The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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 net cash provided by operating activities to conform to current period presentation in the 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 and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending December 31, 2013.
2.
|
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.
In July 2013, the
FASB issued ASU 2013-10, which allowed for the use of the Fed Funds Effective Swap rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes and removes the restriction on using different benchmark rates for
similar hedges. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance will not have a significant impact on the Companys
consolidated financial position or results of operation.
In July 2013, the FASB issued ASU 2013-11, which clarified guidance on the presentation of
unrecognized tax benefits. The guidance requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. This guidance is effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. The amendments
should be applied prospectively to all unrecognized tax benefits that exist at the effective date, and retrospective application is permitted. The adoption of this guidance is not expected to have a significant impact on the Companys
consolidated financial position.
6
Inventories are stated at the lower of cost or market and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Short-term inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
45,624
|
|
|
$
|
56,913
|
|
Work-in-process
|
|
|
1,187
|
|
|
|
10,157
|
|
Finished goods
|
|
|
60,014
|
|
|
|
43,374
|
|
Supplies
|
|
|
3,120
|
|
|
|
3,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,945
|
|
|
|
113,545
|
|
Long-term inventories:
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
1,306
|
|
|
|
1,608
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
111,251
|
|
|
$
|
115,153
|
|
|
|
|
|
|
|
|
|
|
Long-term inventories are recorded in other assets.
4.
|
Fair Value Measurements
|
The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an
asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.
The authoritative guidance establishes a fair value hierarchy 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
September 30,
2013
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets
|
|
$
|
5,627
|
|
|
$
|
5,627
|
|
|
$
|
|
|
|
$
|
|
|
Derivatives
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,659
|
|
|
$
|
5,627
|
|
|
$
|
32
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(44
|
)
|
|
$
|
|
|
|
$
|
(44
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
The deferred compensation plan assets consist of cash and several publicly traded stock and bond mutual funds,
valued using quoted market prices in active markets classified as Level 1 within the fair value hierarchy. 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 escrow account at December 31, 2012 consisted of a money market mutual fund and was valued using quoted market prices in active markets classified as Level
1 within the fair value hierarchy.
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 $7.5
million and the carrying value was $7.8 million at September 30, 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. During the three and
nine months ended September 30, 2013, there were $0.3 million of impairment charges recorded on investments. There were no impairment charges taken during the three and nine months ended September 30, 2012.
5.
|
Derivative Instruments and Hedging Activities
|
The Company conducts business in various foreign countries, and, from time to time, settles transactions in foreign currencies. The Company
has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures, typically arising from sales contracts denominated in Canadian currency. 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 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 September 30, 2013 and December 31, 2012, the total notional amount of the derivative
contracts not designated as hedges was $0.6 million (CAD$0.6 million) and $2.7 million (CAD$2.6 million), respectively. As of September 30, 2013 and December 31, 2012, the total notional amount of the derivative contracts designated as
hedges was $5.6 million (CAD$5.8 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.
8
The balance sheet location and the fair values of derivative instruments are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Foreign Currency Forward Contracts
|
|
2013
|
|
|
2012
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
$
|
7
|
|
|
$
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
32
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
|
|
|
$
|
197
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
44
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
44
|
|
|
$
|
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)
|
|
|
(v) = (iii) - (iv)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in
the Statement of Financial Position
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
$
|
32
|
|
|
$
|
|
|
|
$
|
32
|
|
|
$
|
32
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
|
(ii)
|
|
|
(iii) = (i) - (ii)
|
|
|
(iv)
|
|
|
(v) = (iii) - (iv)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in
the Statement of Financial Position
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
$
|
44
|
|
|
$
|
|
|
|
$
|
44
|
|
|
$
|
44
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
353
|
|
|
$
|
|
|
|
$
|
353
|
|
|
$
|
353
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The amounts of the gains and losses related to the Companys derivative contracts designated as hedging
instruments for the three and nine months ended September 30, 2013 and September 30, 2012 are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax Gain (Loss) Recognized in Comprehensive
Income on Effective Portion of Derivative
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(32
|
)
|
|
$
|
(300
|
)
|
|
$
|
279
|
|
|
$
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax Gain (Loss) Recognized in Income on Effective
Portion of Derivative as a Result of Reclassification
from
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
Location
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Net sales
|
|
$
|
66
|
|
|
$
|
(27
|
)
|
|
$
|
131
|
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Ineffective Portion of Derivative and Amount
Excluded from Effectiveness Testing Recognized in
Income
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
Location
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Net sales
|
|
$
|
3
|
|
|
$
|
(44
|
)
|
|
$
|
(50
|
)
|
|
$
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2013, there is $14,000 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 both the three and nine months ended September 30, 2013, the gains and losses from our derivative contracts not designated as hedging instruments
recognized in net sales were a loss of $0.1 million. For the three and nine months ended September 30, 2012, the losses from our derivative contracts not designated as hedging instruments recognized in net sales were a loss of $0.3 million and
a loss of $0.4 million, respectively.
6.
|
Commitments and Contingencies
|
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 2011 and the draft FS was submitted by the LWG to the EPA in March 2012. As of the date of this filing, the final RI and the revised FS are scheduled to be submitted
to the EPA in the Spring of 2014.
10
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. 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 in the fourth quarter of 2013 or
first half of 2014.
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 pollutants in its storm water, the Company painted a substantial part of the Portland facilitys roofs in 2009 and installed a storm water
treatment system in 2012. Stormwater discharge has remained below storm water benchmark levels ever since.
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, as requested by the ODEQ. The Company submitted a remediation plan related to soil contamination, which the ODEQ approved. The
Company has completed the approved remediation plan in 2011 and 2012, which included the excavation of localized soil and paving pervious surfaces. A final report on storm water source control with the Final RI/Source Control Evaluation report will
be submitted in the fourth quarter of 2013 or the first half of 2014.
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 has completed its second round
of groundwater sampling for the Stained Soil Investigation Area. The results will be reported to ODEQ in the fourth quarter of 2013 or the first half of 2014.
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. 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.
11
At this time, the Company is unable to estimate an amount or an amount within a range of costs for its obligation
with respect to the Portland Harbor matters, and no further adjustment to the Condensed Consolidated Financial Statements has been recorded as of September 30, 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 September 30, 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 September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Transmission
|
|
$
|
46,835
|
|
|
$
|
63,487
|
|
|
$
|
183,596
|
|
|
$
|
180,968
|
|
Tubular Products
|
|
|
56,187
|
|
|
|
51,612
|
|
|
|
176,761
|
|
|
|
207,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,022
|
|
|
$
|
115,099
|
|
|
$
|
360,357
|
|
|
$
|
388,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Transmission
|
|
$
|
7,932
|
|
|
$
|
9,681
|
|
|
$
|
39,927
|
|
|
$
|
27,529
|
|
Tubular Products
|
|
|
880
|
|
|
|
1,919
|
|
|
|
5,757
|
|
|
|
14,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,812
|
|
|
$
|
11,600
|
|
|
$
|
45,684
|
|
|
$
|
41,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Transmission
|
|
$
|
6,306
|
|
|
$
|
6,969
|
|
|
$
|
34,838
|
|
|
$
|
21,123
|
|
Tubular Products
|
|
|
93
|
|
|
|
1,134
|
|
|
|
3,644
|
|
|
|
11,981
|
|
Corporate
|
|
|
(3,559
|
)
|
|
|
(4,074
|
)
|
|
|
(11,442
|
)
|
|
|
(12,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,840
|
|
|
$
|
4,029
|
|
|
$
|
27,040
|
|
|
$
|
20,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
8.
|
Share-based Compensation
|
The Company has one active stock incentive plan for employees and directors, the 2007 Stock Incentive Plan, which provides for awards of
stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units (RSUs) and performance share awards (PSAs). In addition, the Company has one inactive stock
option plan, the 1995 Stock Option Plan for Nonemployee Directors, under which previously granted options remain outstanding.
The Company recognizes
compensation cost as service is rendered based on the fair value of the awards. The following summarizes share-based compensation expense recorded (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
199
|
|
|
$
|
145
|
|
|
$
|
466
|
|
|
$
|
287
|
|
Selling, general and administrative expenses
|
|
|
678
|
|
|
|
780
|
|
|
|
1,701
|
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
877
|
|
|
$
|
925
|
|
|
$
|
2,167
|
|
|
$
|
2,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013, unrecognized compensation expense related to the unvested portion of the Companys RSUs
and PSAs was $4.9 million which is expected to be recognized over a weighted average period of 1.9 years.
Stock Option Awards
A summary of the status of the Companys stock options as of September 30, 2013 and changes during the nine 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
|
|
|
(7,000
|
)
|
|
|
10.31
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2013
|
|
|
40,000
|
|
|
|
25.44
|
|
|
|
4.90
|
|
|
$
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2013
|
|
|
40,000
|
|
|
|
25.44
|
|
|
|
4.90
|
|
|
$
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value, defined as the difference between the current market value and the grant price, of
options exercised or exchanged during the nine months ended September 30, 2013 was $0.1 million.
13
Restricted Stock Units and Performance Awards
A summary of the status of the Companys RSUs and PSAs as of September 30, 2013 and changes during the nine 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
|
|
|
122,878
|
|
|
|
33.97
|
|
RSUs and PSAs vested
|
|
|
(92,930
|
)
|
|
|
23.59
|
|
RSUs and PSAs canceled
|
|
|
(13,521
|
)
|
|
|
26.86
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs and PSAs at September 30, 2013
|
|
|
259,568
|
|
|
|
30.69
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2013 includes approximately 198,000 PSAs at a target level of performance; the actual number
of common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 200%.
Stock Awards
For the nine months ended
September 30, 2013 and 2012, stock awards of 4,912 and 4,807 shares, respectively, were granted to non-employee directors, which vested immediately upon issuance. The Company recorded compensation expense based on the fair market value per
share of the awards on the grant date of $27.49 and $23.40 in 2013 and 2012, respectively.
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, 2010 and 2011. With few exceptions, the Company is no longer subject to U.S. Federal, state or foreign income tax examinations for years
before 2009.
The Company had $5.6 million and $5.2 million of unrecognized tax benefits at September 30, 2013 and December 31, 2012,
respectively. The Company believes 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 42.3% and 33.4%, respectively, for the three and nine month periods ended
September 30, 2013. The Companys effective rate for the three months ended September 30, 2013 was greater than our federal statutory rate of 35% primarily due to an increase in the valuation allowance related to an investment in
which the Company is anticipating a future capital loss. The Companys effective tax rate was less than our federal statutory rate for the first nine months of 2013 primarily due to the favorable impact of the research and development tax
credit. The Company provided for income taxes at an estimated effective tax benefit rate of 25.3% and an estimated effective tax rate of 26.5%, respectively, for the three and nine month periods ended September 30, 2012. During the third
quarter of 2012, the Company performed a research and development tax credit study for fiscal years 2010 through 2011. The Company recorded a net tax benefit of $1.8 million resulting from this study in the third quarter of 2012. Combined with the
operating results for the quarter, the Companys effective rates for the three and nine months ended September 30, 2012 were therefore less than our federal statutory rate of 35%.
14
Earnings per basic and diluted weighted average common share outstanding were calculated as follows for the three and nine months ended
September 30, 2013 and 2012 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Net income
|
|
$
|
1,016
|
|
|
$
|
3,396
|
|
|
$
|
16,083
|
|
|
$
|
11,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
9,449
|
|
|
|
9,383
|
|
|
|
9,443
|
|
|
|
9,375
|
|
Effect of potentially dilutive common shares
(1)
|
|
|
68
|
|
|
|
116
|
|
|
|
55
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding
|
|
|
9,517
|
|
|
|
9,499
|
|
|
|
9,498
|
|
|
|
9,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share
|
|
$
|
0.11
|
|
|
$
|
0.36
|
|
|
$
|
1.70
|
|
|
$
|
1.25
|
|
Earnings per diluted common share
|
|
$
|
0.11
|
|
|
$
|
0.36
|
|
|
$
|
1.69
|
|
|
$
|
1.24
|
|
|
|
|
|
|
Antidilutive shares not included in diluted common share calculation
|
|
|
93
|
|
|
|
96
|
|
|
|
97
|
|
|
|
120
|
|
(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.
|
11.
|
Changes in Accumulated Other Comprehensive Loss
|
The following table summarizes changes in the components of accumulated other comprehensive income (loss) during the nine months ended
September 30, 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
|
|
|
|
|
|
|
175
|
|
|
|
175
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
194
|
|
|
|
(82
|
)
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income
|
|
|
194
|
|
|
|
93
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2013
|
|
$
|
(1,994
|
)
|
|
$
|
8
|
|
|
$
|
(1,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 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 Income
|
|
|
|
Defined Benefit Pension Items
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
(295
|
)
|
|
Cost of sales
|
|
|
|
101
|
|
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
$
|
(194
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
Gains and losses on cash flow hedges
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
131
|
|
|
Net sales
|
|
|
|
(49
|
)
|
|
Tax expense
|
|
|
|
|
|
|
|
|
|
$
|
82
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
15