTITUTION:
|
On October 24, 2012, the Company entered into the Amended Credit Agreement, which amends, supersedes and restates
the Credit Agreement dated May 31, 2007, and provides for a revolving loan, swing line loan and letters of credit in the aggregate amount of up to $165 million. In addition, the Amended Credit Agreement reflects reductions in the interest rates
charged on outstanding balances and a reduction in the number of financial covenants. The Amended Credit Agreement bears interest at rates related to LIBOR plus 1.75% to 2.75%, or the lending institutions prime rate plus 0.75% to 1.75%. The
Amended Credit Agreement expires on October 24, 2017.
At December 31, 2012, $47.5 million was outstanding under the
Amended Credit Agreement. We were able to borrow at LIBOR plus 2.0% at December 31, 2012. At December 31, 2012 we had $90.8 million available under the Amended Credit Agreement while remaining in compliance with the Companys
financial covenants, net of outstanding letters of credit. The Amended Credit Agreement bears interest at a weighted average rate of 2.31% at December 31, 2012.
At December 31, 2011, the Company had a $125.0 million Credit Agreement, under which $62.0 million was outstanding. The Credit Agreement bore interest at a weighted average rate of 3.03% at
December 31, 2011. We were able to borrow at LIBOR plus 2.5% at December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Series A Term Note, maturing on February 25, 2014, due in annual payments of $2.1 million that began February 25, 2008,
plus interest at 10.50% paid quarterly, on February 25, May 25, August 25 and November 25, collateralized by accounts receivable, inventory and certain equipment
|
|
$
|
4,286
|
|
|
$
|
6,429
|
|
Series B Term Note, maturing on June 21, 2014, due in annual payments of $1.5 million that began June 21, 2008, plus
interest at 10.22% paid quarterly, on March 21, June 21, September 21 and December 21, collateralized by accounts receivable, inventory and certain equipment
|
|
|
3,000
|
|
|
|
4,500
|
|
Series C Term Note, maturing on October 26, 2014, due in annual payments of $1.4 million that began October 26, 2008,
plus interest at 9.11% paid quarterly, on January 26, April 26, July 26 and October 26, collateralized by accounts receivable, inventory and certain equipment
|
|
|
2,857
|
|
|
|
4,286
|
|
Series D Term Note, maturing on January 24, 2015, due in annual payments of $643,000 that began January 24, 2009, plus
interest at 9.07% paid quarterly, on January 24, April 24, July 24 and October 24, collateralized by accounts receivable, inventory and certain equipment
|
|
|
1,928
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
12,071
|
|
|
$
|
17,785
|
|
|
|
|
|
|
|
|
|
|
Amounts are presented in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
5,714
|
|
|
$
|
5,714
|
|
Long-term debt, less current portion
|
|
|
6,357
|
|
|
|
12,071
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,071
|
|
|
$
|
17,785
|
|
|
|
|
|
|
|
|
|
|
F-16
Future principal payments of long-term debt are as follows (in
thousands):
|
|
|
|
|
2013
|
|
$
|
5,714
|
|
2014
|
|
|
5,714
|
|
2015
|
|
|
643
|
|
2016
|
|
|
|
|
2017
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,071
|
|
|
|
|
|
|
Interest expense under the Companys credit agreement and long-term debt was $5.6 million, net of amounts
capitalized of $0.2 million in 2012, $9.3 million, net of amounts capitalized of $0.2 million in 2011, and $8.9 million, net of amounts capitalized of $0.5 million in 2010.
Capital Leases
The Company leases certain equipment used in the manufacturing process.
The future minimum payments under the Companys capital leases are as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
4,129
|
|
2014
|
|
|
4,052
|
|
2015
|
|
|
2,697
|
|
2016
|
|
|
2,145
|
|
2017
|
|
|
1,315
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
14,338
|
|
Amount representing interest
|
|
|
(1,864
|
)
|
|
|
|
|
|
Present value of minimum lease payments with average interest rates of 7.68%
|
|
|
12,474
|
|
Current portion of capital lease obligation
|
|
|
3,295
|
|
|
|
|
|
|
Capital lease obligation, less current portion
|
|
$
|
9,179
|
|
|
|
|
|
|
We had a total of $12.5 million in capital lease obligations outstanding at December 31, 2012. The weighted
average interest rate on all of the Companys capital leases is 7.68%. The Companys capital leases are for certain equipment used in the manufacturing process. Of the total capital lease balance, $6.6 million of the Companys capital
leases outstanding as of December 31, 2012 consists of a Financing Arrangement entered into as of September 2009 to finance the Companys Bossier City, Louisiana facility under which certain equipment used in the manufacturing process at
the facility is leased. As part of the Financing Arrangement, a $10 million escrow account was provided for the Company by a local government entity through a financial institution and funds are released upon qualifying purchase requisitions. As we
purchase equipment for the facility, we enter into a sale-leaseback transaction with the governmental entity as part of the Financing Arrangement. As of December 31, 2012, $0.9 million was held in the escrow account, which is included in Other
Assets, as a result of proceeds from the Financing Arrangement. The Financing Arrangement requires the Company to meet certain loan covenants, measured at the end of each fiscal quarter. These loan covenants follow the covenants required by the
Companys Amended Credit Agreement.
Operating Leases
The Company has entered into various equipment and property leases with terms of ten years or less. Total rental expense for 2012, 2011,
and 2010 was $3.2 million, $3.3 million, and $3.2 million, respectively. Certain of
F-17
the Companys operating lease agreements include renewals and/or purchase options set to expire at various dates.
Future minimum payments as of December 31, 2012 for operating leases with initial or remaining terms in excess of one year are (in thousands):
|
|
|
|
|
2013
|
|
$
|
2,421
|
|
2014
|
|
|
2,021
|
|
2015
|
|
|
1,751
|
|
2016
|
|
|
1,465
|
|
2017
|
|
|
1,077
|
|
Thereafter
|
|
|
699
|
|
|
|
|
|
|
|
|
$
|
9,434
|
|
|
|
|
|
|
8.
|
FAIR VALUE MEASUREMENTS:
|
Assets/Liabilities Measured and Recorded at Fair Value on a Recurring Basis
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 guidance for fair value measurements also applies to
nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities.
The authoritative guidance
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. These levels are: Level 1 (inputs are quoted prices in active markets for identical assets or liabilities);
Level 2 (inputs are other than quoted prices that are observable, either directly or indirectly through corroboration with observable market data); and Level 3 (inputs are unobservable, with little or no market data that exists, such as internal
financial forecasts). The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The following table summarizes
information regarding the Companys financial assets and financial liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
December 31,
2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow account
|
|
$
|
898
|
|
|
$
|
898
|
|
|
$
|
|
|
|
$
|
|
|
Deferred compensation plan assets
|
|
|
5,280
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,178
|
|
|
$
|
6,178
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(353
|
)
|
|
$
|
|
|
|
$
|
(353
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
December 31,
2011
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow account
|
|
$
|
897
|
|
|
$
|
897
|
|
|
$
|
|
|
|
$
|
|
|
Deferred compensation plan assets
|
|
|
4,575
|
|
|
|
4,575
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
153
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,625
|
|
|
$
|
5,472
|
|
|
$
|
153
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(108
|
)
|
|
$
|
|
|
|
$
|
(108
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The escrow account, consisting of a money market mutual fund, is valued using quoted market prices in active markets
classified as Level 1 within the fair value hierarchy. The deferred compensation plan assets consists 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. The Companys 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 net carrying amounts of cash and cash equivalents, trade and other
receivables, accounts payable, accrued liabilities and note payable to financial institution approximate fair value due to the short-term nature of these instruments. The Company is obligated to repay the carrying value of the Companys long
term debt. The fair value of the Companys debt is calculated using a coupon rate on borrowings with similar maturities, current remaining average life to maturity, borrower credit quality, and current market conditions all of which are
classified as Level 2 inputs within the valuation hierarchy. The fair value of the Companys long-term debt, including the current portion, was $11.5 million and the carrying value was $12.1 million at December 31, 2012. The fair value of
the Companys long-term debt, including the current portion, was $16.1 million and the carrying value was $17.8 million at December 31, 2011.
Financial Assets Measured and Recorded at Fair Value on a Non-Recurring Basis
The Company measures its financial assets, including loans receivable and non-marketable equity method investments, at fair value on a non-recurring basis when they are determined to be
other-than-temporarily impaired. The fair value of these assets is determined using Level 3 unobservable inputs due to the absence of observable market inputs and the valuations requiring management judgment. During 2012, there were no impairment
charges taken. During 2011, we recognized $4.1 million of impairment charges on loans receivable. The impairment charges were included in other expense (income) in the consolidated statement of income. All notes receivable are categorized as Level 3
in the fair value hierarchy.
9.
|
DERIVATIVE FINANCIAL 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 re-measured at fair value on each balance sheet date and resulting gains and losses are recognized in net income. As of December 31, 2012 and 2011, the total
notional amount of the derivative contracts not designated as hedges was $2.7 million (CAD$2.6 million) and $1.5 million (CAD$1.5million), respectively. As
F-19
of December 31, 2012 and 2011, the total notional amount of the derivative contracts designated as hedges was $12.4 million (CAD$12.3 million) and $8.5 million (CAD$8.6 million),
respectively.
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 instruments 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 hedges 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 on the Consolidated Statement of 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 Companys Canadian forward contracts have maturities not longer than 12 months as of December 31, 2012, except one
contract with a notional value of $3.1 million (CAD$3.1 million) which has a remaining maturity of 15 months.
The balance sheet location and the
fair values of derivative instruments are:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Foreign Currency Forward Contracts
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
Prepaid expenses and other
|
|
$
|
|
|
|
$
|
66
|
|
Derivatives not designated as hedging instruments
Prepaid expenses and other
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
Accrued liabilities
|
|
$
|
197
|
|
|
$
|
23
|
|
Derivatives not designated as hedging instruments
Accrued liabilities
|
|
|
156
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
353
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
F-20
The amounts of losses related to the
Companys derivative contracts designated as hedging instruments for the year ended December 31, 2012 and 2011 are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
Loss
Recognized in
Other
Comprehensive
Income on
Effective
Portion of Derivative
|
|
|
Pretax
Loss
Recognized in Income on
Effective Portion of
Derivative as a
Result
of Reclassification from
Accumulated Other
Comprehensive Loss
|
|
|
Ineffective Portion
of
Loss on Derivative and
Amount Excluded from
Effectiveness Testing
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Amount
|
|
|
Location
|
|
|
Amount
|
|
|
Location
|
|
|
Amount
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(234
|
)
|
|
|
Net sales
|
|
|
$
|
(40
|
)
|
|
|
Net sales
|
|
|
$
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(172
|
)
|
|
|
Net sales
|
|
|
$
|
(501
|
)
|
|
|
Net sales
|
|
|
$
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(157
|
)
|
|
|
Net sales
|
|
|
$
|
(31
|
)
|
|
|
Net sales
|
|
|
$
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the
beginning and ending balances of the Companys accumulated other comprehensive income (loss) related to gains or losses on derivative contracts, as well as amounts reclassified to earnings for the years ended December 31, 2012 and 2011 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
14
|
|
|
$
|
(197
|
)
|
Net unrealized loss from cash flow hedging instruments arising during the period, net of tax
|
|
|
(120
|
)
|
|
|
(107
|
)
|
Reclassifications into earnings, net of tax
|
|
|
21
|
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(85
|
)
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2012, 2011 and 2010, gains (losses) of $(0.4) million, $0.1 million and ($0.6)
million, respectively, from derivative contracts not designated as hedging instruments were recognized in net sales. At December 31, 2012, there is $0.1 million of unrealized pretax loss on outstanding derivatives accumulated in other
comprehensive loss, substantially all of which is expected to be reclassified to net sales within the next 12 months as a result of underlying hedged transactions also being recorded in net sales.
The Company has a defined contribution retirement plan that covers substantially all of its employees and provides for
a Company match of up to 50% of the first 6% of employee contributions to the plan, subject to certain limitations. The defined contribution retirement plan offers fourteen investment options.
The Company has a non-qualified retirement savings plan that covers officers and selected highly compensated employees. The non-qualified
plan generally matches up to 50% of the first $10,000 of officer contributions to the plan and the first $5,000 of other selected highly compensated employee contributions, subject to certain limitations. It also provides a Company funded component
for the employees with a retirement target benefit. The retirement target benefit amount is an actuarially estimated amount necessary to provide 35% of final base pay after a 35-year career with the Company or 1% of final base pay per year of
service. The actual benefit, however, assumes an investment growth at 8% per year. Should the investment growth be greater than 8%, the benefit will be more, but if it is less than 8%, the amount will be less and the Company does not make up
any deficiency.
F-21
The Company also has two noncontributory defined benefit plans. Effective 2001, both plans
were frozen, and participants were fully vested in their accrued benefits as of the date each plan was frozen. No additional participants can be added to the plans and no additional service can be earned by participants subsequent to the date the
plans were frozen. The funding policy for each noncontributory defined benefit plan is based on current plan costs plus amortization of the unfunded plan liability. All current employees covered by these plans are now covered by the defined
contribution retirement plan. As of December 31, 2012 the Company had recorded, in accordance with the actuarial valuation, an accrued pension liability of $2.6 million and an unrecognized actuarial loss, net of tax, of $2.2 million in
accumulated other comprehensive loss. As of December 31, 2011, the Company had recorded an accrued pension liability of $2.6 million and an unrecognized actuarial loss, net of tax, of $2.3 million in accumulated other comprehensive loss.
Additionally, as of December 31, 2012 and 2011, the projected and accumulated benefit obligation was $6.7 million and $6.4 million, respectively, and the fair value of plan assets was $4.1 million and $3.8 million, respectively. The net
periodic benefit cost was $0.4 million for the year ended December 31, 2012, $0.3 million for the year ended December 31, 2011, and $0.3 million for the year ended December 31, 2010. The weighted average discount rates used to measure
the projected benefit obligation were 3.52% and 4.06% as of December 31, 2012 and 2011, respectively. The plan assets are invested in growth mutual funds, consisting of a mix of debt and equity securities, which are categorized as Level 2 under
the fair value hierarchy. The expected weighted average long term rate of return on plan assets was 7.5% and 7.5% as of December 31, 2012 and 2011, respectively.
Total expense for all retirement plans in 2012, 2011 and 2010 was $1.7 million, $1.3 million and $1.3 million, respectively.
11.
|
SHARE-BASED COMPENSATION PLANS:
|
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, RSUs and PSAs. In addition, the Company has one inactive stock option plan, the 1995 Stock
Options Plan for Nonemployee Directors, under which previously granted options remain outstanding. The plans provide that options become exercisable according to vesting schedules, which range from immediate to ratably over a 60-month period.
Options terminate 10 years from the date of grant. The plans also provide for other equity instruments, such as RSUs and PSAs, which grant the right to receive a specified number of shares over a specified period of time. RSUs are service-based
awards and vest according to vesting schedules, which range from immediate to ratably over a three-year period. PSAs are service-based awards with either a performance or market-based vesting condition. Vesting of the performance-based PSAs is
dependent upon meeting certain strategic goals and ranges from a three-month period to a three-year period. Vesting of the market-based PSAs is dependent upon the performance of the market price of the Companys stock relative to a comparator
group of companies and ranges from two to three years.
The following summarizes share-based compensation expense recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Cost of sales
|
|
$
|
432
|
|
|
$
|
143
|
|
|
$
|
49
|
|
Selling, general and administrative expenses
|
|
|
2,616
|
|
|
|
1,318
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,048
|
|
|
$
|
1,461
|
|
|
$
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, unrecognized compensation expense related to the unvested portion of the Companys
RSUs and PSAs was $3.1 million, which is expected to be recognized over a weighted average period of 1.6 years.
There were
227,177 shares of common stock available for future issuance under the Companys stock compensation plans at December 31, 2012; an additional 47,000 options and 243,141 RSUs and PSAs have been
F-22
granted and remain outstanding. There were 307,984 and 408,434 shares of common stock available for future issuance under the Companys stock compensation plans at December 31, 2011 and
2010, respectively.
Stock Options Awards
A summary of status of the Companys stock
options as of December 31, 2012 and changes during the three years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Balance, December 31, 2009
|
|
|
213,103
|
|
|
$
|
15.26
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
24,000
|
|
|
|
24.15
|
|
|
|
|
|
|
|
|
|
Options exercised or exchanged
|
|
|
(87,671
|
)
|
|
|
13.63
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(4,223
|
)
|
|
|
17.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
145,209
|
|
|
|
17.64
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised or exchanged
|
|
|
(73,612
|
)
|
|
|
14.12
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
71,597
|
|
|
|
21.26
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised or exchanged
|
|
|
(24,597
|
)
|
|
|
17.58
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
47,000
|
|
|
|
23.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and Outstanding, December 31, 2012
|
|
|
47,000
|
|
|
|
23.19
|
|
|
|
4.86
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value, defined as the difference between the current market value and the grant price, of options
exercised during the years ended December 31, 2012, 2011 and 2010 was $0.1 million, $0.8 million and $0.8 million, respectively.
The following table summarizes information about stock options outstanding at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Prices
Per Share
|
|
Number
of
Options
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
$10.31
|
|
|
7,000
|
|
|
|
0.36
|
|
|
$
|
10.31
|
|
|
|
7,000
|
|
|
$
|
10.31
|
|
$14.00
|
|
|
2,000
|
|
|
|
1.36
|
|
|
|
14.00
|
|
|
|
2,000
|
|
|
|
14.00
|
|
$22.07 - $24.15
|
|
|
28,000
|
|
|
|
6.55
|
|
|
|
23.85
|
|
|
|
28,000
|
|
|
|
23.85
|
|
$28.31
|
|
|
4,000
|
|
|
|
3.36
|
|
|
|
28.31
|
|
|
|
4,000
|
|
|
|
28.31
|
|
$34.77
|
|
|
6,000
|
|
|
|
4.41
|
|
|
|
34.77
|
|
|
|
6,000
|
|
|
|
34.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,000
|
|
|
|
4.86
|
|
|
|
23.19
|
|
|
|
47,000
|
|
|
|
23.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted during 2012 or 2011; the weighted average grant date fair value of options granted during
2010 was $15.35. The fair value of options granted in 2010 was estimated as of the date of grant using the Black-Scholes-Merton option-pricing model with the assumptions noted in the following table. The risk-free interest rate is based on the
United States Treasury yield curve corresponding to the expected life of the
F-23
option in effect at the time of the grant. The expected life is based on the historical exercise pattern of similar groups of employees. Expected volatility is based on the historical volatility
of the Companys stock.
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
Risk-free interest rate
|
|
|
3.74
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
51.19
|
%
|
Expected lives (in years)
|
|
|
9.25
|
|
Restricted Stock Units and Performance Awards
A summary of status of the Companys RSUs and PSAs
as of December 31, 2012 and changes during the three years then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of
RSUs and PSAs
|
|
|
Weighted Average Grant
Date Fair Value
|
|
Unvested RSUs and PSAs at December 31, 2009
|
|
|
127,487
|
|
|
$
|
41.66
|
|
Unvested RSUs and PSAs cancelled
|
|
|
(54,986
|
)
|
|
|
44.70
|
|
Unvested RSUs and PSAs vested
|
|
|
(16,658
|
)
|
|
|
47.27
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs and PSAs at December 31, 2010
|
|
|
55,843
|
|
|
|
37.00
|
|
RSUs and PSAs granted
|
|
|
174,891
|
|
|
|
23.32
|
|
Unvested RSUs and PSAs cancelled
|
|
|
(20,997
|
)
|
|
|
47.46
|
|
Unvested RSUs and PSAs vested
|
|
|
(15,756
|
)
|
|
|
26.27
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs and PSAs at December 31, 2011
|
|
|
193,981
|
|
|
|
24.41
|
|
RSUs and PSAs granted
|
|
|
115,306
|
|
|
|
29.06
|
|
Unvested RSUs and PSAs cancelled
|
|
|
(39,306
|
)
|
|
|
28.44
|
|
Unvested RSUs and PSAs vested
|
|
|
(26,840
|
)
|
|
|
23.13
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs and PSAs at December 31, 2012
|
|
|
243,141
|
|
|
$
|
26.11
|
|
|
|
|
|
|
|
|
|
|
The unvested balance of RSUs and PSAs at December 31, 2012 includes approximately 172,000 PSAs included at a
target level. The vesting of these awards is subject to the achievement of specified market-based conditions, and 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%.
The total fair value of RSUs and PSAs vested during the years ended December 31,
2012, 2011, and 2010 was $0.6 million, $0.4 million, and $0.8 million, respectively.
Stock Awards
For the years ended December 31, 2012, 2011 and 2010, stock awards were granted to non-employee directors, which vested immediately
upon issuance, as follows: 4,807 shares; 6,261 shares; and 6,615 shares, respectively. The Company recorded compensation expense based on the fair market value per share of the awards on the grant date of $23.40 in 2012, $25.15 in 2011, and $23.81
in 2010.
12.
|
SHAREHOLDER RIGHTS PLAN:
|
In June 1999, the Board of Directors adopted a Shareholder Rights Plan (the Plan) designed to ensure fair
and equal treatment for all shareholders in the event of a proposed acquisition of the Company by enhancing the ability of the Board of Directors to negotiate more effectively with a prospective acquirer, and reserved 150,000 shares of Series A
Junior Participating Preferred Stock (Preferred Stock) for purposes of the Plan. In connection with the adoption of the Plan, the Board of Directors declared a dividend distribution of one
non-
F-24
detachable preferred stock purchase right (a Right) per share of common stock, payable to shareholders of record on July 9, 2000. Each Right represents the right to purchase one
one-hundredth of a share of Preferred Stock at a price of $83.00, subject to adjustment. The Rights will be exercisable only if a person or group acquires, or commences a tender offer to acquire, 15% or more of the Companys outstanding shares
of common stock. Subject to the terms of the Plan and upon the occurrence of certain events, each Right would entitle the holder to purchase common stock of the Company, or of an acquiring company in certain circumstances, having a market value
equal to two times the exercise price of the Right. The Company may redeem the Rights at a price of $0.01 per Right under certain circumstances.
On June 18, 2009, the Company and Computershare (Rights Agent) entered into an Amended and Restated Rights Agreement (the Amended and Restated Rights Agreement). The Amended
and Restated Rights Agreement amended and restated the Rights Agreement dated as of June 28, 1999 between the Company and ChaseMellon Shareholder Services, L.L.C. (predecessor to the Rights Agent). The Amended and Restated Rights Agreement
extended the Final Expiration Date of the Rights from June 28, 2009 to June 28, 2019. The Amended and Restated Rights Agreement also reflected certain changes in the rights and obligations of the Rights Agent and certain changes in
procedural requirements under the Amended and Restated Rights Agreement.
13.
|
COMMITMENTS AND CONTINGENCIES:
|
Class Action and Derivative Lawsuits
On November 20, 2009, a complaint against the Company, captioned Richard v. Northwest Pipe Co. et al., No. C09-5724 RBL (Richard), was filed in the United States District Court for the
Western District of Washington. The plaintiff is allegedly a purchaser of the Companys stock. In addition to the Company, Brian W. Dunham, the Companys former President and Chief Executive Officer, and Stephanie J. Welty, the
Companys former Chief Financial Officer, are named as defendants. The complaint alleges that defendants violated Section 10(b) of the Securities Exchange Act of 1934 by making false or misleading statements between April 23, 2008 and
November 11, 2009, subsequently extended to December 22, 2011 (the Class Period). Plaintiff seeks to represent a class of persons who purchased the Companys stock during the same period, and seeks damages for losses
caused by the alleged wrongdoing.
A similar complaint, captioned Plumbers and Pipefitters Local Union No. 630
Pension-Annuity Trust Fund v. Northwest Pipe Co. et al., No. C09-5791 RBL (Plumbers), was filed against the Company in the same court on December 22, 2009. In addition to the Company, Brian W. Dunham, Stephanie J. Welty and William
R. Tagmyer, the Companys Chairman of the Board, are named as defendants in the Plumbers complaint. In the Plumbers complaint, as in the Richard complaint, the plaintiff is allegedly a purchaser of the Companys stock and asserts that
defendants violated Section 10(b) of the Securities Exchange Act of 1934 by making false or misleading statements during the Class Period. Plaintiff seeks to represent a class of persons who purchased the Companys stock during that
period, and seeks damages for losses caused by the alleged wrongdoing.
The Richard action and the Plumbers action were
consolidated on February 25, 2010. Plumbers and Pipefitters Local No. 630 Pension-Annuity Trust Fund was appointed lead plaintiff in the consolidated action. A consolidated amended complaint was filed by the plaintiff on December 21,
2010, and our motion to dismiss was filed on February 25, 2011, as were similar motions filed by the individual defendants. On August 26, 2011, the Court denied all defendants motions to dismiss, and the Company filed its answer to
the consolidated amended complaint on October 24, 2011. The parties participated in an initial settlement mediation on January 30, 2012. On July 19, 2012 the parties participated in a second settlement mediation at which the parties
agreed, subject to court approval, to settle all of the plaintiffs claims for $12.5 million. All of this amount will be paid by the Companys insurers with the exception of $200,000 in retention which was expensed in the second quarter of
2010 and $200,000 which was expensed in the second quarter of 2012. The full settlement amount has been placed into escrow. On November 27, 2012, the Court issued an order preliminarily approving the class action settlement and setting a
settlement hearing for final approval for March 22, 2013.
F-25
On March 3, 2010, the Company was served with a derivative complaint, captioned Ruggles
v. Dunham et al., No. C10-5129 RBL (Ruggles), and filed in the United States District Court for the Western District of Washington. The plaintiff in this action is allegedly a current shareholder of the Company. The Company is a nominal
defendant in this litigation. Plaintiff seeks to assert, on the Companys behalf, claims against Brian W. Dunham, Stephanie J. Welty, William R. Tagmyer, Keith R. Larson, Wayne B. Kingsley, Richard A. Roman, Michael C. Franson and Neil R.
Thornton. The asserted basis of the claims is that defendants breached fiduciary duties to the Company by causing the Company to make improper statements between April 23, 2008 and August 7, 2009. Plaintiff seeks to recover, on the
Companys behalf, damages for losses caused by the alleged wrongdoing.
On September 23, 2011, the Company was
served with a derivative complaint, captioned Grivich v. Dunham, et al., No. 11-2-03678-6 (Grivich), and filed in the Superior Court of Washington for Clark County. The plaintiff in this action is allegedly a current shareholder of
the Company. The Company is a nominal defendant in this litigation. Plaintiff seeks to assert, on the Companys behalf, claims against Brian W. Dunham, Stephanie J. Welty, William R. Tagmyer, Keith R. Larson, Wayne B. Kingsley, Richard A.
Roman, Michael C. Franson and Neil R. Thornton. The asserted basis of the claims is that defendants breached fiduciary duties to the Company between April 2, 2007 and the date of the Complaint. Plaintiff seeks to recover, on the Companys
behalf, damages for losses caused by the alleged wrongdoing.
On October 14, 2011, another derivative complaint,
captioned Richard v. Dunham, et al., No. 11-2-04080-5 (Richard Deriv.), was filed in the Superior Court of Washington for Clark County. The plaintiff in this action is allegedly a current shareholder of the Company. The Company is a
nominal defendant in this litigation. Plaintiff seeks to assert, on the Companys behalf, claims against Brian W. Dunham, Stephanie J. Welty, William R. Tagmyer, Keith R. Larson, Wayne B. Kingsley, Richard A. Roman, Michael C. Franson and Neil
R. Thornton. The asserted basis of the claims is that defendants breached fiduciary duties to the Company between April 2, 2007 and the date of the Complaint. Plaintiff seeks to recover, on the Companys behalf, damages for losses caused
by the alleged wrongdoing.
An amended complaint in the Ruggles action was filed on November 10, 2011, and the defendants
responded to the complaint by filing a motion to dismiss. The derivative parties participated in both of the settlement mediations described above. At the mediation on July 19, 2012, the parties agreed, subject to court approval, to settle all
of the above derivative plaintiffs claims in all of the above-described derivative actions, with the Company agreeing to make certain corporate governance modifications and pay plaintiffs the amount of $750,000 for plaintiffs
attorneys fees. All of this amount will be paid by the Companys insurers. The full settlement amount is included in accrued liabilities. The amount that will be paid by the insurers is included in trade and other receivables. On
December 19, 2012, the Court issued an order preliminarily approving the settlement of the derivative actions and setting a settlement hearing for final approval for March 29, 2013.
SEC Investigation
On March 8, 2010, the staff of the Enforcement
Division of the SEC advised our counsel that they had obtained a formal order of investigation with respect to matters which resulted in the restatement of our financial statements completed in November of 2010. We are cooperating fully with the SEC
in connection with these matters. We cannot predict if, when or how they will be resolved or what, if any, actions we may be required to take as part of any resolution of these matters. Any action by the SEC or other governmental agency could result
in civil or criminal sanctions against us and/or certain of our current and former officers, directors and employees. It is not possible to predict the outcome of the investigation at this time. Therefore, we have not accrued any charges related to
this investigation.
F-26
Other Matters
Portland Harbor Superfund
On December 1, 2000, a section of the lower
Willamette River known as the Portland Harbor was included on the National Priorities List at the request of the United States Environmental Protection Agency (the EPA). While the Companys Portland, Oregon manufacturing facility
does not border the Willamette River, an outfall from the facilitys stormwater system drains into a neighboring propertys privately owned stormwater system and slip. Since the listing of the site, the Company was notified by the EPA and
the Oregon Department of Environmental Quality (the ODEQ) of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). In 2008, the Company was asked to file information
disclosure reports with the EPA (CERCLA 104 (e) information request). By agreement with the EPA, the ODEQ is responsible for overseeing remedial investigation and source control activities for all upland sites to investigate sources and prevent
future contamination to the river. A remedial investigation and feasibility study (RI/FS) of the Portland Harbor has been directed by a group of potentially responsible parties known as the Lower Willamette Group (the LWG)
under agreement with the EPA. The Company made a payment of $175,000 to the LWG in June 2007 as part of an interim settlement, and is under no obligation to make any further payment. The final draft RI was submitted to the EPA by the LWG in fall of
2011and the draft FS was submitted by the LWG to the EPA in March 2012. As of the filing of this 2012 Form 10-K, the final RI is scheduled to be submitted to the EPA in the fall of 2013, and the final FS is scheduled to be submitted to the EPA by
November 30, 2013.
In 2001, groundwater containing elevated volatile organic compounds (VOCs) was identified
in one localized area of leased property adjacent to the Portland facility furthest from the river. Assessment work in 2002 and 2003 to further characterize the groundwater was consistent with the initial conclusion that the source of the VOCs is
located off of Company-owned property. In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (the Agreement) with the ODEQ. The Company is one of many Upland Source
Control Sites working with the ODEQ on Source Control and is considered a medium priority site by the ODEQ. The Company performed remedial investigation work required under the Agreement and submitted a draft Remedial
Investigation/Source Control Evaluation Report in December 2005. The conclusions of the report indicated that the VOCs found in the groundwater do not present an unacceptable risk to human or ecological receptors in the Willamette River. The report
also indicated there is no evidence at this time showing a connection between detected VOCs in groundwater and Willamette River sediments. In 2009, the ODEQ requested that the Company revise its Remedial Investigation/Source Control Evaluation
Report from 2005 to include more recent information from focused supplemental sampling at the Portland facility and more recent information that has become available related to nearby properties. The Company submitted the Expanded Risk Assessment
for the VOCs in Groundwater in May 2012, and comments from the ODEQ were received in in November 2012. The Company is currently discussing additional sampling requirements with the ODEQ.
Also, based on sampling associated with the Portland facilitys remedial investigation and on sampling and reporting required under
the Portland, Oregon manufacturing facilitys National Pollutant Discharge Elimination System permit for storm water, the Company and the ODEQ have periodically detected low concentrations of polynuclear aromatic hydrocarbons
(PAHs), polychlorinated biphenyls (PCBs), and trace amounts of zinc in storm water. Storm water from the Portland, Oregon manufacturing facility site is discharged into a communal storm water system that ultimately discharges
into the neighboring propertys privately owned slip. The slip was historically used for shipbuilding and subsequently for ship breaking and metal recycling. Studies of the river sediments have revealed trace concentrations of PAHs, PCBs and
zinc, along with other constituents which are common constituents in urban storm water discharges. To minimize the zinc traces in its storm water, the Company painted a substantial part of the Portland facilitys roofs, and zinc has remained
below storm water benchmark levels ever since. In June 2009, under the ODEQ Agreement, the Company submitted a Final Supplemental Work Plan to evaluate and assess soil and storm water, and further assess groundwater risk. In May 2010, the Company
submitted a remediation plan related to soil contamination, which the ODEQ approved in
F-27
August 2010. The Company has completed the approved remediation plan which has included excavation of a localized soil area to remove soil containing PAHs (completed in the third quarter of
2011), an upgrade to the fuel and waste storage systems (completed in the fourth quarter of 2011), a storm water filtration system (completed in the first quarter of 2012), and paving any permeable surfaces (completed in the second quarter of 2012).
During the localized soil excavation in the third quarter of 2011, additional stained soil was discovered. At the request of
the ODEQ, the Company developed an additional Work Plan to characterize the nature and extent of soil and/or groundwater impacts from the staining. The Company began implementing this Work Plan in the second quarter of 2012 and submitted sampling
results to the ODEQ in the third quarter of 2012. Comments from the ODEQ were received in November 2012. The Company is currently discussing additional sampling requirements with the ODEQ.
The Company has spent approximately $2.5 million in 2012 to complete the Source Control work specified in the Work Plans, and anticipates
having to spend approximately $50,000 for further Source Control work in 2013.
Concurrent with the activities of the EPA and
the ODEQ, the Portland Harbor Natural Resources Trustee Council (Trustees) sent some or all of the same parties, including the Company, a notice of intent to perform a Natural Resource Damage Assessment (NRDA) for the
Portland Harbor Site to determine the nature and extent of natural resource damages under CERCLA section 107. The Trustees for the Portland Harbor Site consist of representatives from several Northwest Indian Tribes, three federal agencies and one
state agency. The Trustees act independently of the EPA and the ODEQ. In 2009, the Trustees completed phase one of their three-phase NRDA. Phase one of the NRDA consisted of environmental studies to fill gaps in the information available from the
EPA, and development of a framework for evaluating, quantifying and determining the extent of injuries to the natural resource. Phase two of the NRDA began in 2010 and consists largely of implementing the framework developed in phase one.
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 2009, one of the Tribal Trustees (the Yakima Nation) resigned and has requested funding from the same parties to support its own assessment. The Company has not assumed any payment
obligation or liability related to either request. The extent of the Companys obligation with respect to Portland Harbor matters is not known, and no further adjustment to the consolidated financial statements has been recorded as of
December 31, 2012.
All Sites
We operate our facilities under numerous governmental permits and licenses relating to air emissions, storm water run-off, and other environmental matters. Our operations are also governed by many other
laws and regulations, including those relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations there under which, among other requirements, establish noise and dust standards. We believe we
are in material compliance with our permits and licenses and these laws and regulations, and we do not believe that future compliance with such laws and regulations will have a material adverse effect on our financial position, results of operations
or cash flows.
From time to time, the Company is involved in litigation relating to claims arising out of its operations in
the normal course of its business. The Company maintains insurance coverage against potential claims in amounts that are believed to be adequate. The Company believes that it is not presently a party to any other litigation, the outcome of which
would have a material adverse effect on its business, financial condition, results of operations or cash flows.
F-28
Guarantees
The Company has entered into certain stand-by letters of credit that total $3.2 million at December 31, 2012. The stand-by letters of
credit relate to workers compensation insurance and equipment financing.
The components of the provision for (benefit from) income
taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,428
|
|
|
$
|
2,639
|
|
|
$
|
(11,047
|
)
|
State
|
|
|
130
|
|
|
|
695
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
5,558
|
|
|
|
3,334
|
|
|
|
(11,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(296
|
)
|
|
|
5,380
|
|
|
|
9,743
|
|
State
|
|
|
259
|
|
|
|
904
|
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense
|
|
|
(37
|
)
|
|
|
6,284
|
|
|
|
9,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,521
|
|
|
$
|
9,618
|
|
|
$
|
(1,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the Companys effective income
tax rates and the statutory United States federal income tax rate of 35% is explained as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Provision (benefit) at statutory rate of 35%
|
|
$
|
7,618
|
|
|
$
|
7,800
|
|
|
$
|
(2,481
|
)
|
State provision, net of federal benefit
|
|
|
519
|
|
|
|
922
|
|
|
|
174
|
|
Research and development credits
|
|
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
Domestic manufacturing deduction
|
|
|
(762
|
)
|
|
|
(389
|
)
|
|
|
772
|
|
Sale of business
|
|
|
|
|
|
|
341
|
|
|
|
|
|
Change in valuation allowance
|
|
|
|
|
|
|
872
|
|
|
|
|
|
Other
|
|
|
(53
|
)
|
|
|
72
|
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,521
|
|
|
$
|
9,618
|
|
|
$
|
(1,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax (benefit) rate
|
|
|
25.4
|
%
|
|
|
43.2
|
%
|
|
|
(23.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the tax rate in 2012 was primarily attributable to a research and development tax credit study for
years 2010 and 2011 performed during 2012, for which a net tax benefit of $1.8 million was recorded.
F-29
The tax effect of temporary differences that give rise to
significant portions of deferred tax assets and liabilities is presented below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts, net
|
|
$
|
1,323
|
|
|
$
|
1,459
|
|
Accrued employee benefits
|
|
|
1,612
|
|
|
|
3,110
|
|
Inventories
|
|
|
1,393
|
|
|
|
1,337
|
|
Trade receivable, net
|
|
|
650
|
|
|
|
625
|
|
Net operating loss carryforwards
|
|
|
364
|
|
|
|
622
|
|
Accrued professional fees
|
|
|
|
|
|
|
77
|
|
Other
|
|
|
693
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,035
|
|
|
|
7,406
|
|
Valuation allowance
|
|
|
(146
|
)
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,889
|
|
|
|
7,056
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(712
|
)
|
|
|
(665
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets, net
|
|
|
5,177
|
|
|
|
6,391
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
|
549
|
|
|
|
499
|
|
Tax credit carryforwards
|
|
|
64
|
|
|
|
102
|
|
Accrued employee benefits
|
|
|
3,673
|
|
|
|
2,708
|
|
Other assets
|
|
|
4,527
|
|
|
|
3,617
|
|
Other
|
|
|
17
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,830
|
|
|
|
7,145
|
|
Valuation allowance
|
|
|
(794
|
)
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
8,036
|
|
|
|
6,569
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(23,290
|
)
|
|
|
(27,157
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities, net
|
|
|
(15,254
|
)
|
|
|
(20,588
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(10,077
|
)
|
|
$
|
(14,197
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, the Company had approximately $18 million of state net operating loss carryforwards which
expire on various dates between 2018 and 2030. The Company also had state tax carryforwards of $298,000, which begin to expire in 2019.
The Company considers the earnings of the Mexican subsidiary to be indefinitely reinvested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to
meet future domestic cash needs. Should the Company decide to repatriate the foreign earnings, the income tax provision would be adjusted in the period it is determined that the earnings will no longer be indefinitely reinvested outside the United
States, and a deferred tax liability of approximately $600,000 related to the United States federal and state income taxes and foreign withholding taxes on approximately $1.7 million of undistributed foreign earnings would be recorded.
F-30
A summary of the changes in the unrecognized tax benefits
during the years ended December 31, 2012, 2011 and 2010 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
309
|
|
|
$
|
125
|
|
|
$
|
185
|
|
Decreases for settlements
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
Increases for positions taken in prior years
|
|
|
3,571
|
|
|
|
10
|
|
|
|
|
|
Decreases for positions taken in prior years
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
Increases for positions taken in the current year
|
|
|
1,549
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits, end of year
|
|
$
|
5,245
|
|
|
$
|
309
|
|
|
$
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not believe it is reasonably possible that the total amounts of unrecognized tax benefits will change
in the following twelve months; however, actual results could differ from those currently expected. Of the balance of unrecognized tax benefits, $1.4 million would affect the Companys effective tax rate if recognized at some point in the
future.
The Company files income tax returns in the United States Federal jurisdiction, in a limited number of foreign
jurisdictions, and in many state jurisdictions. The Company is currently under examination by the Internal Revenue Service for years 2009 and 2010. With few exceptions, the Company is no longer subject to United States Federal or state income tax
examinations for years before 2008.
The Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. As of December 31, 2012 and 2011, the Company has approximately $172,000 and $72,000, respectively, of accrued interest related to uncertain tax positions. Total interest for uncertain tax positions increased by
approximately $100,000 in 2012, increased by approximately $8,000 in 2011, and increased by approximately $4,000 in 2010.
The operating segments reported below are based on the nature of the products sold by the Company and are the segments
of the Company for which separate financial information is available and for which operating results are regularly evaluated by executive management to make decisions about resources to be allocated to the segment and assess its performance.
Management evaluates segment performance based on operating income.
The Companys Water Transmission segment
manufactures and markets large diameter, high-pressure steel pipe used primarily for water transmission. The Companys Water Transmission products are manufactured at one of six manufacturing facilities located in Portland, Oregon; Denver,
Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas; and Monterrey, Mexico. During the second half of 2012, we permanently closed our facility located in Pleasant Grove, Utah, and have transferred its property and equipment to
other manufacturing locations. Products are sold primarily to public water agencies either directly or through an installation contractor.
The Companys Tubular Products segment manufactures and markets smaller diameter, ERW steel pipe for use in a wide range of applications, including energy, construction, agricultural, and industrial
systems. Tubular Products manufacturing facilities are located in Atchison, Kansas; Houston, Texas; and Bossier City, Louisiana. Tubular Products are marketed through a network of direct sales force personnel and sales agents throughout the United
States, Canada and Mexico.
F-31
Based on the location of the customer, the Company sold principally all products in the
United States, Canada and Mexico. One customer accounted for 12% of total net sales in 2012. No one customer represented more than 10% of total net sales in 2011 or 2010. As of December 31, 2012, all material long-lived assets are located in
the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
269,203
|
|
|
$
|
271,885
|
|
|
$
|
221,251
|
|
Tubular products
|
|
|
255,300
|
|
|
|
239,783
|
|
|
|
165,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
524,503
|
|
|
$
|
511,668
|
|
|
$
|
386,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
45,051
|
|
|
$
|
43,182
|
|
|
$
|
19,430
|
|
Tubular products
|
|
|
11,147
|
|
|
|
15,956
|
|
|
|
10,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,198
|
|
|
$
|
59,138
|
|
|
$
|
29,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
36,278
|
|
|
$
|
34,113
|
|
|
$
|
10,825
|
|
Tubular products
|
|
|
8,335
|
|
|
|
12,660
|
|
|
|
6,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,613
|
|
|
|
46,773
|
|
|
|
17,788
|
|
Corporate
|
|
|
(17,053
|
)
|
|
|
(13,950
|
)
|
|
|
(17,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,560
|
|
|
$
|
32,823
|
|
|
$
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
10,474
|
|
|
$
|
8,729
|
|
|
$
|
8,282
|
|
Tubular products
|
|
|
5,541
|
|
|
|
5,723
|
|
|
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,015
|
|
|
|
14,452
|
|
|
|
13,287
|
|
Corporate
|
|
|
252
|
|
|
|
69
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,267
|
|
|
$
|
14,521
|
|
|
$
|
13,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
6,830
|
|
|
$
|
4,765
|
|
|
$
|
9,307
|
|
Tubular products
|
|
|
9,813
|
|
|
|
11,386
|
|
|
|
9,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,643
|
|
|
|
16,151
|
|
|
|
18,442
|
|
Corporate
|
|
|
146
|
|
|
|
182
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,789
|
|
|
$
|
16,333
|
|
|
$
|
18,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
473,403
|
|
|
$
|
455,625
|
|
|
$
|
347,028
|
|
Other
|
|
|
51,100
|
|
|
|
56,043
|
|
|
|
39,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
524,503
|
|
|
$
|
511,668
|
|
|
$
|
386,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
Water transmission .
|
|
$
|
|
|
|
$
|
|
|
Tubular products .
|
|
|
20,478
|
|
|
|
20,478
|
|
|
|
|
|
|
|
|
|
|
Total .
|
|
$
|
20,478
|
|
|
$
|
20,478
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
Water transmission .
|
|
$
|
221,987
|
|
|
$
|
203,073
|
|
Tubular products .
|
|
|
174,591
|
|
|
|
181,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,578
|
|
|
|
384,131
|
|
Corporate .
|
|
|
25,844
|
|
|
|
29,242
|
|
|
|
|
|
|
|
|
|
|
Total .
|
|
$
|
422,422
|
|
|
$
|
413,373
|
|
|
|
|
|
|
|
|
|
|
All property and equipment is located in the United States as of December 31, 2012 and 2011, except for a total of
$2.4 million which is located in Mexico.
16.
|
QUARTERLY DATA (UNAUDITED):
|
Summarized quarterly financial data for 2012 and 2011 is as follows (dollars in thousands, except per share).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
For the year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
58,431
|
|
|
$
|
59,050
|
|
|
$
|
63,487
|
|
|
$
|
88,235
|
|
|
$
|
269,203
|
|
Tubular products
|
|
|
83,744
|
|
|
|
71,991
|
|
|
|
51,612
|
|
|
|
47,953
|
|
|
|
255,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,175
|
|
|
$
|
131,041
|
|
|
$
|
115,099
|
|
|
$
|
136,188
|
|
|
$
|
524,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
9,699
|
|
|
$
|
8,149
|
|
|
$
|
9,681
|
|
|
$
|
17,522
|
|
|
$
|
45,051
|
|
Tubular products
|
|
|
6,801
|
|
|
|
5,428
|
|
|
|
1,919
|
|
|
|
(3,001
|
)
|
|
|
11,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,500
|
|
|
$
|
13,577
|
|
|
$
|
11,600
|
|
|
$
|
14,521
|
|
|
$
|
56,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
8,024
|
|
|
$
|
6,130
|
|
|
$
|
6,969
|
|
|
$
|
15,155
|
|
|
$
|
36,278
|
|
Tubular products
|
|
|
6,196
|
|
|
|
4,651
|
|
|
|
1,134
|
|
|
|
(3,646
|
)
|
|
|
8,335
|
|
Corporate
|
|
|
(5,041
|
)
|
|
|
(3,811
|
)
|
|
|
(4,074
|
)
|
|
|
(4,127
|
)
|
|
|
(17,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,179
|
|
|
$
|
6,970
|
|
|
$
|
4,029
|
|
|
$
|
7,382
|
|
|
$
|
27,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,734
|
|
|
$
|
3,604
|
|
|
$
|
3,396
|
|
|
$
|
4,510
|
|
|
$
|
16,244
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.38
|
|
|
$
|
0.36
|
|
|
$
|
0.48
|
|
|
$
|
1.73
|
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
0.38
|
|
|
$
|
0.36
|
|
|
$
|
0.48
|
|
|
$
|
1.72
|
|
F-33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
For the year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
58,645
|
|
|
$
|
74,459
|
|
|
$
|
76,953
|
|
|
$
|
61,828
|
|
|
$
|
271,885
|
|
Tubular products
|
|
|
52,813
|
|
|
|
69,342
|
|
|
|
62,312
|
|
|
|
55,316
|
|
|
|
239,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
111,458
|
|
|
$
|
143,801
|
|
|
$
|
139,265
|
|
|
$
|
117,144
|
|
|
$
|
511,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
9,894
|
|
|
$
|
11,531
|
|
|
$
|
13,345
|
|
|
$
|
8,412
|
|
|
$
|
43,182
|
|
Tubular products
|
|
|
4,874
|
|
|
|
5,140
|
|
|
|
3,169
|
|
|
|
2,773
|
|
|
|
15,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,768
|
|
|
$
|
16,671
|
|
|
$
|
16,514
|
|
|
$
|
11,185
|
|
|
$
|
59,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water transmission
|
|
$
|
8,261
|
|
|
$
|
9,142
|
|
|
$
|
10,747
|
|
|
$
|
5,963
|
|
|
$
|
34,113
|
|
Tubular products
|
|
|
3,849
|
|
|
|
4,304
|
|
|
|
2,349
|
|
|
|
2,158
|
|
|
|
12,660
|
|
Corporate
|
|
|
(4,631
|
)
|
|
|
(2,378
|
)
|
|
|
(3,049
|
)
|
|
|
(3,892
|
)
|
|
|
(13,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,479
|
|
|
$
|
11,068
|
|
|
$
|
10,047
|
|
|
$
|
4,229
|
|
|
$
|
32,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,932
|
|
|
$
|
4,977
|
|
|
$
|
3,284
|
|
|
$
|
1,467
|
|
|
$
|
12,660
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
0.53
|
|
|
$
|
0.35
|
|
|
$
|
0.16
|
|
|
$
|
1.36
|
|
Diluted
|
|
$
|
0.31
|
|
|
$
|
0.53
|
|
|
$
|
0.35
|
|
|
$
|
0.15
|
|
|
$
|
1.35
|
|
Out-of-Period Adjustment
In the first quarter of 2012, net sales was increased by $0.8 million for corrected estimates used in the computation of revenue recognized on the percentage of completion method that should have been
recorded in the year ended December 31, 2011. In the third quarter of 2012, cost of sales was decreased by $0.4 million to correct an overstatement of expenses that had originally been recorded in the year ended December 31, 2011 ($0.1
million), first quarter of 2012 ($0.1 million) and the second quarter of 2012 ($0.2 million). When reviewing these errors in conjunction with other immaterial uncorrected adjustments impacting prior periods, the Company concluded that the
adjustments did not, individually or in the aggregate, result in a material misstatement of the Companys consolidated financial statements for any prior period, and are not material to the Companys 2012 annual and quarterly financial
statements.
F-34