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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from                  to                 

Commission File Number 0-18050

PW EAGLE, INC.

(Exact name of registrant as specified in its Charter)

1550 Valley River Drive

Eugene, Oregon 97401

(Address of principal executive offices)

Registrant’s telephone number, including area code: (541) 343-0200

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of August 10, 2004 was 7,539,591.

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PW EAGLE, INC.

INDEX

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PART I. FINANCIAL INFORMATION

PW EAGLE, INC.

Condensed Consolidated Statement of Operations – Three and Six- Months Ended June 30, 2004 and 2003

(Unaudited)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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PW EAGLE, INC.

Condensed Consolidated Balance Sheet – June 30, 2004 and December 31, 2003 (Unaudited)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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PW EAGLE, INC.

Condensed Consolidated Statement of Cash Flows – Six Months Ended June 30, 2004 and 2003 (Unaudited)

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

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PW EAGLE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of PW Eagle, Inc. (the “Company”) at June 30, 2004 and the results of its operations and cash flows for the three and six month periods ended June 30, 2004 and 2003. Certain information and footnote disclosures normally included in 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. Although the Company’s management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements of the Company included with its Annual Report on Form 10-K for the year ended December 31, 2003.

Certain reclassifications were made to the prior year financial statements to conform to the June 30, 2004 presentation. Such reclassifications have no effect on net income or stockholders’ equity as previously stated.

The following provides additional information concerning inventory (in thousands):

The following provides supplemental disclosure of significant non-cash operating, investing and financing activities (in thousands):

Acquisition of ETI

On March 14, 2003, PW Eagle, Inc. acquired (the “Acquisition”) all of the outstanding stock of Uponor ETI Company, a subsidiary of Uponor Oyj, a Finish company. In connection with the Acquisition, Uponor ETI Company was merged with and into Extrusion Technologies, Inc. (ETI) a wholly owned subsidiary of PW Eagle formed specifically to acquire Uponor ETI Company.

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The following unaudited pro forma condensed consolidated statement of operations for 2003 (compared to actual results for 2004) have been derived by the application of pro forma adjustments to PW Eagle and Uponor ETI Company’s historical financial statements and are based on the estimates and assumptions set forth below. The unaudited pro forma combined results of operations as if the Acquisition occurred on the first day of 2003 are as follows (in thousands except per share amounts):

The unaudited pro forma results include amortization of the acquired intangibles, depreciation of acquired property, plant and equipment and interest expense on debt assumed to finance the Acquisition. The unaudited pro forma results also include the impact of a $1.59 million fair value inventory adjustment recorded in connection with the purchase accounting. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed on January 1, 2003 nor are they necessarily indicative of future consolidated results.

On April 1, 2004, PWPipe sold two manufacturing facilities in Baker City, Oregon and Hastings, Nebraska for an aggregate loss of $0.4 million. Net proceeds of $1.9 million were used to pay down the PWPipe Revolving Credit Facility. In a separate but related transaction, PWPoly entered into lease agreements for these same two facilities.

Current and long-term obligations at June 30, 2004 and December 31, 2003 consisted of the following (in thousands):

PWPipe

On March 26, 2004, PWPipe entered into a sale-leaseback transaction on two manufacturing facilities in Sunnyside, Washington and Visalia, California. As a result of the sale-leaseback transaction, a financing lease obligation of $3.6 million, net of the debt discount of $0.1 million, was recorded based on the estimated fair value of the financing lease obligation. No gain or loss was recognized on the transaction. The financing lease obligation requires an annual lease payment of $0.4 million, including interest at a rate of 9.7%. The financing lease has an initial term of twenty years, upon which the lease will automatically renew for ten years. The financing lease will continue to automatically renew every ten years until the financing lease is terminated. The financing lease includes certain financial covenants and requires the Company maintain an irrevocable letter of credit equal to $0.4 million, which can be drawn in the event of a default under the lease.

In connection with this transaction, warrants were issued to the lender to purchase 15,000 shares of common stock in PW Eagle, Inc. for $0.01 a share at any time through March 26, 2009. The lender exercised these warrants during the second quarter of 2004. A debt discount totaling $0.1 million has been recorded with the issuance of the warrant and will be amortized using the effective interest method as a yield adjustment over the term of the lease. Net proceeds of $3.3 million resulting from the sale-leaseback transaction were used to pay down the PWPipe Revolving Credit Facility and Senior Term Note A.

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PWPoly

On January 16, 2004, PWPoly entered into a Subordinated Debt Agreement with Medallion Capital, Inc. for $1.3 million. Interest of 12 percent on the Subordinated Debt is due monthly on the first day of each month beginning February 1, 2004 and continuing on the first date of each month thereafter until all outstanding principal has been paid in full on January 15, 2009. In connection with the Subordinated Debt Agreement, warrants were issued to purchase up to 7.5% of PWPoly’s then outstanding common stock on a fully diluted basis for $10 per issuance (fixed warrants). In addition, warrants were issued for the purchase of the lesser of 14% of PWPoly’s then outstanding common stock on a fully diluted basis or for an amount sufficient to incrementally provide the lender an overall 24.5 percent internal rate of return on the subordinated debt (performance warrants). The fixed warrants are exercisable at any time after January 15, 2004 through the fifth anniversary of the date when all outstanding principal and accrued interest on the subordinated debt has been paid in full. The performance warrants are exercisable immediately through the later of the maturity of the subordinated debt or at which time the subordinated debt and interest are paid in full. The warrants also contain a clause whereby after the occurrence of a put date, defined as the earlier of the maturity of the subordinated debt or an occurrence of a default under the debt agreement until the expiration date, the lender shall have the right to sell to PWPoly all or a portion of the warrants or the warrant based shares. Under the clause, PWPoly would be obligated to purchase such warrant or warrant based shares at PWPoly’s fair value. The warrants are recorded as a liability which will be periodically adjusted to fair value. In addition, a corresponding debt discount has been recorded with the issuance of the warrant and will be amortized using the effective interest method as a yield adjustment over the term of the debt.

On April 1, 2004, PWPoly entered into lease transactions on its manufacturing facilities in Hastings, Nebraska and a distribution center in Baker City, Oregon. These leases are recorded as capital leases, with a total financing lease obligation of $1.9 million. The leases require monthly payments of $20,000, including interest at a rate of 11.25%. These financing leases have a term of twenty years, with purchase options of the greater of $2 million ($1.3 million on the Hastings property and $0.7 million on the Baker City property) or the fair market value at the end of the lease term. As a part of these transactions, PWPoly issued standby letters of credit for $0.2 million, which can be drawn in the event of default under the leases.

The Company incurred $0.9 million in additional financing costs in fiscal 2004 to complete the above transactions for PWPipe and PWPoly. These financing costs are capitalized and will be amortized over the life of the respective debt using the effective interest method.

Scheduled aggregate annual maturities of amounts classified as debt obligations at June 30, 2004, under terms of the revised loan agreements and sale-leaseback financing lease obligations are (in thousands):

Management estimates that the fair value of borrowing under its debt agreements approximates the carrying value at June 30, 2004, as the applicable interest rates approximate current market rates.

As described above, under current financing agreements, the Company is required to comply with certain restrictive financial ratios and covenants. Maintenance of these ratios and covenants is of particular concern given the uncertain economic climate in the United States and price stability of PVC pipe and PVC resin.

At December 31, 2003, PWPoly was in violation of certain covenants on its senior debt. On January 15, 2004, the Company amended its PWPoly Senior Credit Facility to revise certain financial covenants. In connection with the amendment, the lenders of PWPoly’s senior debt waived any event of default arising from the Company’s past inability to comply with the financial covenants of these agreements. PWPoly was not in compliance with its financial covenants for its senior and

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subordinated debt at June 30, 2004. As a result, the long-term portions of the senior and subordinated debt have been reclassified to current. PWPoly is working with its lenders to resolve these covenant violations.

At December 31, 2003, PWPipe was in violation of certain covenants on its senior and subordinated debt, as well as on the financing lease obligation. In addition, PWPipe was in payment default relating to interest on its subordinated debt. On March 31, 2004, PWPipe amended its senior and subordinated debt agreements, as well as its financing lease agreement, to revise certain financial covenants. In connection with the amendments, the lenders of PWPipe’s senior debt, the holders of the subordinated debt and the lessor in the financing lease waived any events of default arising from PWPipe’s past inability to comply with the financial covenants of its various debt agreements through the first quarter of 2004. PWPipe also cured the payment default on March 31, 2004. PWPipe was in compliance with its debt covenants for the second quarter of 2004, and believes that it will be in compliance with the revised covenants through the second quarter of 2005.

On March 30, 2004, ETI amended its loan and security agreement to revise certain financial covenants. ETI was in compliance with its financial covenants at March 31, 2004 and June 30, 2004.

Comprehensive income for the Company includes net income (loss), changes in fair market value of financial instruments designated as hedges of interest rate exposure and changes in fair market value of securities held for the non-qualified deferred compensation plans. Comprehensive income for the three months ended June 30, 2004 and 2003 was as follows (in thousands):

The components of accumulated other comprehensive income (loss) are as follows:

The Company has elected to continue to account for stock-based compensation using the intrinsic value method. Accordingly, no compensation expense has been recorded for the stock option plan. Had the Company used the fair value-based method of accounting to measure compensation expense for its stock-based compensation and charged compensation expense against income over the vesting periods, net income and the related basic and diluted per common share amounts would have been reduced to the following pro forma amounts (in thousands except per share amounts):

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Basic earnings per common share is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding. Diluted earnings per common share assumes the exercise of stock options and warrants using the treasury stock method, if dilutive. The following tables reflect the calculation of basic and diluted earnings per share (in thousands, except per share amounts):

The following table summarizes outstanding securities, which are excluded from the computation of diluted EPS because inclusion of these shares would be anti-dilutive (in thousands).

Product warranties: The Company’s products are generally guaranteed against defects in material and workmanship for one year. The product warranty liability is reviewed regularly by management to insure the Company’s warranty allowance is adequate based on frequency and average cost of historical warranty claims activity. Management studies trends of warranty claim activity to improve pipe quality and pipe installation techniques to minimize future claims activity (in thousands).

Standby letters of credit: The Company is required to maintain standby letters of credit totaling $2.8 million. These letters of credit guarantee payment to third parties in the event the Company is unable to pay in a timely manner. Standby letters of credit reduce the funds available under the revolving credit facility by $2.8 million. No amounts were drawn on these letters of credit for the period ending June 30, 2004.

We are from time to time a party to various claims and litigation matters incidental to our normal course of business. We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.

In connection with the closure of the Minneapolis, Minnesota corporate office and the resignation of certain officers as part of the Company’s restructuring plan initiated in fiscal 2003, the Board of Directors modified certain outstanding restricted stock and stock option awards effective January 2, 2004. The modifications allow for continued vesting in stock awards,

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which would have been forfeited upon the officers’ resignation under the original terms. As a result of these modifications, the Company recognized compensation expense of $0.5 million on the fully vested awards, which is recorded in restructuring and related costs in the statement of operations, and an unearned compensation charge of $0.3 million. The offsetting credit was recorded to common stock and additional paid in capital. In addition, the Company incurred $0.1 million of severance and relocation expenses during the quarter ending March 31, 2004, which are recorded as restructuring costs.

In the second quarter of 2004, the Board of Directors approved the payment of management bonuses totaling $1.0 million for the successful restructuring of the Company. The recipients of the management bonus elected to receive $0.8 million in PW Eagle stock and the balance of $0.2 million in cash.

Following is a summary of the restructuring reserve activity:

In 2004, a monthly management fee of $52,000 will be paid to Spell Capital to provide supervisory and monitoring services to the Company as well as advise and assist with acquisitions, divestitures and financing activities of the Company.

On January 16, 2004, PWPoly invested $1.6 million in W.L. Plastics Corporation to increase its ownership to approximately 23 percent. As a result of this transaction, this investment is accounted for under the equity method of accounting, with earnings included in equity in earnings of affiliate, and the investment included in other non-current assets on the balance sheet. For the six months ended June 30, 2004, PWPoly recognized $0.4 million of income from this investment. At June 30, 2004, PWPoly’s investment in W.L. Plastics Corporation totaled $2.3 million. During the six months ended June 30, 2004, PWPoly received $1.7 million in cash related to subscriptions for its common stock. The Company has recorded a minority interest liability totaling $1.7 million related to this transaction.

PW EAGLE, INC.

The following table sets forth items from our Statement of Operations as a percentage of net sales: