=============================================================================== 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, 1999 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 6,449,232 (Class) (Shares outstanding at April 30, 1999) ===============================================================================
NORTHWEST PIPE COMPANY FORM 10-Q INDEX <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Page - ------------------------------ ---- <S> <C> Item 1. Financial Statements: Consolidated Balance Sheets - March 31, 1999 and December 31, 1998............................................2 Consolidated Statements of Income - Three Months Ended March 31, 1999 and 1998..........................................3 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998..........................................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............12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.....................................12 </TABLE> 1
NORTHWEST PIPE COMPANY CONSOLIDATED BALANCE SHEETS (In thousands except share and per share amounts) <TABLE> <CAPTION> March 31, December 31, 1999 1998 -------------- ------------- ASSETS (Unaudited) <S> <C> <C> Current assets: Cash and cash equivalents $ 1,827 $ 524 Trade receivables, less allowance for doubtful accounts of $1,094 and $1,046 48,576 41,719 Costs and estimated earnings in excess of billings on uncompleted contracts 20,648 23,270 Inventories 47,207 49,269 Refundable income taxes 2,800 2,800 Deferred income taxes 1,794 1,794 Prepaid expenses and other 1,450 1,733 -------------- ------------- Total current assets 124,302 121,109 Property and equipment, less accumulated depreciation of $26,504 and $25,493 88,458 87,139 Goodwill, net 23,082 23,223 Restricted assets 2,300 2,300 Other assets, net 311 380 -------------- ------------- $ 238,453 $ 234,151 -------------- ------------- -------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to financial institution $ 39,300 $ 34,200 Current portion of long-term debt 1,679 1,679 Current portion of capital lease obligations - 2,000 Accounts payable 18,482 23,524 Accrued liabilities 9,062 5,469 -------------- ------------- Total current liabilities 68,523 66,872 Long-term debt, less current portion 76,321 76,321 Minimum pension liability 58 58 Deferred income taxes 7,185 7,185 -------------- ------------- Total liabilities 152,087 150,436 -------------- ------------- 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, 6,449,232 and 6,447,516 shares issued and outstanding 64 64 Additional paid-in-capital 38,857 38,849 Retained earnings 47,501 44,858 Accumulated other comprehensive loss - minimum pension liability (56) (56) -------------- ------------- Total stockholders' equity 86,366 83,715 -------------- ------------- $ 238,453 $ 234,151 -------------- ------------- -------------- ------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 2
NORTHWEST PIPE COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three months ended March 31, ----------------------------- 1999 1998 ---------- ---------- <S> <C> <C> Net sales $ 57,531 $ 38,240 Cost of sales 46,517 31,739 ---------- ---------- Gross profit 11,014 6,501 Selling, general and administrative expense 4,542 3,052 ---------- ---------- Income from operations 6,472 3,449 Interest expense, net 2,030 625 ---------- ---------- Income before income taxes 4,442 2,824 Provision for income taxes 1,799 1,101 ---------- ---------- Net income $ 2,643 $ 1,723 ---------- ---------- ---------- ---------- Basic earnings per share $ 0.41 $ 0.27 ---------- ---------- ---------- ---------- Diluted earnings per share $ 0.40 $ 0.26 ---------- ---------- ---------- ---------- Shares used in per share calculations: Basic 6,443 6,416 ---------- ---------- ---------- ---------- Diluted 6,602 6,631 ---------- ---------- ---------- ---------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
NORTHWEST PIPE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Three months ended March 31, ----------------------------- 1999 1998 ---------- ---------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,643 $ 1,723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,152 849 Provision for doubtful accounts 48 215 Changes in current assets and liabilities, net of acquisitions: Trade receivables (6,905) (5,874) Costs and estimated earnings in excess of billings on uncompleted contracts 2,622 2,012 Inventories 2,062 (5,672) Prepaid expenses and other 283 462 Accounts payable (5,042) 10,336 Accrued and other liabilities 3,593 1,844 ---------- ---------- Net cash provided by operating activities 456 5,895 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (2,330) (4,311) Acquisitions, net of cash acquired - (39,754) Other assets 69 67 ---------- ---------- Net cash used in investing activities (2,261) (43,998) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the sale of common stock, net 8 - Net proceeds (payments) under notes payable 5,100 39,200 Payments on capital lease obligations (2,000) - ---------- ---------- Net cash provided by financing activities 3,108 39,200 ---------- ---------- Net increase in cash and cash equivalents 1,303 1,097 Cash and cash equivalents, beginning of period 524 904 ---------- ---------- Cash and cash equivalents, end of period $ 1,827 $ 2,001 ---------- ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest, net of amounts $ 685 $ 204 capitalized SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: Cost in excess of fair value of assets acquired $ - $ 23,717 Fair value of assets acquired - 32,941 Fair value of liabilities assumed - 8,802 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
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, 1999 and 1998 have been prepared in conformity with generally accepted accounting principles. The financial information as of December 31, 1998 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, 1998. 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, 1998, 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, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 1999, 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" which establishes requirements for disclosure of comprehensive income. 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. EARNINGS PER SHARE The Company has adopted FASB 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. 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 158,868 and 214,968 for the three months ended March 31, 1999 and 1998, respectively, were used in the calculations of diluted earnings per share. Options to purchase 270,016 shares of common stock at prices of $15.75 to $22.88 per share were outstanding at March 31, 1999, 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. 5
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. 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> March 31, December 31, 1999 1998 ------------ ------------- <S> <C> <C> Finished goods $ 18,485 $ 12,404 Raw materials 26,626 34,769 Materials and supplies 2,096 2,096 ------------ ------------- $ 47,207 $ 49,269 ------------ ------------- ------------ ------------- </TABLE> 4. SEGMENT INFORMATION The Company has adopted FASB Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an 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. <TABLE> <CAPTION> Three months ended March 31, ----------------------------- 1999 1998 ------------- ----------- <S> <C> <C> Net Sales: Water Transmission $ 35,706 $ 21,904 Tubular Products 21,825 16,336 ------------- ----------- Total $ 57,531 $ 38,240 ------------- ----------- ------------- ----------- Gross Profit: Water Transmission $ 8,149 $ 3,997 Tubular Products 2,865 2,504 ------------- ----------- Total $ 11,014 $ 6,501 ------------- ----------- ------------- ----------- </TABLE> 5. ACQUISITIONS On March 31, 1999, the Company announced that it had signed a letter of intent to acquire North American Pipe, Inc. ("North American") of Saginaw, Texas. North American operates two facilities which produce custom fabricated piping assemblies and had sales of approximately $18 million for the twelve months ended December 31, 1998. The Company expects to complete the acquisition in May 1999. 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 (the "Parkersburg Facility") for $5.3 million, and acquired the Parkersburg Facility's inventory net of assumed accounts payable. The Parkersburg Facility is employed in the manufacture of large diameter, high pressure steel pipe products. 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") for $40.1 million. The excess of the acquisition cost 6
over the fair value of the net assets acquired of approximately $23.7 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. 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 and schedule for deliveries of certain Water Transmission orders and due to the seasonality of the Company's Tubular Products business. 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 manufactures and markets welded steel pipe in two business segments. Its Water Transmission segment is a leading supplier of large diameter, high pressure steel pipe products that are used primarily for water transmission in the United States and Canada. Its Tubular Products Group manufactures smaller diameter steel pipe for a wide range of construction, agricultural, energy, industrial and mechanical applications. The Company is headquartered in Portland, Oregon. Water Transmission products are manufactured in the Company's Portland, Oregon; Denver, Colorado; Adelanto and Riverside, California; and Parkersburg, West Virginia facilities. Tubular Products are manufactured in the Company's Portland, Oregon; Atchison, Kansas; Houston, Texas; and Bossier City, Louisiana 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. 7
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. <TABLE> <CAPTION> Three months ended March 31, --------------------------- 1999 1998 ---------- ---------- <S> <C> <C> Net sales Water Transmission 62.1% 57.3% Tubular Products 37.9 42.7 ---------- ---------- Total net sales 100.0 100.0 Cost of sales 80.9 83.0 ---------- ---------- Gross profit 19.1 17.0 Selling, general and administrative expense 7.9 8.0 ---------- ---------- Income from operations 11.2 9.0 Interest expense, net 3.5 1.6 ---------- ---------- Income before income taxes 7.7 7.4 Provision for income taxes 3.1 2.9 ---------- ---------- Net income 4.6% 4.5% ---------- ---------- ---------- ---------- Gross profit as a percentage of segment net sales: Water Transmission 22.8% 18.2% Tubular Products 13.1 15.3 </TABLE> FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998 SALES. Net sales increased 50.4% to $57.5 million in the first quarter of 1999, from $38.2 million in the first quarter of 1998. Water Transmission sales increased 63.0% to $35.7 million in the first quarter of 1999 from $21.9 million in the first quarter of 1998, primarily as a result of higher production resulting from improved market conditions in the first quarter of 1999 and increased sales attributable to the Parkersburg Facility, which was acquired in June 1998. Late in the first quarter of 1999, several Water Transmission projects expected to be produced during the second quarter of 1999 were postponed, which is expected to negatively impact sales in that quarter. Tubular Products sales increased 33.6% to $21.8 million in the first quarter of 1999 from $16.3 million in the first quarter of 1998. The increase was primarily the result of sales attributable to P&H Tube Corporation ("P&H") and Southwestern Pipe, Inc. ("Southwestern"), which were acquired in March 1998, and increased production related to the new Tubular Products mill in the Company's Portland, Oregon facility, which was operational in late 1998. In the first quarter of 1999 and 1998, no single customer accounted for 10% or more of total net sales. GROSS PROFIT. Gross profit increased 69.4% to $11.0 million (19.1% of total net sales) in the first quarter of 1999 from $6.5 million (17.0% of total net sales) in the first quarter of 1998. Water Transmission gross profit increased 103.9% to $8.1 million (22.8% of segment net sales) in the first quarter of 1999 from $4.0 million (18.2% of segment net sales) in the first quarter of 1998. During the first quarter of 1998, the Company experienced lower bidding activity, unfavorable pricing pressures and shipping delays. In the first quarter of 1999, demand and production increased due to improvements in general market conditions and bidding activity and the acquisition of the Parkersburg Facility in June 1998. 8
Tubular Products gross profit increased 14.4% to $2.9 million (13.1% of segment net sales) in the first quarter of 1999 from $2.5 million (15.3% of segment net sales) in the first quarter of 1998, primarily due to the acquisition of P&H and Southwestern in March 1998. Tubular Products gross profit as a percent of segment net sales decreased due to continued pricing pressure from imported products, which the Company expects will continue through at least the first six months of 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expenses increased 48.8% to $4.5 million (7.9% of total net sales) in the first quarter of 1999 compared to $3.1 million (8.0% of total net sales) in the first quarter of 1998. The increase was primarily the result of additional operating costs related to acquisitions completed in March and June 1998. INTEREST EXPENSE. Interest expense increased to $2.0 million in the first quarter of 1999 from $625,000 in the first quarter of 1998 due to 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 increased to $1.8 million in the first quarter of 1999 from $1.1 million in the first quarter of 1998, based upon an expected tax rate of approximately 40% for 1999. LIQUIDITY AND CAPITAL RESOURCES The Company finances operations with internally generated funds and available borrowings. At March 31, 1999, the Company had cash and cash equivalents of $1.8 million. Net cash provided by operating activities in the first quarter of 1999 was $456,000. This was primarily a net result of $2.6 million of net income, non-cash adjustments for depreciation and amortization of $1.2 million, decreases in costs and estimated earnings in excess of billings on uncompleted contracts and inventories of $2.6 and $2.1 million, respectively, and an increase in accrued liabilities of $3.6 million; offset by an increase in net trade receivables of $6.9 million and a decrease in accounts payable of $5.0 million. The decreases in accounts payable and inventories were primarily attributable to the timing and amount of purchases, payments and utilization of steel. The increase in trade receivables and decrease in costs and estimated earnings in excess of billings on uncompleted contracts primarily resulted from increased product shipments in the first quarter of 1999. Net cash used in investing activities in the first quarter of 1999 was $2.3 million, which primarily resulted from expenditures related to additions of property and equipment and the completion of construction of the Company's propane tank manufacturing facility in Monterrey, Mexico. Capital expenditures are expected to approximate $10 million in 1999. Net cash provided by financing activities was $3.1 million in the first quarter of 1999, which resulted from $5.1 million in borrowings under the Company's line of credit agreement offset by a $2.0 million payment of capital lease obligations. The Company had the following significant components of debt at March 31, 1999: a $45 million credit agreement under which $39.3 million was outstanding; $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%; $35.0 million of Senior Notes, without collateral, which bear interest at 6.87%; and an Industrial Development Bond of $3.0 million with variable interest rate of 2.8%. The credit agreement expires on September 30, 2001 and is without collateral. It bears interest at rates related to IBOR or LIBOR plus 0.65% to 1.75% (6.5% at March 31, 1999), or at prime less 0.5% (7.25% at March 31, 1999). At March 31, 1999, the Company had $39.3 million outstanding under the line of credit with $37.0 million bearing interest at a weighted average IBOR interest rate of 6.50%, $2.3 million bearing interest at 7.25% and additional borrowing capacity under the line of credit of $5.7 million. The line of credit agreement contains the following covenants; minimum debt service ratio, maximum funded debt to earnings before 9
interest, taxes, depreciation and amortization ("EBITDA"), and minimum tangible net worth. In December 1998, the Company amended its line of credit agreement which, among other changes, adjusted the restriction associated with the ratio of maximum funded debt to EBITDA from 3.75:1.0 to 4.00:1.0 until March 31, 1999. The restriction associated with this ratio will be further reduced to 3.75:1.0 on June 30, 1999, to 3.50:1.0 on September 30, 1999, 3.25:1.0 on December 31, 1999, and 3.00:1.0 until September 30, 2001. At March 31, 1999, the Company was in compliance with all covenants specified in the line of credit agreement. 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 usage. 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 has from time to time evaluated and continues to evaluate opportunities for acquisitions and expansion. SEE NOTE 5 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Any such transactions, if consummated, may use a portion of the Company's working capital or necessitate additional bank borrowings. 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. The Company currently anticipates that its internal Year 2000 assessment initiatives will be completed by the end of the second quarter of 1999. The Company estimates that as of April 30, 1999, it had completed approximately 90% 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 10% of the initiatives are expected to be completed by the end of the second 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 will request written certification of Year 2000 compliance from all critical suppliers and customers by the end of the second quarter of 1999. In the event that suppliers 10
are not Year 2000 compliant, the Company may 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 second quarter of 1999. 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, is not expected to 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 March 31, 1999, the Company had incurred costs of approximately $35,000 related to its Year 2000 assessment, remediation and testing efforts. In addition, the Company has determined that it must replace approximately $150,000 of certain telephone system components as a result of the Year 2000 issue, which are expected to be replaced by the end of the second quarter of 1999. 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 June 30, 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. 11
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: <TABLE> <CAPTION> Exhibit No. ----------- <S> <C> 27 Financial Data Schedule </TABLE> (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1999. 12
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 6, 1999 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) 13