UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-27140
NORTHWEST PIPE COMPANY
(Exact name of registrant as specified in its charter)
OREGON | 93-0557988 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
5721 SE Columbia Way
Suite 200
Vancouver, Washington 98661
(Address of principal executive offices and zip code)
360-397-6250
(Registrants telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Common Stock, par value $.01 per share | 9,449,299 | |
(Class) | (Shares outstanding at November 1, 2013) |
FORM 10-Q
INDEX
Page | ||||
PART I - FINANCIAL INFORMATION |
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Item 1. Financial Statements: |
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Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (unaudited) |
2 | |||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
21 | |||
21 | ||||
22 | ||||
22 | ||||
23 | ||||
24 |
1
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data)
September 30, 2013 |
December 31, 2012 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
$ | 33 | $ | 46 | ||||
Trade and other receivables, less allowance for doubtful accounts of $719 and $1,748 |
64,609 | 41,498 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
51,066 | 73,314 | ||||||
Inventories |
109,945 | 113,545 | ||||||
Refundable income taxes |
1,339 | | ||||||
Deferred income taxes |
5,277 | 5,177 | ||||||
Prepaid expenses and other |
1,708 | 2,558 | ||||||
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Total current assets |
233,977 | 236,138 | ||||||
Property and equipment, net |
162,616 | 152,545 | ||||||
Goodwill |
20,478 | 20,478 | ||||||
Other assets |
16,642 | 13,261 | ||||||
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Total assets |
$ | 433,713 | $ | 422,422 | ||||
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
$ | 5,714 | $ | 5,714 | ||||
Current portion of capital lease obligations |
4,420 | 3,295 | ||||||
Accounts payable |
22,063 | 21,042 | ||||||
Accrued liabilities |
11,878 | 23,424 | ||||||
Deferred revenue |
7,866 | 8,793 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
4,005 | 6,478 | ||||||
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Total current liabilities |
55,946 | 68,746 | ||||||
Note payable to financial institution |
59,951 | 47,533 | ||||||
Long-term debt, less current portion |
2,071 | 6,357 | ||||||
Capital lease obligations, less current portion |
6,248 | 9,179 | ||||||
Deferred income taxes |
18,957 | 15,254 | ||||||
Pension and other long-term liabilities |
13,301 | 15,921 | ||||||
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Total liabilities |
156,474 | 162,990 | ||||||
Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding |
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Common stock, $.01 par value, 15,000,000 shares authorized, 9,449,299 and 9,382,994 shares issued and outstanding |
94 | 94 | ||||||
Additional paid-in-capital |
113,667 | 112,230 | ||||||
Retained earnings |
165,464 | 149,381 | ||||||
Accumulated other comprehensive loss |
(1,986 | ) | (2,273 | ) | ||||
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Total stockholders equity |
277,239 | 259,432 | ||||||
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Total liabilities and stockholders equity |
$ | 433,713 | $ | 422,422 | ||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net sales |
$ | 103,022 | $ | 115,099 | $ | 360,357 | $ | 388,315 | ||||||||
Cost of sales |
94,210 | 103,499 | 314,673 | 346,638 | ||||||||||||
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Gross profit |
8,812 | 11,600 | 45,684 | 41,677 | ||||||||||||
Selling, general and administrative expense |
5,972 | 7,571 | 18,644 | 21,499 | ||||||||||||
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Operating income |
2,840 | 4,029 | 27,040 | 20,178 | ||||||||||||
Other expense |
242 | 49 | 279 | 51 | ||||||||||||
Interest income |
(141 | ) | (35 | ) | (384 | ) | (122 | ) | ||||||||
Interest expense |
977 | 1,305 | 2,982 | 4,471 | ||||||||||||
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Income before income taxes |
1,762 | 2,710 | 24,163 | 15,778 | ||||||||||||
Provision for (benefit from) income taxes |
746 | (686 | ) | 8,080 | 4,044 | |||||||||||
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Net income |
$ | 1,016 | $ | 3,396 | $ | 16,083 | $ | 11,734 | ||||||||
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Basic earnings per share |
$ | 0.11 | $ | 0.36 | $ | 1.70 | $ | 1.25 | ||||||||
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Diluted earnings per share |
$ | 0.11 | $ | 0.36 | $ | 1.69 | $ | 1.24 | ||||||||
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Shares used in per share calculations: |
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Basic |
9,449 | 9,383 | 9,443 | 9,375 | ||||||||||||
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Diluted |
9,517 | 9,499 | 9,498 | 9,458 | ||||||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income |
$ | 1,016 | $ | 3,396 | $ | 16,083 | $ | 11,734 | ||||||||
Other comprehensive income (loss), net of tax: |
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Pension liability adjustment, net of tax |
65 | 59 | 194 | 254 | ||||||||||||
Deferred gain (loss) on cash flow derivatives, net of tax |
(62 | ) | (168 | ) | 93 | (185 | ) | |||||||||
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Other comprehensive income (loss), net of tax |
3 | (109 | ) | 287 | 69 | |||||||||||
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Comprehensive income |
$ | 1,019 | $ | 3,287 | $ | 16,370 | $ | 11,803 | ||||||||
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months ended September 30, | ||||||||
2013 | 2012 | |||||||
Cash Flows From Operating Activities: |
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Net income |
$ | 16,083 | $ | 11,734 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
10,131 | 11,666 | ||||||
Provision for doubtful accounts |
(1,029 | ) | (429 | ) | ||||
Amortization of debt issuance costs |
476 | 1,119 | ||||||
Loss on impairment |
250 | | ||||||
Deferred income taxes |
3,603 | 572 | ||||||
Loss on disposal of property and equipment |
16 | 455 | ||||||
Stock based compensation expense |
2,167 | 2,199 | ||||||
Unrealized (gain) loss on foreign currency forward contracts |
(193 | ) | 353 | |||||
Changes in operating assets and liabilities: |
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Trade and other receivables, net |
(22,082 | ) | (657 | ) | ||||
Costs and estimated earnings in excess of billings on uncompleted contracts, net |
19,775 | (18,351 | ) | |||||
Inventories |
3,901 | (24,078 | ) | |||||
Refundable income taxes |
(1,339 | ) | (4,982 | ) | ||||
Prepaid expenses and other assets |
1,702 | 4,099 | ||||||
Accounts payable |
2,566 | 4,562 | ||||||
Deferred revenue |
(927 | ) | 10,129 | |||||
Accrued and other liabilities |
(13,715 | ) | 23,808 | |||||
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Net cash provided by operating activities |
21,385 | 22,199 | ||||||
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Cash Flows From Investing Activities: |
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Additions to property and equipment |
(22,080 | ) | (11,277 | ) | ||||
Proceeds from the sale of property and equipment |
1,695 | 1,054 | ||||||
Issuance of notes receivable |
(5,700 | ) | (1,000 | ) | ||||
Other investing activities |
(250 | ) | | |||||
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Net cash used in investing activities |
(26,335 | ) | (11,223 | ) | ||||
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Cash Flows From Financing Activities: |
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Proceeds from issuance of common stock |
72 | 37 | ||||||
Tax withholdings related to net share settlements of restricted stock units and performance share awards |
(802 | ) | (212 | ) | ||||
Payments on long-term debt |
(4,286 | ) | (4,286 | ) | ||||
Borrowings under note payable to financial institution |
138,971 | 109,300 | ||||||
Payments on note payable to financial institution |
(126,553 | ) | (113,011 | ) | ||||
Payments on capital lease obligations |
(2,465 | ) | (2,557 | ) | ||||
Payments of debt amendment costs |
| (401 | ) | |||||
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Net cash provided by (used in) financing activities |
4,937 | (11,130 | ) | |||||
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Change in cash and cash equivalents |
(13 | ) | (154 | ) | ||||
Cash and cash equivalents, beginning of period |
46 | 182 | ||||||
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Cash and cash equivalents, end of period |
$ | 33 | $ | 28 | ||||
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Non-cash investing activity: |
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Escrow account related to capital lease financing |
$ | | $ | 898 | ||||
Accrued property and equipment purchases |
1,233 | 1,284 | ||||||
Capital lease additions |
| 142 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
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
3. | Inventories |
Inventories are stated at the lower of cost or market and consist of the following (in thousands):
September 30, 2013 |
December 31, 2012 |
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Short-term inventories: |
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Raw materials |
$ | 45,624 | $ | 56,913 | ||||
Work-in-process |
1,187 | 10,157 | ||||||
Finished goods |
60,014 | 43,374 | ||||||
Supplies |
3,120 | 3,101 | ||||||
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109,945 | 113,545 | |||||||
Long-term inventories: |
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Finished goods |
1,306 | 1,608 | ||||||
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Total inventories |
$ | 111,251 | $ | 115,153 | ||||
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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 |
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Deferred compensation plan assets |
$ | 5,627 | $ | 5,627 | $ | | $ | | ||||||||
Derivatives |
32 | | 32 | | ||||||||||||
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Total Assets |
$ | 5,659 | $ | 5,627 | $ | 32 | $ | | ||||||||
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Financial Liabilities |
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Derivatives |
$ | (44 | ) | $ | | $ | (44 | ) | $ | | ||||||
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Description | Balance at December 31, 2012 |
Level 1 | Level 2 | Level 3 | ||||||||||||
Financial Assets |
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Escrow account |
$ | 898 | $ | 898 | $ | | $ | | ||||||||
Deferred compensation plan assets |
5,280 | 5,280 | | | ||||||||||||
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Total Assets |
$ | 6,178 | $ | 6,178 | $ | | $ | | ||||||||
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Financial Liabilities |
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Derivatives |
$ | (353 | ) | $ | | $ | (353 | ) | $ | | ||||||
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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 |
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Derivatives designated as hedging instruments |
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Prepaid expenses and other |
$ | 7 | $ | | ||||
Derivatives not designated as hedging instruments |
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Prepaid expenses and other |
25 | | ||||||
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Total assets |
$ | 32 | $ | | ||||
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Liabilities |
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Derivatives designated as hedging instruments |
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Accrued liabilities |
$ | | $ | 197 | ||||
Derivatives not designated as hedging instruments |
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Accrued liabilities |
44 | 156 | ||||||
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Total liabilities |
$ | 44 | $ | 353 | ||||
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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) | ||||||||||||||||||||
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Gross Amounts Not Offset in the Statement of Financial Position |
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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 |
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September 30, 2013 |
$ | 32 | $ | | $ | 32 | $ | 32 | $ | | $ | | ||||||||||||
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December 31, 2012 |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
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(i) | (ii) | (iii) = (i) - (ii) | (iv) | (v) = (iii) - (iv) | ||||||||||||||||||||
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Gross Amounts Not Offset in the Statement of Financial Position |
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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 |
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September 30, 2013 |
$ | 44 | $ | | $ | 44 | $ | 44 | $ | | $ | | ||||||||||||
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December 31, 2012 |
$ | 353 | $ | | $ | 353 | $ | 353 | $ | | $ | | ||||||||||||
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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 | ) | |||||
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|
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|
|
|
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 | ) | |||||||
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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 | ) | ||||||
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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.
7. | Segment Information |
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 | ||||||||||||
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|
|
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Total |
$ | 103,022 | $ | 115,099 | $ | 360,357 | $ | 388,315 | ||||||||
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|||||||||
Gross profit: |
||||||||||||||||
Water Transmission |
$ | 7,932 | $ | 9,681 | $ | 39,927 | $ | 27,529 | ||||||||
Tubular Products |
880 | 1,919 | 5,757 | 14,148 | ||||||||||||
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|
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|
|
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Total |
$ | 8,812 | $ | 11,600 | $ | 45,684 | $ | 41,677 | ||||||||
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|
|
|||||||||
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 | ) | ||||||||
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|
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|
|
|
|
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Total |
$ | 2,840 | $ | 4,029 | $ | 27,040 | $ | 20,178 | ||||||||
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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 | ||||||||||||
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Total |
$ | 877 | $ | 925 | $ | 2,167 | $ | 2,199 | ||||||||
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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 | |||||||||||
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|
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Exercisable, September 30, 2013 |
40,000 | 25.44 | 4.90 | $ | 309 | |||||||||||
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|
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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 | |||||
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|
|||||||
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.
9. | Income Taxes |
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
10. | Earnings per Share |
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 | ||||||||
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|
|
|
|
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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 | ||||||||||||
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Diluted weighted-average common shares outstanding |
9,517 | 9,499 | 9,498 | 9,458 | ||||||||||||
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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 | ) | |||
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|
|
|
|||||||
Other comprehensive income before reclassifications |
| 175 | 175 | |||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
194 | (82 | ) | 112 | ||||||||
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|
|||||||
Net current period other comprehensive income |
194 | 93 | 287 | |||||||||
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|
|
|
|||||||
Balance, September 30, 2013 |
$ | (1,994 | ) | $ | 8 | $ | (1,986 | ) | ||||
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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 |
Amount reclassified from Accumulated Other Comprehensive Income (Loss) |
Affected line item in the | ||||
Defined Benefit Pension Items |
||||||
Net periodic pension cost |
$ | (295 | ) | Cost of sales | ||
101 | Tax benefit | |||||
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$ | (194 | ) | Net of tax | |||
|
|
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Gains and losses on cash flow hedges |
||||||
Foreign currency forward contracts |
$ | 131 | Net sales | |||
(49 | ) | Tax expense | ||||
|
|
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$ | 82 | Net of tax | ||||
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|
|
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Total reclassifications for the period |
$ | (112 | ) | |||
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15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
This Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act that are based on current expectations, estimates and projections about our business, managements beliefs, and assumptions made by management. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, forecasts, should, could, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include changes in demand and market prices for our products, product mix, bidding activity, the timing of customer orders and deliveries, production schedules, the price and availability of raw materials, excess or shortage of production capacity, international trade policy and regulations and other risks discussed in our 2012 Form 10-K and from time to time in our other SEC filings and reports. Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
Overview
We are a leading North American manufacturer of large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, primarily related to drinking water systems, and we also manufacture other welded steel pipe products for use in a wide range of applications, including energy, construction, agriculture, and industrial systems. Our pipeline systems are also used for hydroelectric power systems, wastewater systems and other applications, and we also make products for industrial plant piping systems and certain structural applications. These pipeline systems are produced by our Water Transmission Group from six manufacturing facilities located in Portland, Oregon; Denver, Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas; and Monterrey, Mexico. Our Water Transmission Group accounted for approximately 50.9% of net sales in the first nine months of 2013.
Our water infrastructure products are generally sold to installation contractors, who include our products in their bids to municipal agencies or privately-owned water companies for specific projects. Within the total pipeline system, our products best fit the larger-diameter, higher-pressure applications. We believe our sales are substantially driven by spending on new water infrastructure with additional spending on water infrastructure upgrades, replacements, and repairs. Pricing of our water infrastructure products is largely determined by the competitive environment in each regional market, and the regional markets generally operate independently of each other. We operate our Water Transmission business with a long-term time horizon. Projects are often planned for many years in advance and are sometimes part of fifty-year build out plans. In the near-term, we expect strained municipal budgets will continue to impact the Water Transmission Group, although increased infrastructure needs and drought-related projects in Texas will help offset the effects of strained municipal budgets in other parts of the United States.
Our Tubular Products Group manufactures other welded steel products in three facilities: Atchison, Kansas; Houston, Texas; and Bossier City, Louisiana. We produce a range of products used in several different markets, including energy, construction, agriculture, and industrial systems, which are sold to distributors and used in many different applications. Our Tubular Products Groups sales volume is typically driven by energy spending, non-residential construction spending, and general economic conditions. Our Tubular Products Group generated approximately 49.1% of net sales in the first nine months of 2013.
We believe the greatest long-term potential for significant sales growth in our Tubular Products Group is through our energy products. We are currently exploring strategic alternatives for the Oil Country Tubular Goods (OCTG) portion of our energy business, which could include potential acquisitions, divestitures and joint-ventures. Significant foreign imports of energy products have continued to place downward pressure on our energy sales. A trade case was filed in July 2013 for an investigation of imports of OCTG, particularly casing and tubing, from nine countries and possible imposition of anti-dumping duties. A preliminary determination of harm was found in August 2013, with a final determination expected in the second quarter of 2014. However, in the near term, we do not expect a significant improvement in either selling prices or volumes in the fourth quarter of 2013. Ad valorem taxes due for inventory on hand at December 31, 2013 in Texas, our biggest market, may delay improvement in selling volumes to the first quarter of 2014. Drilling activity, as represented by rig counts, has declined since the end of 2012 but has remained steady during the first nine months of 2013 and is expected to remain steady during the remainder of 2013.
16
Purchased steel represents a substantial portion of our cost of sales, and changes in our selling prices often correlate directly to changes in steel costs. This correlation is the greatest in our Tubular Products Group as its margins are highly sensitive to changes in steel costs, although the amounts of margins are also influenced by the current level of demand in the marketplace.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our consolidated financial statements is set forth in our 2012 Form 10-K.
Recent Accounting Pronouncements
See Note 2 of the Condensed Consolidated Financial Statements in Part I - Item I, Financial Statements for a description of recent accounting pronouncements, including the dates of adoption and estimated effects on financial position, results of operations and cash flows.
Results of Operations
The following tables set forth, for the period indicated, certain financial information regarding costs and expenses expressed as a percentage of total net sales and net sales of our business segments.
Three months ended September 30, 2013 |
Three months ended September 30, 2012 |
|||||||||||||||
$ | % of Net Sales |
$ | % of Net Sales |
|||||||||||||
Net sales |
||||||||||||||||
Water Transmission |
$ | 46,835 | 45.5 | % | $ | 63,487 | 55.2 | % | ||||||||
Tubular Products |
56,187 | 54.5 | 51,612 | 44.8 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total net sales |
103,022 | 100.0 | 115,099 | 100.0 | ||||||||||||
Cost of sales |
94,210 | 91.4 | 103,499 | 89.9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
8,812 | 8.6 | 11,600 | 10.1 | ||||||||||||
Selling, general and administrative expense |
5,972 | 5.8 | 7,571 | 6.6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
2,840 | 2.8 | 4,029 | 3.5 | ||||||||||||
Other expense |
242 | 0.2 | 49 | 0.0 | ||||||||||||
Interest income |
(141 | ) | (0.1 | ) | (35 | ) | (0.0 | ) | ||||||||
Interest expense |
977 | 0.9 | 1,305 | 1.1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
1,762 | 1.8 | 2,710 | 2.4 | ||||||||||||
Provision for income taxes |
746 | 0.7 | (686 | ) | (0.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 1,016 | 1.1 | % | $ | 3,396 | 3.0 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit as a percentage of segment net sales: |
||||||||||||||||
Water Transmission |
16.9 | % | 15.2 | % | ||||||||||||
Tubular Products |
1.6 | 3.7 |
17
Nine months ended September 30, 2013 |
Nine months ended September 30, 2012 |
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$ | % of Net Sales |
$ | % of Net Sales |
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Net sales |
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Water Transmission |
$ | 183,596 | 50.9 | % | $ | 180,968 | 46.6 | % | ||||||||
Tubular Products |
176,761 | 49.1 | 207,347 | 53.4 | ||||||||||||
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Total net sales |
360,357 | 100.0 | 388,315 | 100.0 | ||||||||||||
Cost of sales |
314,673 | 87.3 | 346,638 | 89.3 | ||||||||||||
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Gross profit |
45,684 | 12.7 | 41,677 | 10.7 | ||||||||||||
Selling, general and administrative expense |
18,644 | 5.2 | 21,499 | 5.5 | ||||||||||||
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Operating income |
27,040 | 7.5 | 20,178 | 5.2 | ||||||||||||
Other expense |
279 | 0.1 | 51 | 0.0 | ||||||||||||
Interest income |
(384 | ) | (0.1 | ) | (122 | ) | (0.0 | ) | ||||||||
Interest expense |
2,982 | 0.8 | 4,471 | 1.2 | ||||||||||||
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Income before income taxes |
24,163 | 6.7 | 15,778 | 4.0 | ||||||||||||
Provision for income taxes |
8,080 | 2.2 | 4,044 | 1.0 | ||||||||||||
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Net income |
$ | 16,083 | 4.5 | % | $ | 11,734 | 3.0 | % | ||||||||
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Gross profit as a percentage of segment net sales: |
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Water Transmission |
21.7 | % | 15.2 | % | ||||||||||||
Tubular Products |
3.3 | 6.8 |
Three Months and Nine Months Ended September 30, 2013 Compared to Three Months and Nine Months Ended September 30, 2012
Net sales. Net sales decreased 10.5% to $103.0 million for the third quarter of 2013 compared to $115.1 million for the third quarter of 2012 and decreased 7.2% to $360.4 million for the first nine months of 2013 compared to $388.3 million in the same period of 2012. No single customer accounted for more than 10% of total net sales in the third quarter of 2013. One customer in the Water Transmission segment accounted for 14.0% of total net sales in the first nine months of 2013. One customer in the Water Transmission segment accounted for 16.3% of total net sales in the third quarter of 2012. No single customer accounted for more than 10% of total net sales in the first nine months of 2012.
Water Transmission sales decreased by 26.2% to $46.8 million in the third quarter of 2013 from $63.5 million in the third quarter of 2012 and increased 1.5% to $183.6 million in the first nine months of 2013 from $181.0 million in the first nine months of 2012. The decrease in sales in the third quarter of 2013 compared to the third quarter of 2012 was due to a 60% decrease in tons produced, partially offset by downstream fabrication services on pipe produced in prior periods. The decrease in tons produced was impacted by continued weakness in municipal markets. In addition, we started the largest project in our history in the third quarter of 2012, and did not have a similar-sized project in the third quarter of 2013. This was partially offset by positive impacts due to the timing of production and mix of projects produced during the quarter, as well as a 54% increase in materials costs per ton including steel. The increase in sales in the first nine months of 2013 compared to the first nine months of 2012 was due to a 27% increase in average selling price per ton, partially offset by a 20% decrease in tons produced due to continued weakness in municipal markets. The increase in average selling prices per ton in the first nine months of 2013 was due to product mix as well as a 16% increase in material costs per ton including steel. Bidding activity, backlog and production levels may vary significantly from period to period affecting sales volumes.
Tubular Products sales increased 8.9% to $56.2 million in the third quarter of 2013 from $51.6 million in the third quarter of 2012 and decreased 14.8% to $176.8 million in the first nine months of 2013 from $207.3 million in the first nine months of 2012. The sales increase in the third quarter of 2013 as compared to the third quarter of 2012 was due to a 20% increase in tons sold, offset by a 9% decrease in the average selling price per ton. We sold 51,400 tons in the third quarter of 2013 as compared to 42,900 tons in the third quarter of 2012. Energy pipe sales represent 76% of our tons sold, and increased 33% from 29,500 tons in the third quarter of 2012 to 39,200 tons in the third quarter of 2013 primarily due to increased sales of line pipe partially offset by decreased sales of OCTG products. The decrease in average selling price for the third quarter of 2013 as compared to the third quarter of 2012 was due to continued downward pricing pressure from imported pipe. The sales decrease in the first nine months of 2013 compared to the same period in 2012 was due to a 5% decrease in tons sold from 166,800 tons to 158,100 tons and a 10% decrease in the average selling price per ton. The decrease in average selling price for the first nine months of 2013 as compared to the first nine months of 2012 was due to a 9% decrease in steel cost per ton along with the downward pricing pressure from imported pipe. Increased imports of energy pipe, decreases in rig counts from 2012, low natural gas prices, and volatility of steel prices have negatively impacted sales volumes and selling prices, particularly in energy pipe. The selling price for energy pipe decreased 12% in the first nine months of 2013 from the first nine months of 2012.
18
Gross profit. Gross profit decreased 24.0% to $8.8 million (8.6% of total net sales) in the third quarter of 2013 from $11.6 million (10.1% of total net sales) in the third quarter of 2012 and increased 9.6% to $45.7 million (12.7% of total net sales) in the first nine months of 2013 from $41.7 million (10.7% of total net sales) in the first nine months of 2012.
Water Transmission gross profit decreased $1.7 million, or 18.1%, to $7.9 million (16.9% of segment net sales) in the third quarter of 2013 from $9.7 million (15.2% of segment net sales) in the third quarter of 2012. Water Transmission gross profit increased $12.4 million, or 45.0%, to $39.9 million (21.7% of segment net sales) in the first nine months of 2013 compared to the same period in the prior year when gross profit was $27.5 million (15.2% of segment net sales). The decrease in gross profit for the third quarter of 2013 was primarily driven by the decrease in tons produced, which was partially offset by the downstream fabrication services discussed above. The increase in gross profit in the first nine months of 2013 was primarily due to the increase in selling price per ton, offset by the decrease in tons produced as discussed above. The increase in gross profit as a percentage of net sales in the third quarter of 2013 and the first nine months of 2013 was driven by a favorable project mix, including the production of the Lake Texoma project, the largest project in our history. This project was produced from the third quarter of 2012 through the second quarter of 2013. The increase in gross profit as a percentage of net sales in the third quarter of 2013 and the first nine months of 2013 was also the result of cost reduction initiatives which have reduced overhead costs and man hours per ton, as well as improvements in quality.
Gross profit from Tubular Products decreased $1.0 million, or 54.1%, to $0.9 million (1.6% of segment net sales) in the third quarter of 2013 from $1.9 million (3.7% of segment net sales) in the third quarter of 2012 and decreased $8.4 million, or 59.3%, to $5.8 million (3.3% of segment net sales) in the first nine months of 2013 from $14.1 million (6.8% of segment net sales) in the first nine months of 2012. As noted above, sales of our Tubular Products increased during the third quarter of 2013, particularly in our energy products, which had sales revenue of $39.3 million in the third quarter of 2012 and increased 18% to $46.2 million in the third quarter of 2013. This was partially offset by negative impacts of increased materials cost per ton discussed above and a lower of cost or market inventory adjustment of $0.8 million. The decrease in gross profit in the first nine months of 2013 compared to the first nine months of 2012 was the result of overall decreases in our energy pipe sales, which decreased 13% from $164.1 million in the first nine months of 2012 to $142.7 million in the first nine months of 2013. The lower sales volume in our energy products had a significant negative impact on the fixed portion of our cost of goods sold as a percent of net sales. In addition, we recorded a $2.0 million lower of cost or market inventory adjustment during the first nine months of 2013. This was partially offset by lower material costs per ton, which decreased 4% in the first nine months of 2013 compared to the first nine months of 2012. The decrease in gross profit was also partially offset by a $1.2 million refundable state tax credit recognized during the first nine months of 2013.
Selling, general and administrative expenses. Selling, general and administrative expenses decreased 21.1% to $6.0 million (5.8% of total net sales) in the third quarter of 2013 from $7.6 million (6.6% of total net sales) in the third quarter of 2012 and decreased 13.3% to $18.6 million (5.2% of total net sales) in the first nine months of 2013 from $21.5 million (5.5% of total net sales) in the first nine months of 2012. The decrease in the third quarter of 2013 as compared to the third quarter of 2012 was due to a $0.9 million decrease in outside services and other administrative expenses, a $0.2 million decrease in bonus expense, a $0.2 million decrease in wages, and a $0.1 million decrease in stock based compensation expense. The decrease in the first nine months of 2013 as compared to the first nine months of 2012 was due to a decrease of $2.2 million in professional fees and outside services primarily due to a reduction in audit related fees, a $0.2 million decrease in wages, and a $0.2 million decrease in stock based compensation expense.
Interest expense. Interest expense was $1.0 million in the third quarter of 2013 and $1.3 million in the third quarter of 2012 and $3.0 million in the first nine months of 2013 and $4.5 million in the first nine months of 2012. Lower average borrowings and lower average interest rates resulted in decreased interest expense in the third quarter of 2013 compared to the third quarter of 2012. Lower average interest rates and a decrease in amortization expense of deferred financing costs following the refinancing of our Credit Agreement during the fourth quarter of 2012 resulted in decreased interest expense in the first nine months of 2013 compared to 2012. This was partially offset by higher borrowings in the first nine months of 2013 compared to 2012.
Income Taxes. The tax provision was $0.7 million in the third quarter of 2013 (an effective tax rate of 42.3%) compared to a tax benefit of $0.7 million in the third quarter of 2012 (an effective tax benefit rate of 25.3%) and $8.1 million in the first nine months of 2013 (an effective tax rate of 33.4%) compared to $4.0 million (an effective tax rate of 26.5%) in the first nine months of 2012. Our effective tax rate in the third quarter of 2013 was greater than our federal statutory rate of 35% primarily due to an increase in the valuation allowance related to an investment in which we are anticipating a future capital loss. Our effective tax rate was less than our federal statutory rate for the first nine months of 2013 primarily due to the favorable impact of the research and development tax credit. During the third quarter of 2012, we performed a research and development tax credit study for fiscal years 2010 and 2011. We recorded a net tax benefit of $1.8 million resulting from this study in the third quarter of 2012. Combined with our operating results for the quarter, our effective rates for the three and nine months ended September 30, 2012 were therefore less than our federal statutory rate of 35%.
19
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of liquidity generally include operating cash flows and our bank credit agreement. Our principal uses of liquidity generally include capital expenditures, working capital and debt service. Information regarding our cash flows for the nine months ended September 30, 2013 is presented in our Condensed Consolidated Statements of Cash Flows contained in this Form 10-Q, and is further discussed below.
As of September 30, 2013, our working capital (current assets minus current liabilities) was $178.0 million as compared to $167.4 million as of December 31, 2012. The primary reason for the increase in working capital was an increase in accounts receivable and a decrease in accrued liabilities, partially offset by a decrease in costs and estimated earnings in excess of billings.
Net cash provided by operating activities in the first nine months of 2013 was $21.4 million. This was primarily the result of net income, depreciation, and the net increase in working capital as discussed above.
Net cash provided by operating activities in the first nine months of 2012 was $22.2 million. This was primarily the result of net income, depreciation, and fluctuations in working capital including increases in accrued liabilities, partially offset by an increase in costs and estimated earnings in excess of billings on uncompleted contracts.
Fluctuations in our working capital accounts result from timing differences between production, shipment and invoicing of our products, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we are generally obligated to pay for goods and services early in the project while cash is not received until much later in the project. Our revenues in the Water Transmission segment are recognized on a percentage-of-completion method; therefore, there is little correlation between revenue and cash receipts and the elapsed time can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary from period to period.
Net cash used in investing activities in the first nine months of 2013 was $26.3 million, primarily related to capital expenditures for previously disclosed strategic investment projects and funds disbursed under a notes receivable arrangement of $5.7 million. Capital expenditures in 2013 are expected to be approximately $26 million to $30 million for standard capital replacement and recently announced strategic investment projects. These projects include the installation of an additional horizontal accumulator and hydrotester, and the replacement of the existing front end of the 16 inch mill at our Atchison plant, as well as expansion at our Saginaw plant, which will enable production of pipe up to 126 inches in diameter as well as increase overall capacity. Expenditures for these strategic investments during the first nine months of 2013 included $4.0 million for the replacement of the existing front end of the 16 inch mill and $1.4 million for a new hydrotester at our Atchison plant, and $8.6 million for expansion projects at our Saginaw plant. This was partially offset by proceeds received from the sale of property and equipment of $1.7 million.
Net cash used in investing activities in the first nine months of 2012 was $11.2 million, primarily for capital expenditures for storm water upgrades at our Portland, Oregon facility and planned capacity expansion in our Tubular Products plants.
Net cash provided by financing activities in the first nine months of 2013 was $4.9 million, which resulted primarily from borrowings under our Credit Agreement totaling $139.0 million, partially offset by repayments under our Credit Agreement and Note Purchase Agreement totaling $130.8 million.
Net cash used in financing activities in the first nine months of 2012 was $11.1 million, which resulted primarily from repayments under our Credit Agreement and Note Purchase Agreement totaling $117.3 million, partially offset by net borrowings of $109.3 million.
We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under our credit agreements will be adequate to fund our working capital and capital requirements for the foreseeable future. We also expect to continue to rely on cash generated from operations or funds available from our line of credit to make required principal payments on our long-term debt during 2013. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and capital and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may use a portion of our working capital or necessitate additional bank borrowings or other sources of funding.
Line of Credit and Long-Term Debt
We had the following significant components of debt at September 30, 2013: a $165.0 million Credit Agreement, under which $60.0 million was outstanding; $2.1 million of Series A Term Notes, $1.5 million of Series B Term Notes, $2.9 million of Series C Term Notes and $1.3 million of Series D Term Notes.
20
The 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%. We were able to borrow at LIBOR plus 2.0% under the Credit Agreement at September 30, 2013. Borrowings under the Credit Agreement are collateralized by substantially all of our personal property. The Credit Agreement will expire on October 24, 2017. At September 30, 2013 we had $95.9 million available under the Credit Agreement while remaining in compliance with our financial covenants, net of outstanding letters of credit. The Credit Agreement bears interest at a weighted average rate of 2.41% at September 30, 2013.
The Series A Term Note in the principal amount of $2.1 million matures on February 25, 2014 and requires annual payments in the amount of $2.1 million plus interest of 10.50% paid quarterly on February 25, May 25, August 25 and November 25. The Series B Term Notes in the principal amount of $1.5 million mature on June 21, 2014 and require annual payments in the amount of $1.5 million plus interest of 10.22% paid quarterly on March 21, June 21, September 21 and December 21. The Series C Term Notes in the principal amount of $2.9 million mature on October 26, 2014 and require annual payments of $1.4 million plus interest of 9.11% paid quarterly on January 26, April 26, July 26 and October 26. The Series D Term Notes in the principal amount of $1.3 million mature on January 24, 2015 and require annual payments in the amount of $643,000 plus interest of 9.07% paid quarterly on January 24, April 24, July 24 and October 24. The Series A Term Note, the Series B Term Notes, the Series C Term Notes, and the Series D Term Notes (together, the Term Notes) are collateralized by accounts receivable, inventory and certain equipment.
We had a total of $10.7 million in capital lease obligations outstanding at September 30, 2013. The weighted average interest rate on all of our capital leases is 7.68%. Our capital leases are for certain equipment used in the manufacturing process, with $5.7 million of our capital leases outstanding as of September 30, 2013 representing an agreement entered into as of September 2009 to finance our Bossier City, Louisiana facility (the Financing Arrangement) under which certain equipment used in the manufacturing process at the facility is leased. The Financing Arrangement requires us to meet certain loan covenants, measured at the end of each fiscal quarter. These loan covenants follow the covenants required by our Credit Agreement.
The Credit Agreement, the Note Purchase Agreement and certain of our leases place various restrictions on our ability to, among other things, incur certain additional indebtedness, create liens or other encumbrances on assets, and incur additional capital expenditures. The Credit Agreement, Note Purchase Agreement, and certain of our leases require us to be in compliance with certain financial covenants. The results of our financial covenants as of September 30, 2013 are below.
| The Consolidated Total Leverage Ratio must not be greater than 3.5:1.0. Our ratio as of September 30, 2013 is 1.67:1.0. |
| The Consolidated Tangible Net Worth must be greater than $210.3 million. Our Tangible Net Worth as of September 30, 2013 is $256.8 million. |
| The Consolidated Fixed Charge Coverage Ratio must not be less than 1.25:1.0. Our ratio at September 30, 2013 is 1.82:1.0 |
As of September 30, 2013, we are in compliance with all financial covenants.
Based on our business plan and forecasts of operations, we believe we will remain in compliance with our covenants for the next twelve months.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
For a discussion of the Companys market risk associated with foreign currencies and interest rates, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk in Part II of the Companys 2012 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosures.
21
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2013. As a result of the assessment, our CEO and CFO have concluded that, as of September 30, 2013, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Information required by this Item 1 is contained in Note 6 to the Condensed Consolidated Financial Statements, Part I - Item 1, Financial Statements of this report, under the caption Commitments and Contingencies. The text under such caption is incorporated by reference into this Item 1.
In addition to the other information set forth in this report, the factors discussed in Part I - Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 could materially affect our business, financial condition or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, that may also materially adversely affect our business, financial condition, or operating results.
22
(a) The exhibits filed as part of this Report are listed below:
Exhibit Number |
Description | |
10.1 | Change in Control Agreement between Northwest Pipe Company and William Smith dated as of October 15, 2013, filed herewith. | |
10.2 | Change in Control Agreement between Northwest Pipe Company and Martin Dana dated as of October 15, 2013, filed herewith. | |
31.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Document | |
101.DEF | XBRL Taxonomy Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
23
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 5, 2013
NORTHWEST PIPE COMPANY | ||
By: | /s/ SCOTT MONTROSS | |
Scott Montross | ||
Director, President and Chief Executive Officer | ||
By: | /s/ ROBIN GANTT | |
Robin Gantt | ||
Senior Vice President, Chief Financial Officer, and Assistant Secretary | ||
(Principal Financial Officer) |
24
Exhibit 10.1
October 15, 2013
William Smith
5271 SE Columbia Way, Suite 200
Vancouver, WA 98661
Northwest Pipe Company, an Oregon corporation (the Company), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interest of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the Board) has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Companys management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company.
In order to induce you to remain in the employ of the Company, this letter agreement, which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below.
1. Right to Terminate. The Company or you may terminate your employment at any time, subject to the Companys obligations to provide the benefits hereinafter specified in accordance with the terms hereof.
2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until October 14, 2014; provided, however, that commencing on October 14, 2014 and each October 14 thereafter, the term of this Agreement shall automatically be extended for one additional year unless at least 90 days prior to such October 14, 2014 date, the Company or you shall have given notice that this Agreement shall not be extended; provided, however, that this Agreement shall continue in effect for a period of twenty-four (24) months beyond the term provided herein if a Change in Control, as defined in Section 3 hereto shall have occurred during such term. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a Change in Control as defined in Section 3 hereof.
3. Change in Control; Person.
3.1 For purposes of this Agreement, a Change in Control shall mean the occurrence of any of the following events:
3.1.1 The approval by the shareholders of the Company of:
(a) any consolidation, merger or plan of share exchange involving the Company (a Merger) in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock of the Company (Company Shares) would be converted into cash, securities or other property, other than a Merger involving Company Shares in which the holders of Company Shares immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger,
(b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or
(c) the adoption of any plan or proposal for the liquidation or dissolution of the Company.
3.1.2 At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or
3.1.3 Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (Voting Securities) representing thirty percent (30%) or more of the combined voting power of the then outstanding Voting Securities.
Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the Board, no Change in Control shall be deemed to have occurred for purposes of this Agreement if (1) you acquire (other than on the same basis as all other holders of the Company Shares) an equity interest in an entity that acquires the Company in a Change in Control otherwise described under subparagraph 3.1.1 above, or (2) you are part of a group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a Change in Control under subparagraph 3.1.3 above.
3.2 For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company or any employee benefit plan(s) sponsored by the Company.
Page 2
4. Termination Following Change In Control. If a Change in Control shall have occurred, you shall be entitled to the benefits provided in Section 5.3 hereof upon the termination of your employment within twenty-four (24) months after such Change in Control unless such termination is (a) because of your death, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined).
4.1 Disability. Termination by the Company of your employment based on Disability shall mean termination because of your absence from your duties with the Company on a full-time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full-time performance of your duties.
4.2 Cause. Termination by the Company of your employment for Cause shall mean termination upon (a) the willful and continued failure by you to substantially perform your reasonably assigned duties with the Company consistent with those duties assigned to you prior to the Change in Control (other than any such failure resulting from your incapacity due to physical or mental illness) which failure shall not have been corrected within thirty (30) days after a demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph 4.2, no act, or failure to act, on your part shall be considered willful unless done, or omitted to be done, by you in knowing bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the corporation. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph 4.2 and specifying the particulars thereof in detail.
4.3 Good Reason. Termination by you of your employment for Good Reason shall mean termination based on:
4.3.1 a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your judgment (which shall be exercised in good faith), constitutes an adverse change from your status, title, position(s) and responsibilities as in effect immediately prior to the Change in Control, or the assignment to you of any duties or responsibilities which, in your judgment (which shall be exercised in good faith), are inconsistent
Page 3
with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or as a result of your death or by you other than for Good Reason;
4.3.2 a reduction by the Company in your base salary as in effect immediately prior to the Change in Control;
4.3.3 the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control;
4.3.4 the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Companys normal vacation policy as in effect immediately prior to the Change in Control;
4.3.5 the Companys requiring you to be based anywhere other than within ten (10) miles of where your office is located immediately prior to the Change in Control except for required travel on the Companys business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control;
4.3.6 the failure by the Company to obtain from any Successor (as hereinafter defined) the assumption or assent to this Agreement contemplated by Section 6 hereof within thirty (30) days after a Change in Control; or
4.3.7 any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph 4.4 below (and, if applicable, paragraph 4.2 above); and for purposes of this Agreement no such purported termination shall be effective.
For purpose of this Agreement, Plan shall mean any compensation plan such as an incentive, stock option or restricted stock plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance, or relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees.
4.4 Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated.
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4.5 Date of Termination. Date of Termination shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause, the date on which a Notice of Termination is given, and (c) if your employment is to be terminated by you or by the Company for any other reason, the date specified in the Notice of Termination, which shall be a date no earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been agreed to by the party receiving the Notice of Termination either in advance of, or after, receiving such Notice of Termination. Notwithstanding anything in the foregoing to the contrary, if the party receiving the Notice of Termination has not previously agreed to the termination, then within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination may notify the other party that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 12 hereof.
5. Compensation Upon Termination or During Disability.
5.1 During any period following a Change in Control that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4.1, 4.4 and 4.5 hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect.
5.2 If your employment shall be terminated for Cause or as a result of your death following a Change in Control of the Company, the Company shall pay you your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement.
5.3 If within twenty-four (24) months after a Change in Control shall have occurred, as defined in Section 3 above, your employment by the Company shall be terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then, by no later than the fifth day following the Date of Termination (except as otherwise provided), you shall be entitled to, and shall be paid, without regard to any contrary provisions of any Plan, a severance benefit (the Severance Benefit) equal to either (x) the Specified Benefits (as defined in subsection 5.3.1 below), or (y) the Capped Benefit (as defined in subsection 5.3.2 below). You shall be entitled, in your sole discretion, to elect to receive either the Specified Benefits or the Capped Benefit.
5.3.1 The Specified Benefits are as follows:
(a) the Company shall pay your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given
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plus any benefits or awards (including both cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request);
(b) as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you in a single payment an amount in cash equal to (i) an amount equal to two (2) times the higher of (A) your annual base salary at the rate in effect just prior to the time a Notice of Termination is given, or (B) your annual base salary in effect immediately prior to the Change in Control of the Company, plus (ii) an amount equal to two (2) times the average of the cash bonuses paid to you during the previous three years;
(c) for a twenty-four (24) month period after the Date of Termination, the Company shall arrange to provide you and your dependents with life, accident, medical and dental insurance benefits substantially similar to those which you were receiving immediately prior to the Change in Control of the Company. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by you pursuant to this paragraph 5.3.1(c) to the extent that a similar benefit is actually received by you from a subsequent employer during such twenty-four (24) month period, and any such benefit actually received by you shall be reported to the Company;
(d) any and all outstanding options to purchase stock of the Company (or any Successor) held by you shall immediately vest and become exercisable in full; and
(e) the Company shall pay you for any vacation time earned but not taken at the Date of Termination, at an hourly rate equal to your annual base salary as in effect immediately prior to the time a Notice of Termination is given divided by 2080.
5.3.2 The Capped Benefit equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a parachute payment as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (IRC), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the base amount as defined in IRC, Section 280G(b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a Change in Control of the Company within the meaning of IRC Section 280G(b)(2)(A)(i), including accelerated vesting of options and other awards under the Companys stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a Change in Control within the meaning of IRC Section 280G(b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC Section 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.
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5.4 Except as specifically provided above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. Your entitlements under Section 5.3 are in addition to, and not in lieu of any rights, benefits or entitlements you may have under the terms or provisions of any Plan.
6. Successors; Binding Agreement.
6.1 The Company will seek to have any Successor (as hereinafter defined), by agreement in form and substance satisfactory to you, assume the Companys obligations under this Agreement or assent to the fulfillment by the Company of its obligations under this Agreement. Failure of the Company to obtain such assumption or assent prior to or at the time a Person becomes a Successor shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company has occurred, shall entitle you immediately to the benefits provided in Section 5.3 hereof upon delivery by you of a Notice of Termination which the Company, by executing this Agreement, hereby assents to. This Agreement will be binding upon and inure to the benefit of the Company and any Successor (and such Successor shall thereafter be deemed the Company for purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. For purposes of this Agreement, Successor shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Companys business directly, by merger, consolidation or purchase of assets, or indirectly, by purchase of the Companys Voting Securities or otherwise.
6.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate.
7. Fees and Expenses. The Company shall pay all legal fees and related legal expenses incurred by you as a result of (i) your termination following a Change in Control of the Company (including all such fees and expenses, if any, incurred in contesting or disputing any such termination) or (ii) your seeking to obtain or enforce any right or benefit provided by this Agreement.
8. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 5, 6, 7 and 12 of this Agreement shall survive termination of this Agreement.
9. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given
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when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed to the address of the respective party set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing. In accordance herewith, except that notice of change of address shall be effective only upon receipt.
10. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Oregon.
11. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Portland, Oregon by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 12.
13. Related Agreements. To the extent that any provision of any other agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose.
14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.
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If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.
Sincerely, |
Scott J. Montross |
President and Chief Executive Officer |
AGREED AND ACCEPTED:
|
William Smith |
Executive Vice President, Water Transmission Group |
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Exhibit 10.2
October 15, 2013
Martin Dana
5271 SE Columbia Way, Suite 200
Vancouver, WA 98661
Northwest Pipe Company, an Oregon corporation (the Company), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interest of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the Board) has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Companys management to their assigned duties without distraction in circumstances arising from the possibility of a Change in Control of the Company.
In order to induce you to remain in the employ of the Company, this letter agreement, which has been approved by the Board, sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a Change in Control of the Company under the circumstances described below.
1. Right to Terminate. The Company or you may terminate your employment at any time, subject to the Companys obligations to provide the benefits hereinafter specified in accordance with the terms hereof.
2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until October 14, 2014; provided, however, that commencing on October 14, 2014 and each October 14 thereafter, the term of this Agreement shall automatically be extended for one additional year unless at least 90 days prior to such October 14, 2014 date, the Company or you shall have given notice that this Agreement shall not be extended; provided, however, that this Agreement shall continue in effect for a period of twenty-four (24) months beyond the term provided herein if a Change in Control, as defined in Section 3 hereto shall have occurred during such term. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company terminate your employment prior to a Change in Control as defined in Section 3 hereof.
3. Change in Control; Person.
3.1 For purposes of this Agreement, a Change in Control shall mean the occurrence of any of the following events:
3.1.1 The approval by the shareholders of the Company of:
(a) any consolidation, merger or plan of share exchange involving the Company (a Merger) in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock of the Company (Company Shares) would be converted into cash, securities or other property, other than a Merger involving Company Shares in which the holders of Company Shares immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger,
(b) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or
(c) the adoption of any plan or proposal for the liquidation or dissolution of the Company.
3.1.2 At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board (Incumbent Directors) shall cease for any reason to constitute at least a majority thereof unless each new director elected during such two-year period was nominated or elected by two-thirds of the Incumbent Directors then in office and voting (with new directors nominated or elected by two-thirds of the Incumbent Directors also being deemed to be Incumbent Directors); or
3.1.3 Any Person (as hereinafter defined) shall, as a result of a tender or exchange offer, open market purchases, or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors (Voting Securities) representing thirty percent (30%) or more of the combined voting power of the then outstanding Voting Securities.
Notwithstanding anything in the foregoing to the contrary, unless otherwise determined by the Board, no Change in Control shall be deemed to have occurred for purposes of this Agreement if (1) you acquire (other than on the same basis as all other holders of the Company Shares) an equity interest in an entity that acquires the Company in a Change in Control otherwise described under subparagraph 3.1.1 above, or (2) you are part of a group that constitutes a Person which becomes a beneficial owner of Voting Securities in a transaction that otherwise would have resulted in a Change in Control under subparagraph 3.1.3 above.
3.2 For purposes of this Agreement, the term Person shall mean and include any individual, corporation, partnership, group, association or other person, as such term is used in Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934 (the Exchange Act), other than the Company or any employee benefit plan(s) sponsored by the Company.
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4. Termination Following Change In Control. If a Change in Control shall have occurred, you shall be entitled to the benefits provided in Section 5.3 hereof upon the termination of your employment within twenty-four (24) months after such Change in Control unless such termination is (a) because of your death, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined).
4.1 Disability. Termination by the Company of your employment based on Disability shall mean termination because of your absence from your duties with the Company on a full-time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full-time performance of your duties.
4.2 Cause. Termination by the Company of your employment for Cause shall mean termination upon (a) the willful and continued failure by you to substantially perform your reasonably assigned duties with the Company consistent with those duties assigned to you prior to the Change in Control (other than any such failure resulting from your incapacity due to physical or mental illness) which failure shall not have been corrected within thirty (30) days after a demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company. For purposes of this paragraph 4.2, no act, or failure to act, on your part shall be considered willful unless done, or omitted to be done, by you in knowing bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the corporation. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph 4.2 and specifying the particulars thereof in detail.
4.3 Good Reason. Termination by you of your employment for Good Reason shall mean termination based on:
4.3.1 a change in your status, title, position(s) or responsibilities as an officer of the Company which, in your judgment (which shall be exercised in good faith), constitutes an adverse change from your status, title, position(s) and responsibilities as in effect immediately prior to the Change in Control, or the assignment to you of any duties or responsibilities which, in your judgment (which shall be exercised in good faith), are inconsistent
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with such status, title or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s), except in connection with the termination of your employment for Cause, Disability or as a result of your death or by you other than for Good Reason;
4.3.2 a reduction by the Company in your base salary as in effect immediately prior to the Change in Control;
4.3.3 the failure by the Company to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the Change in Control (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the Change in Control, or the taking of any action, or the failure to act, by the Company which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the Change in Control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the Change in Control;
4.3.4 the failure by the Company to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with the Companys normal vacation policy as in effect immediately prior to the Change in Control;
4.3.5 the Companys requiring you to be based anywhere other than within ten (10) miles of where your office is located immediately prior to the Change in Control except for required travel on the Companys business to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company prior to the Change in Control;
4.3.6 the failure by the Company to obtain from any Successor (as hereinafter defined) the assumption or assent to this Agreement contemplated by Section 6 hereof within thirty (30) days after a Change in Control; or
4.3.7 any purported termination by the Company of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph 4.4 below (and, if applicable, paragraph 4.2 above); and for purposes of this Agreement no such purported termination shall be effective.
For purpose of this Agreement, Plan shall mean any compensation plan such as an incentive, stock option or restricted stock plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, disability, accident, life insurance, or relocation plan or policy or any other plan, program or policy of the Company intended to benefit employees.
4.4 Notice of Termination. Any purported termination by the Company or by you following a Change in Control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a Notice of Termination shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated.
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4.5 Date of Termination. Date of Termination shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company for Cause, the date on which a Notice of Termination is given, and (c) if your employment is to be terminated by you or by the Company for any other reason, the date specified in the Notice of Termination, which shall be a date no earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been agreed to by the party receiving the Notice of Termination either in advance of, or after, receiving such Notice of Termination. Notwithstanding anything in the foregoing to the contrary, if the party receiving the Notice of Termination has not previously agreed to the termination, then within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination may notify the other party that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 12 hereof.
5. Compensation Upon Termination or During Disability.
5.1 During any period following a Change in Control that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with paragraphs 4.1, 4.4 and 4.5 hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect.
5.2 If your employment shall be terminated for Cause or as a result of your death following a Change in Control of the Company, the Company shall pay you your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you. Thereupon the Company shall have no further obligations to you under this Agreement.
5.3 If within twenty-four (24) months after a Change in Control shall have occurred, as defined in Section 3 above, your employment by the Company shall be terminated (a) by the Company other than for Cause or Disability or (b) by you for Good Reason, then, by no later than the fifth day following the Date of Termination (except as otherwise provided), you shall be entitled to, and shall be paid, without regard to any contrary provisions of any Plan, a severance benefit (the Severance Benefit) equal to either (x) the Specified Benefits (as defined in subsection 5.3.1 below), or (y) the Capped Benefit (as defined in subsection 5.3.2 below). You shall be entitled, in your sole discretion, to elect to receive either the Specified Benefits or the Capped Benefit.
5.3.1 The Specified Benefits are as follows:
(a) the Company shall pay your full base salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given
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plus any benefits or awards (including both cash and stock components) which pursuant to the terms of any Plans have been earned or become payable, but which have not yet been paid to you (including amounts which previously had been deferred at your request);
(b) as severance pay and in lieu of any further salary for periods subsequent to the Date of Termination, the Company shall pay to you in a single payment an amount in cash equal to (i) an amount equal to two (2) times the higher of (A) your annual base salary at the rate in effect just prior to the time a Notice of Termination is given, or (B) your annual base salary in effect immediately prior to the Change in Control of the Company, plus (ii) an amount equal to two (2) times the average of the cash bonuses paid to you during the previous three years;
(c) for a twenty-four (24) month period after the Date of Termination, the Company shall arrange to provide you and your dependents with life, accident, medical and dental insurance benefits substantially similar to those which you were receiving immediately prior to the Change in Control of the Company. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by you pursuant to this paragraph 5.3.1(c) to the extent that a similar benefit is actually received by you from a subsequent employer during such twenty-four (24) month period, and any such benefit actually received by you shall be reported to the Company;
(d) any and all outstanding options to purchase stock of the Company (or any Successor) held by you shall immediately vest and become exercisable in full; and
(e) the Company shall pay you for any vacation time earned but not taken at the Date of Termination, at an hourly rate equal to your annual base salary as in effect immediately prior to the time a Notice of Termination is given divided by 2080.
5.3.2 The Capped Benefit equals the Specified Benefits, reduced by the minimum amount necessary to prevent any portion of the Specified Benefits from being a parachute payment as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (IRC), or any successor provision. The amount of the Capped Benefit shall therefore equal (1) three times the base amount as defined in IRC, Section 280G(b)(3)(A) reduced by $1 (One Dollar), and further reduced by (2) the present value of all other payments and benefits you are entitled to receive from the Company that are contingent upon a Change in Control of the Company within the meaning of IRC Section 280G(b)(2)(A)(i), including accelerated vesting of options and other awards under the Companys stock option plans, and increased by (3) all Specified Benefits that are not contingent upon a Change in Control within the meaning of IRC Section 280G(b)(2)(A)(i). If you receive the Capped Benefit, you may determine the extent to which each of the Specified Benefits shall be reduced. The parties recognize that there is some uncertainty regarding the computations under IRC Section 280G which must be applied to determine the Capped Benefit. Accordingly, the parties agree that, after the Severance Benefit is paid, the amount of the Capped Benefit may be retroactively adjusted to the extent any subsequent Internal Revenue Service regulations, rulings, audits or other pronouncements establish that the original calculation of the Capped Benefit was incorrect. In that case, amounts shall be paid or reimbursed between the parties so that you will have received the Severance Benefit you would have received if the Capped Benefit had originally been calculated correctly.
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5.4 Except as specifically provided above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. Your entitlements under Section 5.3 are in addition to, and not in lieu of any rights, benefits or entitlements you may have under the terms or provisions of any Plan.
6. Successors; Binding Agreement.
6.1 The Company will seek to have any Successor (as hereinafter defined), by agreement in form and substance satisfactory to you, assume the Companys obligations under this Agreement or assent to the fulfillment by the Company of its obligations under this Agreement. Failure of the Company to obtain such assumption or assent prior to or at the time a Person becomes a Successor shall constitute Good Reason for termination by you of your employment and, if a Change in Control of the Company has occurred, shall entitle you immediately to the benefits provided in Section 5.3 hereof upon delivery by you of a Notice of Termination which the Company, by executing this Agreement, hereby assents to. This Agreement will be binding upon and inure to the benefit of the Company and any Successor (and such Successor shall thereafter be deemed the Company for purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. For purposes of this Agreement, Successor shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Companys business directly, by merger, consolidation or purchase of assets, or indirectly, by purchase of the Companys Voting Securities or otherwise.
6.2 This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate.
7. Fees and Expenses. The Company shall pay all legal fees and related legal expenses incurred by you as a result of (i) your termination following a Change in Control of the Company (including all such fees and expenses, if any, incurred in contesting or disputing any such termination) or (ii) your seeking to obtain or enforce any right or benefit provided by this Agreement.
8. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Section 5, 6, 7 and 12 of this Agreement shall survive termination of this Agreement.
9. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given
Page 7
when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed to the address of the respective party set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing. In accordance herewith, except that notice of change of address shall be effective only upon receipt.
10. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Oregon.
11. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Portland, Oregon by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 12.
13. Related Agreements. To the extent that any provision of any other agreement between the Company or any of its subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose.
14. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument.
Page 8
If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.
Sincerely, |
Scott J. Montross President and Chief Executive Officer |
AGREED AND ACCEPTED: |
|
Martin Dana |
Executive Vice President, Tubular Products Group |
Page 9
Exhibit 31.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Montross, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Northwest Pipe Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 5, 2013 | By: | /s/ SCOTT MONTROSS | ||||
Scott Montross | ||||||
Director, President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robin Gantt, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Northwest Pipe Company; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 5, 2013 | By: | /s/ ROBIN GANTT | ||||
Robin Gantt | ||||||
Senior Vice President, Chief Financial Officer, and Assistant Secretary | ||||||
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Northwest Pipe Company (the Company) on Form 10-Q for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Scott Montross, Director, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ SCOTT MONTROSS |
Scott Montross |
Director, President and Chief Executive Officer |
November 5, 2013 |
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Northwest Pipe Company (the Company) on Form 10-Q for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Robin Gantt, Senior Vice President, Chief Financial Officer, and Assistant Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ ROBIN GANTT |
Robin Gantt |
Senior Vice President, Chief Financial Officer, and Assistant Secretary |
November 5, 2013 |
Changes in Accumulated Other Comprehensive Loss
|
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2013
|
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Equity [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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:
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):
|
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