<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12005 N. BURGARD
PORTLAND, OREGON 97203
(Address of principal executive offices and zip code)
503-285-1400
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
COMMON STOCK, PAR VALUE $.01 PER SHARE 6,447,736
(Class) (Shares outstanding at October 30, 1998)
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NORTHWEST PIPE COMPANY
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 2
Consolidated Statements of Income - Three Months and Nine Months
Ended September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
1
<PAGE>
NORTHWEST PIPE COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,396 $ 904
Trade receivables, less allowance for doubtful accounts
of $1,465 and $1,825 39,184 25,162
Costs and estimated earnings in excess of billings on
uncompleted contracts 24,292 19,914
Inventories 49,679 20,530
Refundable income taxes -- 3,307
Deferred income taxes 447 447
Prepaid expenses and other 1,052 1,402
---------- ----------
Total current assets 116,050 71,666
Property and equipment, less accumulated depreciation
of $25,639 and $23,679 82,115 57,447
Restricted assets 2,300 2,300
Goodwill, net 20,164 --
Other assets 274 638
---------- ----------
$ 220,903 $ 132,051
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to financial institution $ 26,500 $ 7,000
Current portion of long-term debt 1,678 250
Current portion of capital lease obligations 2,048 2,175
Accounts payable 27,055 8,116
Accrued liabilities 6,562 3,074
---------- ----------
Total current liabilities 63,843 20,615
Long-term debt, less current portion 76,321 38,490
Capital lease obligations, less current portion -- 1,454
Minimum pension liability 294 294
Deferred income taxes 438 419
---------- ----------
Total liabilities 140,896 61,272
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued or outstanding -- --
Common stock, $.01 par value, 15,000,000 shares authorized,
6,445,591 and 6,411,402 shares issued and outstanding 64 64
Additional paid-in-capital 38,763 38,725
Retained earnings 41,467 32,277
Minimum pension liability (287) (287)
---------- ----------
Total stockholders' equity 80,007 70,779
---------- ----------
$ 220,903 $ 132,051
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
NORTHWEST PIPE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 59,268 $ 39,739 $ 151,518 $ 114,937
Cost of sales 47,071 31,236 121,819 90,787
-------- -------- -------- --------
Gross profit 12,197 8,503 29,699 24,150
Selling, general and administrative
expenses 3,898 2,905 11,391 8,771
-------- -------- -------- --------
Operating income 8,299 5,598 18,308 15,379
Interest expense 1,372 329 3,243 1,037
Interest expense to related parties -- 53 -- 165
-------- -------- -------- --------
Income before income taxes 6,927 5,216 15,065 14,177
Provision for income taxes 2,701 1,917 5,875 5,501
-------- -------- -------- --------
Net income $ 4,226 $ 3,299 $ 9,190 $ 8,676
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share $ .66 $ 0.51 $ 1.43 $ 1.35
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share $ .64 $ 0.50 $ 1.38 $ 1.31
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share
calculations:
Basic 6,442 6,406 6,431 6,404
-------- -------- -------- --------
-------- -------- -------- --------
Diluted 6,633 6,638 6,639 6,611
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
NORTHWEST PIPE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,190 $ 8,676
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,951 1,734
Decrease in accrued pension obligation -- (212)
Provision for doubtful accounts (540) 1,146
Gain from the sale of property and equipment (341) --
Changes in current assets and liabilities:
Trade receivables (9,228) (3,548)
Costs and estimated earnings in excess of billings on
uncompleted contracts (4,378) (9,411)
Inventories (18,580) (2,410)
Refundable income taxes 3,307 --
Prepaid expenses and other 459 (278)
Accounts payable 14,496 1,462
Accrued and other liabilities 2,329 (2,754)
------------ ------------
Net cash used in operating activities (335) (5,595)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (10,622) (11,895)
Proceeds from the sale of property and equipment 1,670 --
Acquisition, net of cash acquired (47,802) --
Other assets 364 (2,833)
------------ ------------
Net cash used in investing activities (56,390) (14,728)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 39 44
Proceeds under long-term debt 40,000 --
Payments on long-term debt (740) (1,638)
Net proceeds under note payable to financial institution 19,500 20,155
Payments on capital lease obligations (1,582) (368)
------------ ------------
Net cash provided by financing activities 57,217 18,193
------------ ------------
Net increase (decrease) in cash and cash equivalents 492 (2,130)
Cash and cash equivalents, beginning of period 904 4,302
------------ ------------
Cash and cash equivalents, end of period $ 1,396 $ 2,172
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,957 $ 1,038
Income taxes 2,845 4,576
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Tax benefit of nonqualified stock options exercised $ 74 $ 102
Acquisition:
Cost in excess of fair value of net assets acquired $ 20,463 $ --
Fair value of assets acquired 32,940 --
Fair value of liabilities assumed 5,601 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
NORTHWEST PIPE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amount)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements as of and for the three month
and nine month periods ended September 30, 1998 and 1997 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1997 is derived from the audited financial
statements presented in the Northwest Pipe Company (the "Company") Annual Report
on Form 10-K for the year ended December 31, 1997. Certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial statements
include all adjustments necessary (which are of a normal and recurring nature)
for the fair presentation of the results of the interim periods presented. The
accompanying financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997, as
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Operating results for the three months and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 1998, or any portion thereof.
On January 1, 1998, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes requirements for
disclosure of comprehensive income. The objective of SFAS 130 is to report a
measure of all changes in equity that result from transactions and economic
events other than transactions with owners. Comprehensive income is the total of
net income and all other non-owner changes in equity. Comprehensive income did
not differ from reported net income in the periods presented.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Finished goods are stated
at standard cost which approximates the first-in, first-out method of
accounting. Inventories of steel coil are stated at cost on a specific
identification basis. Inventories of coating and lining materials, as well as
materials and supplies, are stated on an average cost basis.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Finished goods $ 11,590 $ 5,854
Raw materials 36,222 12,809
Materials and supplies 1,867 1,867
-------------- -------------
$ 49,679 $ 20,530
-------------- -------------
-------------- -------------
</TABLE>
3. EARNINGS PER SHARE
In December 1997, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which supersedes APB Opinion No. 15 and specifies the computation,
presentation and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock.
5
<PAGE>
Under SFAS 128, basic earnings per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed using the weighted average number of shares of common
stock and dilutive common equivalent shares outstanding during the period.
Incremental shares of 191,456 and 232,056 for the quarters ended September 30,
1998 and 1997, respectively, and 207,910 and 207,304 for the nine months ended
September 30, 1998 and 1997, respectively, were used in the calculations of
diluted earnings per share.
4. ACQUISITIONS
On March 6, 1998, the Company acquired all of the outstanding capital stock of
Southwestern Pipe, Inc. ("Southwestern") and P&H Tube Corporation ("P&H"), both
Texas corporations. The Company paid a purchase price of $40.1 million. The
excess of the acquisition cost over the fair value of the net assets acquired of
approximately $20.5 million, is being amortized over 40 years using the
straight-line method.
The principal business of both Southwestern and P&H is the manufacture and sale
of structural and mechanical tubing products. Southwestern owns and operates a
manufacturing facility in Houston, Texas. P&H owns and operates a manufacturing
facility in Bossier City, Louisiana. The Company will continue to operate the
acquired plants, equipment and other property for the same purpose, and will
operate each of the companies as separate wholly owned subsidiaries of the
Company.
The accompanying consolidated financial statements include the results of
operations of P&H and Southwestern from the date of acquisition. The
acquisitions were accounted for using the purchase method of accounting.
The following unaudited pro forma information represents the results of
operations of the Company as if the acquisitions had occurred at the beginning
the period presented. Southwestern and P&H became separate operating companies
on May 1, 1997.
<TABLE>
<CAPTION>
(Unaudited)
For the Nine Months Ended
September 30, 1998
---------------------------
<S> <C>
Net sales $ 156,627
Net income 9,418
Diluted earnings per share 1.42
</TABLE>
The unaudited pro forma information does not purport to be indicative of the
results which would actually have been obtained had the acquisitions occurred at
the beginning of the period indicated or which may be obtained in the future.
On June 9, 1998, the Company acquired from L.B. Foster Company, the plant,
equipment, leasehold and contract rights and miscellaneous assets of its
Fosterweld Division manufacturing facility located in Parkersburg, West Virginia
(the "Parkersburg Facility"). The Company paid $5.3 million for the Parkersburg
Facility. The Company also acquired the Parkersburg Facility's inventory net of
assumed accounts payable.
The Parkersburg Facility was employed in the manufacture of large diameter, high
pressure steel pipe products used primarily for water transmission. The Company
will continue to operate the Parkersburg Facility for the same purpose. The
accompanying consolidated financial statements include the results of operations
of the Parkersburg Facility from the date of acquisition.
6
<PAGE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative instrument's fair
value be recognized currently in results of operations unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company's management has studied the
implications of SFAS No. 133 and based on the initial evaluation, expects the
adoption to have no impact on the Company's financial condition or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Report contain forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995 that are
based on current expectations, estimates and projections about the Company's
business and management's beliefs and assumptions. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" 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 certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors, including, but not limited to those
discussed in this discussion and analysis of financial condition and results of
operations, as well as those discussed elsewhere in this Report and from time to
time in the Company's other Securities and Exchange Commission filings and
reports. In addition, such statements could be affected by general industry and
market conditions and growth rates, and general domestic and international
economic conditions. Such forward-looking statements speak only as of the date
on which they are made and the Company does not undertake any obligation to
update any forward-looking statement to reflect events or circumstances after
the date of this Report. If the Company does update or correct one or more
forward-looking statements, investors and others should not conclude that the
Company will make additional updates or corrections with respect thereto or with
respect to other forward-looking statements.
The Company's net sales and net income may fluctuate significantly from quarter
to quarter due to the size of certain Water Transmission orders, the schedule
for deliveries of those orders and the inventory management policies of certain
of the Company's Tubular Products customers. The Company has experienced such
fluctuations in the past and may experience such fluctuations in the future.
Results of operations in any period should not be considered indicative of the
results to be expected for any future period, and fluctuations in operating
results may also result in fluctuations in the price of the Company's common
stock. The Company's business is subject to cyclical fluctuations based on
general economic conditions and the economic conditions of the specific
industries served. Future economic downturns could have a material adverse
effect on the Company's business, financial condition and results of operations.
7
<PAGE>
RESULTS OF OPERATIONS
The following table compares for the periods indicated, certain financial
information regarding costs and expenses expressed as a percentage of total net
sales and net sales of the Company's segments.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales
Water transmission 61.1 % 66.0 % 56.7 % 64.8 %
Tubular products 38.9 34.0 43.3 35.2
------- ------- ------- -------
Total net sales 100.0 100.0 100.0 100.0
Cost of sales 79.4 78.6 80.4 79.0
------- ------- ------- -------
Gross profit 20.6 21.4 19.6 21.0
Selling, general and administrative
expenses 6.6 7.3 7.5 7.6
------- ------- ------- -------
Operating income 14.0 14.1 12.1 13.4
Interest expense 2.3 1.0 2.1 1.1
------- ------- ------- -------
Income before income taxes 11.7 13.1 10.0 12.3
Provision for income taxes 4.6 4.8 3.9 4.8
------- ------- ------- -------
Net income 7.1 % 8.3 % 6.1 % 7.5 %
------- ------- ------- -------
------- ------- ------- -------
Gross profit as a percentage
of segment net sales:
Water transmission 25.9 % 24.2 % 22.7 % 23.4 %
Tubular products 12.2 16.0 15.5 16.6
</TABLE>
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THIRD QUARTER
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
SALES. Net sales increased 49.1% to $59.3 million in the third quarter of 1998,
from $39.7 million in the third quarter of 1997, and increased 31.8% to $151.5
million in the first nine months of 1998, from $114.9 million in the first nine
months of 1997.
Water Transmission sales increased 38.2% to $36.2 million in the third quarter
of 1998 from $26.2 million in the third quarter of 1997, and increased 15.5% to
$86.0 million in the first nine months of 1998 from $74.4 million in the first
nine months of 1997. The sales increases resulted primarily from higher
production brought about by improved market conditions in 1998 and increased
sales from the Parkersburg Facility which was acquired in June 1998.
Tubular Products sales increased 70.4% to $23.1 million in the third quarter of
1998 from $13.5 million in the third quarter of 1997 and increased 61.8% to
$65.5 million in the first nine months of 1998 from $40.5 million in the first
nine months of 1997. The increases were primarily the result of sales
attributable to P&H and Southwestern, which were acquired in March 1998, and
increased demand in certain product lines.
No single customer accounted for 10% or more of total net sales in the first
nine months of 1998 or 1997.
GROSS PROFIT. Gross profit increased 43.4% to $12.2 million (20.6% of total net
sales) in the third quarter of 1998 from $8.5 million (21.4% of total net sales)
in the third quarter of 1997 and increased 23.0% to $29.7 million (19.6% of
total net sales) in the first nine months of 1998 from $24.2 million (21.0% of
total net sales) in the first nine months of 1997.
8
<PAGE>
Water Transmission gross profit increased 47.9% to $9.4 million (25.9% of
segment net sales) in the third quarter of 1998 from $6.3 million (24.2% of
segment net sales) in the third quarter of 1997 and increased 12.2% to $19.5
million (22.7% of segment net sales) in the first nine months of 1998 from $17.4
million (23.4% of segment net sales) in the first nine months of 1997. Water
Transmission gross profit, both in dollars and as a percentage of segment net
sales, improved in the third quarter of 1998 compared to the third quarter of
1997, as a result of increased demand and production brought about by improved
market conditions. Water Transmission gross profit as a percentage of segment
net sales decreased in the first nine months of 1998 compared to the first nine
months of 1997, due to lower bidding activity, unfavorable pricing pressures and
weather related and other delays in shipping which primarily affected the first
six months of 1998. Based on the Company's backlog and expected market activity,
the Company expects improved performance in the Water Transmission Group to
continue through the end of 1998, but does expect gross profit as a percentage
of segment net sales to decline from the 25.9% realized in the third quarter of
1998.
Gross profit from Tubular Products increased 30.3% to $2.8 million (12.2% of
segment net sales) in the third quarter of 1998 from $2.2 million (16.0% of
segment net sales) in the third quarter of 1997 and increased 51.0% to $10.2
million (15.5% of segment net sales) in the first nine months of 1998 from $6.7
million (16.6% of segment net sales) in the first nine months of 1997. During
the third quarter of 1998, the Company continued to experience pricing pressures
in its tubular products markets which it believes is the result of increased
foreign price competition. This increased foreign price competition, and to a
lesser degree, an unfavorable product mix resulted in a decrease in Tubular
Products gross profit as a percentage of net sales in the third quarter of 1998,
and consequently the first nine months of 1998. The Company expects pricing
pressures resulting from foreign price competition to continue to effect Tubular
Products gross profit into 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 34.2% to $3.9 million (6.6% of total net
sales) in the third quarter of 1998 from $2.9 million (7.3% of total net sales)
in the third quarter of 1997 and increased 29.9% to $11.4 million (7.5% of total
net sales) in the first nine months of 1998 from $8.8 million (7.6% of total net
sales) in the first nine months of 1997. The increases were primarily the result
of additional operating costs related to the acquisitions completed in March and
June 1998.
INTEREST EXPENSE. Interest expense increased 259.2% to $1.4 million in the third
quarter of 1998 from $382,000 in the third quarter of 1997 and increased 169.8%
to $3.2 million in the first nine months of 1998 from $1.2 million in the first
nine months of 1997. The increases in interest expense resulted from increased
borrowings used to finance the acquisitions made in March and June 1998, and to
support higher production and sales levels.
INCOME TAXES. The provision for income taxes was $5.9 million in the first nine
months of 1998, based on an expected tax rate of approximately 39.0%.
LIQUIDITY AND CAPITAL RESOURCES
The company finances operations with internally generated funds and available
borrowings. At September 30, 1998, the Company had cash and cash equivalents of
$1.4 million.
Net cash used in operating activities in the first nine months of 1998 was
$335,000. This was primarily a net result of $9.2 million of net income adjusted
for depreciation and amortization, an increase in accounts payable of $14.5
million, and a decrease in refundable income taxes of $3.3 million; offset by
increases in costs and estimated earnings in excess of billings on uncompleted
contracts, trade receivables and inventories of $4.4 million, $9.2 million and
$18.6 million, respectively. The increases in accounts payable and inventories
were attributable to the timing and volume of steel purchases and payments, and
an increase in raw materials inventory resulting from purchases of imported
steel which necessitate a greater amount of time between the order date and the
anticipated date of receipt. The increases in trade receivables and in costs
and estimated
9
<PAGE>
earnings in excess of billings on uncompleted contracts primarily resulted from
increased production levels related to the acquisitions made in 1998 as well as
improved market conditions.
Net cash used in investing activities in the first nine months of 1998 was $56.4
million, which primarily resulted from expenditures related to the acquisitions
of Southwestern and P&H in March 1998 and the Parkersburg Facility in June 1998,
as well as expenditures related to the new tubular products mill installed in
the Company's Portland, Oregon facility, offset by the September 1998 sale of
the Princeton, Kentucky manufacturing facility which the Company acquired in May
1996 as part of its acquisition of Thompson Pipe and Steel Company.
Net cash provided by financing activities was $57.2 million in the first nine
months of 1998, which primarily resulted from $19.5 million in borrowings under
the Company's line of credit agreement and $40.0 million of proceeds received
from the sale of the Company's Series A and Series B Senior Notes in April 1998,
offset by the repayment of the capital lease obligations and long-term debt
associated with the Princeton, Kentucky manufacturing facility which was sold in
September 1998.
The Company had the following significant components of debt at September 30,
1998: a credit agreement under which $26.5 million was outstanding; $35.0
million of Senior Notes, without collateral, which bear interest at 6.87%; $10.0
million of Series A Senior Notes, without collateral, which bear interest at
6.63%; $30.0 million of Series B Senior Notes, without collateral, which bear
interest at 6.91%; Industrial Development Bonds in the aggregate amount of $3.0
million with variable interest rate of 3.14%; and capital leases aggregating
$2.0 million bearing interest at rates ranging from 8.0% to 11.25%.
The credit agreement expires on October 20, 2000 and is without collateral. It
bears interest at rates related to IBOR or LIBOR plus 0.65% to 1.50% (1.50% at
September 30, 1998, resulting in interest of 6.84%), or at prime less 0.5%
(7.75% at September 30, 1998). At September 30, 1998, the Company had $26.5
million outstanding under the line of credit with $26.0 million bearing interest
at a weighted average IBOR interest rate of 7.05%, and additional borrowing
capacity under the line of credit of $13.5 million. In June 1998, the Company
amended its line of credit agreement to increase the amount available under the
line of credit to $40.0 million from $30.0 million. Additionally, at that time,
the restriction associated with the ratio of maximum funded debt to earnings
before interest, taxes, depreciation and amortization ("EBITDA") was adjusted
from 3.25:1.0 to 3.75:1.0 until December 31, 1998.
In April 1998, the Company issued $40.0 million of senior notes, without
collateral. The notes were issued in two series: Series A Senior Notes for $10.0
million bearing interest at 6.63%, which mature on April 1, 2005, with
semi-annual interest payments due in April and October, and equal principal
payments commencing on April 1, 1999; and Series B Senior Notes for $30.0
million bearing interest at 6.91%, which mature on April 1, 2008, with
semi-annual interest payments due in April and October, and equal principal
payments commencing on April 1, 2002.
The Company also has $35.0 million of 6.87% Senior Notes outstanding, without
collateral, which mature on November 15, 2007, and require semi-annual interest
payments in November and May, and equal annual principal payments commencing on
November 15, 2001 and continuing every year thereafter until final maturity.
The Company's working capital requirements have increased due to an increase in
the Company's Water Transmission business, which is characterized by lengthy
production periods and extended payment cycles, an increase in Tubular Products
sales, and an increase in the purchase of imported steel, which has a longer
lead time between the order date and anticipated date of receipt. The Company
anticipates that its existing cash and cash equivalents, cash flows expected to
be generated by operations and amounts available under its line of credit will
be adequate to fund its working capital and capital requirements for at least
the next twelve months.
To the extent necessary, the Company may also satisfy capital requirements
through additional bank borrowings, senior notes and capital leases if such
resources are available on satisfactory terms. The Company
10
<PAGE>
has from time to time evaluated and continues to evaluate opportunities for
acquisitions and expansion. Any such transactions, if consummated, may use a
portion of the Company's working capital or necessitate additional bank
borrowings.
ACQUISITIONS AND GOODWILL. In March 1998, the Company acquired all of the
outstanding capital stock of Southwestern and P&H, both Texas corporations. The
Company paid a purchase price of $40.1 million in cash. The excess of the
acquisition cost over the fair value of the net assets acquired, of $20.5
million, is being amortized over 40 years, using the straight-line method. (SEE
NOTE 4 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
On June 9, 1998, the Company acquired from L.B. Foster Company, the plant,
equipment, leasehold and contract rights and miscellaneous assets of its
Fosterweld Division manufacturing facility located in Parkersburg, West Virginia
(the "Parkersburg Facility"). The Company paid $5.3 million for the Parkersburg
Facility. The Company also acquired the Parkersburg Facility's inventory net of
assumed accounts payable. (SEE NOTE 4 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.)
YEAR 2000 ISSUE. Like most other companies, the Year 2000 computer issue creates
risks for the Company. The Year 2000 issue exists because many computer
programs use two digit rather than four digit date fields to define the
applicable year. As a result, computer equipment and software and devices with
imbedded technology that are time-sensitive may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, production delays, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. Incomplete or
untimely resolution of the Year 2000 issue by the Company or critically
important suppliers or customers of the Company could have a materially adverse
effect on the Company's business, financial condition or results of operations.
The Company has undertaken various initiatives intended to ensure that its
computer systems and software will function properly with respect to dates in
the Year 2000 and thereafter. For this purpose, the term "computer systems and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including enterprise software, operating systems,
networking components, application and data servers, PC hardware, accounting,
data processing and other information systems, as well as systems that are not
commonly thought of as IT systems, such as telephone systems, fax machines,
manufacturing equipment and other miscellaneous systems and equipment. Both IT
and non-IT systems may contain imbedded technology, which complicates the
Company's Year 2000 assessment, remediation and testing efforts.
Based upon its assessment efforts to date, the Company believes that certain of
the computer systems and software it currently uses will require replacement or
modification. Specifically, the Company has determined that certain components
of its telephone systems will require replacement and that software upgrades
will be required with respect to certain of its IT systems. The Company
currently anticipates that its internal Year 2000 assessment initiatives will be
completed by the end of the first quarter of 1999. The Company estimates that as
of September 30, 1998, it had completed approximately 30% of the assessment,
remediation and testing initiatives that it believes will be necessary to fully
address potential Year 2000 issues relating to its computer systems and
software. The projects comprising the remaining 70% of the initiatives are
expected to be completed by the end of the first quarter of 1999.
The Company is working with critical suppliers of products and services to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant or to monitor their progress toward Year 2000
compliance. The Company has received verbal responses from approximately 60% of
the suppliers contacted to date, most of which have indicated that their
products and operations are Year 2000 compliant. The Company intends to pursue
the receipt of written certification of Year 2000 compliance from all critical
suppliers. In the event that suppliers are not Year 2000 compliant, the Company
will seek alternative sources of supply. It is expected that the Company's
assessment of critical suppliers' Year 2000 compliance will be completed by the
end of the first quarter of 1999.
11
<PAGE>
The Company currently estimates that the cost of its Year 2000 assessment,
remediation and testing efforts, as well as current anticipated costs to be
incurred by the Company with respect to Year 2000 issues of third parties, will
not exceed $200,000, which expenditures will be funded from operating cash
flows. This estimate is subject to change as additional information is obtained
in connection with the Company's assessment of the Year 2000 issue. As of
September 30, 1998, the Company had incurred costs of approximately $20,000
related to its Year 2000 assessment, remediation and testing efforts. In
addition, the Company has determined that it must replace certain telephone
system components with an estimated replacement cost of $150,000 as a result of
the Year 2000 issue. No other material capital equipment replacements related to
the Year 2000 issue have been identified to date.
The Company presently believes that Year 2000 issues will not pose significant
problems for the Company. However, if all Year 2000 issues are not properly
identified, or assessment, remediation and testing are not effected timely with
respect to Year 2000 problems that are identified, there can be no assurance
that the Year 2000 issue will not have a material adverse impact on the
Company's business, financial condition or results of operations, or adversely
affect the Company's relationships with customers, vendors or others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities, such as one or more of the Company's critical customers or suppliers,
will not have a material adverse impact on the Company's systems or its
business, financial condition or results of operations. Finally, if there are
infrastructure failures, such as disruptions in the supply of electricity, water
or communications services, or major institutions, such as the government,
foreign or domestic banking systems are unable to continue to provide their
services or support resulting in a disruption in services or support to the
Company, the Company may be unable to operate for the duration of the
disruption.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by December 31, 1999.
The costs of the Company's Year 2000 assessment, remediation and testing efforts
and the dates on which the Company believes it will complete such efforts are
forward-looking statements that are based upon management's best estimates,
which were derived using numerous assumptions regarding future events, including
the continued availability of certain resources, third party remediation plans
and certifications, and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant computer codes and embedded technology, the
reliability of third party assessments and certifications, and similar
uncertainties.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes in the
derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company's
management has studied the implications of SFAS 133 and based on the initial
evaluation, expects the adoption to have no impact on the Company's financial
condition or results of operations.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Substantially all of the Company's liquid investments are at fixed interest
rates, and therefore the fair value of these investments is affected by changes
in market interest rates. However, substantially all of the Company's liquid
investments mature within one year. As a result, the Company believes that the
market risk arising from its holdings of financial instruments is minimal.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the third quarter of 1998, the Company sold securities without
registration under the Securities Act of 1933, as amended (the "Securities Act")
upon the exercise of certain stock options granted under the Company's stock
option plans. An aggregate of 9,195 shares of Common Stock were issued at
exercise price of $1.00. These transactions were effected in reliance upon the
exemption from registration under the Securities Act provided by Rule 701
promulgated by the Securities and Exchange Commission pursuant to authority
granted under Section 3(b) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit No.
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K/A, Amendment No. 2, was filed with the Securities
and Exchange Commission on August 24, 1998 disclosing, under Item 7, financial
statements related to the acquisitions of Southwestern Pipe, Inc. and P&H Tube
Corporation. Combined financial statements (as restated) for Southwestern Pipe,
Inc. and P&H Tube Corporation as of September 30, 1997 and for the period from
May 1, 1997 to September 30, 1997, and pro forma consolidated financial
statements for Northwest Pipe Company and Subsidiaries were filed as part of
this report.
No other reports on Form 8-K were filed during the quarter ended September 30,
1998.
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 4, 1998
NORTHWEST PIPE COMPANY
By: /s/ WILLIAM R. TAGMYER
----------------------
William R. Tagmyer
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ JOHN D. MURAKAMI
--------------------
John D. Murakami
Vice President, Chief Financial Officer,
(Principal Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements found in the Company's Form 10-Q for the nine
month period ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,396
<SECURITIES> 0
<RECEIVABLES> 40,649
<ALLOWANCES> 1,465
<INVENTORY> 49,679
<CURRENT-ASSETS> 116,050
<PP&E> 107,754
<DEPRECIATION> 25,639
<TOTAL-ASSETS> 220,903
<CURRENT-LIABILITIES> 63,843
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 79,943
<TOTAL-LIABILITY-AND-EQUITY> 220,903
<SALES> 151,518
<TOTAL-REVENUES> 151,518
<CGS> 121,819
<TOTAL-COSTS> 121,819
<OTHER-EXPENSES> 11,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,243
<INCOME-PRETAX> 15,065
<INCOME-TAX> 5,875
<INCOME-CONTINUING> 9,190
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,190
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.38
</TABLE>
