- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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
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
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
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
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
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
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
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
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
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
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
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
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
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