NORTHWEST PIPE CO, 10-Q, 2000-05-04

NORTHWEST PIPE CO
10-Q, 2000-05-04
STEEL PIPE & TUBES

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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: March 31, 2000

/ /	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.)

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		6,467,417
(Class)		(Shares outstanding at May 1, 2000)

NORTHWEST PIPE COMPANY

FORM 10-Q

INDEX

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets—March 31, 2000 and December 31, 1999	2
	Consolidated Statements of Income—Three Months Ended March 31, 2000 and 1999	3
	Consolidated Statements of Cash Flows—Three Months Ended March 31, 2000 and 1999	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	10
PART II—OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	11

NORTHWEST PIPE COMPANY

CONSOLIDATED BALANCE SHEETS

(In thousands except share and per share amounts)

	March 31, 2000		December 31, 1999
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	496	$	969
Trade receivables, less allowance for doubtful accounts of $1,027 and $1,896		55,095		47,934
Costs and estimated earnings in excess of billings on uncompleted contracts		21,960		22,389
Inventories		58,999		44,362
Refundable income taxes		2,244		2,244
Deferred income taxes		1,502		1,502
Prepaid expenses and other		1,843		2,222

Total current assets		142,139		121,622
Property and equipment, less accumulated depreciation and amortization of $32,060 and $30,389		100,656		101,240
Goodwill, net		22,482		22,637
Restricted assets		2,300		2,300
Other assets		464		472

	$	268,041	$	248,271

Liabilities and Stockholders' Equity
Current liabilities:
Note payable to financial institution	$	43,800	$	40,000
Current portion of long-term debt		2,124		2,124
Current portion of capital lease obligations		484		484
Accounts payable		27,162		17,558
Accrued liabilities		9,093		4,978

Total current liabilities		82,663		65,144
Long-term debt, less current portion		75,088		75,088
Capital lease obligations, less current portion		1,786		1,896
Deferred income taxes		8,974		8,974

Total liabilities		168,511		151,102
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, 6,459,930 shares issued and outstanding		64		64
Additional paid-in-capital		38,962		38,962
Retained earnings		60,504		58,143

Total stockholders' equity		99,530		97,169

	$	268,041	$	248,271

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

NORTHWEST PIPE COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2000		1999
Net sales	$	63,991	$	57,531
Cost of sales		52,523		46,517

Gross profit		11,468		11,014
Selling, general and administrative expense		5,296		4,542

Income from operations		6,172		6,472
Interest expense, net		2,237		2,030

Income before income taxes		3,935		4,442
Provision for income taxes		1,574		1,799

Net income	$	2,361	$	2,643

Basic earnings per share	$	0.37	$	0.41

Diluted earnings per share	$	0.36	$	0.40

Shares used in per share calculations:
Basic		6,460		6,443

Diluted		6,608		6,602

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

NORTHWEST PIPE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2000			1999
Cash Flows From Operating Activities:
Net income	$	2,361		$	2,643
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,825			1,152
Allowance for doubtful accounts		(869	)		48
Gain on sales of property and equipment		(483	)		—
Changes in current assets and liabilities:
Trade receivables		(6,291	)		(6,905	)
Costs and estimated earnings in excess of billings on uncompleted contracts		429			2,622
Inventories		(14,637	)		2,062
Prepaid expenses and other		379			283
Accounts payable		9,604			(5,042	)
Accrued and other liabilities		4,115			3,593

Net cash (used in) provided by operating activities		(3,567	)		456
Cash Flows From Investing Activities:
Additions to property and equipment		(1,142	)		(2,330	)
Proceeds from sale of property and equipment		539			—
Other assets		7			69

Net cash used in investing activities		(596	)		(2,261	)
Cash Flows From Financing Activities:
Proceeds from the sale of common stock, net		—			8
Net proceeds under notes payable		3,800			5,100
Payments on capital lease obligations		(110	)		(2,000	)

Net cash provided by financing activities		3,690			3,108

Net (decrease) increase in cash and cash equivalents		(473	)		1,303
Cash and cash equivalents, beginning of period		969			524

Cash and cash equivalents, end of period	$	496		$	1,827

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	844		$	685
Income taxes		40			—

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

NORTHWEST PIPE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

1. Basis of Presentation

The accompanying unaudited financial statements as of and for the three month periods ended March 31, 2000 and 1999 have been prepared in conformity with generally accepted accounting principles. The financial information as of December 31, 1999 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, 1999. 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, 1999, as presented in the Company's Annual Report on Form 10-K for the year then ended.

Operating results for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2000 or any portion thereof.

2. Earnings per Share

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 147,976 and 158,868 for the three months ended March 31, 2000 and 1999, respectively, were used in the calculations of diluted earnings per share. Options to purchase 439,277 shares of common stock at prices of $14.563 to $22.875 per share were outstanding at March 31, 2000, but were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price of the underlying common stock.

3. 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. Raw material inventories of steel coil are stated at cost on a specific identification basis. Raw material inventories of coating and lining materials, as well as materials and supplies, are stated on an average cost basis.

	March 31, 2000		December 31, 1999
Finished goods	$	27,599	$	18,107
Raw materials		29,301		24,156
Materials and supplies		2,099		2,099

	$	58,999	$	44,362

4. Segment Information

The Company has adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of and Enterprise and Related Information" which requires disclosure of financial and descriptive information about the Company's reportable operating segments. The operating segments reported below are based on the nature of the products sold by the Company and are the segments of the Company for which separate financial information is available and for which operating results are regularly evaluated by executive management to make decisions about resources to be allocated to the segment and assess its performance. Management evaluates segment performance based on segment gross profit. There were no material transfers between segments in the periods presented.

	Three months ended March 31,
	2000		1999
Net Sales:
Water Transmission	$	31,498	$	35,706
Tubular Products		32,493		21,825

Total	$	63,991	$	57,531

Gross Profit:
Water Transmission	$	5,753	$	8,149
Tubular Products		5,715		2,865

Total	$	11,468	$	11,014

No single customer accounted for 10% or more of total net sales in the first quarter of 2000 or 1999.

5. Acquisition

In June 1999, the Company acquired all of the outstanding common stock of North American Pipe, Inc. ("North American") of Saginaw, Texas. North American operates two facilities which produce custom fabricated piping assemblies. The purchase price of $4.5 million was allocated to the underlying assets and liabilities, including certain debt, of North American.

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, growth rates, bidding activity, project delays, 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, the delays in Water Transmission projects the Company has been awarded or postponements in bidding activity and awarding of new Water Transmission projects 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.

Overview

The Company's Water Transmission products are manufactured in its Portland, Oregon; Denver, Colorado; Adelanto and Riverside, California; Parkersburg, West Virginia; and Saginaw, Texas facilities. Tubular Products are manufactured in the Company's Portland, Oregon; Atchison, Kansas; Houston, Texas; Bossier City, Louisiana; and Monterrey, Mexico facilities.

The Company believes that the Tubular Products business, in conjunction with the Water Transmission business, provides a significant degree of market diversification, because the principal factors affecting demand for water transmission products are different from those affecting demand for tubular products. Demand for water transmission products is generally based on population growth and movement, changing water sources and replacement of aging infrastructure. Demand can vary dramatically within the Company's market area since each population center determines its own waterworks requirements. Demand for tubular products is influenced by construction, the energy market, the agricultural economy and general economic conditions.

Results of Operations

The following table sets forth, 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 business segments.

	Three months ended March 31,
	2000		1999
Net sales
Water Transmission	49.2	%	62.1	%
Tubular Products	50.8		37.9

Total net sales	100.0		100.0
Cost of sales	82.1		80.9

Gross profit	17.9		19.1
Selling, general and administrative expense	8.3		7.9

Income from operations	9.6		11.2
Interest expense, net	3.5		3.5

Income before income taxes	6.1		7.7
Provision for income taxes	2.4		3.1

Net income	3.7	%	4.6	%

Gross profit as a percentage of segment net sales:
Water Transmission	18.3	%	22.8	%
Tubular Products	17.6		13.1

First Quarter 2000 Compared to First Quarter 1999

Sales. Net sales increased 11.2% to $64.0 million in the first quarter of 2000, from $57.5 million in the first quarter of 1999.

Water Transmission sales decreased 11.8% to $31.5 million in the first quarter of 2000 from $35.7 million in the first quarter of 1999. Water Transmission sales in the first quarter of 2000 continued to be negatively impacted by delays in projects the Company had already been awarded, and postponements in bidding activity and awarding of new projects. Bidding activity did begin to improve during the first quarter of 2000. However, sales in the remainder of 2000 will be dependent on a reduction of the delays in projects the Company has been awarded and continued strong bidding activity in the water transmission market.

Tubular Products sales increased 48.9% to $32.5 million in the first quarter of 2000 from $21.8 million in the first quarter of 1999. The increases were primarily the result of strong demand in certain product lines and price increases implemented in the fourth quarter of 1999 to offset increases in the price of steel purchased by the Company.

Gross Profit. Gross profit increased 4.1% to $11.5 million (17.9% of total net sales) in the first quarter of 2000 from $11.0 million (19.1% of total net sales) in the first quarter of 1999.

Water Transmission gross profit decreased 29.4% to $5.8 million (18.3% of segment net sales) in the first quarter of 2000 from $8.1 million (22.8% of segment net sales) in the first quarter of 1999. Water Transmission gross profit in the first quarter of 2000 was negatively impacted by delays in projects the Company had already been awarded, and postponements in bidding activity and awarding of new projects. As a result, the Company was unable to effectively utilize its available manufacturing capacity in the first quarter of 2000, which reduced gross profit. Gross profit in the remainder of 2000 will be dependent on a

reduction of the delays in projects the Company has been awarded and continued strong bidding activity in the water transmission market.

Tubular Products gross profit increased 99.5% to $5.7 million (17.6% of segment net sales) in the first quarter of 2000 from $2.9 million (13.1% of segment net sales) in the first quarter of 1999, primarily as a result of a favorable product mix and an increase in prices in certain product lines implemented to offset increases in the price of steel purchased by the Company. There can be no assurance that the Company will be successful in implementing further price increases on its products to offset additional steel price increases, if any.

Selling, General and Administrative Expense. Selling, general and administrative expenses increased 16.6% to $5.3 million (8.3% of total net sales) in the first quarter of 2000 compared to $4.5 million (7.9% of total net sales) in the first quarter of 1999. The increase was primarily the result of additional operating costs related to North American, which was acquired in June 1999.

Interest Expense. Interest expense increased to $2.2 million in the first quarter of 2000 from $2.0 million in the first quarter of 1999 due to increased borrowings used to finance the acquisition of North American in June 1999 and to support higher production and sales levels.

Income Taxes. The provision for income taxes was $1.6 million in the first quarter of 2000, based upon an expected tax rate of approximately 40% for 2000.

Liquidity and Capital Resources

The Company finances operations with internally generated funds and available borrowings. At March 31, 2000, the Company had cash and cash equivalents of $496,000.

Net cash used in operating activities in the first quarter of 2000 was $3.6 million. This was primarily the result of $2.4 million of net income, non-cash adjustments for depreciation and amortization of $1.8 million and increases in accounts payable and accrued liabilities of $9.6 and $4.1 million, respectively; offset by an increase in net trade receivables and inventories of $7.2 and $14.6 million, respectively. The increases in accounts payable and inventories were primarily attributable to the timing and amount of purchases and utilization of steel. Tubular Products finished goods inventory has also increased in order to support a higher level of sales. The increase in trade receivables primarily resulted from increased tubular product shipments in the first quarter of 2000.

Net cash used in investing activities in the first quarter of 2000 was $596,000, which primarily resulted from additions of property and equipment. Capital expenditures are expected to approximate $9.0 million in 2000.

Net cash provided by financing activities in the first quarter of 2000 was $3.7 million, which primarily resulted from $3.8 million in net borrowings under the Company's credit agreement, offset by payments of capital lease obligations.

The Company had the following significant components of debt at March 31, 2000: a $55 million credit agreement under which $43.8 million was outstanding; $8.6 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%; $35.0 million of Senior Notes, without collateral, which bear interest at 6.87%; an Industrial Development Bond of $2.8 million with a variable interest rate of 3.86%; and capital lease obligations of $2.3 million which bear interest at 7.9%.

The credit agreement expires on September 30, 2002 and is without collateral. It bears interest at rates related to IBOR or LIBOR plus 0.65% to 2.25% (7.9% at March 31, 2000), or at prime less 0.5% (8.5% at March 31, 2000). At March 31, 2000, the Company had $41.0 million outstanding under the credit agreement bearing interest at a weighted average IBOR interest rate of 7.83%, $2.8 million bearing

interest at 8.5% and additional borrowing capacity under the credit agreement of $11.2 million. The credit agreement contains the following covenants: minimum debt service ratio, maximum funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), and minimum tangible net worth. The ratio of maximum funded debt to EBITDA allowed under the terms of the credit agreement was 3.75:1.0 through March 31, 2000, 3.50:1.0 until September 30, 2000 and 3.25:1.0 on or after December 31, 2000.

At March 31, 2000, the Company was in compliance with all covenants specified in its debt agreements.

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, and an increase in Tubular Products sales. The Company anticipates that its existing cash and cash equivalents, cash flows expected to be generated by operations and amounts available under its credit agreement 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 working capital requirements through additional bank borrowings, senior notes and capital leases if such resources are available on satisfactory terms. The Company 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.

Acquisition. In June 1999, the Company acquired all of the outstanding common stock of North American Pipe, Inc. ("North American") of Saginaw, Texas. North American operates two facilities which produce custom fabricated piping assemblies. The purchase price of $4.5 million was allocated to the underlying assets and liabilities, including certain debt, of North American.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company does not currently use derivative financial instruments for speculative purposes which expose the Company to market risk. The Company is exposed to cash flow and fair value risk due to changes in interest rates with respect to its long-term debt. Information required by this item is set forth in "Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Part II—Other Information

Item 6. Exhibits and Reports on Form 8-K

(a): The exhibits filed as part of this report are listed below:

Exhibit No.
10.19		Amended 1995 Stock Incentive Plan, incorporated by reference to Exhibit A to the Company's Proxy Statement for its 2000 Annual Meeting of Shareholders as filed with the Securities and Exchange Commission on March 31, 2000
10.20		Office Lease Agreement dated January 7, 2000 between Northwest Pipe Company and 200 Market Associates Limited Partnership
27		Financial Data Schedule

(b): Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended March 31, 2000.

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: May 3, 2000

		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)

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Item 2. Management's Discussion and Analysis of Financial Condition And Results Of Operations

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Part II—Other Information

Item 6. Exhibits and Reports on Form 8-K