NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial Statements include the accounts of Northwest Pipe Company (the
Company) and its subsidiaries in which the Company exercises control as of the financial statement date. Intercompany accounts and transactions have been eliminated.
Prior period deferred revenue, which was previously reflected within accrued liabilities, has been reclassified (separated) to its own line item within current liabilities and net cash provided by operating activities to conform
to current period presentation in the condensed consolidated balance sheets and condensed consolidated statements of cash flows. This reclassification has no impact on cash flows from operations, income from operations, net income, or total
liabilities.
The accompanying unaudited condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America. The financial information as of December 31, 2012 is derived from the audited consolidated financial statements presented in the Companys Annual
Report on Form 10-K for the year ended December 31, 2012 (the 2012 Form 10-K). Certain information or footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of management, the accompanying condensed
consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair statement of the results of the interim periods presented. The condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto together with managements discussion and analysis of financial condition and results of operations contained in the Companys 2012 Form 10-K.
Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending December 31, 2013.
Inventories are stated at the lower of cost or market and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Short-term inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
52,869
|
|
|
$
|
56,913
|
|
Work-in-process
|
|
|
7,812
|
|
|
|
10,157
|
|
Finished goods
|
|
|
45,824
|
|
|
|
43,374
|
|
Supplies
|
|
|
3,099
|
|
|
|
3,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,604
|
|
|
|
113,545
|
|
Long-term inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
1,463
|
|
|
|
1,608
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
111,067
|
|
|
$
|
115,153
|
|
|
|
|
|
|
|
|
|
|
Long-term inventories are recorded in other assets. The lower of cost or market adjustment was $4.4 million at March 31, 2013 and
$3.5 million at December 31, 2012.
3.
|
Fair Value Measurements
|
The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an
asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.
The authoritative guidance establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. These levels are: Level 1 (inputs are
quoted prices in active markets for identical assets or liabilities); Level 2 (inputs are other than quoted prices that are observable, either directly or indirectly through corroboration with observable market data); and Level 3 (inputs are
unobservable, with little or no market data that exists, such as internal financial forecasts). The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
6
The following table summarizes information regarding the Companys financial assets and financial
liabilities that are measured at fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
March 31,
2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow account
|
|
$
|
898
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
|
5,618
|
|
|
|
5,618
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,537
|
|
|
|
6,516
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(106
|
)
|
|
|
|
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2012
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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, and are 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 fair value of our debt is calculated using a coupon rate on borrowings with similar maturities, current remaining average life to maturity, borrower credit
quality, and current market conditions, all of which are classified as Level 2 within the valuation hierarchy. The fair value of the Companys long-term debt, including the current portion, was $8.8 million and the carrying value was $9.3
million at March 31, 2013, and $11.5 million with a carrying value of $12.1 million at December 31, 2012.
Financial Assets
Measured and Recorded at Fair Value on a Non-Recurring Basis
We measure our 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. There were no impairment charges taken during the three months ended March 31, 2013 or March 31, 2012. All loans receivable are categorized as Level 3 in the fair
value hierarchy.
4.
|
Derivative Instruments and Hedging Activities
|
The Company conducts business in various foreign countries, and, from time to time, settles transactions in foreign currencies. The
Company has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures, typically arising from sales contracts denominated in Canadian currency. These
derivative contracts are consistent with the Companys strategy for financial risk management. The Company uses cash flow hedge accounting treatment for qualifying foreign currency forward contracts. The Company initially reports any gain or
loss on the effective portion of a cash flow hedge as a component of other comprehensive income and subsequently reclassifies any gain or loss to net sales when the
7
hedged revenues are recorded. 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 March 31, 2013 and December 31, 2012, the total notional amount of the derivative contracts not designated as hedges was $0.5 million (CAD$0.5 million) and $2.7 million (CAD$2.6 million), respectively. As of
March 31, 2013 and December 31, 2012, the total notional amount of the derivative contracts designated as hedges was $11.1 million (CAD$11.3 million) and $12.4 million (CAD$12.3 million), respectively.
For each derivative contract for 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. 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.
The balance sheet location
and the fair values of derivative instruments are (in thousands):
|
|
|
|
|
|
|
|
|
Foreign Currency Forward Contracts
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
$
|
11
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
71
|
|
|
$
|
197
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
35
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
106
|
|
|
$
|
353
|
|
|
|
|
|
|
|
|
|
|
All of the Companys foreign currency forward contracts are subject to an enforceable master netting arrangement. The Company
presents its foreign currency forward contract assets and liabilities within the Statement of Financial Position at their gross fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
|
(ii)
|
|
|
(iii) = (i) - (ii)
|
|
|
(iv)
Gross Amounts Not Offset
in
the Statement of Financial Position
|
|
|
(v) = (iii) - (iv)
|
|
|
|
Gross Amount
of
Recognized Assets
|
|
|
Gross Amount
Offset in
the
Statement of
Financial Position
|
|
|
Net Amount of
Assets
Presented
in the Statement of
Financial Position
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Received
|
|
|
Net Amount
|
|
Derivative Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
21
|
|
|
$
|
21
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
|
(ii)
|
|
|
(iii) = (i) - (ii)
|
|
|
(iv)
Gross Amounts Not Offset
in
the Statement of Financial Position
|
|
|
(v) = (iii) - (iv)
|
|
|
|
Gross Amount
of
Recognized Liabilities
|
|
|
Gross Amount
Offset in
the
Statement of
Financial Position
|
|
|
Net Amount of
Liabilities
Presented
in the Statement of
Financial Position
|
|
|
Financial
Instruments
|
|
|
Cash
Collateral
Received
|
|
|
Net Amount
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
$
|
106
|
|
|
$
|
|
|
|
$
|
106
|
|
|
$
|
106
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
353
|
|
|
$
|
|
|
|
$
|
353
|
|
|
$
|
353
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The amounts of the gains and losses related to the Companys derivative contracts designated as hedging
instruments for the three months ended March 31, 2013 and March 31, 2012 are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
Pretax
Gain
Recognized in
Other
Comprehensive
Income on
Effective
Portion
of Derivative
|
|
|
Pretax Gain
Recognized
in Income on Effective Portion
of Derivative as a Result
of
Reclassification from
Accumulated
Other
Comprehensive Income
|
|
|
Loss on
Ineffective Portion
of
Derivative and
Amount Excluded
from
Effectiveness Testing
Recognized in Income
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
Amount
|
|
|
|
Location
|
|
|
|
Amount
|
|
|
|
Location
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
200
|
|
|
|
Net sales
|
|
|
$
|
26
|
|
|
|
Net sales
|
|
|
$
|
(52)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012
|
|
|
|
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 Income
|
|
|
Loss on
Ineffective Portion
of
Derivative and
Amount Excluded
from
Effectiveness Testing
Recognized in Income
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
Amount
|
|
|
|
Location
|
|
|
|
Amount
|
|
|
|
Location
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(101)
|
|
|
|
Net sales
|
|
|
$
|
(15)
|
|
|
|
Net sales
|
|
|
$
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2013, there is $40,000 of unrealized pretax gain on outstanding derivatives accumulated in other comprehensive loss,
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.
For the three months ended March 31, 2013, losses from our derivative contracts not designated as hedging instruments recognized in net sales were $0.1 million. For the three months ended
March 31, 2012, losses from our derivative contracts not designated as hedging instruments recognized in net sales were $0.1 million.
5.
|
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 was 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, were named as defendants. The complaint alleged 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 sought to represent a class of persons who purchased the Companys stock during the same period, and sought 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, were named as defendants in the Plumbers complaint. In the Plumbers complaint, as in the Richard complaint, the plaintiff was allegedly a purchaser of the Companys stock and asserted that defendants
violated Section 10(b) of the Securities Exchange Act of 1934 by making false or misleading statements during the Class Period. Plaintiff sought to represent a class of persons who purchased the Companys stock during that period, and
sought damages for losses caused by the alleged wrongdoing.
The Richard action and the Plumbers action were consolidated on February 25,
2010 (the Consolidated Action). 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 the Companys motion to dismiss was filed on February 25, 2011,
9
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 was 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 was placed into escrow in December 2012. On November 27, 2012, the Court issued an order preliminarily approving the settlement. The settlement was approved by the
Court on March 22, 2013 and the Consolidated Action was dismissed.
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 was allegedly a current shareholder of the
Company. The Company was a nominal defendant in this litigation. Plaintiff sought 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 was 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
sought 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 was allegedly a current
shareholder of the Company. The Company was a nominal defendant in this litigation. Plaintiff sought 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 was that defendants breached fiduciary duties to the Company between April 2, 2007 and the date of the Complaint. Plaintiff sought 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 was allegedly a current shareholder of the Company. The Company was a nominal
defendant in this litigation. Plaintiff sought 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 was that defendants breached fiduciary duties to the Company between April 2, 2007 and the date of the Complaint. Plaintiff sought 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. The settlement was approved by the Court on March 29, 2013 and the derivative actions were dismissed.
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. The Company cooperated fully with the SEC in
connection with these matters. On April 3, 2013, the Company was informed by the SEC that its investigation had been completed as to the Company, and that the staff of the SEC did not intend to recommend any enforcement action against the
Company.
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,
10
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
date of this filing, 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 (RI) work required under the Agreement and submitted a draft RI/ 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 RI/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. In February 2013, the ODEQ
requested the Company revise the presented information in the 2012 Expanded Risk Assessment for the VOCs in Groundwater a second time, for submittal with the Final RI/Source Control Evaluation report. Also, based on sampling associated with the
Portland facilitys RI 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 in 2011 and 2012 and will provide a
final report on storm water source control with the Final RI/Source Control Evaluation report.
During the localized soil excavation in 2011,
additional stained soil was discovered. At the request of the ODEQ, the Company developed an additional Work Plan to characterize the nature and extent of soil and/or groundwater impacts from the staining. The Company began implementing this Work
Plan in the second quarter of 2012 and submitted sampling results to the ODEQ in the third quarter of 2012. Comments from the ODEQ were received in November 2012. In February 2013, the ODEQ clarified its comments from November 2012, and the Company
will be completing its second round of sampling for the Stained Soil Investigation by the end of the third quarter of 2013.
The Company
anticipates having to spend less than $0.1 million 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.
11
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 condensed consolidated financial statements has been
recorded as of March 31, 2013.
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.
Guarantees
The Company has entered into certain stand-by letters of credit that total $3.1 million at March 31, 2013. The stand-by letters of credit relate to
workers compensation insurance and equipment financing.
The Companys operations are organized in two reportable segments, the Water Transmission Group and the Tubular Products Group,
which are based on the nature of the products and the manufacturing process. The Water Transmission Group manufactures large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, primarily related to drinking
water systems. These products are also used for hydroelectric power systems, wastewater systems and other applications. In addition, the Water Transmission Group makes products for industrial plant piping systems and certain structural applications.
The Tubular Products Group manufactures and markets smaller diameter, electric resistance welded steel pipe used in a wide range of applications, including energy, construction, agriculture and industrial systems. These two segments represent
distinct business activities, which management evaluates based on segment gross profit and operating income. Transfers between segments in the periods presented were not material.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Water Transmission
|
|
$
|
78,613
|
|
|
$
|
58,431
|
|
Tubular Products
|
|
|
61,984
|
|
|
|
83,744
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
140,597
|
|
|
$
|
142,175
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
Water Transmission
|
|
$
|
19,870
|
|
|
$
|
9,699
|
|
Tubular Products
|
|
|
1,334
|
|
|
|
6,801
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,204
|
|
|
$
|
16,500
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Water Transmission
|
|
$
|
18,033
|
|
|
$
|
8,024
|
|
Tubular Products
|
|
|
666
|
|
|
|
6,196
|
|
Corporate
|
|
|
(3,879
|
)
|
|
|
(5,041
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,820
|
|
|
$
|
9,179
|
|
|
|
|
|
|
|
|
|
|
12
7.
|
Share-based Compensation
|
The Company has one active stock incentive plan for employees and directors, the 2007 Stock Incentive Plan, which provides for awards
of stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units and performance awards. In addition, the Company has one inactive stock option plan, the 1995
Stock Option Plan for Nonemployee Directors, under which previously granted options remain outstanding.
The Company recognizes compensation
cost as service is rendered based on the fair value of the awards. The following summarizes share-based compensation expense recorded (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cost of sales
|
|
$
|
128
|
|
|
$
|
85
|
|
Selling, general and administrative expenses
|
|
|
398
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
526
|
|
|
$
|
579
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013, unrecognized compensation expense related to the unvested portion of the Companys restricted stock
units (RSUs) and performance awards (PSAs) was $2.5 million which is expected to be recognized over a weighted average period of 1.4 years.
Stock Option Awards
A summary of the status of the Companys stock options as of March 31, 2013 and changes during the three months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
per Share
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Balance, January 1, 2013
|
|
|
47,000
|
|
|
$
|
23.19
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised or exchanged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
|
47,000
|
|
|
|
23.19
|
|
|
|
4.62
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2013
|
|
|
47,000
|
|
|
|
23.19
|
|
|
|
4.62
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units and Performance Awards
A summary of the status of the Companys RSUs and PSAs as of March 31, 2013 and changes during the three months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
and
PSAs
|
|
|
Weighted Average
Grant
Date Fair Value
|
|
Unvested RSUs and PSAs at January 1, 2013
|
|
|
243,141
|
|
|
$
|
26.11
|
|
RSUs and PSAs granted
|
|
|
|
|
|
|
|
|
RSUs and PSAs vested
|
|
|
(88,018
|
)
|
|
|
23.37
|
|
RSUs and PSAs canceled
|
|
|
(6,818
|
)
|
|
|
24.14
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs and PSAs at March 31, 2013
|
|
|
148,305
|
|
|
|
27.82
|
|
|
|
|
|
|
|
|
|
|
RSUs and PSAs are measured at the estimated fair value on the date of grant. RSUs are service-based awards and vest according to
vesting schedules, which range from immediate to ratably over a three-year period. PSAs are service-based awards with a market-based vesting condition. Vesting of the market-based PSAs is dependent upon the performance of the market price of the
Companys stock relative to a peer group of companies and ranges from two to three years. The unvested balance of RSUs and PSAs at March 31, 2013 includes approximately 115,000 PSAs at a target level of performance; the actual number of
common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 200%.
13
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 U.S. Federal, state or foreign income tax examinations for years
before 2008.
The Company had $5.7 million and $5.2 million of unrecognized tax benefits at March 31, 2013 and December 31, 2012,
respectively. 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, $2.2 million would affect the Companys effective tax rate if recognized at some point in the future.
The
Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company provided for income taxes at estimated effective tax rates of 31.7% and 37.2% for the three month periods ended March 31, 2013 and
March 31, 2012, respectively.
Earnings per basic and diluted weighted average common share outstanding were calculated as follows for the three months ended
March 31, 2013 and 2012 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Net income
|
|
$
|
9,506
|
|
|
$
|
4,734
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
9,437
|
|
|
|
9,369
|
|
Effect of potentially dilutive common shares
(1)
|
|
|
47
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
$
|
9,484
|
|
|
|
9,412
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
$
|
1.01
|
|
|
$
|
0.51
|
|
Earnings per diluted common share
|
|
$
|
1.00
|
|
|
$
|
0.50
|
|
Antidilutive shares not included in diluted common share calculation
|
|
|
10
|
|
|
|
34
|
|
(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.
|
10.
|
Changes in Accumulated Other Comprehensive Income (Loss)
|
The following table summarizes change in the components of accumulated other comprehensive income (loss) during the three months ended
March 31, 2013 (in thousands). All amounts are net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension
Items
|
|
|
Gains (Losses) on
Cash
Flow
Hedges
|
|
|
Total
|
|
Balance, December 31, 2012
|
|
$
|
(2,188
|
)
|
|
$
|
(85
|
)
|
|
$
|
(2,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
|
|
|
|
127
|
|
|
|
127
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
65
|
|
|
|
(16
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
65
|
|
|
|
111
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
(2,123
|
)
|
|
$
|
26
|
|
|
$
|
(2,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
The following table provides additional detail about accumulated other comprehensive income (loss)
components which were reclassified to the Condensed Consolidated Statement of Operations during the three months ended March 31, 2013 (in thousands):
|
|
|
|
|
|
|
Details about Accumulated Other
Comprehensive Income (Loss) Components
|
|
Amount reclassified
from
Accumulated Other
Comprehensive Income (Loss)
|
|
|
Affected line item in
the
Condensed Consolidated
Statement of Operations
|
Defined Benefit Pension Items
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
(98)
|
|
|
Cost of sales
|
|
|
|
33
|
|
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
$
|
(65)
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Gains and losses on cash flow hedges
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
26
|
|
|
Net sales
|
|
|
|
(10)
|
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
$
|
16
|
|
|
Net of tax
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(49)
|
|
|
|
|
|
|
|
|
|
|
11.
|
Recent Accounting and Reporting Developments
|
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 Company adopted this guidance on January 1, 2013 and has made the required additional disclosures.
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. The Company adopted this guidance on January 1, 2013 and has made the required additional disclosures.
On April 1, 2013, the Company entered into a note receivable with a third party. Total consideration to be paid by the Company
under the arrangement is $5.7 million. The loan will be repaid over a ten year period and will bear interest at 4.5%.
15