NWPX Infrastructure Inc (NWPX) 2012 Q3 法說會逐字稿

At this time, all participants are in a listen-only mode.

(Operator Instructions)

Today's conference is being recorded. If you have any objections you may disconnect at this time.

Now I will turn the meeting over to Mr. Rich Roman.

Thank you, Cory. Good morning and welcome to Northwest Pipe's conference call. My name is Rich Roman. I am President and CEO of the Company. I'm joined by Scott Montross, our Chief Operating Officer; and Robin Gantt, our Chief Financial Officer.

As we begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause actual results to differ materially from expectations.

Before I turn this over to Robin for a discussion of our third-quarter results, let me add that there are no developments to report since our most recent disclosures with regard to the shareholder litigation or SEC investigation.

Now, Robin?

Thank you, Rich.

Our net income was $3.4 million, or $0.36 per diluted share in the third quarter of 2012, compared to $3.3 million, $0.35 per diluted share in the third quarter of 2011. Net income was positively impacted by a net benefit from income taxes of $686,000. During the third quarter of 2012, we performed a research and development tax credit study for fiscal years 2010 and 2011. This led us to record a tax benefit of $1.8 million in the third quarter.

Water Transmission sales decreased 17% to $63 million in the third quarter of 2012, and $77 million in the third quarter of 2011. Water Transmission gross profit decreased to 15.2% in the third quarter from 17.3% in the third quarter of last year. The decrease in sales in the third quarter of 2012 compared to 2011 was due to a 16% decrease in selling price per ton and a 2% decrease in tons produced. The decrease in gross profit was driven by the mix of projects produced and lower volumes which had a negative impact on the fixed portion of our cost of goods sold.

Tubular Products sales decreased 17% to $52 million in the third quarter of 2012, from $62 million in the third quarter of 2011. Volumes decreased 18%, which was partially offset by a 2% increase in selling prices. We sold 42,900 tons in the third quarter of 2012, as compared to 52,100 tons in the third quarter of 2011. Tubular Products gross profit was 3.7% in the current third quarter, compared to 5.1% in the third quarter of last year. Our energy products comprised approximately 69% of Tubular Products sales in the third quarter of 2012, compared to 71% in the third quarter of 2011.

Selling, general, and administrative costs increased to $7.6 million in the third quarter of 2012, compared to $6.5 million in the third quarter of 2011. There was an increase in outside services and wages and benefits in the third quarter of 2012 as we have increased the accounting and finance staff and utilized outside resources to address our internal controls remediation effort.

Interest expense was $1.3 million in the third quarter of 2012, and $2.2 million in the third quarter of 2011. The decrease was a result of lower average borrowing and lower average interest rates.

In the first half of 2012, the Company generated $22.2 million in cash from operations to support the growth of the business, mainly through our net income and depreciation and increases in our accrued liability account. These were partially offset by an increase in our cost and estimated earnings in excess of billing, and inventory. Inventories have increased $24 million since December 31, with $14 million due to an increase in coil purchased for fourth quarter Water Transmission production. The remaining $10 million is an increase in Tubular Products inventories, related to customer-owned inventories that cannot be recognized as revenue until delivery occurs.

Capital expenditures were $11.3 million, primarily from environmental upgrades in our Portland, Oregon facility and planned capacity expansion in our Tubular Products plants. The remainder was for ongoing maintenance capital expenditures.

Now I will turn it over to Rich for an update on our business.

As of September 30, 2012, our backlog in Water Transmission was approximately $241 million. As of September 2011, our backlog was approximately $187 million. The backlog in Water Transmission has increased substantially with the addition of a Lake Texoma project. Production for Lake Texoma started in August and will continue through the middle of 2013. The addition to this project, along with some smaller emergency drought-related work in Texas, will lead to higher net sales in the Water Transmission segment in the fourth quarter of 2012.

In Tubular Products, we expect to see compressed margins for the foreseeable future, as imports have had a significant negative impact on both volume and margins. We took some short-term production reductions in the third quarter and we'll consider additional reductions as we react to future changes in the market.

In conclusion, we anticipate fourth quarter will be the strongest quarter in 2012 for our Water Transmission business, while we anticipate that continued competition from imports of energy products will limit profitability for our Tubular Products segment, at least through the balance of 2012 and the first quarter of 2013.

At this time, we will be happy to answer your questions.

(Operator Instructions)

Scott Graham of Jefferies. So the weakness on the water side, I was just wondering, first of all, what the -- how many shipments did we get -- was there a dollar number for the shipments on the Lake Texoma project for the quarter?

For the third quarter? You're asking, because we said our production in August?

That's correct.

I don't have here the specific numbers for our Texoma, but I can tell you that Texoma runs from August, when we started up through the, probably April or so, but through sometime in the second quarter of next year.

Right. So I guess my point would be that when we exclude that, the base business was actually a little worse than the 17%, I'm just -- down 17%. I was just wondering -- what are you seeing out there in the marketplace that would have pushed the number so much different than what we saw in the last couple of quarters?

You're talking with regard to Water Transmission?

Yes, Water Transmission, yes.

The Water Transmission marketplace continues to be very much challenged by the difficulty that we are seeing with municipal financing. So to the extent that municipal budgets or water agency budgets continue to be constrained, we are seeing a real limitation in the bidding activity. So, and I think I have mentioned this before, the activity that we are seeing is largely related to emergency work, drought-related work, that sort of project that we've seen in Texas. We have seen a handful of them in 2012 in Texas alone. That, really, is the work that is enabling us to have the revenue numbers that we are having in Water Transmission. If you look, for example, in California, there is very little going on with regard to water transmission activity, in large part, because public finances in California are so difficult that not much is happening that doesn't absolutely need to happen.

Okay. Got you.

That, by the way, is a phenomenon that I see continuing for the near term. The good news is that we have quite a bit of work in Texas that is coming up that is more the result of the growth in population in Texas, as well as the drought conditions. That is a very large market for us. Front Range of Colorado is another place where the demographics really have dictated that we've got to do something with regard to water spending. But, in a place like California, which really isn't growing or at least isn't growing faster than the nation as a whole, in terms of population, there's not the same kind of demands with regard to building new water infrastructure. They are very reluctant giving their public finances to spend on existing infrastructure of all kinds.

Understood. Another question, this one on the other business in Tubular. Pricing down [2%] and in the first half of the year, pricing was up. Is that a down 2%, which is obviously an average for the quarter, is that flat in the first part of the quarter and actually worse than that in the second part of the quarter? Or is that a run rate that you're thinking of going forward?

Pretty much pricing did get worse during the quarter and that's consistent with what we have been hearing from many companies in the same space. It's not flattening and it hasn't gotten any better. So I would say that it has gone down during the quarter.

So, in the fourth quarter, that number will be a larger number, a larger negative?

We do definitely see challenges in the fourth quarter, that's for sure.

Okay.

To the extent that imports continue to roll in and we've seen this as a progressive phenomenon. Then there will continue to be challenges to the pricing because the imported stuff is coming in at a lower price point.

Fair enough. To adjust to this environment, maybe could you talk a little about what you're doing on the cash flow side? Maybe lowering working capital, that kind -- I can see that receivables were down in the quarter, but inventory was up, I assume in part because of the Lake Texoma project. But what are you guys doing to -- if we're looking at a rougher next couple of quarters, looking at the balance sheet I'm seeing payables paid down. I am just wondering, what are the steps we -- the next couple of quarters that we take here to prop up cash flow when things are weaker?

Well, the inventory, I did go through the change on that. When you look from the end of December to now, we had $14 million increase due to the coil in Water Transmission. But we also had the remaining increases, all due to tubular products that is customer owned. In other words, the customer pays, that we are not able to represent its revenue on yet. So that is how we are managing that. We are keeping it in inventory but we've already received the cash for it. In terms of the accounts payable is going down, part of that is because we have been buying a lot less steel for the Tubular Products side, as you can imagine. So all of that is coming through. We do continue -- we watch our inventories I'll say weekly, but practically, more often than that. Several times a week, we are looking at our inventory on a real-time basis and making sure that it is not getting out of hand. We had a pretty strong hit from the market in terms of all these imports. Yet, the Tubular side, when you take out these customer-owned inventories, did not go up. So we work very hard to get to that and we continue to work hard to get that number down more, if we can. That's what we're working on.

This sheet that I have in front of me says Doug Graham, but is this Scott Graham?

Yes, no relation to any Doug, so -- (laughter)

I thought when Cory introduced you, she said Doug Graham, too. And I said this sounds like Scott Graham, not --

That's okay. That's okay.

Anyway, Scott, two things going on. One is that we really are focused on inventory, as Robin said, because as we continue to experience difficulty in the Tubular Products arena, we really need to drive down that inventory number and control the inventory. We really are focused on that. The thing that obscures it a little bit, in terms of working capital, is that the Tubular products -- I mean, sorry, the Water Transmission business is going to have a good fourth quarter, and that's -- we're already embarked on that. So the Water Transmission business actually uses a lot of working capital as it grows, because we are spending money a long time before we get paid in that business. So, we need to be sensitive to the fact that as you look at the use of working capital, we are focused on bringing down, especially the inventory in Tubular. But we are going to see the use of more working capital on the Water Transmission side.

That's fine. Okay. Understood. Last question is, really just surrounding the outlook in back to Water. I am with you on this. The municipalities, the states using more operational expenses from their budget to fix their water situations, and not really opening up the capital budget, per se. What I am wondering, though, is that we are hearing an increasing level of inquiries, and let's call it, like feed work, if you will. I was wondering if you are seeing even a pick-up in activity, even if it wasn't a booking. But are you seeing things that, how much longer can we go without spending on our water infrastructure-type stuff? I was wondering if you are seeing any of that whatsoever in (multiple speakers) --

Yes, there is definitely conversation along those lines. It gets reflected, I think, in conversation among engineers in the way that they focus their business. So I don't know if you covered the E&C segment, but if you look at what some of them are saying, they are saying -- our business isn't going to be so much building new stuff. Our business, as engineers, is going to be fixing old stuff, fixing old infrastructure. So there is a lot more discussion at that end of the spectrum, and you have to wait and see if it's going to result in projects. Eventually, it will result in projects because stuff breaks. But what the engineers are trying to do, is reposition their business so that they can be at the proactive end of what I'll call, the maintenance part of infrastructure, as opposed to being at the new construction end of infrastructure. So I think that discussion that you hear a little bit of is going on not only in Water Transmission, but in other aspects of infrastructure, and I think it is going to be a theme. So replacement and repair is going to be an important, or more important part of the business, than new construction, at least for a little while.

Barry Vogel of Barry Vogel & Associates.

I want to start off with a little bit of color on the Tubular operations. First of all, I know you gave us the tonnage for Water Transmission backlog at 241. Can you give us the Tubular backlog at the end of September?

With the backlog in Tubular, we really haven't -- it's really not a relevant number. I know I've said that many times, so it's just something that we decided wasn't as relevant anymore.

Well, I remember, it's not relevant -- what you mean? It's so small that it's not relevant? Well --

What I mean is that it's not a true indication -- it's a true indication of how your next couple of weeks may look but it's not a true indication of your total quarter, whereas Water Transmission really gives you a good look ahead. We have so much spot business that that's what I mean, that it's not as relevant.

Okay.

It may not necessarily give you the flavor for what is there.

Well, in fact, Barry, it sometimes goes the wrong way. The backlog goes between $12 million and $25 million at any given time. But sometimes it's at $25 million when the business is falling off and at $12 million when the business is growing. So it was, in some cases, it can be a counter indication, and so we thought for two, for that reason and the reason that it's a relatively small number, that we would focus more on the Water Transmission backlog. Okay, now, you've been talking to us about your major expansions, which are going to increase your capacity at some point to about 400,000 tons of Tubular capacity. Can you give us an idea, first of all, on average, what was the utilization rate of your Tubular capacity in the third quarter? Could you give us a similar number for October?

Our utilization rate has been about 50% in the third quarter. And unless something changes in these markets, as we said, we do see the continued pressure from the imports, I think that will continue going forward. And if the situation gets worse, that number could get lower.

All right. Having said that, you had an operating profit in the quarter, I think it was [$1.134 million].

Yes.

Looking at current business conditions, that's almost breakeven, obviously, in terms of operating profits. What is your worst case basis for operating profits in Tubular, considering you understand what is going on, you're being very protective of being sure you don't over-produce, and don't have to -- a significant amount of inventories. But are we looking at a breakeven number or -- for the fourth quarter in Tubular, or can you lose money in Tubular in the fourth quarter?

We are not expecting to do better than we did in third quarter, Barry. But we are not looking at in the projections that we have today, anything that is a negative number either.

Okay. So it will be, probably a very low level of operating profits in the fourth quarter in Tubular?

I think that that is fair to say.

Okay. Can you give us an idea of where we are, and I know this is all over the lot, but those two major projects that you've talked about for the last nine or so months, one with Tarrant County and one with Houston? Can you give us some real good color on where we are in both of them?

Yes, and I will take that question. The Tarrant County, or the IPL project right now, the current schedule is that the project will bid in either the June or July timeframe. We expect to be making pipe right now, as it stands, sometime in the fourth quarter of 2013. When you look at the Houston MSA project, which, I believe was originally scheduled for some time in 2014, our best and most current information tells us that it is currently looking like it is going to be more like 2015, or maybe 2016. So we've seen a little bit of push out in the Houston project, and right now, the Tarrant County project, IPL project is similar to what we have expected in our forecasts.

Okay, and --

Barry, to add on to that. I wouldn't be surprised, just given the size of the IPL project, the Tarrant County project, I wouldn't be surprised to see that slip a little bit. So current projections are as Scott described, but don't be surprised by the fact that it could be delayed. There's a lot of things that Tarrant County still needs to put together to make that thing to arrive on schedule.

Yes, going back to your capacity that we've talked -- you've talked about in several conference calls, and I know you've had different expansions, different parts, different quarters. Can you give us an update of where you are in the fourth quarter? When the fourth quarter ends, what would you -- be your Tubular capacity in place and what might it be in the first quarter, given the completion of some of these projects?

I will take that one. I think as we end the year, we're probably looking at a Tubular Products across all of our three Tubular Products mills of around 400,000 tons. When we go into the first quarter of next year, we've got a project that we will complete in the first quarter of next year that I think will take our capacity somewhere around 425,000 tons.

Okay. So at the end of the first quarter of '13, you would have 425,000 tons of capacity?

Correct.

Now are there any other projects in Tubular that you have your -- that's taking some of your thoughts going forward? I'm assuming that the industry approves, but are there other projects that you're thinking about beyond the last project in the first quarter to get you to 425,000?

Yes. We already have two projects on the drawing board in Tubular, Barry, that will take our production beyond the 400,000 and 425,000. But more importantly, these projects will allow us to greatly expand our product offerings. So we will be able to manufacture pipe that is of greater gauge, greater thickness, in terms of the wall and that will put us on -- give us the ability to be able to serve a much broader range of our clients' needs. So that's much the motivation for those investments as simply expanding production in terms of total tons

Am I right in assuming that they would be higher value-added, higher margin products?

Exactly. We are trying to move up the chain in Tubular.

Gerry Sweeney of Boenning.

I want to see if you could give any color on potential trade cases. I know that's been talked about in the past. It seems to be getting a little bit more press as well. From your results, it looks like imports are impacting the industry more and more as we go into Q3 and Q4.

I'd make some comments on that. I think when you look at the amount of the market share that the imports are taking on both the oil country side and the line pipe side, you're looking at somewhere between 50% and 55% of the market. I think those imports, as Robin stated before, are starting to have a depressing effect on the pricing, especially on OCTG products. We have seen prices, and the market's seen prices really deteriorate over the last several months and the same has been said, is true for line pipes. So with all of that being said, with the prices being depressed and the compression that I believe everybody is seeing on margins at this point, I think it is pretty safe to say that, that the trade cases that are being looked at more in earnest now than they have been.

I don't know, Gerry, whether you listened in on the Tenaris call yesterday, I think it was yesterday, but that was the -- U.S. Steel has been hinting at it but Tenaris comments I thought were pretty much the strongest and most direct that I've seen with regard to the potential for a trade case.

Yes, and I'm hearing it from multiple sources so --. The market share, you said 50% to 55%, what if there is a normalized level of what imports have, do you know off the top your head, what that would be?

It is difficult to define normal with the --

Yes.

I think when you look back into 2011. I'm trying to remember back that far, import levels were more along the lines of 40% to 45%. But I think when you look at what happens to those imports and this is off the top of my head, after there's some kind of trade action taking place, that obviously drops down significantly more, probably into the 35% range. That is a little bit of a, off the top of my head number but I'd say those numbers are probably -- are relatively sound.

Okay. Very good. That's the ranges I have been hearing as well. And then, one question on the Lake Texoma project. If you could, walk us through how quickly -- when you started the production, I guess it was probably mid-August, is there a ramp-up time associated with that? Can we see a lot more of that project running through, I guess as a percentage of overall production in Q4? If you could give any color on that?

Yes, I think when you look at when we got the award for the Texoma project, it was probably early to mid-summer, I'm thinking back to. But we started the production, really in early to mid-August and that was with trying to get all of the coil in as fast as we could, the substrates to make the production to get it started. The ramp-up on that took a little bit longer with getting all of the coil in. We really don't hit our stride on the Texoma project until the October timeframe. It continues through the fourth quarter and into the March, April timeframe of next year and a little beyond, depending on which one of our facilities that you are talking about.

Okay. So, maybe, it starts to decline, we'll say, in April, in terms of you start winding down the project, in terms of maybe production (multiple speakers) --

Yes. I think the April timeframe is really probably a pretty good estimate on when the project starts to wind down a little bit.

Okay. Understood.

Just for context, Gerry, remember that this is roughly a $70 million project that will be produced roughly $35 million in 2012 and the same in 2013. And that is so, call it, $35 million of annual revenues in the context of a business segment that is making roughly $260 million in revenue. So it is important, but it is not completely dominant.

No, understood. It's -- I imagine some of the margins in that. I mean it's incrementally important and it runs through and then it definitely has an incremental improvement across the board on the margins and on the volume.

Exactly, because for example, we're running the Texas plant now, three shifts, we're running around-the-clock. That obviously has positive impacts with regards to the absorption in the margin, absorption of fixed cost for the margin.

Matt Sherwood of Cooper Creek Partners.

Just had a quick question on the relation between the backlog and the sales of the Water Transmission business. So I guess if I look back to 2011, you had maybe $194 million, $200 million of backlog, and in the second and third quarter, you were doing about $150 million run rate, so about $75 million a quarter run rate of sales. Right now, you're sitting with $241 million of Water backlog, and it looks like sales have been in the [$16] million range. Just, can you -- help walk through the relationship between backlog and sales on the Water side?

The relationship is, I think if you want to do it in a more detailed analysis, you need a little more information because what the total number of backlogs does not tell you is when that work is scheduled to occur. So generally the work occurs within 12 months, but the first question is, how much of it is beyond 12 months? So if you get a particularly large project, as we had in Utah, and that project that just finished this past spring. That project went over a number of years and so when you have first cut, what is your backlog that goes beyond a year and is that only 10%, as it might be at a particular point in time, or 40% of you backlog? Once you answer that question, then you can get a little bit closer to being to relate the revenues to the backlog. But even then, let's just say you taking everything within a year, you still have to know how it plays out by quarter, because these projects are completely independent and they have -- they occur across the country and have nothing to do with one another. So they can jam up in the quarter while conversely slow down or dissolve in a particular quarter. So it is part of our job to figure out how to best fit these assignments through the manufacturing facilities so that we obtain the best utilization of those facilities we can, given the schedule that our customers have for production.

Right. I mean, just taking a step back. You've been doing about $60 million of revenue, despite having a backlog in the $130 million to $160 million range, even if you back out the Lake Texoma project, your backlog, up $69 million, your backlog is higher than that. It's at, say, $175 million, and you said that this Lake Texoma project is going to go over the next three quarters, effectively, of $69 million, which in my math, it should be at least $20 million a quarter. It seems like your revenue should ramp materially in the -- it should be closer to $80 million to $85 million in the few quarters.

It will ramp significantly in the fourth quarter of this year and the first quarter of next year. I think we've tried to signal that a little bit in the materials that we have here. You are right, fourth quarter, we've -- as we've said, fourth quarter is going to be the best quarter for Water Transmission this year. It's going to be a very strong quarter with regard to revenues, as you have identified.

But saying it's the best quarter this year, your third quarter's the second best quarter, and that was down 19% year-on-year. So I guess it seems like a little bit of a conservative statement.

Conservative? (laughter) It's going to be a good quarter.

No, no. I guess, looking Water gross margins, your gross margins have been pretty solid this year on a lower sales level. How can we look at gross margins on a go-forward basis?

When I look at both of these businesses, Matt, my focus is on trying to utilize the plants as effectively as we can. Because what really impacts the ability to make margin here is how much volume running through the plant because you have a significant fixed cost. So these projects that are filling up the Water Transmission plants really help us with the margin. We haven't seen too much of that materialize yet; it's been -- we've been able to hold our own because you have a couple of phenomenons going on here. You have relatively small number projects being big so they [aren't] competitive. But as we begin to use our capacity more effectively, as we will see here in the fourth quarter, we should have a better impact on the margin. Now that sword cuts in both directions, because what we are seeing on the Tubular side of the business is a fall in volume and so we have the opposite going on where we don't have as much production to absorb the fixed cost. So we are going to be challenged on the margin side in that part of the business.

Right. But less challenged than you would have been otherwise if you hadn't put the accumulator on the small mill and then putting one on the big mill in the first quarter?

Right, that's right.

Great. I guess just final question on the Tubular side. You, or Scott, had suggested that trade case has increased the domestic share of volumes from, say, 45% to 60% in the past, which would be rough, or broad-brush close to 50% increase in volumes if a trade case were filed and were somewhat successful. How does that play -- how can we look at the way that situation could conceivably affect Northwest if the industry decides to take that step?

It's really hard to speculate on what effect these trade cases are going to have. If indeed, anything does happen with those, I think, obviously, what it does, is it gives some relief from the low-priced imports for a period of time and, theoretically, at least, allows domestic capacity to fill that space. I think one of the things we are seeing now, though, is everybody sees there is more domestic capacity coming online, too, as we look out into the future. So it really is hard to speculate at this point in time what the magnitude of the impact would be. I mean, obviously, we believe that the impact is positive if low-priced imports are kept out of the market. But it is really difficult at this point in time to judge how exactly that looks.

All right. And then looking at your tubular business, you're going to have to spend some capital on putting the two new accumulators on and expanding the capacity at Atchison, and in this case, you have -- in the first half of this year, you were running at 7.5%, 8% gross margin. If you were to achieve better, similar levels of capacity utilization, could we look at a materially higher gross margin in 2013?

Pretty much we've been saying all along that we do think that we're in the low teens on that. When we said that, that was having those capacity expansions in mind. So we don't see anything different from that right now assuming, like we said, that the import levels go down and we don't have anything to change from the low-teen number that we've provided before.

Okay. So if that happens, you still think longer term, you could hit similar EBITDA targets and the longer-term targets you laid out in your presentation at the --?

Matt, we do have some investments to make but the fundamental issue here is volume. We have to be able to get the volume or another to make those margins. We need to see what's happening with regard to, not only the supply side of this equation, which Scott has mentioned in terms of additional production being available, imports coming in, but also the demand side. We are seeing now a recount that is pretty stable. It has come down a little bit. There's about 1,800 rigs in the US now. As long as we stay there or go up, we should see a pretty healthy demand continue. However, from 2008 to 2009, we saw the rig count fall from 2,000 to 800. So there are a lot of factors at play here that make it difficult to have a very clear vision of what you think the results are going to be in a year or two.

Thanks. Yes, hopefully we don't see a '08, '09 situation in the near future.

I don't think we will. I didn't mean to suggest that but I'm just saying it's -- you don't see that coming and so then when it arrives, you don't achieve what you thought you were going to achieve. You have to understand what's going on.

David Fondrie with the Heartland.

So I'm trying to reconcile a little bit of 50% capacity utilization and then adding capacity, and then also, I guess, bringing out more capacity for more value-added thicker, thickness (multiple speakers) --

Heavier gauge, yes.

So will some of the -- when you put that thicker gauge in, will it absorb, will you take away some of that excess capacity you have in the Tubular goods now? Because from what you are saying, absent trade cases, it sure doesn't sound like there's going to be any uptick in Tubular goods.

Yes. So there's a couple of things going on here. As I say, these capacity additions, as they have been described, are not, and I don't view them so much as total capacity additions, although they will if certain product mixes allow us to run more tons. But what is really important about what we're doing beyond the two accumulators, one of which is already installed and one goes in the first quarter of next year. Beyond those accumulators, what we are doing is putting ourselves in a position to make a different kind of product. Part of that has to do with what's called standard wall product. So what's going on there, David, is that we're actually going to be able to make some, I'll call it, stouter stuff, that goes into the standard and structural end of the business, as opposed to the energy part of the business. But if you're going to sell that kind of thing, and we already sell into that market a little bit in less stout material, if you're going into that end of the business, you need the commercial construction industry to get off its back. Because nothing is going on, really. It's very, very quiet. But to the extent that the commercial construction industry comes back and we are able to make a standard schedule pipe, we will have a much broader market to sell our product in.

That's fair. But that would utilize some -- that is the heart of my question. Will that utilize some of that excess capacity you currently have? So you start, you have some, a little (multiple speakers) --

Yes, yes. The short answer is yes. And if both commercial construction and energy were to remain very strong, you'd end up having to make a decision as to which one you wanted to manufacture.

Okay. Perfect, that helps. Because in this environment, again, absent trade cases, I can't see much of an argument for increased Tubular goods to use. So if you can use some of that capacity, if indeed commercial construction comes back, then you are absorbing more capacity, and should get better margins overall in the Tubular goods.

That's the idea.

Okay. Secondly, I guess I don't quite understand completely that you have sold Tubular goods, but they remain in your inventory. Does that mean -- but you've received the cash for them? So you have not recognized them in sales or you have recognized them in sales?

They are not in our sales.

So when you recognize those, ultimately, in sales, having already received the cash, is there a profit margin that is yet to be recognized on those?

We will have a revenue and profit [as sold] recorded when those are recognized and when they come through. The thing that needs to happen is the delivery. So they need to head off to their final destination. That is what we are waiting on.

So what is your (multiple speakers) -- when you recognize a sale, that's a credit from an accounting standpoint. What is the debit?

We'll have the --

Accounts receivable isn't a simple debit.

Well, not anymore. That's the way (multiple speakers) --

Well, you've already received the cash so it's not like -- there must be a liability out there?

Yes, it's in deferred revenue which appears in our accrued liability.

Okay, but there still is a profit margin that you will recognize on those. Because you have not recognized a profit piece of it, I take it.

Yes, we don't recognize the profit margin until a sale is recognized. Just so that you understand the flow of goods here, this material we produce has now gone to processor for further treatment, probably for heat treatment, okay? It is not recognized as -- and it goes from the heat treater to our customer, not recognized as a sale until it leaves the heat treater and goes to the customer. It left our property some time ago.

So, is it, I guess it would be fair to say that those profit margins are probably more along the line of the margins that we saw in the fourth quarter in -- I'm sorry, third quarter in Tubular goods as opposed to some higher profit margins?

Yes, I would not say that it should be any different than any other product that is going out of the plant, better or worse.

And then, lastly, could you talk a little bit about steel pricing? What you're seeing in steel prices, and maybe more importantly, how that may reflect in the margins for tubular goods?

Well, there's actually been a couple of events over the last, probably, two months in steel pricing. About, probably about a month ago, steel producers announced it was a $40 a ton increase and that increases looks like it's being accepted by the marketplace. About a week ago, they announced an additional $50 a ton to bring the total up to $90. That additional $50 doesn't look like it is being as widely accepted by the marketplace at this point in time. But there's still upward pressure on pricing, and I think a lot of it is really just the steel people being in a situation where they're so close to their costs, that they are forcing, or trying to force prices up. I don't think the demand is so great in the marketplace right now that it's pulling the prices up.

Generally, what we have seen over the last couple of years, is that prices will run up in the fourth quarter of the year. And then as we get into the first quarter of the year, prices start to deteriorate. Also what we have seen is that price volatility of hot bands over the last three years has gotten less significant. If you look a few years ago, the volatility of the high and low was probably $250 to $300 a ton. Last year, it was probably $150 to $175. We expect this year to be closer to $100. So there's not as much volatility. But I think to answer the second part of your question, I think along with prices coming down in the marketplace, obviously driven somewhat by the imports and steel prices moving up, that's, causes more of a compression on the market as we go into the first quarter of next year through the fourth quarter of this year. So I do believe it has an effect on the margin.

Yes. That does -- well, in that type of environment, it's almost imperative that trade cases be filed. Is the trade -- who has to initiate a trade case? How do you -- what is the process for initiating a trade --

Generally, it's an industry group and not a company, although in some cases, it can be a company itself if it's a big dog in the industry. In the case of our industry, there is an industry group called The Committee on Pipe and Tube Imports. That group will be responsible for initiating the action with regard to imports. Now, U.S. Steel, which is the largest tubular products manufacturer in the United States is not a part of the Committee on Pipe and Tube Imports. So they will file their -- if they decide to do this, they would file their own action separately.

Well, I assume that you are part of this industry group. I mean it's hard to believe they haven't already started to put together the information to file this trade case and that they haven't filed it yet.

Yes, there is certainly analysis going on, Dave, with regard to these issues. There's been quite a bit of news or statements in the press with third quarter earnings release about this subject. So it is an area where we are doing analysis and there will be more consideration of what the position should be as these months proceed here.

Diane Daggatt of McAdams Ragen.

Robin, question for you with regards to SG&A, you talked about how there were outside services and you've added to your finance staff, which you definitely needed to do. Do you feel like you're at the right level now and do you expect SG&A to continue to run at about this rate of $7.5 million per quarter?

I expect about $7 million to $7.5 million going forward and certainly for the fourth quarter. We'll see about going forward. We -- I do believe my staffing is where it needs to be. We are at that level now. Some of the outside costs had to do with coming in and helping us until we got to that level, as well as working on those internal control remediation issues. But to answer your question, I do believe that about $7 million to $7.5 million in the fourth quarter is what I'm expecting.

Mason Stark, shareholder.

I have two questions, probably for Robin and both of them have just been touched on. The first one, would like to clarify on your accrued liability lines since it has popped up two quarters in a row. The last quarter was for the settlement and that sounds like this is the deferred revenue associated with this pipe that hasn't shipped yet. If that's the case, could you go through exactly, is this large pipe order or something to that nature or why there's a large tubular pipe deal. We see this on the Water side but we don't usually see this on the Tubular side.

Well, the Tubular side is just expanding more into the OCTG business, trying to do more whereas we're doing more of the value-added products. That's why we're sending them to the third party [for other services]. As we start doing this, this is more of how that business goes. It has just become more and more of what we've done. Now that particular balance from the end of June increased about $5.5 million dollars and so that's part of the cost that you're seeing in the accrued liabilities just from last quarter.

Okay. So basically this is getting, this is waiting to get shipped to a third party to add coating or something to that extent?

It's already at the third party. It is waiting for the final destination from the customer.

Got you. Okay. The other one is a follow-up on the SG&A question. A couple of quarters ago, I think after the first quarter, it's either first or second quarter, we were talking about getting the SG&A run rate down to $6.25 million I think by the end of the year, if not, even this quarter. Now we're looking more like $7.25 million, $7.50 million. Well, what -- I understand the basics of what you've mentioned but that's a huge delta on a 9.5 million share outstanding account. What has changed that to add, it looks like $4 million worth of SG&A annually to the business on that line item?

Some of the increase has to do with the -- I've added several staff people. We also incurred a lot of costs related to our audits dealing with the aftermath of that from last year. Going through figuring out how to make sure that we don't have to go through this again. So it was really just putting together an organizational plan to go forward. And there has been a lot of people added. We also brought in some consultants to make sure that we were on the right path and that's where the outside services came in, so, clearly, it wouldn't be repeated. But we did go through because the ultimate cost of going through with these [restatements] was a lot more than some of the cost we've been putting in SG&A. So we are going through and doing what we have to do, and we will be looking at those costs to make sure that they make sense going forward.

Okay. I certainly agree with that. We don't want to go through that again. But since like six months ago, we thought we were going to be a bit lower than this. How much of this $1 million a quarter increase is going to be permanent? How much of it is, looks like it's more of one-time, after we get done with using these outside consultants, and et cetera?

Well, pretty much I think that we'll probably see some of it through. I guess I'm not quite ready to answer that yet. I really need, we need to do some more work and see and get further along the process.

Brent Thielman of D.A. Davidson.

Good morning, this is Tarin filling in for Brent.

Good morning Tarin.

Hi Tarin.

So most of my questions were answered but I just wasn't sure if you could maybe talk a little bit more about what percent of the Lake Texoma project we could expect in Q4 and the second half -- first half of 2013?

Well, we don't have that off the top of our head. (laughter) But it's going to divide roughly $35 million and $35 million, and there was a little bit, I don't -- I'm not sure how much was in the third quarter off the top of my head.

It was a relatively small amount. I think the number was about $35 million and $35 million is a pretty sound number.

So 35 --

So it was about $35 million in 2012, and $35 million in 2013. So we're predicting this total for Texoma in 2012 would be about $35 million. We don't -- look at it in terms of like how it's going to be but I would say maybe two-thirds of that, of the $35 million would be in the fourth quarter.

Okay, perfect. And then, what are your feelings on your future EBITDA assumptions? Is it still -- remain the same?

Sorry, Tarin, our feelings on which assumptions?

On your future EBITDA assumptions doubling?

Well, we're still working towards that. Certainly everything we are doing is going into that direction. I guess we don't have any updates to make to that at this time.

Okay.

It's still a target. We haven't given, we haven't changed that target in the last quarter.

Okay. Perfect. And then just one last. Has there been any changes to your $22 million to $25 million CapEx assumption for the year?

Let me grab that number really quick. I think that it was mainly -- it was about, we said between $18 million and $22 million right now. That's mainly the timing of when things are coming in. We haven't necessarily changed our plans. Some things have moved out, some of it is just from the practicality of being able to schedule the work-ins and some of it getting some lead times on the equipment coming in. But we are expecting it to be between $18 million and $22 million right now for the year.

At this time, we show that we have no further questions.

Okay. Thank you everybody and we will talk to you again, I guess it won't be until the spring. Thanks very much now.

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