Table Of Contents

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2015

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, WA 98661

(Address of principal executive offices and zip code)

360-397-6250

(Registrant’s telephone number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class of Stock	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	Nasdaq Global Select Market
Preferred Stock Purchase Rights	Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  ☐

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 Act. (Check one):

Large accelerated filer  ☐

Accelerated filer  ☒

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 Act).    Yes  ☐    No  ☒

The aggregate market value of the common equity that was held by non-affiliates of the Registrant was $171,160,045 as of June 30, 2015 based upon the last sales price as reported by Nasdaq.

The number of shares outstanding of the Registrant’s common stock as of February 26, 2016 was 9,573,289 shares.

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  Documents Incorporated by Reference

 

The registrant has incorporated into Parts II and III of Form 10-K by reference certain portions of its Proxy Statement for its 2016 Annual Meeting of Shareholders.

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NORTHWEST PIPE COMPANY

2015 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

		Page
Cautionary Statement Regarding Forward-Looking Statements		1
	Part I
Item 1	Business	2
Item 1A	Risk Factors	7
Item 1B	Unresolved Staff Comments	13
Item 2	Properties	14
Item 3	Legal Proceedings	14
Item 4	Mine Safety Disclosures	16
	Part II
Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6	Selected Financial Data	19
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	29
Item 8	Financial Statements and Supplementary Data	30
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	30
Item 9A	Controls and Procedures	31
Item 9B	Other Information	31
	Part III
Item 10	Directors, Executive Officers and Corporate Governance	32
Item 11	Executive Compensation	33
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
Item 13	Certain Relationships and Related Transactions, and Director Independence	33
Item 14	Principal Accountant Fees and Services	33
	Part IV
Item 15	Exhibits and Financial Statement Schedules	34

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”), other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on current expectations, estimates and projections about our business, management’s 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 a number of risks and uncertainties that are difficult to predict. 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 the important factors discussed in Part I—Item 1A, “Risk Factors.” Such forward-looking statements speak only as of the date they are made and we do not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this 2015 Form 10-K. If we do update 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.

 

 

PART I

 

Item 1.

Business

 

Overview

 

We are the largest manufacturer of engineered steel pipe water systems in North America. With eight Water Transmission manufacturing facilities, we are positioned to meet North America’s growing needs for water and wastewater infrastructure. We serve a wide range of markets and our solutions-based products are a good fit for applications including water transmission, plant piping, tunnels and river crossings. With a history that dates back more than 100 years, we have established a prominent position based on a strong and widely recognized reputation for quality, service and an extensive range of products engineered and manufactured to meet expectations in all categories of performance including highly corrosive environments.

 

We manufacture water infrastructure steel pipe products through our Water Transmission Group, which in 2015, 2014, and 2013 generated approximately 73%, 59%, and 63%, respectively, of our net sales from continuing operations. The Water Transmission Group produces large diameter, high pressure, engineered welded steel pipe products for use in water transmission applications. Our sales have historically been driven by the need for new water infrastructure, which is based primarily on overall population growth and population movement between regions. More recently, we are seeing increased demand driven by drought conditions, which are causing a dwindling water supply from developed water sources.

  

We also manufacture smaller diameter electric resistance welded (“ERW”) steel pipe through our Tubular Products Group at our Atchison, Kansas facility, although the facility is currently idled due to difficult market conditions. Our smaller diameter pipe is used for applications in the energy sector, as well as for structural, commercial and industrial uses. Since the sale in March 2014 of our oil country tubular goods (OCTG) business, the Atchison facility is the sole remaining operating facility in our Tubular Products Group. In 2015, 2014, and 2013 our Tubular Products Group generated approximately 27%, 41%, and 37%, respectively, of our net sales from continuing operations.

 

Recent Business Developments

 

On July 20, 2015 we announced that we retained Raymond James & Associates as financial advisors to assist in the process of exploring the sale of our remaining Tubular Products business. The decision to explore a sale reflects our long-term objective to focus on our core Water Transmission business through organic growth initiatives as well as through merger and acquisition activity. The Atchison facility operated at reduced levels from April 2015 to January 2016, when we idled the facility to reduce operating expenses until market conditions improve or a sale is completed. We are continuing to sell previously manufactured tubular products inventory.

 

Our Industries

 

Water Transmission. Much of the United States water infrastructure is antiquated and many authorities, including the United States Environmental Protection Agency (the “EPA”), believe the United States water infrastructure is in critical need of updates, repairs or replacements. The current contaminated water supply situation in Flint, Michigan, and reports of contaminated drinking water in other cities in the Midwest and Northeast regions of the United States illustrate the impact of infrastructure replacement delays on aging water supply systems. In its 2011 Drinking Water Infrastructure Needs Survey and Assessment released in June 2013, the EPA estimates the nation will need to spend $384 billion in infrastructure investments by 2030 to continue to provide safe drinking water to the public. The American Society of Civil Engineers has given poor ratings to many aspects of the United States water infrastructure in their 2013 Report Card for America’s Infrastructure. In its most recent Failure to Act study of current infrastructure, the American Society of Civil Engineers estimates there will be an $84 billion funding gap for water and wastewater infrastructure by 2020, and a $144 billion gap by 2040.

  

Within this market, we focus on large diameter, engineered welded steel pipeline systems utilized in water, energy, structural and plant piping applications. Our core market is the large diameter, high-pressure portion of a water transmission pipeline that is typically at the “upper end” of a pipeline system. This is the portion of the overall water pipeline that generally transports water from the source to a treatment plant or from a treatment plant into the distribution system, rather than the small lines that deliver water directly into households. We believe the addressable market for the products sold by our Water Transmission Group will total approximately $1.2 billion over the next three years.

 

A combination of population growth, movement to new population centers, dwindling supplies from developed water sources, substantial underinvestment in water infrastructure over the past several decades, and an increasingly stringent regulatory environment are driving demand for water infrastructure projects in the United States. These trends are increasing the need for new water infrastructure as well as the need to upgrade, repair and replace existing water infrastructure. While we believe this offers the potential for increased demand for our water infrastructure products and other products related to water transmission, we also expect current governmental and public water agency budgetary pressures will impact near-term demand.

 

 

The primary drivers of growth in new water infrastructure installation are population growth and movement as well as dwindling supplies from developed water sources. According to the United States Census Bureau, the population of the United States will increase by approximately 74 million people between 2016 and 2050. The resulting increase in demand will require substantial new infrastructure, as the existing United States water infrastructure is not equipped to provide water to millions of new residents. In addition, many current water supply sources are in danger of being exhausted. The development of new sources of water at greater distances from population centers will drive the demand for new water transmission lines. Our eight Water Transmission manufacturing facilities are well located to take advantage of the anticipated growth and demand.

 

Increased public awareness of problems with the quality of drinking water and efficient water usage has resulted in more stringent application of federal and state environmental regulations. The need to comply with these regulations in an environment of heightened public awareness towards water issues is expected to contribute to demand in the water infrastructure industry over the next several years as water systems will need to be installed, upgraded and replaced. In November 2014, the State of California approved the Water Quality, Supply and Infrastructure Improvement Act (Proposition 1). Proposition 1 authorizes $7.5 billion in general obligation bonds to fund state water supply infrastructure projects, such as public water system improvements, surface and groundwater storage, drinking water protection, water recycling and advanced conveyance, wastewater treatment, drought relief, emergency water supplies, and ecosystem and watershed protection and restoration.

 

In January 2015, U.S. President Barack Obama announced new initiatives to improve the conditions of the aging water infrastructure, in which he noted that the U.S. needs $600 billion for drinking water and wastewater management over the next 20 years. These initiatives included a new Water Finance Agency at the EPA and a Rural Opportunity Investment Initiative at the U.S. Department of Agriculture. The White House proposal to create Qualified Public Infrastructure Bonds and the proposed Move America Bonds as part of the Move America Act of 2015 introduced in Congress in May 2015 are both intended to encourage more public-private partnerships.

 

Tubular Products. The tubular products industry encompasses a wide variety of products serving a diverse group of end markets. We have been active in several of these markets, including energy, construction, agricultural, commercial, and industrial systems. With the sale of our OCTG business in March 2014, the segment’s remaining operating facility is located in Atchison, Kansas, primarily producing line pipe used to connect oil and gas wells to larger diameter pipelines. We are attempting to sell the remaining assets in our Tubular Products business.

 

We expect demand from the energy markets to continue to be weak in 2016, due to recent decreases in energy prices. After trading near $100 per barrel for most of the period since 2011, the price of crude oil started dropping in the summer of 2014 and decreased sharply in the fourth quarter of 2014 to approximately $53 per barrel at December 31, 2014. The price of crude oil fluctuated during 2015, but by December 2015 had dropped to less than $40 per barrel. Natural gas prices have also dropped significantly during 2015. The decrease in oil and natural gas prices has led to a significant reduction in energy exploration activity in the United States. Domestic rig counts have dropped steadily over the past 18 months, and in December 2015 were at their lowest level since 1999.

 

Products

 

Water Transmission. Water transmission pipe is used for high-pressure applications, typically requiring pipe to withstand pressures in excess of 150 pounds per square inch. Most of our water transmission products are made to custom specifications for fully engineered, large diameter, high-pressure water infrastructure systems. Other uses include pipe for piling and hydroelectric projects, wastewater treatment plants and other applications. Our primary manufacturing process has the capability to manufacture water transmission pipe in diameters ranging from 24 inches to 156 inches with wall thickness of 0.135 inch to 1.00 inch. We also have the ability to manufacture even larger and heavier pipe with other processes. We can coat and/or line these products with cement mortar, polyethylene tape, polyurethane paints, epoxies, Pritec®, and coal tar enamel according to our customers’ specifications. We maintain fabrication facilities that provide installation contractors with custom fabricated sections as well as straight pipe sections. We typically deliver a complete pipeline system to the installation contractor. We also manufacture Permalok® steel casing pipe, which is a proprietary pipe joining system that employs a press-fit interlocking connection system. The Permalok® product is generally installed in trenchless construction projects.

 

Tubular Products. The tubular products we produce at our Atchison facility range in size from 4.500 inches to 16 inches in diameter with wall thickness from 0.134 inch to 0.375 inch. These products are typically sold to distributors or original equipment manufacturers and are used for a wide variety of applications, including energy, construction, agriculture, and other commercial and industrial uses. As previously discussed, our Atchison facility is currently idled until market conditions improve or a sale is completed.

 

 

Marketing

 

Water Transmission. The primary customers for water transmission products are installation contractors for projects funded by public water agencies. One customer accounted for 16% of total net sales from continuing operations in 2014 and 15% of total net sales from continuing operations in 2013. No customer accounted for 10% or more of our total net sales in 2015. Our plant locations in Oregon, Colorado, California, West Virginia, Texas, Missouri, Utah and Mexico, allow us to efficiently serve customers throughout the United States, as well as Canada and Mexico. Our Water Transmission marketing strategy emphasizes early identification of potential water projects, promotion of specifications consistent with our capabilities and close contact with the project designers and owners throughout the design phase. Our in-house sales force is comprised of sales representatives, engineers and support personnel who work closely with public water agencies, contractors and engineering firms, often years in advance of projects being bid. This allows us to identify and evaluate planned projects at early stages, participate in the engineering and design process, and ultimately promote the advantages of our systems. After an agency completes a design, they publicize the upcoming bid for a water transmission project. We then obtain detailed plans and develop our estimate for the pipe portion of the project. We typically bid to installation contractors who include our bid in their proposals to public water agencies. A public water agency generally awards the entire project to the contractor with the lowest responsive bid.

 

Tubular Products. Our tubular products have been marketed through an in-house sales force, which has been reduced in conjunction with the recent idling of the Atchison plant. Our tubular products are primarily sold to distributors. Our marketing strategy focuses on quality, customer service and customer relationships. One customer of our Tubular Products business accounted for 10% of our total net sales from continuing operations in 2014. No customer accounted for more than 10% of our total net sales from continuing operations during 2015 or 2013.

 

Manufacturing

 

Water Transmission. Water transmission manufacturing begins with the preparation of engineered drawings of each unique piece of pipe in a project. These drawings are prepared on our proprietary computer-aided design system and are used as blueprints for the manufacture of the pipe. After the drawings are completed and approved, manufacturing begins by feeding steel coil continuously at a specified angle into a spiral weld mill which cold-forms the band into a tubular configuration with a spiral seam. Automated arc welders, positioned on both the inside and the outside of the tube, are used to weld the seam. The welded pipe is then cut at the specified length. After completion of the forming and welding phases, the finished cylinder is tested and inspected in accordance with project specifications, which may include 100% radiographic analysis of the weld seam. The cylinders are then coated and lined as specified. Possible coatings include coal tar enamel, polyethylene tape, polyurethane paint, epoxies, Pritec^® and cement mortar. The inside of the pipe cylinders can be lined with cement mortar, polyurethane or epoxies. Following coating and lining, certain pieces may be custom fabricated as required for the project. This process is performed in our fabrication facilities. Typically, completed pipe segments are evaluated for structural integrity with a hydrotester. Upon final inspection, the pipe is prepared for shipment. We ship our products to project sites principally by truck. 

 

 

Tubular Products. Tubular products are manufactured by an ERW process in diameters ranging from 4.500 inches to 16 inches. This process begins by unrolling and slitting steel coils into narrower bands sized to the circumference of the finished product. Each band is re-coiled and fed into the material handling equipment at the front end of the ERW mill and fed through a series of rolls that cold-form it into a tubular configuration. The resultant tube is welded by high-frequency electric resistance welders. After exiting the mill, the products are straightened, inspected, tested and end-finished. Certain products are coated.

 

Technology. Advances in technology help us produce high quality products at competitive prices. We have invested in modern welding and inspection equipment to improve both productivity and product quality. With the purchase of Permalok Corporation in December 2013, the Company acquired certain technologies with respect to an interlocking pipe joining system (Permalok®) that provides an alternate joint solution used for connecting steel pipes. To stay current with technological developments in the United States and abroad, we participate in trade shows, industry associations, research projects and vendor trials of new products.

 

Quality Assurance. We have quality management systems in place that assure we consistently provide products that meet or exceed customer and applicable regulatory requirements. All of our quality management systems in the United States are registered by the International Organization for Standardization, or ISO, under a multi-site registration. In addition to ISO qualification, the American Institute of Steel Construction, American Petroleum Institute, American Society for Mechanical Engineers, Factory Mutual, National Sanitation Foundation, and Underwriters Laboratory have certified us for specific products or operations. The Quality Assurance department is responsible for monitoring and measuring characteristics of the product. Inspection capabilities include, but are not limited to, visual, dimensional, liquid penetrant, magnetic particle, hydrostatic, ultrasonic, real-time imaging enhancement, real-time radioscopic, base material tensile, yield and elongation, sand sieve analysis, coal-tar penetration, concrete compression, lining and coating dry film thickness, adhesion, absorption, guided bend, charpy impact, hardness, metallurgical examinations, chemical analysis, spectrographic analysis and finished product final inspection. Product is not released for shipment to our customers until there is verification that all product requirements have been met.

 

 

Product Liability. The manufacturing and use of our products involves a variety of risks. Certain losses may result, or be alleged to result, from defects in our products, thereby subjecting us to claims for damages, including consequential damages. We warrant our products to be free of certain defects for one year. We maintain insurance coverage against potential product liability claims in the amount of $51 million, which we believe to be adequate. Historically, product liability claims against us have not been material. However, there can be no assurance that product liability claims exceeding our insurance coverage will not be experienced in the future or that we will be able to maintain such insurance with adequate coverage.

 

Backlog

 

Our backlog includes confirmed orders, including the balance of projects in process, and projects for which we have been notified that we are the successful bidder even though a binding agreement has not been executed. Projects for which a binding contract has not been executed could be cancelled. Binding orders received by us may be subject to cancellation or postponement; however, cancellation would generally obligate the customer to pay the costs incurred by us. As of December 31, 2015, the backlog of orders for our Water Transmission Group was approximately $116 million. Binding contracts had been executed for approximately 75% of the Water Transmission backlog as of February 10, 2016. At December 31, 2014, the backlog of orders for our Water Transmission Group was approximately $121 million. Backlog as of any particular date may not be indicative of actual operating results for any fiscal period. There can be no assurance that any amount of backlog ultimately will be realized.

 

Competition

 

Water Transmission. We have several regional competitors in the Water Transmission business. Most water transmission projects are competitively bid and price competition is vigorous. Price competition may reduce the gross margin on sales, which may adversely affect overall profitability. Other competitive factors include timely delivery, ability to meet customized specifications and high freight costs which may limit the ability of manufacturers located in other market areas to compete with us.

 

With Water Transmission manufacturing facilities in Oregon, Colorado, California, West Virginia, Texas, Missouri, Utah, and Mexico, we believe we can more effectively compete throughout the United States, Canada and Mexico. Our primary competitor in the Water Transmission business in the western United States and southwestern Canada is NOV Ameron, a business unit of National Oilwell Varco, Inc. East of the Rocky Mountains, our primary competition includes: American Cast Iron Pipe Company and U.S. Pipe, which manufacture ductile iron pipe; American Spiral Weld Pipe Company, Mid America Pipe Fabricating and Supply Inc. and Jindal Steel and Power Limited, which manufacture spiral welded steel pipe; and Hanson Pipe & Precast, which manufactures concrete pressure pipe and spiral welded steel pipe.

 

No assurance can be given that other new or existing competitors will not establish new facilities or expand capacity within our market areas. New or expanded facilities or new competitors could have a material adverse effect on our ability to capture market share and maintain product pricing.

 

Tubular Products. The market for our tubular products has been highly fragmented and diversified with over 100 manufacturers in the United States alone. We have competed with TMK Ipsco, Energex Tube, Tex Tube Co., Tenaris, Evraz North America, California Steel Industries Inc., Paragon Industries, Inc., Welspun Tubular, LLC, and Axis Pipe and Tube, Inc., as well as foreign competitors. Domestic demand for our tubular products has decreased dramatically in 2015 with the reduction in domestic rig counts spurred by the drop in crude oil prices. This pressure is accentuated by the increased competition our tubular products had already faced from foreign-based manufacturers that export tubular products into the United States which has resulted in imported steel pipe becoming a very significant percentage of the domestic line pipe market. In December 2015, the United States Department of Commerce concluded the trade case filed in October 2014 requesting an investigation of imports of welded API line pipe from Korea and Turkey for possible imposition of antidumping and countervailing duties. Under the final order, duties will be assessed on welded line pipe imported from Korea and Turkey. However, we do not expect these duties to materially reduce the volume of imported line pipe, or to ease the difficult conditions in the tubular products market in the near term. As previously discussed, in January 2016 we idled the Atchison facility to reduce operating expenses until market conditions improve or a sale is completed.

  

Raw Materials and Supplies

 

We purchase hot rolled and galvanized steel coil from both domestic and foreign steel mills. Domestic suppliers include Steel Dynamics, Inc., Nucor Corporation, California Steel Industries, Inc., Evraz North America, ArcelorMittal USA and SSAB. Foreign suppliers include Posco America Corporation and BlueScope Steel. Steel for the Water Transmission business is normally purchased only after a project has been awarded to us. From time to time, we may purchase additional steel when it is available at favorable prices. Purchased steel represents a substantial portion of our cost of sales. The steel industry is highly cyclical in nature and steel prices fluctuate significantly, influenced by numerous factors beyond our control, including general economic conditions, availability of raw materials, energy costs, import duties, other trade restrictions and currency exchange rates.

  

 

We also rely on certain suppliers of coating materials, lining materials and certain custom fabricated items. We have at least two suppliers for most of our raw materials. We believe our relationships with our suppliers are positive and have no indication that we will experience shortages of raw materials or components essential to our production processes or that we will be forced to seek alternative sources of supply. Any shortages of raw materials may result in production delays and costs, which could have a material adverse effect on our financial position, results of operations or cash flows.  

 

Environmental and Occupational Safety and Health Regulation

 

We are subject to federal, state, local and foreign environmental and occupational safety and health laws and regulations, violation of which could lead to fines, penalties, other civil sanctions or criminal sanctions. These environmental laws and regulations govern emissions to air; discharges to water (including stormwater); and the generation, handling, storage, transportation, treatment and disposal of waste materials. We operate under numerous governmental permits and licenses relating to air emissions, stormwater run-off and other environmental matters, and we are also subject to environmental laws requiring the investigation and cleanup of environmental contamination at properties we presently own or operate and at third-party disposal or treatment facilities to which these sites send or arrange to send hazardous waste. For example, we have been identified as a potentially responsible party at the Portland Harbor Site discussed in Part 1—Item 3, “Legal Proceedings” of this 2015 Form 10-K. We believe we are in material compliance with these laws and regulations and do not currently believe that future compliance with such laws and regulations will have a material adverse effect on our financial position, results of operations or cash flows.

 

Based on our assessment of potential liability, we have established a reserve for an ongoing environmental assessment and potential remediation project at our former Tubular Products manufacturing facility in Houston, Texas. At this time, we have no other reserves for environmental investigations and cleanup. However, estimating liabilities for environmental investigations and cleanup is complex and dependent upon a number of factors beyond our control which may change dramatically. Accordingly, although we believe our current environmental reserves are appropriate based on current information, we cannot provide assurance that our future environmental investigation and cleanup costs and liabilities will not result in a material expense.

 

Employees

 

As of February 10, 2016, we had approximately 676 full-time employees. Approximately 35% were salaried and approximately 65% were employed on an hourly basis. All of our employees are non-union, with exception of the hourly employees at our Monterrey, Mexico facility, which represent approximately 8% of our employees. We consider our relations with our employees to be good.

  

Geographic Information 

 

The Company sold principally all of its products in the United States, Canada and Mexico. As of December 31, 2015, all material long-lived assets are located in the United States.   See Note 16 to the consolidated financial statements in Part II -- Item 8. “Financial Statements and Schedules” of this 2015 Form 10-K.

 

Executive Officers of the Registrant

 

Information regarding the Company’s executive officers is set forth under the caption “Directors, Executive Officers and Corporate Governance” in Part III—Item 10 of this 2015 Form 10-K and is incorporated herein by reference.

 

Available Information

 

Our internet website address is www.nwpipe.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available through our internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law. Our internet website and the information contained therein or connected thereto are not incorporated into this 2015 Form 10-K.

 

Additionally, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

 

Item 1A.

Risk Factors

 

You should carefully consider the following factors, together with all the other information included in this 2015 Form 10-K, in evaluating our Company and our business. If any of the following risks actually occur, our business, financial condition, results of operations, or cash flows could be materially and adversely affected, and the value of our stock could decline. The risks and uncertainties described below are those that we currently believe may materially affect our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. As such, you should not consider this list to be a complete statement of all potential risks or uncertainties.  

 

Risks Related to our Business

 

A downturn in government spending related to public water transmission projects would adversely affect our business. Our Water Transmission business accounted for approximately 73% of our net sales from continuing operations in 2015. Our Water Transmission business is primarily dependent upon spending on public water transmission projects, including water infrastructure upgrades, repairs and replacement and new water infrastructure spending, which, in turn, depends on, among other things:

 

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the need for new or replacement infrastructure;

 

•

the priorities placed on various projects by governmental entities;

 

•

federal, state and local government spending levels, including budgetary constraints related to capital projects and the ability to obtain financing; and

 

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the ability of governmental entities to obtain environmental approvals, right-of-way permits and other required approvals and permits.

 

Decreases in the number of, or government funding of, public water transmission projects would adversely affect our business, financial position, results of operations, or cash flows.

 

Our Water Transmission business faces an overcapacity situation due to recent capacity expansions as well as the potential for increased competition from substitute products from manufacturers of concrete, ductile iron, polyvinyl chloride (“PVC”) and high density polyethylene (“HDPE”) pipe. Orders in the Water Transmission business are competitively bid, and price competition can be vigorous. The recent increases in capacity have negatively affected our gross margins and overall profitability. Other competitive factors include timely delivery, ability to meet customized specifications and high freight costs. Although our Water Transmission manufacturing facilities in Oregon, Colorado, California, West Virginia, Texas, Missouri, Utah, and Mexico allow us to compete throughout the United States, Canada and Mexico, we cannot assure you that new or existing competitors will not establish new facilities or expand capacity further within our market areas. New or expanded facilities or new competitors could have a material adverse effect on our market share and product pricing in our Water Transmission business.  

 

Water transmission pipe is manufactured generally from steel, concrete, HDPE, PVC or ductile iron. Each pipe material has advantages and disadvantages. Steel and concrete are more common materials for larger diameter water transmission pipelines because ductile iron pipe generally is limited in diameter due to the manufacturing process. The public agencies and engineers who determine the specifications for water transmission projects analyze these pipe materials for suitability for each project. Individual project circumstances normally dictate the preferred material. If we experience cost increases in raw materials, labor and overhead specific to our industry or the location of our facilities, while competing products or companies do not experience similar changes, we could experience an adverse change in the demand, price and profitability of our products, which could have a material adverse effect on our business, financial position, results of operations or cash flows.  

 

Project delays in public water transmission projects could adversely affect our business. The public water agencies constructing water transmission projects generally announce the projects well in advance of the bidding and construction process. It is not unusual for projects to be delayed and rescheduled. Projects are delayed and rescheduled for a number of reasons, including changes in project priorities, difficulties in complying with environmental and other government regulations, changes in ability to obtain adequate project funding, and additional time required to acquire rights-of-way or property rights. Delays in public water transmission projects may occur with insufficient notice to allow us to replace those projects in our manufacturing schedules. As a result, our business, financial position, results of operations or cash flows may be adversely affected by unplanned downtime.

 

 

Fluctuations in steel prices may affect our future results of operations. Purchased steel represents a substantial portion of our cost of sales. The steel industry is highly cyclical in nature, and, at times, pricing can be highly volatile due to a number of factors beyond our control, including general economic conditions, import duties, other trade restrictions and currency exchange rates. Over the past three years, steel prices have fluctuated significantly. Our cost for a ton of steel from continuing operations was approximately $573 per ton in 2015, $746 per ton in 2014, and $707 per ton in 2013. In 2015, our monthly average steel purchasing costs ranged from a high of approximately $706 per ton to a low of approximately $488 per ton. This volatility can significantly affect our gross profit. Although we seek to recover increases in steel prices through price increases in our products, we have not always been successful. Any increase in steel prices that is not offset by an increase in our prices could have an adverse effect on our business, financial position, results of operations or cash flows.

 

 

Our Water Transmission backlog is subject to reduction and cancellation. Backlog represents products or services that our customers have committed to purchase from us and projects for which we have been notified that we are the successful bidder even though a binding agreement has not been executed. Projects for which a binding contract has not been executed could be cancelled. Our backlog of orders for our Water Transmission segment was approximately $116 million at December 31, 2015. Our backlog is subject to fluctuations; moreover, cancellations of purchase orders, change orders on contracts, or reductions of product quantities could materially reduce our backlog and, consequently, future revenues. Our failure to replace canceled or reduced backlog could result in lower revenues, which could adversely affect our business, financial position, results of operations or cash flows.

 

We may be unable to develop or successfully market new products or our products might not obtain necessary approvals or achieve market acceptance, which could adversely affect our growth. We will continue to actively seek to develop new products and to expand our existing products into new markets, but we cannot assure you that we will be successful in these efforts. If we are unsuccessful in developing and marketing new products, expanding into new markets, or we do not obtain or maintain requisite approvals for our products, the demand for our products could be adversely affected, which could affect our business, financial position, results of operations or cash flows.

 

The success of our business is affected by general economic conditions, and our business may be adversely affected by an economic slowdown or recession. Periods of economic slowdown or recession in the United States, or the public perception that one may occur, have and could further decrease the demand for our products, affect the price of our products and adversely impact our business. We have been impacted in the past by the general slowing of the economy, and the economic slowdown has had an adverse impact on our business, financial position, results of operations or cash flows. In particular, our Tubular Products Group is exposed to the energy exploration, non-residential construction, and agriculture markets, and a significant downturn in any one of these markets could cause a reduction in our revenues that could be difficult to offset.

 

Increased levels of imports have and could continue to adversely affect pricing and demand for our products. We believe import levels are affected by, among other things, overall worldwide demand, lower cost of production in other countries, the trade practices of foreign governments, government subsidies to foreign producers and governmentally imposed trade restrictions in the United States. The level of imports of tubular products has historically impacted the domestic tubular products market and reduced the demand for our tubular products, a situation we expect to continue. While imported pipe has historically most affected our Tubular Products business, imported pipe could have a greater effect on our Water Transmission business in the future. Additionally, high levels of imported tubular products have led at least one domestic manufacturer of tubular products to recently enter the water transmission market, and other tubular products manufacturers could do the same in the future. Increased imports in the United States and Canada which compete with our Water Transmission products could reduce demand for our products in the future and adversely affect our business, financial position, results of operations or cash flows.

  

Operating problems in our business could adversely affect our business, financial position, results of operations or cash flows. Our manufacturing operations are subject to typical hazards and risks relating to the manufacture of similar products such as:

 

•

explosions, fires, inclement weather and natural disasters;

 

•

mechanical failure;

 

•

unscheduled downtime;

 

•

labor difficulties;

 

•

loss of process control and quality;

 

•

disruptions to supply;

 

•

raw materials quality defects;

 

•

service provider delays or failures;

 

•

transportation delays or failures;

 

•

an inability to obtain or maintain required licenses or permits; and

 

•

environmental hazards such as chemical spills, discharges or releases of toxic or hazardous substances or gases into the environment or workplace.

 

The occurrence of any of these operating problems at our facilities may have a material adverse effect on the productivity and profitability of a particular manufacturing facility or on our operations as a whole, during and after the period of these operating difficulties. These operating problems may also cause personal injury and loss of life, severe damage to or destruction of property and equipment, and environmental damage. In addition, individuals could seek damages for alleged personal injury or property damage. Furthermore, we could be subject to present and future claims with respect to workplace injury, exposure to hazardous materials, workers’ compensation and other matters. Although we maintain property and casualty insurance of the types and in the amounts that we believe are customary for our industries, we cannot assure you that our insurance coverage will be adequate for liability that may be ultimately incurred or that such coverage will continue to be available to us on commercially reasonable terms. Any claims that result in liability exceeding our insurance coverage could have an adverse effect on our business, financial position, results of operations or cash flows.

 

 

Our quarterly results of operations are subject to significant fluctuation. Our net sales and operating results may fluctuate significantly from quarter to quarter due to a number of factors, including:

 

•

the commencement, completion or termination of contracts during any particular quarter;

 

•

unplanned down time due to project delays or mechanical failure;

 

•

underutilized capacity or factory productivity;

 

•

adverse weather conditions;

 

•

fluctuations in the cost of steel and other raw materials; and

 

•

competitive pressures.

 

Results of operations in any period are not indicative of results for any future period, and comparisons between any two periods may not be meaningful.

 

We face risks in connection with potential acquisitions and divestitures. Acquiring businesses that expand and/or complement our operations has been an important element of our business strategy, and we continue to evaluate potential acquisitions that may expand and/or complement our business. We may not be able to successfully identify attractive acquisition candidates or negotiate favorable terms in the future. Furthermore, our ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of our implementation plans, the ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired operational efficiencies. We may also consider other alternatives for our business units in order to strategically position our business and continue to compete in our markets, which may include joint-ventures and/or divestitures. Our failure to successfully integrate the operations of any businesses that we may acquire in the future or our inability to attract a business partner in which to enter into a joint-venture or a buyer willing to purchase our business units (including our remaining Tubular Products business, for which we are exploring a divestiture) may adversely affect our business, financial position, results of operations or cash flows.

 

We may be subject to claims for damages for defective products, which could adversely affect our business, financial position, results of operations or cash flows. We warrant our products to be free of certain defects. We have, from time to time, had claims alleging defects in our products. We cannot assure you that we will not experience material product liability losses in the future or that we will not incur significant costs to defend such claims. While we currently have product liability insurance, we cannot assure you that our product liability insurance coverage will be adequate for liabilities that may be incurred in the future or that such coverage will continue to be available to us on commercially reasonable terms. Any claims relating to defective products that result in liabilities exceeding our insurance coverage could have an adverse effect on our business, financial position, results of operations or cash flows.

 

We may not be able to recover costs and damages from vendors that supply defective materials. We may receive defective materials from our vendors that are incorporated into our products during the manufacturing process. The cost to repair, remake or replace defective products could be greater than the amount that can be recovered from the vendor. Such excess costs could have an adverse effect on our business, financial position, results of operations or cash flows.

 

We have a foreign operation which exposes us to the risks of doing business abroad. Our facility in Monterrey, Mexico primarily exports products to the United States. We may operate in additional countries in the future. Any material changes in the quotas, regulations or duties on imports imposed by the United States government and our agencies or on exports imposed by these foreign governments and their agencies could adversely affect our foreign operations.

 

We also sell some of our products internationally. Our foreign activities are also subject to various other risks of doing business in a foreign country, including:

 

•

currency fluctuations;

 

•

transportation delays and interruptions;

 

•

political, social and economic instability and disruptions;

 

•

government embargoes or foreign trade restrictions;

 

 

•

the imposition of duties, tariffs and other trade barriers;

 

•

import and export controls;

 

•

labor unrest and current and changing regulatory environments;

 

•

limitations on our ability to enforce legal rights and remedies; and

 

•

potentially adverse tax consequences.

 

No assurance can be given that our operations may not be adversely affected in the future. Any of these events could have an adverse effect on our operations in the future by reducing the demand for our products and services, decreasing the prices at which we can sell our products or increasing costs such that there would be an adverse effect on our business, financial position, results of operations or cash flows. We cannot assure you that we will continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject, or that any such regulations or laws will not be modified. Any failure by us to comply with any such applicable regulations or laws, or any changes in any such regulations or laws could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Our use of the percentage-of-completion method of accounting includes estimates. Revenue from construction contracts in our Water Transmission segment is recognized on the percentage-of-completion method, measured by the costs incurred to date as a percentage of the estimated total costs of each contract (the cost-to-cost method). Estimated total costs of each contract are reviewed on a monthly basis by project management and operations personnel for all active projects. All cost revisions that result in the gross profit as a percent of sales increasing or decreasing by more than two percent are reviewed by senior management personnel.

 

The use of estimated cost to complete each contract is a significant variable in the process of determining income earned and is a significant factor in the accounting for contracts. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known. Due to the variability of events affecting our estimates which have a material impact on our contract accounting, actual results could differ from those estimates, which could adversely affect our financial position, results of operations or cash flows.

 

We are subject to stringent environmental and health and safety laws, which may require us to incur substantial compliance and remediation costs, thereby reducing our profits. We are subject to many federal, state, local and foreign environmental and health and safety laws and regulations, particularly with respect to the use, handling, treatment, storage, discharge and disposal of substances and hazardous wastes used or generated in our manufacturing processes. Compliance with these laws and regulations is a significant factor in our business. We have incurred, and expect to continue to incur, significant expenditures to comply with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, installation of pollution control equipment or remedial actions.

 

We are currently, and may in the future be, required to incur costs relating to the environmental assessment or environmental remediation of our property, and for addressing environmental conditions, including, but not limited to, the issues associated with our Portland, Oregon and Houston, Texas facilities as discussed in Part I—Item 3, “Legal Proceedings” below. Some environmental laws and regulations impose liability and responsibility on present and former owners, operators or users of facilities and sites for contamination at such facilities and sites without regard to causation or knowledge of contamination. Consequently, we cannot assure you that existing or future circumstances, the development of new facts or the failure of third parties to address contamination at current or former facilities or properties will not require significant expenditures by us.

 

We expect to continue to be subject to increasingly stringent environmental and health and safety laws and regulations. It is difficult to predict the future interpretation and development of environmental and health and safety laws and regulations or their impact on our future earnings and operations. We anticipate that compliance will continue to require capital expenditures and operating costs. Any increase in these costs, or unanticipated liabilities arising, for example, out of discovery of previously unknown conditions or more aggressive enforcement actions, could adversely affect our results of operations, and there is no assurance that they will not have a material adverse effect on our business, financial position, results of operations or cash flows.

 

Our information technology systems can be negatively affected by cyber security threats. Increased global information technology security requirements, vulnerabilities, threats and a rise in sophisticated and targeted computer crime pose a risk to the security of our systems, networks and the confidentiality, availability and integrity of our data. Despite our efforts to protect sensitive information and confidential and personal data, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches. This could lead to disclosure, modification or destruction of proprietary, employee, and other key information, and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.

 

 

Risks Specifically Related to Our Tubular Products Business

 

Our Tubular Products business faces difficult market conditions. Our Tubular Products business is exposed to the energy markets. Our line pipe products, which serve the energy market, comprise 58%, 77%, and 71% of our tons sold in 2015, 2014, and 2013, respectively, for our continuing operations in the Tubular Products Group. Sales of these products are tied to the exploration, development, and production of natural gas and oil reserves. Decreasing oil prices, particularly since late 2014, have resulted in weaker demand for our line pipe products. With recent further declines in oil prices, we expect demand for these products to continue to be weak in 2016. Additionally, the market for our tubular products is over-supplied, driven by high levels of imported product and increased domestic capacity and production in the United States and Canada. The Atchison facility operated at reduced levels from April 2015 to January 2016, when we idled the facility to reduce operating expenses until market conditions improve or a sale is completed. A protracted weak market for our tubular products could adversely affect our business, financial position, results of operations or cash flows.

 

Our Tubular Products business has incurred past operating losses, and could generate operating losses for an extended period. The Tubular Products business has incurred operating losses in the past, and is likely to do so until the Atchison plant is either restarted or sold. Some fixed costs will continue to be incurred while the plant is idled, generating ongoing operating losses. An accumulation of operating losses could result in an impairment of our Tubular Products assets or a loss on the sale of those assets. If the Atchison facility remains idle for an extended period, our business, financial position, results of operations or cash flows could be adversely affected.

 

Our plan to explore the sale of our remaining Tubular Products business may not result in a transaction or a transaction may cause us to recognize a loss. We announced on July 20, 2015 that we are exploring the sale of our remaining Tubular Products business to focus on our core Water Transmission business. The process to explore this sale is subject to a number of uncertainties, some of which are not in our control. As a result, we cannot provide assurance that the process will result in a transaction or, if it does, that it would occur within any specified period of time or under what terms. Our evaluation of potential transactions may cause us to incur substantial costs and divert management’s time from other business activities.

 

In addition, the fact that we are exploring the sale of our Tubular Products business may damage our relationship with that business’ customers, suppliers, employees and other business partners, which may result in a reduction of net sales and market position that we may not be able to regain if we are unable to successfully complete a transaction.

 

Even if the process results in a transaction, we cannot predict how the market price for our common stock would be affected by the announcement of a transaction. In addition, the market price of our common stock could be highly volatile during the period in which we explore the sale and may continue to be more volatile if and when a transaction is announced or if we announce that we are no longer exploring a sale.

 

Any eventual sale of the Tubular Products business is subject to negotiation of a final agreement and a negotiated transaction price could be below the current carrying value of Tubular Products’ net assets. This could result in recognition of a material loss on the disposition of that business which could adversely affect our financial position, results of operations or cash flows.

 

Risks Related to Our Financial Condition

 

The restrictions under which we operate as a result of our debt agreements could have a material adverse effect on our business, financial condition, results of operations or cash flows. We have financed our operations through cash flows from operations, available borrowings and other financing arrangements. As of December 31, 2015, we had approximately $1.1 million of capital lease obligations, and no outstanding borrowings on our line of credit. However, we could incur borrowings on our line of credit in the future to finance increases in working capital, fund capital expenditures, fund negative operating cash flows, or for other corporate purposes. These borrowings could become significant in the future.

 

Our current and future debt and debt service obligations could:

 

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limit our ability to obtain additional financing for working capital or other purposes in the future;

 

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reduce the amount of funds available to finance our operations, capital expenditures and other activities;

 

•

increase our vulnerability to economic downturns, illiquid capital markets, and adverse industry conditions;

 

•

limit our flexibility in responding to changing business and economic conditions, including increased competition;

 

•

place us at a disadvantage when compared to our competitors that have less debt; and

 

•

with respect to our borrowings that bear interest at variable rates, cause us to be vulnerable to increases in interest rates.

 

Our ability to make scheduled payments on our current and future debt will depend on our future operating performance and cash flows, which are subject to prevailing economic conditions, prevailing interest rate levels and other financial, competitive and business factors, many of which are beyond our control. Our inability to make scheduled payments on our debt or any of the foregoing factors would have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

 

 

We will need to substantially increase working capital if market conditions and customer order levels improve. If market conditions and customer order levels improve, we will have to increase our working capital substantially, as it will take several months for new orders to be translated into cash receipts. In general, borrowings under our Credit Agreement are limited to the lesser of $60 million or availability under a borrowing base, which is subject to various sublimits and borrowing restrictions as determined under our Credit Agreement. As of December 31, 2015, we had $23.2 million available to borrow under our Credit Agreement. We may not have sufficient availability under our Credit Agreement to borrow the amounts we need, and other opportunities to borrow additional funds or raise capital in the equity markets may be limited or nonexistent. A shortage in the availability of working capital would have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

Our failure to comply with covenants in our debt agreements could result in our indebtedness being immediately due and payable, which would have a material adverse effect on our business, financial condition, results of operations or cash flows. The agreements governing our current and future debt include covenants that impose certain requirements with respect to our financial condition and results of operations and general business activities. These covenants place restrictions on, among other things, our ability to incur certain additional debt and to create liens or other encumbrances on assets, and our ability to experience material adverse events.

 

Our ability to comply with the covenants under our debt instruments in the future is uncertain and will be affected by our results of operations and financial condition as well as other events and circumstances beyond our control. If market and other economic conditions do not improve, our ability to comply with these covenants may be impaired. A failure to comply with the requirements of these covenants, if not waived or cured, could permit acceleration of the related debt. If any of our debt is accelerated, we cannot assure you that we would have sufficient assets to repay such debt or that we would be able to refinance such debt on commercially reasonable terms or at all. The acceleration of a significant portion of our debt would have a material adverse effect on our business, financial condition, results of operations, or cash flows.

 

Disruptions in the financial markets and the general economic slowdown could cause us to be unable to obtain financing and expose us to risks related to the overall macro-economic environment, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. The United States equity and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many equities to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing, even for companies who are otherwise qualified to obtain financing. These events may make it less likely that we will be able to obtain additional financing and also may make it more difficult or prohibitively costly for us to raise capital through the issuance of debt or equity securities.

 

Risks Related to Our Internal Control Over Financial Reporting

 

We have identified material weaknesses in internal control in prior years. For the years ended December 31, 2013 and 2014, a material weakness in our internal control over financial reporting related to goodwill was identified. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected. This material weakness was remediated as of September 30, 2015.

 

No material weaknesses were identified as of December 31, 2015. However, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our financial statements. These misstatements could result in a restatement of financial statements, cause us to fail to meet our reporting obligations or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

Risks Related to Our Common Stock

 

The relatively low trading volume of our common stock may limit your ability to sell your shares. Although our shares of common stock are listed on the Nasdaq Global Select Market (“Nasdaq”), we have historically experienced a relatively low trading volume. If we have a low trading volume in the future, holders of our shares may have difficulty selling a large number of shares of our common stock in the manner or at a price that might otherwise be attainable.

 

 

The market price of our common stock could be subject to significant fluctuations. The market price of our common stock has experienced, and may continue to experience, significant volatility. Among the factors that could affect our stock price are:

 

•

our operating and financial performance and prospects;

 

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quarterly variations in the rate of growth of our financial indicators, such as earnings per share, net income and net sales;

 

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changes in revenue or earnings estimates or publication of research reports by analysts;

 

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loss of any member of our senior management team;

 

•

speculation in the press or investment community;

 

•

strategic actions by us or our competitors, such as acquisitions or restructuring;

 

•

sales of our common stock by shareholders;

 

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relatively low trading volume;

 

•

general market conditions and market expectations for our industry and the financial health of our customers; and

 

•

domestic and international economic, legal and regulatory factors unrelated to our performance.

 

The stock markets in general have experienced broad fluctuations that have often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

 

Certain provisions of our governing documents and Oregon law could discourage potential acquisition proposals. Our articles of incorporation contain provisions that:

 

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classify the board of directors into three classes, each of which serves for a three-year term with one class elected each year;

 

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provide that directors may be removed by shareholders only for cause and only upon the affirmative vote of 75% of the outstanding shares of common stock; and

 

•

permit the board of directors to issue preferred stock in one or more series, fix the number of shares constituting any such series and determine the voting powers and all other rights and preferences of any such series, without any further vote or action by our shareholders.

 

In addition, we are subject to the Oregon Business Combination Act, which imposes certain restrictions on business combination transactions and may encourage parties interested in acquiring us to negotiate in advance with our board of directors. We also have a shareholder rights plan that acts to discourage any person or group from making a tender offer for, or acquiring, more than 15% of our common stock without the approval of our board of directors. Any of these provisions could discourage potential acquisition proposals, could deter, delay or prevent a change in control that our shareholders consider favorable and could depress the market value of our common stock.

 

Item 1B.

Unresolved Staff Comments

 

None.

 

 

Item 2.

Properties

 

Properties

 

The following table provides certain information about our operating facilities as of December 31, 2015:

 

 

Water Transmission Group

 

 

`		Manufacturing Space (approx. sq. ft.)		Property Size (approx. acres)		Number and Type of Mills
Portland, Oregon		300,000		25		3 Spiral mills
Adelanto, California		200,000		100		3 Spiral mills, 1 Plate roll
Denver, Colorado		182,000		40		2 Spiral mills
Parkersburg, West Virginia		145,000		90		2 Spiral mills
Saginaw, Texas (2 facilities)		170,000		50		2 Spiral mills
Monterrey, Mexico		40,000		5		Multiple line fabrication capability
St Louis, Missouri		100,000		20		2 Plate rolls
Salt Lake City, Utah		47,000		1		2 Plate rolls

 

As of December 31, 2015, we owned all of our Water Transmission facilities except for one of our Saginaw, Texas facilities, our St. Louis facility, and our Salt Lake City facility, which are leased. Additionally, land adjacent to our Portland facility used for parking and pipe storage is leased.

 

  

Tubular Products Group

 

 

Location		Manufacturing Space (approx. sq. ft.)		Property Size (approx. acres)		Number and Type of Mills
Atchison, Kansas		106,000		60		2 Electric resistance mills

 

 

 

Our facilities serve regional markets, which vary in the number and sizes of projects year-over-year. Consequently, we have excess manufacturing capacity from time to time at each of our facilities. We believe the quality and productive capacity of our facilities are sufficient to maintain our competitive position for the foreseeable future.

 

Item 3.

Legal Proceedings

 

Portland Harbor Superfund

 

On December 1, 2000, a section of the lower Willamette River known as the Portland Harbor Site was included on the National Priorities List at the request of the United States Environmental Protection Agency (the “EPA”). While the Company’s Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facility’s stormwater system drains into a neighboring property’s 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 (“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). A remedial investigation and feasibility study (“RI/FS”) of the Portland Harbor Site has been directed by a group of 14 potentially responsible parties known as the Lower Willamette Group (the “LWG”) under agreement with the EPA. The final draft remedial investigation (“RI”) was submitted to the EPA by the LWG in fall of 2011 and a draft feasibility study (“FS”) was submitted by the LWG to the EPA in March 2012. The revised draft FS submitted in 2015 identifies six possible remedial alternatives which range in estimated cost from approximately $790 million to $2.5 billion and estimates it will take up to 18 years to implement the remedial work, depending on the selected alternative. The report does not determine who is responsible for the costs of cleanup or how the cleanup costs will be allocated among the potentially responsible parties. As of the date of this filing, the final RI and the revised FS are pending approval of the EPA.

 

 

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 was conducted in 2002 and 2003 to further characterize the groundwater.

 

In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (the “Agreement”) with ODEQ. The Company performed RI work required under the Agreement and submitted a draft RI/Source Control Evaluation Report (“SCE”) in December 2005, a revised draft RI/SCE Report in January 2014, and a further revised RI/SCE Report in March 2015. The conclusions of the report include: (1) the VOCs found in the groundwater do not present an unacceptable risk to human or ecological receptors in the Willamette River; (2) there is no evidence at this time showing a connection between detected VOCs in groundwater and Willamette River sediments; (3) the interim remedial measure to conduct a limited excavation of soil and full paving of the site was completed; (4) a state-of-the art stormwater treatment system was installed; and (5) an area of stained soil was characterized and remediated. In May 2015, and subsequently in August and October 2015, the Company received the EPA’s and ODEQ’s comments, respectively, requesting additional information and modifications to the revised RI/SCE Report, including the request to conduct additional groundwater sampling. The Company is working with consultants to address the comments and questions from the EPA and ODEQ, and in December 2015 submitted a Supplemental Groundwater Sampling Work Plan to the EPA and ODEQ.     

 

          The Company spent $0.2 million for further Source Control work in 2015, and spent $0.1 million in 2014 and less than $0.1 million in 2013.

 

Concurrent with the activities of the EPA and 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 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 June 2014, the Company agreed to participate in the injury assessment process, which included funding $0.4 million of the assessment; of this amount, $0.2 million was paid in July 2014 and the remainder was paid in January 2015. The Company has not assumed any additional payment obligations or liabilities with the participation with the NRDA.

 

The Company’s potential liability is a portion of the costs of the remedy the EPA will select for the entire Portland Harbor Superfund Site. The cost of that remedy is expected to be allocated among more than 100 potentially responsible parties. Because of the large number of responsible parties and the variability in the range of remediation alternatives, 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 Site matters, and no further adjustment to the consolidated financial statements has been recorded as of the date of this filing. The Company has insurance policies for defense costs, as well as indemnification policies it believes will provide reimbursement for any share of the remediation assessed. However, the Company can provide no assurance that those policies will cover all of the costs which the Company may incur.

 

In December 2014, a federal district court approved settlements between the Company and two of its insurance carriers. The Company released its interests in the related insurance policies, and received $2.6 million in January 2015 for reimbursement of past indemnification and defense costs incurred by the Company associated with the Portland Harbor Site, substantially all of which reduced cost of sales in 2014. Notwithstanding these settlements, the Company continues to have insurance coverage for indemnification and defense costs related to the Portland Harbor Site as described above.

 

Houston Environmental Issue

 

In connection with the Company’s sale of its OCTG business, a Limited Phase II Environmental Site Assessment was conducted at the Houston, Texas plant and completed in March 2014, which revealed the presence of VOCs in the groundwater and certain metals in the soil. In June 2014, the Company was accepted into the Texas Commission on Environmental Quality (“TCEQ”) Voluntary Cleanup Program (“VCP”) to address these issues and obtain a Certificate of Completion from TCEQ. The cost of any potential cleanup will not be covered by insurance. However, any costs incurred will be reimbursed by the purchaser of the OCTG business discussed in Note 2, “Disposition of OCTG Business” if the purchaser of the OCTG business exercises its option to purchase the property under certain circumstances after the Certificate of Completion is obtained.

 

 

While the final remediation approach has not yet been determined, the Company has completed an initial assessment and currently estimates the future costs associated with the VCP to be between $0.2 million and $2.2 million. At December 31, 2015, the Company has a $0.3 million accrual for remediation costs based on the low-end estimate of future costs using a probability-weighted analysis of remediation approaches and estimates closure of the issue to occur between the first quarter of 2017 and the third quarter of 2018.

 

The proposed remediation approach includes a municipal ordinance to prevent consumption of shallow groundwater from beneath the property, thereby eliminating the need for more costly remediation measures. Site assessment and monitoring activities are currently underway to satisfy the requirements of the City of Houston and TCEQ for implementation of the municipal ordinance.

 

All Sites

 

The Company operates its facilities under numerous governmental permits and licenses relating to air emissions, storm water run-off, and other environmental matters. The Company’s 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. The Company believes it is in material compliance with its permits and licenses and these laws and regulations, and the Company does not believe that future compliance with such laws and regulations will have a material adverse effect on its financial position, results of operations or cash flows.

 

Other Contingencies

 

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. To the extent that insurance does not cover legal, defense, and indemnification costs associated with a loss contingency, such costs will be expensed as incurred. 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.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

 

 

 

PART II

 

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

Our common stock is quoted on the Nasdaq under the symbol “NWPX.” The price range per share of common stock presented below represents the highest and lowest closing sales prices for the Company’s common stock on the Nasdaq during each quarter of the two most recent years.

 

		Low				High
2015
First Quarter		$	22.24			$	28.84
Second Quarter			19.94				24.95
Third Quarter			12.65				19.99
Fourth Quarter			10.03				15.43
2014
First Quarter		$	33.12			$	37.97
Second Quarter			33.96				40.33
Third Quarter			34.10				40.92
Fourth Quarter			26.77				35.78

 

There were 40 shareholders of record at February 17, 2016. A substantially greater number of holders of our common stock are beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions. There were no cash dividends declared or paid in fiscal years 2015 or 2014, and we do not intend to pay cash dividends in the foreseeable future. We have not issued any securities during the past three years that were not registered under the Securities Act.

 

 

Stock Performance Graph

 

The following graph compares the performance of our common stock to the performance of the Russell 2000 Index and a weighted composite index of certain peer companies selected by us. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity markets. The Old Peer Group was comprised of Mueller Water Products, Lindsay Corporation and Valmont Industries. The New Peer Group is comprised of Mueller Water Products, Lindsay Corporation and Aegion Corp. This change reflects the Company’s significant reduction of its Tubular Products business and its primary focus on the Water Transmission business.

 

The comparisons in the chart below are provided in response to SEC disclosure requirements and, therefore, are not intended to forecast or be indicative of future performance of our common stock.

 

 

		Indexed Return
		Northwest Pipe Company				Russell 2000 Index				New Peer Group				Old Peer Group
December 31, 2010			100.00				100.00				100.00				100.00
December 31, 2011			95.13				95.82				69.15				93.6
December 31, 2012			99.29				111.49				114.62				149.36
December 31, 2013			157.14				154.78				140.75				176.47
December 31, 2014			125.34				162.35				143.97				166.91
December 31, 2015			46.57				155.18				128.02				141.57

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The information with respect to equity compensation plans is included under Part III—Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this 2015 Form 10-K.

 

 

 

Item 6.

Selected Financial Data

 

The following tables include selected summary financial data for each of our last five years and should be read in conjunction with Part II—Item 8, “Financial Statements and Supplementary Data,” and Part II—Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this 2015 Form 10-K.

 

 

The following selected consolidated financial data as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014 and 2013 are derived from our audited consolidated financial statements included in this 2015 Form 10-K. For the year ended December 31, 2011, income activity related to the disposed OCTG business is presented as discontinued operations, consistent with the years ended December 31, 2015, 2014, 2013, and 2012. While this 2011 data is derived from the Company’s historical audited financial statements for that year, discontinued operations reporting for that year has not been audited.

 

		As of December 31,
		2015				2014				2013				2012				2011
		(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Net sales		$	236,608			$	403,298			$	359,445			$	388,902			$	396,994
Gross profit			(12,625	)			40,576				60,236				59,108				59,513
Income (loss) from continuing operations			(29,388	)			(6,173	)			21,676				17,501				12,544
Income (loss) from discontinued operations			-				(11,714	)			(22,599	)			(1,257	)			116
Net income (loss)		$	(29,388	)		$	(17,887	)		$	(923	)		$	16,244			$	12,660
Earnings per Common Share :
Basic - Income (loss) from continuing operations		$	(3.07	)		$	(0.65	)		$	2.29			$	1.87			$	1.35
Income (loss) from discontinued operations			-				(1.23	)			(2.39	)			(0.14	)			0.01
Net Income (loss) per share		$	(3.07	)		$	(1.88	)		$	(0.10	)		$	1.73			$	1.36
Diluted - Income (loss) from continuing operations		$	(3.07	)		$	(0.65	)		$	2.27			$	1.85			$	1.34
Income (loss) from discontinued operations			-				(1.23	)			(2.37	)			(0.13	)			0.01
Net Income (loss) per share assuming dilution		$	(3.07	)		$	(1.88	)		$	(0.10	)		$	1.72			$	1.35

 

		As of December 31,
		2015				2014				2013				2012				2011
		(In thousands)
Consolidated Balance Sheet Data:
Working capital		$	93,709			$	165,683			$	195,357			$	167,392			$	170,614
Total assets			259,380				351,882				433,459				422,422				413,373
Long-term debt and capital lease obligations, less current portion			718				45,812				94,241				63,069				86,418
Stockholders' equity			217,560				245,635				261,850				259,432				240,267

 

 

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this 2015 Form 10-K 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, management’s 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 the important factors discussed in Part 1—Item 1A, “Risk Factors.” 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 2015 Form 10-K. 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

 

Water Transmission Group. We are the largest manufacturer of engineered steel pipe water systems in North America. With eight Water Transmission manufacturing facilities, we are positioned to meet North America’s growing needs for water and wastewater infrastructure. We serve a wide range of markets and our solutions-based products are a good fit for applications including water transmission, plant piping, tunnels and river crossings. With a history that dates back more than 100 years, we have become a leading manufacturer in the welded steel pipe industry. These pipeline systems are produced by our Water Transmission Group from eight manufacturing facilities, which are located in Portland, Oregon; Denver, Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas; Salt Lake City, Utah; St. Louis, Missouri; and Monterrey, Mexico. Our Water Transmission Group accounted for approximately 73% of net sales from continuing operations in 2015.

 

Our water infrastructure products are sold generally to installation contractors, who include our products in their bids to municipal agencies or privately-owned water companies for specific projects. We believe our sales are substantially driven by spending on new water infrastructure with a recent trend towards spending on water infrastructure replacement, repair and upgrade. Within the total range of pipe products, our products tend to fit the larger diameter, higher-pressure applications.

 

Tubular Products Group. Our Tubular Products Group manufactures ERW steel pipe at our Atchison, Kansas facility, producing a range of line pipe products used in several different applications including energy, industrial, construction, and agricultural. Our Tubular Products Group generated approximately 27% of our net sales from continuing operations in 2015. Our Tubular Products Group’s sales volume is typically driven by energy spending, non-residential construction spending and general economic conditions. The OCTG business, formerly part of our Tubular Products Group, was sold in March 2014, as discussed in Item 1. We announced on July 20, 2015 that we are in the process of exploring the sale of our remaining Energy Tubular Products business, which includes line, structural and standard pipe, and is located in Atchison, Kansas. The decision to explore a sale of our remaining Energy Tubular Products business reflects our long-term objective to focus on our core Water Transmission business through organic growth initiatives as well as through merger and acquisition activity. The Atchison facility operated at reduced levels from April 2015 to January 2016, when we idled the Atchison facility to reduce operating expenses until market conditions improve or a sale is completed. We are continuing to sell previously manufactured tubular products inventory.

 

Our Current Economic Environment

 

We operate our Water Transmission Group 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. Long-term demand for water infrastructure projects in the United States appears strong. However, in the near term, we expect strained governmental and water agency budgets and increased capacity from competition to impact the Water Transmission Group. Fluctuating steel costs will be a factor in both our Tubular Products Group and our Water Transmission Group, as the ability to adjust our selling prices as steel costs fluctuate will depend on market conditions.

 

 

Demand for line pipe, the primary product of our Tubular Products Group, is correlated to oil and gas exploration activity in the United States, which is itself correlated to global oil prices. Historically low oil prices have led to reduced demand in 2015, and we continue to expect weak demand in 2016.

 

In addition to the macroeconomic factors described above, we continue to face pressures from significant volumes of foreign imports of tubular products. We also face increased pressures due to recent domestic capacity expansions by our competitors.

 

Critical Accounting Policies

 

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.

 

Management Estimates:

 

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an on-going basis, we evaluate all of our estimates, including those related to revenue recognition, allowance for doubtful accounts, goodwill, property and equipment, including depreciation and amortization, inventories, income taxes, and litigation and other contingencies. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and related judgments and estimates affect the preparation of our consolidated financial statements.

 

Revenue Recognition:

 

Revenue from construction contracts in our Water Transmission Group is recognized on the percentage-of-completion method. For a majority of contracts, revenue is measured by the costs incurred to date as a percentage of the estimated total costs of each contract (cost-to-cost method). For a small number of contracts, revenue is measured using units of delivery as progress is best estimated by the number of units delivered under the contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Selling, general and administrative costs are charged to expense as incurred. The cost of steel is recognized as a project cost when the steel is introduced into the manufacturing process. Estimated total costs of each contract are reviewed on a monthly basis by project management and operations personnel for all active projects. All cost revisions that result in the gross profit as a percent of sales increasing or decreasing by more than two percent are reviewed by senior management personnel.

 

We begin recognizing revenue on a project when persuasive evidence of an arrangement exists, recoverability is reasonably assured, and project costs are incurred. Costs may be incurred before we have persuasive evidence of an arrangement. In those cases, if recoverability from that arrangement is probable, the project costs are deferred and revenue recognition is delayed.

 

Changes in job performance, job conditions and estimated profitability, including those arising from contract change orders, contract penalty provisions, foreign currency exchange rate movements, changes in raw materials costs, and final contract settlements may result in revisions to estimates of revenue, costs and income and are recognized in the period in which the revisions are determined. Provisions for losses on uncompleted contracts are made in the period such losses become known.

 

Inventories:

 

Inventories are stated at the lower of cost or market. Determining market value of inventories involves judgments and assumptions made by us, including projecting selling prices and cost of sales. To project market value, we review recent sales and gross profit history, existing customer orders, current contract prices, industry supply and demand, forecasted steel prices, replacement costs, seasonal factors, general economic trends and other information, as applicable. If future market conditions are less favorable than those projected by us, inventory write-downs may be required. At December 31, 2015, the inventory balance of $30.3 million is reported net of lower of cost or market reserves totaling $8.6 million. Raw material inventories of steel are stated at cost either on a specific identification basis or on an average cost basis. All other raw materials, as well as supplies, are stated on an average cost basis. Finished goods are stated at cost using the first-in, first-out method of accounting. Due to recent volatility of energy markets, it is at least reasonably possible that these lower of cost or market reserves will materially change in the near term.

 

Property and Equipment:

 

Property and equipment are recorded at cost, and are depreciated using either the units of production method or a straight-line method depending on the classification of the asset. Depreciation expense calculated under the units of production method may be less than, equal to, or greater than depreciation expense calculated under the straight-line method. We evaluate historical and projected units of production at each plant to reassess the units of production expected on an annual basis.

 

 

We assess impairment of property and equipment whenever changes in circumstances indicate that the carrying values of the asset group may not be recoverable. The recoverable value of long-lived assets is determined by estimating future undiscounted cash flows using assumptions about our expected future operating performance. Estimates of future cash flows used in the recoverability test incorporate our own assumptions about the use of the asset group and shall consider all available evidence. Our estimates of undiscounted cash flows may differ from actual cash flow due to, among other things, technological changes, economic conditions, or changes to our business operations. If we determine the carrying value of the property and equipment will not be recoverable, we calculate and record an impairment loss. This analysis is performed prior to assessing goodwill for impairment.

 

Due to continued difficult market conditions for our Tubular Products business, and our exploration of a sale of this business during this difficult market, it is at least reasonably possible that property and equipment associated with the Tubular Products business will be impaired and/or a loss on disposal incurred at some point in the future. 

 

In conjunction with the preparation of its financial statements for the year ended December 31, 2015, the Company determined that an impairment triggering event as defined in ASC 360-10 had occurred for the Atchison asset group included within the Tubular Products segment due to continued operating losses and our plans to idle the facility in January 2016. The Company performed a recoverability test for the asset group, in which the carrying value of the asset group was compared against associated undiscounted future cash flows. This analysis determined that the undiscounted future cash flows substantially exceeded the carrying value of the asset group; thus, the carrying value of the asset group was not impaired at December 31, 2015.

 

In conjunction with the preparation of its financial statements for the quarter ended June 30, 2015, the Company determined that an impairment triggering event as defined in ASC 360-10 had occurred for the asset group included within the Water Transmission segment due to the impairment of its Water Transmission goodwill. The Company performed a recoverability test for the asset group, in which the carrying value of the asset group was compared against associated undiscounted future cash flows. This analysis determined that the undiscounted future cash flows substantially exceeded the carrying value of the asset group; thus, the carrying value of the asset group was not impaired at June 30, 2015. Subsequent to June 30, 2015, no triggering events for the Water Transmission asset group have occurred, and therefore a quantitative recoverability test for this asset group was not performed at December 31, 2015.

 

Business Combinations and Valuation of Goodwill and Other Acquired Intangible Assets:

 

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. Goodwill is recorded for the excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Contingent consideration is calculated and recorded at the date of the acquisition. During the measurement period, which does not exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed as a result of information received regarding the valuation of assets and liabilities after the acquisition date, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

 

Goodwill is reviewed for impairment annually at December 31 or whenever events occur or circumstances change that indicate goodwill may be impaired. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (also known as a component). Our reporting units are equivalent to our operating segments as the individual components meet the criteria for aggregation.

 

Fair value of goodwill is first evaluated under a qualitative approach which takes into account industry and market conditions, cost factors, overall financial performance, and other relevant entity specific events and changes. In the evaluation of our operating segments, we look at the long-term prospects for the reporting units and recognize that current performance may not be the best indicator of future prospects or value, which requires management judgment. If this analysis determines that it is more likely than not that the fair value of goodwill is above its carrying value, no further analysis is required. Alternatively, we may choose to unconditionally bypass the qualitative analysis in favor of a two-step quantitative impairment test.

 

The first step of this analysis calculates the business enterprise value of the reporting unit by using a combination of income and market approaches. The income approach is based upon projected future after-tax cash flows discounted to present value using factors that consider the timing and risk associated with the future after-tax cash flows. The market approach is based upon historical and/or forward-looking measures using multiples of revenue or earnings before interest, tax, depreciation, and amortization (“EBITDA”). We utilize a weighted average of the income and market approaches, with a heavier weighting on the income approach because of the relatively limited number of direct comparable entities for which relevant multiples are available. If the carrying value of the reporting unit exceeds its calculated enterprise value, then the Company continues to assess the fair value of individual assets and liabilities, other than goodwill. The difference between the reporting unit enterprise value and the fair value of its identifiable net assets is the implied fair value of the reporting unit’s goodwill. A goodwill impairment loss is recorded for the difference between the implied fair value and its carrying value.

 

 

Goodwill of $4.4 million related to the sale of the Company’s discontinued OCTG business in March 2014 was written off as part of the loss on sale of business.

 

Goodwill related to the Company’s Tubular Products Group of $16.1 million was evaluated using a quantitative impairment test as of December 31, 2014. We concluded that there was no implied fair value of the Tubular Products Group goodwill and that it should be completely written off as of December 31, 2014.

 

Goodwill related to the Company’s Water Transmission Group of $5.3 million was evaluated using a quantitative impairment test as of June 30, 2015, due to declining Water Transmission market conditions. We concluded that there was no implied fair value of the Water Transmission Group goodwill and that it should be completely written off as of June 30, 2015. As of December 31, 2015, we have no goodwill assets.

 

Stock-based Compensation:

 

We recognize the compensation cost of employee and director services received in exchange for awards of equity instruments based on the grant date estimated fair value of the awards. Share-based compensation cost is recognized over the period during which the employee or director is required to provide service in exchange for the award, and as forfeitures occur, the associated compensation cost recognized to date is reversed.

 

We estimate the fair value of Restricted Stock Units (“RSUs”) and Performance Stock Awards (“PSAs”) using the value of the Company’s stock on the date of grant, with the exception of market-based PSAs, for which a Monte Carlo simulation model is used. The Monte Carlo simulation model calculates many potential outcomes for an award and estimates fair value based on the most likely outcome.

 

Income Taxes:

 

We account for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes primarily reflects a combination of income earned and taxed in the various United States federal and state and, to a lesser extent, foreign jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

 

We record tax reserves for federal, state, local and international exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about tax issues, potential outcomes and timing, and is a subjective estimate. We assess our tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon settlement with a tax authority that has full knowledge of all relevant information. For those tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the consolidated financial statements.

 

Allowance for Doubtful Accounts:

 

We maintain allowances for estimated losses resulting from the inability of our customers to make required payments based on historical experience and management’s judgment. The extension and revision of credit is established by obtaining credit rating reports or financial information on the customer. An allowance is recorded based on a variety of factors, including our historical collection experience and our historical product quality claims. At least monthly, we review past due balances to identify the reasons for non-payment. We will write down or write off a receivable account once the account is deemed uncollectible for reasons such as customer quality claims, a contract dispute, deterioration in the customer’s financial position, a bankruptcy filing or other events. We believe the reported allowances at December 31, 2015 are adequate. If the customer’s financial conditions were to deteriorate resulting in their inability to make payments, additional allowances may need to be recorded which would result in additional expense being recorded for the period in which such determination was made.

 

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain financial information regarding costs and expenses from continuing operations expressed in dollars (in thousands) and as a percentage of total net sales from continuing operations and net sales of our business segments.

 

		Year Ended December 31, 2015								Year Ended December 31, 2014								Year Ended December 31, 2013
		$				% of Net Sales				$				% of Net Sales				$				% of Net Sales
Net sales:
Water transmission		$	173,160				73.2	%		$	238,545				59.1	%		$	226,427				63.0	%
Tubular products			63,448				26.8				164,753				40.9				133,018				37.0
Total net sales			236,608				100.0				403,298				100.0				359,445				100.0
Cost of sales			249,233				105.3				362,722				89.9				299,209				83.2
Gross profit (loss)			(12,625	)			(5.3	)			40,576				10.1				60,236				16.8
Selling, general and administrative expenses			22,303				9.5				24,316				6.0				22,701				6.3
Impairment of goodwill			5,282				2.2				16,066				4.0				-				0.0
Operating (loss) income			(40,210	)			(17.0	)			194				0.1				37,535				10.5
Other income (expense)			88				0.0				108				0.0				(289	)			(0.1	)
Interest income			173				0.1				466				0.1				409				0.1
Interest expense			(1,390	)			(0.6	)			(2,290	)			(0.6	)			(3,621	)			(1.0	)
Income (loss) before income taxes			(41,339	)			(17.5	)			(1,522	)			(0.4	)			34,034				9.5
Income tax (benefit) expense			(11,951	)			(5.1	)			4,651				1.1				12,358				3.5
Income (loss) from continuing operations			(29,388	)			(12.4	)			(6,173	)			(1.5	)			21,676				6.0
Discontinued operations:
Loss from operations of discontinued business			-				0.0				(2,151	)			(0.5	)			(9,583	)			(2.7	)
Impairment of fixed assets			-				0.0				-				0.0				(27,500	)			(7.6	)
Loss on sale of business			-				0.0				(13,497	)			(3.4	)			-				0.0
Income tax benefit			-				0.0				(3,934	)			(1.0	)			(14,484	)			(4.0	)
Loss on discontinued operations			-				0.0				(11,714	)			(2.9	)			(22,599	)			(6.3	)
Net loss		$	(29,388	)			(12.4)	%		$	(17,887	)			(4.4)	%		$	(923	)			(0.3)	%
Segment gross profit (loss) as a percentage of net sales:
Water transmission							0.3	%							16.6	%							20.7	%
Tubular products							(20.9	)							0.6								10.0

 

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Net sales. Net sales from continuing operations decreased by $166.7 million to $236.6 million in 2015 from $403.3 million in 2014. There were no customers accounting for 10% of net sales from continuing operations in 2015. One customer accounted for 16% and another customer accounted for 10% of net sales from continuing operations in 2014.

 

Water Transmission sales decreased 27.4% to $173.2 million in 2015 from $238.5 million in 2014. The decrease in net sales from continuing operations was due to a 16% decrease in tons produced and a 14% decrease in average selling price per ton. The decrease in tons produced was due to reduced demand and project timing during the year compared to 2014. The decrease in selling prices per ton was due in part to a very competitive bidding environment, and in part to a 23% decrease in steel costs per ton. Lower material costs generally lead to lower contract values and, therefore, lower net sales as contractors and municipalities are aware of the input costs and market conditions. The lower selling prices in 2015 were partially offset by a change in product mix, which included more downstream fabrication work. Bidding activity, backlog and production levels may vary significantly from period to period affecting sales volumes.

 

Tubular Products sales from continuing operations decreased 61.5% to $63.4 million in 2015 from $164.8 million in 2014. The sales decrease was due to a 55% decrease in tons sold from 164,600 tons to 74,000 tons and a 14% decrease in average selling price per ton. The decrease in volume was directly related to the decreased demand for line pipe in the oil and gas industry due to lower oil prices in 2015 compared to 2014. Energy pipe represented 58% of tons sold in 2015 compared to 77% in 2014. Revenues from sales of energy pipe decreased 68% in 2015 compared with 2014.

 

Gross profit (loss). Gross profit decreased 131.1% to a $12.6 million gross loss (negative 5.3% of total net sales from continuing operations) in 2015 from a $40.6 million gross profit (10.1% of total net sales from continuing operations) in 2014.

 

Water Transmission gross profit decreased 98.5% to $0.6 million (0.3% of segment net sales from continuing operations) in 2015 from $39.6 million (16.6% of segment net sales from continuing operations) in 2014. The decrease in gross profit was primarily due to the impact of significant competition on recent project bids and the mix of projects produced. Another significant factor in the decrease in gross profit in 2015 was the decreased volume described above, which had a negative effect on the fixed portion of our cost of goods sold as a percent of sales. Also, rapidly decreasing coil costs caused us to take an additional $1.1 million of lower of cost or market inventory adjustments in 2015.

 

 

Tubular Products gross profit from continuing operations decreased to negative $13.2 million (negative 20.9% of segment net sales from continuing operations) in 2015 from $1.0 million (0.6% of segment net sales from continuing operations) in 2014. Gross loss in 2015 was negatively impacted by lower volume primarily due to lower demand for line pipe, which resulted in lower selling prices. Reduced demand for line pipe reduced our steel purchases in 2015, leading to consumption of higher cost steel inventories in 2015 production. Also contributing to the gross loss in 2015 was an additional $0.3 million of lower of cost or market inventory adjustments and $0.5 million in severance expense related to the production curtailment. The decrease in gross profit and gross profit as a percent of net sales from continuing operations in 2015 was partially offset by a 20% decrease in steel coil cost per ton.

 

Selling, general and administrative expenses. Selling, general and administrative expenses decreased 8.3%, to $22.3 million (9.5% of net sales from continuing operations) in 2015 from $24.3 million (6.0% of net sales from continuing operations) in 2014. The decrease of $2.0 million compared to the prior year was primarily due to lower wages, incentive compensation and benefits of $2.1 million and a $0.9 million reduction in travel, entertainment and other administrative expenses, partially offset by a $0.9 million increase in professional and outside services primarily related to legal and auditing expenses.

 

Impairment of goodwill. Goodwill related to the Company’s Water Transmission segment of $5.3 million was evaluated for impairment in the second quarter of 2015 due to then current market conditions. We concluded that the business enterprise value of the Water Transmission segment was less than its carrying amount at June 30, and engaged a consultant to assist the Company in calculating implied fair value of goodwill for the reporting unit. As a result of that analysis, the entire balance of Water Transmission segment goodwill was written off. In the fourth quarter of 2014, goodwill related to the Company’s Tubular Products Group of $16.1 million was evaluated for impairment due to the significant decrease in crude oil prices in December 2014. We concluded that the business enterprise value of the Tubular Products Group was less than its carrying amount at December 31, and engaged a consultant to assist the Company in calculating implied fair value of goodwill for the reporting unit. As a result of that analysis, the entire balance of Tubular Products Group goodwill was written off in 2014.

 

Interest expense. Interest expense decreased to $1.4 million in 2015 from $2.3 million in 2014. The decrease was due to lower average borrowings and lower capital lease balances in 2015 compared to 2014, and the payoff of our high interest bearing Term Notes in June 2014. Interest expense in 2015 included the write-off of unamortized financing costs totaling $0.4 million associated with the termination of a bank line of credit agreement.

 

Income taxes. The tax benefit from continuing operations was $12.0 million in 2015, an effective tax benefit rate of 28.9%. The effective tax rate for 2015 included the recognition of $2.5 million of research and development (R&D) tax credits for 2014 based on a study completed in 2015. Additionally in 2015, after considering the guidance for accounting for income taxes, and weighing the positive and negative evidence including our recent history of cumulative losses, we recorded a $5.2 million valuation allowance on a portion of our deferred tax assets, primarily related to federal and state tax credits and state net operating loss carry forwards. Another factor reducing the effective tax benefit rate in 2015 was the $5.3 million impairment of Water Transmission goodwill we recorded, which is not deductible for tax purposes.

 

Despite a loss before income taxes of $1.5 million for continuing operations in 2014, income tax expense from continuing operations was $4.7 million. The effective income tax rate for 2014 was negatively affected by the $16.1 million impairment of Tubular Products goodwill we recorded, which is not deductible for income tax purposes; therefore, we did not record any tax benefit for the charge. 

 

Our effective income tax rate can change significantly depending on the relationship of permanent income tax deductions and tax credits to pre-tax income or loss. In 2015, the impact of the recognition of R&D tax credits increased the effective benefit rate, while the non-deductibility of expense related to the impairment of goodwill and deferred tax valuation allowances recorded decreased the effective benefit rate. Accordingly, the comparison of effective rates between periods is not necessarily meaningful in all situations.

  

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Net sales. Net sales from continuing operations increased by $43.9 million to $403.3 million in 2014 from $359.4 million in 2013. One customer accounted for 16% and another customer accounted for 10% of net sales from continuing operations in 2014. One customer also accounted for 15% of net sales from continuing operations in 2013.

 

 

Water Transmission sales increased 5.4% to $238.5 million in 2014 from $226.4 million in 2013. The increase in net sales from continuing operations was due to a 36% increase in tons produced partially offset by a 23% decrease in average selling price per ton. The increase in tons produced was partially due to the addition of Permalok in 2014 as well as the timing of production and mix of projects produced during the year compared to 2013. Projects produced in 2013 required more fabrication, which increased the average selling price per ton in 2013 compared to 2014. In addition, a 12% decrease in materials cost per ton also led to a decrease in average selling prices. Lower material costs generally lead to lower contract values, and therefore lower net sales as contractors and municipalities are aware of the input costs and market conditions. Bidding activity, backlog and production levels may vary significantly from period to period affecting sales volumes.

 

Tubular Products sales from continuing operations increased 23.9% to $164.8 million in 2014 from $133.0 million in 2013. The sales increase was due to a 24% increase in tons sold from 132,800 tons to 164,600 tons. The increase in volume is directly related to our capacity expansion project in Atchison. Selling prices per ton in 2014 were relatively even with 2013. Energy pipe represented 77% of tons sold in 2014 compared to 71% for the same period of 2013. The selling price for energy pipe decreased 3% in 2014 compared with 2013.

 

Gross profit. Gross profit decreased 32.6% to $40.6 million (10.1% of total net sales from continuing operations) in 2014 from $60.2 million (16.8% of total net sales from continuing operations) in 2013.

 

Water Transmission gross profit decreased 15.7% to $39.6 million (16.6% of segment net sales from continuing operations) in 2014 from $47.0 million (20.7% of segment net sales from continuing operations) in 2013. The decrease in gross profit was primarily due to the decrease in selling price per ton, partially offset by the increase in tons produced as discussed above. We have experienced significant competition on recent project bids, which has also contributed to decreased gross profit. The mix of projects produced also contributed to the decrease in gross profit. The decrease was partially offset by our cost reduction initiatives, which have reduced overhead costs and labor hours per ton, as well as improvements in quality. Also partially offsetting the above was a $2.6 million reduction of cost of sales primarily related to insurance settlements, which reimbursed the Company for past costs incurred for Portland Harbor Site. (See Item 3, Legal proceedings, and Note 13 of the accompanying consolidated financial statements for additional information on the settlements).

 

Tubular Products gross profit from continuing operations decreased 92.7% to $1.0 million (0.6% of segment net sales from continuing operations) in 2014 from $13.3 million (10.0% of segment net sales from continuing operations) in 2013. The decrease in gross profit was primarily the result of a 7% increase in steel costs per ton while total average selling prices remained flat. As steel comprises 85% to 90% of Tubular Products costs, this had a significant negative impact on gross profit. Increased imports of energy pipe, low natural gas prices, and volatility of steel prices have negatively impacted gross profits, particularly in energy pipe. In addition, there was a $2.5 million lower of cost or market inventory adjustment recorded during 2014, compared to a $2.2 million lower of cost or market inventory adjustment recorded during 2013. The decrease was partially offset by cost reduction initiatives successfully implemented at our Atchison facility.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased 7.1%, to $24.3 million (6.0% of net sales from continuing operations) in 2014 from $22.7 million (6.3% of net sales from continuing operations) in 2013. The increase of $1.6 million compared to the prior year was primarily due to additional selling, general and administrative expenses included with the Permalok acquisition.

 

Impairment of goodwill. Goodwill related to the Company’s Tubular Products Group of $16.1 million was evaluated for impairment due to the significant decrease in crude oil prices in December 2014. As a result of that analysis, the entire balance of Tubular Products Group goodwill was written off in 2014. There were no goodwill impairment charges recorded in 2013.

 

Interest expense. Interest expense decreased to $2.3 million in 2014 from $3.6 million in 2013. The decrease was due to the payoff of our high interest bearing Term Notes in June 2014, and lower borrowings on our line of credit in 2014 compared to 2013.

 

 

Income taxes. Despite a loss before income taxes of $1.5 million for continuing operations in 2014, income tax expense from continuing operations is $4.7 million. This compares to income tax expense of $12.4 million, or 36.3% of income before income taxes from continuing operations of $34.0 million in 2013. The effective income tax rate for 2014 was negatively impacted by the $16.1 million goodwill impairment charge we recorded, which is not deductible for income tax purposes; therefore, we did not record any tax benefit for the charge. Our effective income tax rate can change significantly depending on the relationship of permanent income tax deductions and tax credits to pre-tax income or loss. Accordingly, the comparison of effective rates between periods is not necessarily meaningful in all situations.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Our principal sources of liquidity generally include operating cash flows and our line of credit. From time to time our long-term capital needs may be met through the issuance of long-term debt or additional equity. Our principal uses of liquidity generally include capital expenditures, working capital and debt service. Information regarding our cash flows for the twelve months ended December 31, 2015 is presented in our consolidated statements of cash flows contained in this 2015 Form 10-K, and is further discussed below. The 2014 and 2013 consolidated statements of cash flows include discontinued operations.

 

As of December 31, 2015, our working capital (current assets minus current liabilities) was $93.7 million as compared to $165.7 million as of December 31, 2014. The primary reasons for the decrease in working capital were decreases in trade and other receivables and inventories due to lower sales, billings and production in 2015 compared to 2014, as well as additions to inventory lower of cost or market reserves during 2015. In addition, our Tubular Products accounts receivable and inventories have decreased following the production curtailment at the Atchison plant, which began in April 2015. Cash and cash equivalents totaled $10.3 million as of December 31, 2015 and $0.5 million as of December 31, 2014. There were no borrowings under our line of credit agreement at December 31, 2015 compared to borrowings of $45.6 million at December 31, 2014.

 

Fluctuations in our working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. Our revenues in the Water Transmission segment are recognized on a percentage-of-completion method; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received 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 by project, and from period to period.

 

Net Cash Provided by Operating Activities

 

Net cash provided by operating activities in 2015 was $55.2 million. This was primarily the result of our net loss adjusted for charges of $9.1 million for depreciation and $5.3 million for impairment of goodwill, and the net positive cash flow effect of a decrease in our working capital of $72.0 million. The decrease in working capital was primarily driven by decreases in accounts receivable of $26.8 million and inventories of $43.7 million, partially offset by a net decrease in accounts payable and accrued liabilities of $5.2 million.

 

Net cash provided by operating activities in 2014 was $35.0 million. This was primarily the result of our net loss, adjusted by noncash charges of $16.1 million for goodwill impairment, $13.6 million for depreciation and the positive cash flow effect of a decrease in working capital.

 

Net cash provided by operating activities in 2013 was $20.1 million. This was primarily the result of our net loss, adjusted by noncash charges of $13.3 million for depreciation and $27.5 million for fixed asset impairment charges, partially offset by an overall increase in working capital at December 31, 2013 compared to December 31, 2012.

 

Net Cash (Used in) Provided by Investing Activities

 

Net cash provided by investing activities in 2015 was $3.1 million. Capital expenditures of $8.5 million in 2015 were primarily standard capital replacement. Offsetting the cash used for additions to property plant and equipment was $4.3 million provided by an escrow that was released to the Company in April 2015 related to the March 2014 disposition of the OCTG business and $7.2 million collected on a note receivable. Capital expenditures in 2016 are expected to be approximately $4 million to $5 million for standard capital replacement.

 

 

Net cash provided by investing activities in 2014 was $15.5 million, primarily due to net proceeds of $29.8 million received from the sale of substantially all of the assets and liabilities associated with the OCTG business, partially offset by capital expenditures of $14.3 million. Capital expenditures in 2014 included $2.5 million for the replacement of the existing front end of our 16 inch mill and $1.8 million for a new hydro tester at our Atchison plant. Net cash used for investing activities for discontinued operations in 2014 was not material.

 

Net cash used in investing activities in 2013 was $48.3 million, primarily related to capital expenditures of $28.4 million for previously disclosed strategic investment projects, $15.7 million for the acquisition of Permalok, and funds disbursed under a notes receivable arrangement of $5.7 million. Previously disclosed strategic investment 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 2013 included $7.1 million for the replacement of the existing front end of the 16 inch mill and $1.7 million for a new hydrotester at our Atchison plant, and $9.2 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) Provided by Financing Activities

 

Net cash used in financing activities in 2015 was $48.5 million, which resulted primarily from net repayments under our line of credit and capital lease payments totaling $47.8 million.

 

Net cash used in financing activities in 2014 was $50.6 million, which resulted primarily from net repayments under our Credit Agreement, long-term debt and capital lease payments totaling $49.9 million.

 

Net cash provided by financing activities in 2013 was $28.7 million, which resulted primarily from net borrowings of $40.4 million under our Credit Agreement, offset by long-term debt and capital lease payments of $11.0 million.

 

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under our Credit Agreement will be adequate to fund our working capital and capital expenditure requirements for at least the next twelve months. 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.

 

Borrowings on Line of Credit

 

On October 26, 2015, we entered into a Loan and Security Agreement (the “Credit Agreement”) with Bank of America, N.A. The Agreement expires on October 25, 2018 and provides for revolving loans and letters of credit up to the maximum principal amount (the Revolver Commitment) of $60 million, subject to a borrowing base. We have the ability to increase the Revolver Commitment to $100 million, subject to the provisions of the Credit Agreement. As of December 31, 2015, we had no outstanding borrowings, and $2.1 million of outstanding letters of credit.

 

The borrowing base is calculated by applying various advance rates to eligible accounts receivable, costs and expected earnings in excess of billings, inventories, and fixed assets, subject to various exclusions, adjustments, and sublimits by asset class. Additionally, the Agreement effectively limits availability under the borrowing base during times when our Fixed Charge Coverage Ratio, as defined in the Credit Agreement, is not met for the previous 12-month period. As of December 31, 2015, the Fixed Charge Coverage Ratio was not met, and therefore the availability limit applied. Including the effect of this limit, we had additional borrowing capacity of $23.2 million, net of outstanding letters of credit, under the Agreement at December 31, 2015. Based on our business plan and forecasts of operations, we expect to have sufficient credit availability to support our operations in 2016.

 

Borrowings under the Agreement bear interest at rates related to LIBOR plus 1.75% to 2.25%, or at Bank of America’s prime rate plus 0.75% to 1.25%. Borrowings under the Agreement are secured by substantially all of the Company’s assets.

 

In conjunction with entering into the Credit Agreement, the Company terminated the Second Amended and Restated Credit Agreement dated as of October 24, 2012. The Company incurred incremental interest expense of approximately $0.4 million during the fourth quarter of 2015 related to the write-off of unamortized financing costs associated with the terminated agreement.

 

 

Capital Lease Obligations

 

We had a total of $1.1 million in capital lease obligations outstanding at December 31, 2015. The weighted average interest rate on all of our capital leases was 4.87%. Our capital leases are for certain equipment used in the manufacturing process.

 

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

 

The following table sets forth our scheduled contractual commitments that will affect our future liquidity as of December 31, 2015 (in thousands):

 

						Payments due by period
		Total				Less than 1 year				1 - 3 years				3 - 5 years				More than 5 years
Capital leases		$	1,058			$	340			$	448			$	270			$	-
Operating leases			9,913				2,664				3,734				1,683				1,832
Contingent consideration			2,974				1,211				1,763				-				-
Interest payments (1)			92				41				41				10				-
Total obligations		$	14,037			$	4,256			$	5,986			$	1,963			$	1,832

 

1)	These amounts represent estimated future interest payments related to our capitalized leases.

2)

Excludes liabilities associated with our pension and our deferred compensation plan as we are unable to reasonably estimate the ultimate amount or timing of settlement of such obligations. As of December 31, 2015, liabilities associated with our pension and deferred compensation plan are $1.9 million and $6.4 million, respectively and are recorded in pension and other long-term liabilities within the consolidated balance sheets.

3)

Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2015, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore, approximately $4.9 million in uncertain tax positions has been excluded from the contractual table above. For further information, see Note 14 in Part II—Item 8, “Financial Statements and Supplementary Data” of the consolidated financial statements.

 

We also have entered into stand-by letters of credit that total approximately $2.1 million as of December 31, 2015. The stand-by letters of credit relate to workers’ compensation insurance. Based on the nature of these arrangements and our historical experience, we do not expect to make any material payments under these 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.

 

Adoption of New Accounting Pronouncements

 

The Company adopted ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” prospectively in the fourth quarter of 2015, and prior periods were not retrospectively adjusted. For further information about our adoption of new accounting pronouncements, see Note 1 in Part II – Item 8, “Financial Statements and Supplementary Data” of the consolidated financial statements.

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

The primary market risks affecting our business relate to our exposure to commodity risk, interest rate risk, and foreign currency exchange rate risk.

 

Commodity Risk

 

Certain materials we use in our business are classified as commodities traded in the worldwide markets, of which the most significant commodity is steel, used in the manufacturing of pipe. We do not hedge our commodity risk and do not enter into any transactions in commodities for trading purposes. The impact of volatility in steel prices to each of our operating segments varies significantly. This volatility can significantly affect our gross profit. Although we seek to recover increases in steel prices through price increases in our products, we have not always been successful.

 

Steel comprises approximately 25% to 35% of Water Transmission project costs. As steel represents a substantial portion of our cost of sales, we generally place orders for steel as soon as possible after a project is awarded. Most projects are awarded within thirty to ninety days of the bid date, and thus we are subject to some market fluctuations involving steel. In order to minimize our risk exposure to steel volatility, we typically submit bids based on general assumptions of the price of steel when we would receive a purchase order or contract. In addition, we typically order steel at the beginning of the project in order to minimize our exposure to fluctuations in steel prices.

 

 

By contrast, steel comprises approximately 85% to 90% of total product costs for Tubular Products. Historically, we have been able to adjust our selling prices to reflect fluctuations in our cost of steel; however, we are exposed to volatile steel prices in those instances in which we carry steel inventory that is not already assigned to sales orders. As a result of our decision to idle our Tubular Products facility, our steel inventories are significantly reduced from normal operating levels and our steel commodity price exposure at December 31, 2015 is not material.

 

Interest Rate Risk

 

At December 31, 2015, we had no debt outstanding accruing interest at a variable rate as compared to $45.6 million at December 31, 2014. Our capital leases bear fixed rates of interest. Assuming average interest rates and borrowings on variable rate debt, a hypothetical 1.0%, or 100 basis point, change in interest rates would not have a material impact on our interest expense in either year.

 

Foreign Currency Exchange Rate Risk

 

We transact business in various foreign countries, and, from time to time, settle our transactions in foreign currencies. We have 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 contracts are not used for trading or for speculative purposes. Foreign currency forward contracts are consistent with our strategy for financial risk management and have maturities generally less than one year. There were no derivative contracts not designated as hedges as of December 31, 2015 and 2014. The total notional amount of these derivative contracts at December 31, 2015 and 2014 was $6.3 million (CAD$8.7 million) and $1.3 million (CAD$1.5 million), respectively At December 31, 2015, all of the Company’s contracts had a remaining maturity of less than 12 months except one contract with a notional amount of $4.4 million (CAD$5.9 million) which had a remaining maturity of 15 months.

 

A hypothetical 10% change in the Canadian Dollar foreign currency exchange rate would not have a material impact on our reported 2015 or 2014 net sales from continuing operations.

 

Item 8.

Financial Statements and Supplementary Data

 

The consolidated financial statements required by this item are included on pages F-1 to F-33 at the end of this 2015 Form 10-K. The financial statement schedule required by this item is included on page S-1. The quarterly information required by this item is included under the caption Quarterly Data (unaudited) in Note 19 of the Notes to Consolidated Financial Statements in Part II—Item 8, “Financial Statements and Supplementary Data” of this 2015 Form 10-K.

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

 

Item 9A.

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 Securities Exchange Act of 1934, as amended (“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.

 

Our management, with the participation of the CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2015. Based on their evaluation, as of December 31, 2015, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective 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 CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed 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 (“GAAP”). Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an assessment of our internal control over financial reporting as of December 31, 2015. In making this assessment, we used the criteria set forth in “Internal Control-Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015.

 

 Remediation of Prior Material Weaknesses

 

As previously disclosed in our Form 10-Q for the quarter ended September 30, 2015, we have remediated the previously reported material weaknesses in our internal control over financial reporting related to accounting for goodwill.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

  

Item 9B.

Other Information

 

None. 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

Directors, Executive Officers, Promoters and Control Persons

 

The information required by Paragraph (a), and Paragraphs (c) through (g) of Item 401 of Regulation S-K (except for information required by Paragraph (e) of that Item to the extent the required information pertains to our executive officers) and Item 405 of Regulation S-K is hereby incorporated by reference from our definitive proxy statement for the 2016 Annual Meeting of Shareholders under the captions Election of Directors and Section 16(A) Beneficial Ownership Reporting Compliance.

 

 

Name		Age		Current Position with Company
Scott Montross		51		Director, President and Chief Executive Officer
Robin Gantt		44		Senior Vice President, Chief Financial Officer and Corporate Secretary
Martin Dana		50		Executive Vice President, Sales and Marketing
William Smith		60		Executive Vice President, Operations
Vicki Taylor		50		Vice President, Human Resources

  

Scott Montross has served as our Director, President and CEO since January 1, 2013. Mr. Montross joined the Company in May, 2011 and served as our Executive Vice President and Chief Operating Officer. Mr. Montross has served in Senior Vice President level positions since 2003 with commercial, operational, and planning responsibilities and has spent a total of 24 years in the steel industry prior to joining the Company. Mr. Montross previously served as the Executive Vice President of the Flat Products Group for Evraz Inc. NA's Oregon Steel Division from 2010 to 2011, as the Vice President and General Manager of Evraz, Inc. NA from 2007 to 2010, as the Vice President of Marketing and Sales for Oregon Steel Mills, Inc. from 2003 to 2006, and as the Vice President of Marketing and Sales for National Steel Corporation from 2002 to 2003.

 

Robin Gantt has served as our Senior Vice President and CFO since January 2011 and Corporate Secretary since June 2015, after joining the Company in July 2010. Ms. Gantt served as the CFO and Treasurer of Evraz Inc. NA from September 2007 through January 2010. From July 2005 through August 2007, Ms. Gantt served as Corporate Controller of Oregon Steel Mills, Inc., which became Evraz Inc. NA after its acquisition by Evraz Group SA in January 2007. Ms. Gantt joined Oregon Steel Mills, Inc. in 1999, holding several finance and accounting positions of increasing responsibility before being appointed to Controller in 2005.

 

Martin Dana has served as our Executive Vice President, Sales and Marketing since April 2014. Previous positions at the Company held by Mr. Dana include Executive Vice President, Tubular Products Group, Vice President of Operations for Tubular Products, Vice President of Sales and Marketing for the Water Transmission Group, and other management and Vice President level positions since joining the Company in 1999. Prior to joining the Company, Mr. Dana held positions at Oregon Steel Mills.

 

William Smith has served as our Executive Vice President, Operations since April 2014. Prior to that, Mr. Smith served as our Executive Vice President, Water Transmission Group, and as Vice President of Operations for Water Transmission. Prior to joining the Company in 2010, Mr. Smith spent 14 years with Ameron International Corporation, holding several key positions including President, Water Transmission. A 39-year veteran of the steel pipe business, Mr. Smith has held positions with United Concrete Pipe, Thompson Steel Pipe and LB Foster.

 

Vicki Taylor has served as our Vice President of Human Resources since November 2014. Prior to joining the Company in 2014, Ms. Taylor spent a year as an advocate for CASA, an organization dedicated to helping children, along with assisting other nonprofits with their human resource needs. Prior to that, Ms. Taylor served seven years as Vigor Industrial’s Senior Vice President of Human Resources. Vigor specializes in ship repair, marine fabrication, industrial coating and specialty machine construction and repair.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics for all employees and a Code of Ethics for Senior Financial Officers. Copies can be found on our website at www.nwpipe.com in the Corporate Governance area of the Investor Relations section or by writing to Northwest Pipe Company, attn. Corporate Secretary, 5721 SE Columbia Way, Suite 200, Vancouver, WA 98661. None of the material on our website is part of this 2015 Form 10-K. If there is any waiver from any provision of either the Code of Business Conduct and Ethics or the Code of Ethics for Senior Financial Officers, we will disclose the nature of such waiver on our website or in a Current Report on Form 8-K.

 

 

Corporate Governance

 

The information required by Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is hereby incorporated by reference from our definitive proxy statement for the 2016 Annual Meeting of Shareholders under the captions Nominating and Governance Committee; Nominations by Shareholders and Audit Committee.

 

Item 11.

Executive Compensation

 

The information required by this Item is hereby incorporated by reference from our definitive proxy statement for the 2016 Annual Meeting of Shareholders under the captions Executive Compensation, Compensation Committee Interlocks and Insider Participation, and Compensation Committee Report.

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table provides information as of December 31, 2015, with respect to the shares of our common stock that may be issued under our existing equity compensation plans.

 

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (1)				Weighted-average exercise price of outstanding options, warrants and rights (b) (2)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders			155,852			$	25.21				690,889
Equity compensation plans not approved by security holders (3)			-				-				-
Total			155,852			$	25.21				690,889

 

 

(1)

Consists of our 2007 Stock Incentive Plan and the 1995 Stock Option Plan for Nonemployee directors. Approximately 110,000 Performance Stock Awards (“PSAs”) have been included at a target level. The vesting of these awards is subject to the achievement of specific performance-based or market-based conditions, and the actual number of common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 200%.

(2)	The weighted-average exercise price set forth in this column is calculated excluding outstanding restricted stock units and PSAs, since recipients are not required to pay an exercise price to receive the shares subject to these awards.

(3)	We do not have any equity compensation plans or arrangements that have not been approved by shareholders.

 

The information required by Item 403 of Regulation S-K is included in our definitive proxy statement for the 2016 Annual Meeting of Shareholders under the caption Stock Owned by Management and Principal Shareholders and is incorporated herein by reference.  

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

The information required by this Item is hereby incorporated by reference from our definitive proxy statement for the 2016 Annual Meeting of Shareholders under the captions Certain Relationships and Related Transactions and Election of Directors.

 

Item 14.

Principal Accountant Fees and Services

 

The information required by this Item is hereby incorporated by reference from our definitive proxy statement for the 2016 Annual Meeting of Shareholders under the caption Independent Registered Public Accounting Firm.

 

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedule

 

(a) (1) Consolidated Financial Statements

 

The consolidated financial statements, together with the reports thereon of PricewaterhouseCoopers LLP are included on the pages indicated below.

 

	Page
Reports of Independent Registered Public Accounting Firm	F-1
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013	F-2
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 2013	F-3
Consolidated Balance Sheets as of December 31, 2015 and 2014	F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013	F-6
Notes to Consolidated Financial Statements	F-7

 

(a) (2) Financial Statement Schedule

 

The following schedule is filed herewith:

 

		Page
Schedule II	Valuation and Qualifying Accounts	S-1

 

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is included in the consolidated financial statements or notes thereto.

 

 

 

(a) (3) Exhibits included herein:

 

Exhibit Number			Description
2.1			Asset Purchase Agreement by and between Northwest Pipe Company and Centric Pipe, LLC, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 1, 2014.
3.1			Second Restated Articles of Incorporation, incorporated by reference to Exhibits to the Company’s Registration Statement on Form S-1, as amended, effective November 30, 1995, Commission Registration No. 33-97308 (“the S-1”)
3.2			First Amendment to Second Restated Articles of Incorporation, incorporated by reference to Exhibits to the Company’s Registration Statement on Form S-3, as amended, effective November 1, 2006, Commission Registration No. 333-137923 (“the S-3”)
3.3			Second Amended and Restated Bylaws, incorporated by reference to Exhibits to the S-1
3.4			First Amendment to Second Amended and Restated Bylaws of Northwest Pipe Company, incorporated by reference to Exhibits to the Company’s Report on Form 8-K as filed with the Securities and Exchange Commission on November 19, 2007
4.1			Amended and Restated Rights Agreement, dated as of June 18, 2009, between the Company and Mellon Investor Services LLC as Rights Agent, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 19, 2009
10.1			1995 Stock Option Plan for Nonemployee Directors, incorporated by reference to Exhibits to the S-1*
10.2			Northwest Pipe NQ Retirement Savings Plan, dated July 1, 1999, incorporated by reference to Exhibits to the Company’s Quarterly Report Form 10-Q for the quarter ended June 30, 2000, as filed with the Securities and Exchange Commission on August 11, 2000*
10.3			Amended and Restated Note Purchase and Private Shelf Agreement dated as of May 31, 2007 by and among Northwest Pipe Company, Prudential Investment Management, Prudential Retirement Insurance and Annuity Company and Prudential Insurance Company of America and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 6, 2007
10.4			Northwest Pipe Company 2007 Stock Incentive Plan, incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement dated April 20, 2007, as filed with the Securities and Exchange Commission on April 26, 2007*
10.5			First Amendment and Limited Waiver to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of October 14, 2008 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates (certain schedules to the Agreement have been omitted), incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 20, 2008
10.6			Third Amendment to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of February 12, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 19, 2010
10.7			Fourth Amendment to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of April 15, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 26, 2010
10.8			Fifth Amendment and Limited Consent to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of July 23, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on July 29, 2010
10.9			Sixth Amendment and Temporary Waiver to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of July 30, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on August 5, 2010

 

 

Exhibit Number			Description
10.10			Seventh Amendment and Limited Waiver to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of September 16, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 5, 2010
10.11			Eighth Amendment and Limited Waiver to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of October 15, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 27, 2010
10.12			Change in Control Agreement between Northwest Pipe Company and Robin Gantt dated as of April 21, 2011, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 25, 2011
10.13			Form of grant of restricted stock units by Northwest Pipe Company to certain Named Officers, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 12, 2011*
10.14			Form of grant of performance share units by Northwest Pipe Company to certain Named Officers, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 12, 2011*
10.15			Form of grant of restricted stock units by Northwest Pipe Company to certain Named Officers, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 20, 2012*
10.16			Form of grant of performance share units by Northwest Pipe Company to certain Named Officers, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 20, 2012*
10.17			Amended and Restated Credit Agreement dated October 24, 2012, by and among Northwest Pipe Company, Bank of America, N.A., US Bank National Association, Wells Fargo Bank, National Association and Bank of the West, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 29, 2012
10.18			Third Amended and Restated Intercreditor and Collateral Agency Agreement dated as of October 24, 2012 by and between Northwest Pipe Company, Bank of America, N.A., US Bank National Association, Wells Fargo Bank, National Association, Bank of the West, and Prudential Investment Management, Inc. and certain of its affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 29, 2012
10.19			Executive Employment Agreement dated December 19, 2012 between Northwest Pipe Company and Richard A. Roman, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on December 20, 2012*
10.20			Ninth Amendment to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of September 16, 2010 by and among Northwest Pipe Company and Prudential Investment Management, Inc. and certain affiliates, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on October 29, 2012
10.21			Form of grant of restricted stock units by Northwest Pipe Company to certain Named Officers, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 6, 2013*
10.22			Form of grant of performance share units by Northwest Pipe Company to certain Named Officers, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 6, 2013*

 

 

Exhibit Number				Description
	10.23			Change in Control Agreement between Northwest Pipe Company and William Smith dated as of October 15, 2013, incorporated by reference to Exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission concurrently on November 5, 2013*
	10.24			Change in Control Agreement between Northwest Pipe Company and Martin Dana dated as of October 15, 2013, incorporated by reference to Exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission concurrently on November 5, 2013*
	10.25			Northwest Pipe Company 2014 Short Term Incentive Plan, incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 17, 2014*
	10.26			Executive Employment Agreement between Northwest Pipe Company and Gary A. Stokes, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 4, 2014*
	10.27			Form of Restricted Stock Unit Agreement, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 4, 2014*
	10.28			Form of Performance Share Award Agreement, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 4, 2014*
	10.29			Change in Control Agreement between Northwest Pipe Company and Scott Montross dated as of May 29, 2014, incorporated by reference to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on June 4, 2014*
	10.30			Northwest Pipe Company 2015 Short Term Incentive Plan dated as of February 26, 2015, incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on March 16, 2015*
	10.31			Temporary Waiver Agreement (incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on October 13, 2015)
	10.32			Loan and Security Agreement (incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on October 29, 2015)
	21.1			Subsidiaries of the Registrant, filed herewith
	23.1			Consent of PricewaterhouseCoopers LLP, filed herewith
	31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
	31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith
	32.1			Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
	32.2			Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
	101.INS			XBRL Instance Document
	101.SCH			XBRL Taxonomy Extension Schema Document
	101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB			XBRL Taxonomy Extension Label Linkbase Document
	101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

---

*	This exhibit constitutes a management contract or compensatory plan or arrangement.

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Northwest Pipe Company

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Northwest Pipe Company and its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

Portland, Oregon

March 4, 2016

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

NORTHWEST PIPE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

  

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share and per share amounts)

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands)

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

  

 

 

 

 

.

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, on the 4^th day of March 2016.

 

	NORTHWEST PIPE COMPANY
	By	/S/  SCOTT MONTROSS
		Scott Montross
		Director, President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on the 4^th day of March 2016.

 

 

Signature		Title
/S/    RICHARD A. ROMAN		Director and Chairman of the Board
Richard A. Roman
/S/    SCOTT MONTROSS		Director, President and Chief Executive Officer
Scott Montross
/S/    ROBIN GANTT		Senior Vice President, Chief Financial Officer and Corporate
Robin Gantt		Secretary (Principal Financial Officer)
/S/    MICHELLE APPLEBAUM		Director
Michelle Applebaum
/S/    JAMES E. DECLUSIN		Director
James E. Declusin
/S/    HARRY L. DEMOREST		Director
Harry L. Demorest
/S/    KEITH R. LARSON		Director
Keith R. Larson