The accounting crisis that consumed Northwest Pipe Co. for months — casting its Nasdaq listing in doubt, eliciting a federal investigation and attracting lawsuits — grew out of multiple problems, including a lack of internal financial controls and a dearth of communication between staff members of the Vancouver-based maker of steel pipe, according to documents and statements that are now emerging.
“We did not have effective controls over our cash flow statements,” the company said in its belated 2009 annual report, not filed until earlier this month, and “we did not have proper preparation and review procedures in place to ensure an accurate preparation of our consolidated statements of cash flows” as required by generally accepted accounting principles.
Moreover, the “sales and human resources teams and plant personnel did not communicate to our accounting staff all of the information necessary to make accurate accounting determinations for certain accounts receivable and accrued liability balances,” the company said.
Nevertheless, Northwest Pipe said it’s developing a plan to fix those and other accounting issues. The company also is showing other signs that it’s pulling itself together. On Nov. 4, for example, it finally brought itself up to speed with financial reports, releasing its 2009 annual report along with other restated financial reports going back to 2007 and more recent results. On Tuesday, the company held its first earnings conference call in more than a year — and had positive things to say.
Northwest Pipe reported a return to third-quarter profitability, with a gain of $693,000, or 7 cents per share, for the period ended Sept. 30. That compares with a loss of $5.5 million, or 59 cents per share, for the same period a year ago.
“We’re glad to be back talking to people again,” said Richard Roman, president and chief executive officer of Northwest Pipe.
That’s not to say the company’s problems have gone away, though Roman declined to get into specifics. Instead, he referred people to Northwest Pipe’s 2009 annual report for details of the company’s “risk factors.” That document divulges concerns the company has about the lawsuits it faces and the SEC investigation it’s under. But it also tells of a company confident in its capacity to do business, partly linking its resoluteness to the projected population growth and water needs of the United States.
Problems emerge
Northwest Pipe manufactures large-diameter, high-pressure steel pipelines, primarily for drinking water systems. From 2007 through 2009, its Water Transmission Group, generated between 63 percent and 76 percent of its net sales. The company has 1,100 full-time workers and owns manufacturing plants in Oregon, Colorado, California, West Virginia, Texas, Utah and Mexico.
Problems started to emerge in November 2009, when Northwest Pipe announced it had delayed its third-quarter earnings report until it could resolve an internal investigation of accounting matters. These included a look into revenue recognition practices.
Since then, it’s been a drumbeat of bad news and management changes for the company:
• In November and December 2009, attorneys representing shareholders filed two separate class-action lawsuits against Northwest Pipe, alleging the company issued false and misleading financial statements in violation of federal securities law. The two suits were later consolidated into one.
• On March 16, Northwest Pipe said in a regulatory filing that it was the subject of an SEC investigation and that it would “cooperate fully.”
• On May 17, the company announced it was unable to timely file its third and fourth quarterly earnings reports, its annual report for 2009 and its quarterly earnings report for the period ending March 31. This news put it at increased risk of being removed from the Nasdaq stock exchange.
• On July 30, the company disclosed through the SEC that it had overstated its profits by $37 million to $47 million over the course of a number of years.
• On Oct. 8, the company said Brian Dunham had resigned as president, more than six months after he stepped down as chief executive. Roman, CEO since April, became president, too.
Accounting mess detailed
In its newly released 2009 annual report, the company lays out why its accounting problems piled up. In addition to a lack of internal financial controls and an absence of effective communication, the company didn’t have proper procedures to make sure it “maintained complete and accurate business documentation to support certain revenue, property and equipment, foreign exchange and vendor claim transactions, including related assumptions and estimates.”
Northwest Pipe is developing a comprehensive plan to fix the problems, including “adding resources and developing and implementing new processes and procedures.” In August, the company hired a director of compliance and controls to oversee this effort. Additionally, Northwest Pipe has implemented a new process with its management group to ensure the company maintains a commitment to “corporate integrity” and upholds “a duty to report financial irregularities.”
Furthermore, the company said, it has acted to “describe more clearly our guiding principles” for accounting for water transmission contracts.
These fixes won’t come easy. “There can be no assurance as to when the remediation plan will be fully developed, when it will be fully implemented and the aggregate cost of implementation,” according to the company.
Meanwhile, Northwest Pipe must contend with the consolidated class-action securities lawsuit and another lawsuit related to derivatives. “If we do not prevail in one or more of these lawsuits, we may be required to pay a significant amount of monetary damages,” the company said.
Northwest Pipe must also conduct its work under the cloud of an SEC investigation, which, it said, “could result in civil or criminal sanctions against the company and/or certain of its current or former officers, directors and/or employees.” The SEC investigation is at an early stage, the company said, and it’s impossible to predict its outcome.
Sales up, backlog strong
For all its troubles, the company sees a future in which its manufacturing capabilities will be needed.
The southern and western regions of the U.S. are projected to add about 50 million new residents, which will increase demand for “substantial” new water infrastructure, the company said. “In addition, many current water supply sources are in danger of being exhausted,” the company went on. “The development of new sources of water at greater distances from population centers will drive the demand for new water transmission lines. Our manufacturing facilities are well located to take advantage of the anticipated growth and demand in these regions.”
Meanwhile, sales are up. For the three months that ended Sept. 30, Northwest Pipe said it had net sales of $112.8 million, up 84 percent from a year ago. Two customers — one in the company’s water transmission segment and the other in its tubular products segment — accounted for 23 percent of net sales in the third quarter of this year.
During Tuesday’s earnings call, Roman, CEO of Northwest Pipe, also outlined the company’s projects and plans. As of Sept. 30, the company’s backlog of project orders was $252 million, up 13 percent from Dec. 31, 2009. And it expects to complete its most significant project since September 2009 — a $61 million contract to supply the pipe for a larger project aimed at enclosing the Provo Reservoir Canal in Utah to conserve water and to boost the canal’s carrying capacity — in December 2011.
At one point during the conference call, Roman was asked whether investors could expect the company to meet its financial reporting deadlines — Northwest Pipe was still late in filing its third-quarter financial report. “We should be in good shape,” Roman replied. “We’re not going to have the confluence of those events again.”
