NWPX Infrastructure Inc (NWPX) 2013 Q4 法說會逐字稿

Welcome and thank you for standing by. At this time all participants will be in listen-only mode. We will have a question-and-answer after the presentation. (Operator Instructions) This call is also being recorded. If you have any objections, you may disconnect.

And now I'm turning the meeting over to your host, the CEO, Mr. Scott Montross. Sir, you may begin.

Okay, thank you, operator. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross and I am President and CEO of the Company, and am joined by Robin Gantt, our Chief Financial Officer. Before we began, 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.

I will now turn to Robin, who will discuss our fourth-quarter and full-year results.

Thank you, Scott. Our fourth quarter net loss was $17 million or $1.80 per diluted share in 2013. This included a non-cash after-tax fixed asset impairment charge of $17.3 million. Excluding this charge, adjusted net income in the fourth quarter of 2013 was $319,000 or $0.03 per diluted share compared to net income of $4.5 million or $0.48 per diluted share in the fourth quarter of 2012.

Water Transmission sales decreased 51% to $43 million in the fourth quarter of 2013 from $88 million in the fourth quarter of 2012. Water Transmission gross profit as a percent of sales decreased to 16.4% in the fourth quarter of 2013 from 19.9% in the fourth quarter of 2012.

Tubular Products sales increased 51% to $72 million in the fourth quarter of 2013 from $48 million in the fourth quarter of 2012. Volume increased 64% while average selling prices decreased 8%. We sold 66,100 tons in the fourth quarter of 2013 as compared to 40,200 tons in the fourth quarter of 2012. Tubular Products was breakeven for gross profit as a percent of sales in the fourth quarter of 2013 compared to a negative 6.3% for gross profit as a percent of sales in the fourth quarter of 2012.

Total Company inventories remained relatively the same in the fourth quarter from the third quarter of 2013. Moving on to the full-year results, our net loss was $923,000 or $0.10 per diluted share. This included the non-cash after-tax fixed asset impairment charge of $17.3 million. Excluding this charge, adjusted net income was $16.4 million or $1.72 per diluted share in 2013 compared to net income of $16.2 million or $1.72 per diluted share in 2012.

Water Transmission sales decreased to $226 million in 2013 from $269 million in 2012. Water Transmission gross profit as a percent of sales increased to 20.7% in 2013 from 16.7% in 2012. The decrease in sales was due to continued weakness in municipal markets.

The increase in gross profit and gross profit as a percent of sales was driven by a favorable product mix, including the production of Lake Texoma, the largest project in our history, as well as cost reduction initiatives. These initiatives have improved quality, reduced overhead costs, and reduced man-hours per ton.

Tubular Products sales decreased 2.4% to $249 million in 2013, from $255 million in 2012. Selling prices decreased 10% while volume increased 9%. We sold 224,300 tons in 2013 compared to 206,200 tons in 2012 (technical difficulty) compared to 4.4% in 2012. Our energy products comprised approximately 78% of Tubular Products sales in 2013 compared to 74% in 2012.

Gross profit and gross profit as a percent of sales was negatively impacted by the increased competition from imports, which exerted significant downward pressure on selling prices in volume. In addition, gross profit was negatively impacted by $4.9 million in lower of cost or market inventory adjustments. This was partially offset by cost reduction initiatives successfully implemented at our Atchison facility, which is important as we complete our capacity expansion investment project at Atchison. The investment projects completed to date have helped increase our 2013 Atchison line pipe shipments by about 50% over the 2012 shipments.

Selling, general, and administrative costs decreased to $24.2 million in 2013 compared to $28.6 million in 2012. These decreases covered a wide range of general and administrative cost categories as part of our total Company efforts to reduce overhead and administrative costs. We recorded a $27.5 million fixed asset impairment charge in 2013, which was $17.3 million after tax.

In conjunction with the preparation of our year-end financial statements, we determined that an impairment triggering event had occurred for the assets in our Bossier City, Louisiana facility due to increased competition in the OCTG market and pricing and volume pressures from imported pipe.

Interest expense was $4 million in 2013 and $5.6 million in 2012. The decrease was the result of lower average interest rates and decreased amortization of deferred financing cost partially offset by higher average borrowing. Our effective tax benefit rate was 69.7% in 2013 and our effective tax provision rate was 25.4% in 2012. During 2013, we performed a research and development tax credit study, which resulted in a net tax benefit of $900,000.

In 2013, the Company generated $20.1 million in cash from operations to support the growth of the business, mainly through our income, excluding the impairment charge, and decreases in inventory and cost and estimated earnings in excess of billing on uncompleted contracts. These were partially offset by an increase in accounts receivable and a decrease in accrued liabilities.

Depreciation was $13.3 million in 2013 and $16.3 million in 2012. Inventories decreased $3 million in 2013 from 2012. This was primarily due to a decrease in water transmission coil inventory with the decrease in production. This was partially offset by an increase in inventory due to the Permalok acquisition on December 30.

Capital expenditures were $28.5 million in 2013, primarily for planned capacity expansion in our Saginaw, Texas Water Transmission facility and our assets in Kansas line pipe facility. The remainder was for ongoing maintenance capital expenditures.

Another large investing outflow was the acquisition of Permalok Corporation on December 30 for $15.7 million in cash. We paid this through borrowings on our revolving credit agreement. Our balance on the credit agreement was $87.9 million at the end of 2013.

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

Thank you, Robin. As of December 31, 2013, our backlog in Water Transmission was approximately $103 million. As of December 31, 2012, our backlog was approximately $173 million. We expect that the first quarter of 2014 will continue to be challenging for both sides of the business. The backlog in Water Transmission has decreased as expected. We expect Water Transmission sales to be comparable to the fourth-quarter levels with gross margins in the high single digits.

The following is an outlook on upcoming Water Transmission projects. This first segment of the Tarrant County integrated pipeline job, or IPL, has bid, and we are expecting the results will be announced in late March. If our bid is successful, the earliest IPL revenue would be recognized is in the second quarter of 2014.

The second segment of IPL is expected to bid in the fourth quarter of 2014. The 22-mile Madison, Wyoming bid was pushed out from the fourth quarter of 2013 to late March, early April of 2014. The Odessa Subarea is a 40 mile pipeline project near the Snake River in Washington State that may bid in mid-2014, at the earliest. But we believe it will be closer to 2015.

The Red River job in North Dakota is approximately 140 miles and will bid in mid to late 2015. As you can see, there's some increased activity, but we expect that our Water Transmission order book will remain at low levels for at least the next quarter.

In Tubular Products, we expect compressed margin to continue into the first quarter as imports have had a negative impact on both volume and margins, and we expect our customers to continue to closely manage their inventory levels. The trade case filed in July addressing the high imports of oil country tubular goods has not yet had a significant impact on sales price or volumes.

The preliminary determination by the Commerce Department was announced in February and it was not favorable. The preliminary determination is not the final determination and could change as more information is presented. The final determination by the Commerce Department is expected in July 2014.

We continued line pipe production on the HH Pipeline in the fourth quarter at our Atchison, Kansas plant. We have produced approximately 24,000 tons through the end of 2013 and expect to produce the remainder of the approximately 36,000-ton order through the first part of the second quarter of 2014. While this line pipe order is significant, rising coil costs, deck and pipe prices, and still-depressed demand continue to put pressure on energy tubular goods margins.

In addition, our Kansas facility is currently shut down while we complete the capacity expansion project, which is installing a new Hydro tester and replacing the front end of the 16-inch mill. This shutdown will cause our Tubular Products cost to increase in the first quarter. Therefore, we expect margins in the tubular products business will be about breakeven in the first quarter.

As we announced at the beginning of 2014, we acquired Permalok Corporation on December 30, 2013. These plants have been integrated into our Water Transmission operations. We expect that this will add about 10% to Water Transmission sales in the future with similar margins to our current water transmission business.

However, as this acquisition is relatively small, and has been fully integrated into Water Transmission, we will not be reporting separate results for Permalok in the future. We expect between $16 million and $20 million of capital expenditures for 2014, which includes the remainder of the Atchison expansion currently underway and normal capital maintenance. We expect that the Atchison expansion project will be completed by the end of March.

The balance on our credit agreement is currently around $63 million, a decrease of about $25 million from year end. We continue to closely manage our current assets to provide the Company with a maximum flexibility for achieving our future growth objectives. As we previously announced, we are in the process of exploring strategic alternatives for our oil country tubular goods business.

There can be no assurances that the exploration of alternatives will result in a transaction or as to the terms, conditions or timetable of any such transaction. It is our policy not to comment on any specific discussions or any potential corporate transactions unless and until we enter into a definitive agreement with respect to such transaction.

In conclusion, we anticipate a challenging first quarter, as we have not yet seen a significant benefit from the trade case on oil country tubular goods. We believe volumes and margins in Tubular Products will remain compressed for the near-term. While there are some larger projects in Water Transmission forecasted to start production in the second half of 2014, our order book is expected to remain at low levels for the near-term. During this period of time, we will continue to work on driving costs from all of our facilities so that, as the market improves, we are positioned to take advantage of our stronger cost position as we go forward.

At this time, we would be happy to answer any questions.

(Operator Instructions) Matt Sherwood.

Congrats on good cost discipline in a very tough environment. Just my first question is, can you walk through the -- you mentioned the lower of cost or market adjustments. How much did that impact the fourth quarter versus just over the course of the year in the Tubular Segment?

It did impact the fourth quarter by about $1.5 million compared to the rest of the year. So we have been getting hits all through the year.

Okay, got you. But without -- but eventually, hopefully pricing stabilizes. And the operation legacy had a positive gross margin in Tubular, just with (inaudible) as well?

Yes.

Great. And then just in terms of the second quarter improvements to the tubular business through the heat treating arrangement and also from the capital programs like water tester and the changes to the front end of the mail at Atchison, can you talk about how those could impact you in the second quarter and beyond?

I think that on the OCTG business with heat treating, obviously, as we have discussed in previous calls, at this point we don't control any of that heat treating business or the heat treating processing of our own products. So we are basically paying a spot market price for the heat treating.

The arrangements that we have going forward are at an advantaged costs to what the market are and really give us a significantly better cost position on the OCTG business as we move into the second quarter and that heat treating arrangement comes online. I think, on the line pipe or the Atchison side of the business, the installation up to this point of the two accumulaters has really started to bear fruit for the facilities. Our uptimes are up significantly on both of the mills that we have at Atchison, and our prime yields are also up significantly.

And I think that when you look at Atchison independently, which we don't break these out on our state is, Atchison has performed strong in the past and it continued to perform strong in 2013 even with a compression between the pipe selling price and the coil selling price of over $50 a ton. I think some of the cost improvements, many of the cost improvements that we have been able to make at Atchison, really help us offset that margin compression to a great extent.

So I think what is going on, Matt, is we have really got a pretty strong platform at the Atchison facility. And with the installation of the capacity expansion project and the modernization project that we are doing at Atchison right now, we think that it creates an even stronger platform and gives us more strength into the future to compete from a better cost position as we go forward.

So I think we are -- we see some very positive signs there.

So it sounds like, everything else being equal, if pricing stayed the same, volume stayed the same, you guys would have materially better performance from the tubular segment in Q2 and beyond -- relative to Q1 and Q4, et cetera.

Yes. I think that you've got to break it into two pieces. I think that when you look at the OCTG piece, you are looking at a situation where we've all seen the impact of what the trade case has been. It really hasn't been anything to date. Not saying that, in the final determination, that the margins won't be placed against the South Koreans. But I think the impact of that along with the increased domestic capacity coming online in 2014 in the OCTG business really, really makes that ramp up even a little bit slower, even with an advantage to heat treating cost.

I think that there will still be pressure on the OCTG prices as we go forward in the market. So even though we've gotten advantaged heat treat cost, I think that our strength is more in line with improving margins there. I think the extra capacity and really the imports that show that they are really not letting up continues to have an impact on the OCTG business.

I think, on the line pipe side of the business, like I said, with the improvements that we have made at Atchison, with the costs that is already been taken out of Atchison and with the additional costs after the modernization project, I think that the platform for competing even in this market -- and like I said, Atchison did pretty well even in 2013 in a very tough market, with depressed pricing.

I think the platform for being even more competitive in, quite frankly, a bigger market, because obviously, as we have discussed, the modernization project virtually doubles the available market to us because of wall thickness and strength levels that we can make. I think that the platform for Atchison to continue to do better in the future is very strong.

Great, thanks a lot.

Scott Graham.

So I was just curious about whether you thought that the more recent decline in steel prices maybe fans the flame on legislation in your favor going forward, if there is that revision that you are talking about, if there is one. Does this fan those flames a little bit?

Scott, in what way? To the positive or the negative?

To the positive. Right? Because if prices are once again declining, right, I would think that they would be more sympathetic here. No?

Yes, I think. I think one of the things that we saw, though, through the end of last year was, really into January, a run-up in the steel prices. So part of what we saw was that, during 2013, just in that year, looking at fourth quarter of 2012 to fourth quarter of 2013, we saw a pipe price -- and whether you are looking at it on the line pipe side or the OCTG side, that came down somewhere between $80 and $85 a ton. And we saw a steel price that was only down year-over-year about $30 a ton.

So we still have significant margin compression going on. So we would hope that as they consider the final determination for the trade case that that would play into it. But as we have said in the past conference calls that we've had, we cannot rely on trade cases for the long-term viability of our facilities. So our focus continues to be driving every bit of cost out of these facilities that we possibly can so that we can compete in any market situation, whether it's high import levels or the advantage you get by having low import levels.

I think, Scott, for the trade case, I would hope that the continued compression on the margins and then the falling of the steel prices would have been looking at other things before the final determination.

Got it, okay. Now on that, though, I know that you have really been a champion of declining costs to right-size your cost structure to that, again, as you just said, whatever this price of steel is and whoever it is bidding it. My question is, where do you think you are on that curve, Scott? So maybe -- and here is maybe the way I'd frame the question. Maybe you can answer it this way.

If steel prices did not change and the level of import activity did not change from today, where do you think -- or, I should say, better yet, when do you believe that you can get to a -- in a sustainable, let's say, mid-20s or higher gross margin and a sustainable 10% gross margin in tubular? How much longer do you think it will take you to get there?

You are talking about the 20% margin on water, the water business, and 12% or whatever percent on tubular?

On the water business, I think part of it was demonstrated in 2013, where, quite frankly, you see the revenue in the topline generated by the water business and what was able to happen on the margin side. We have focused very hard on reducing our man-hours per ton. But on top of that, we've gotten a little bit more granular with that, with looking at our cost per man-hour. And we have really focused on attacking really the indirect portion of overhead and taking a lot -- continue to take a lot out of our cost per man-hour, which obviously contributes to the man-hours per ton figure.

So I think the question on the Water Transmission side, I guess the beginning part of it, is where are we on reducing cost on the Water Transmission side. If I compared this to a major league baseball game, I would say that we are still in the first inning of reducing costs. So we've got a long way to go to drive the cost out of the business. But I think what really will start to demonstrate that, on the Water Transmission side, is when the market levels begin to return to something that we would consider somewhat more normal versus what we saw in the last couple quarters of 2013.

Because what we saw in 2013, if you look at the last 36 quarters that we've had in Water Transmission, we saw the two lowest topline quarters of the last 36 quarters in a row. So obviously, when you start getting into that kind of situation, in the business and the bidding activity, as low as it is -- that really starts to bring out the aggressiveness of everybody bidding.

So I think once we get into a more normalized pattern of what the Water Transmission business had to look like, in maybe 2011 and a good part of 2012, that's when you start seeing those margins come out in Water Transmission side because I think some of those have been demonstrated in 2013.

On the tubular side of the business, again, I think the things that we are doing at our Atchison facility, you are -- there is strength at that facility where the margin generation there, which has still been pretty good in 2013 even with the market situation. I think we continue to build on that with the modernization project that's being installed now.

The OCTG business is a little bit of a rougher road because the new domestic capacity coming online, along with a higher level of imports -- and if that stays the same, we are not as competitively strong on the OCTG side cost-wise as we are at Atchison. So I think the ascent there is a little bit longer. But with the heat treating that we have now and the agreements that we have, we think that that puts us on the right track.

Okay, thank you. Last question is, do you, Robin, know where to expect the tax rate to come in next year?

Yes. It will be around 34%.

34? Thank you.

Tom Van Buskirk.

Just a couple of quick things. First, on the strategic review, I know you can't really talk about it. But if you could maybe just give a sense of the timeframe for that? And then the second thing is, with regard to the OCTG facilities, you had the write-down at Bossier City. What was unique about Bossier that drove that? And do you expect any additional impairments going forward? Or are there any factors that contribute to that, that we might see crop up another facilities?

First of all, I will answer the question on the strategic review and then let Robin talk about the fixed asset impairment to Bossier City. On the strategic review, the only thing I can say right now is that we are down the road on a process, at this point, with reviewing those and what our plans are. And really I can't make any further comments on that at this point in time.

Okay.

In terms of the write-down at Bossier, of course the factors in the OCTG market are a causative, really looked at those fixed assets and say, well, what is going on there? If we look at the carrying values, compare that to fair value, how does it look. So we took a look at the value of all of the fixed assets --so it's the equipment, the land, all of that. In Houston, which is our OCTG, we were okay on the fixed asset side. Bossier -- we were -- basically, our carrying values were higher than the fair value. So that's what led to the write-down.

In terms of if there's anything down the road, if there were, if I could see anything, I probably would have had to take it. But right now we believe that we have written it to its fair value. And so right now for Bossier we believe that we are set.

Okay. And then just to reiterate, to repeat, I think you mentioned it before. But just to clarify on the timing of IPL revenue for the first segment, assuming that the bids are red and that you win that on schedule with when they were expecting it, when would production start for that? When would we start realizing revenue?

Well, we would expect, if we were fortunate enough to get the first segment of the IPL project, we would expect it to start getting revenue sometime in mid-second quarter.

Okay, great, thanks.

Ben Oveson.

I just had a quick question about the project you mentioned coming in 2014 and 2015. Do you have any sort of number that you put on that as far as potential bid revenue, I guess?

On the projects in 2014 and 2015 or beyond 2014?

The ones you mentioned like Wyoming, Odessa?

No, we don't at this point because I think their specifications are still being drawn together. And part of the fittings and the fabrication work that would have to be done is still being quantified. But what we understand about the Odessa project is it could be 40 miles. Okay? And obviously pipeline differences, and the first segment of IPL is about 15 miles. So that gives you a little bit of a view, size-wise.

The one later in 2015, which is the Red River project that's basically bringing water from the Missouri River over to the Red River to feed water into the Dakotas and the cities in the Dakotas, that project, we hear, is anywhere from 130 to 140 miles long. So very major projects. But I don't really have any revenue numbers on those projects at this point.

Okay, that's helpful. And then I guess for the backlog, so potentially sometime in 2014 or 2015 that could be pretty lumpy quarters with backlog where one quarter would be (technical difficulty) more than --

Ben, I can't hear you very well. But I think you asked about the backlog in 2014, throughout the year. I think, when you look at 2014, we are starting in a really relatively low backlog at $103 million. So outside of some of the bigger jobs that we've talked about in 2014, like the two sections of IPL that -- one is bid and we are waiting to get the results of that and the other one is -- what we are hearing is sometime in November.

And the 22-mile Madison pipeline in Wyoming and then some smaller projects, we don't expect that the overall bidding activity increases, really, from 2013. There are just a couple major jobs in there that I think will cause the backlog to spike for periods of time. It depends when they hit and how it works into the existing backlog.

But I think that the backlog is going to remain, maybe not quite as low as it was at the end of 2013. It's going to remain at relatively low levels in 2014, with the expectation, with the additional work that we think we are going to see, and there's some pretty large projects out there for 2015, that that probably starts really making its upward trend some time in 2015.

Great. Okay, that's what I wanted to hear. And then also on the OCTG business in Bossier City, does that only produce OCTG products?

No. Bossier City makes some smaller sizes of line pipe products, but really in the smaller segment of the market. But the -- virtually 85 or so percent to 90% of the production -- in some months it's 100% of the production -- is OCTG product. Our line pipe mill, obviously, as we have discussed, is our Atchison facility.

Great. And then this one is probably one you can't answer. But as far as that asset impairment charge, about what percentage, some ballpark you could give, of the value of the OCTG business was that?

Well, the accounting standards set out to have what you need to do there. We had to go out and -- for the purposes of closing the books -- get appraisals on the property. So you're really looking at what the appraised value is of the equipment and the land. And so it's really not necessarily an indication of the value of the business. That's not how you look at it.

Great, thank you very much.

Jerry Sweeney.

Question on -- just to circle back to the IPL project, you said it was 15 miles. What kind of tonnage would that be?

We're looking at somewhere in the area of around 23,000 tons for the first segment. That's just the first segment. Now, obviously there's many segments with this. And the entire job, which takes the span of several years and, quite frankly, even beyond that, is said to be somewhere around 150,000 tons or so. So it is about 23,000 tons the first segment.

Do you know how much tonnage is, I guess, section 12 and 13, which are -- who's going to better bid this summer?

The bid on the next section is a four-quarter bid. And from what we understand, it will be similar. We think the tons are probably will bit less on the next segment.

Okay. And looking at Water Transmission going into Q1, similar revenue -- but it looks like margins are going to take a little bit of a hit in Q1. And this is compared to Q3 and Q4, you did a very nice job of keeping them up there into the 16% area. What is the differential or the delta that is occurring between, say, Q4 and Q1 that's going to drop margins down?

I think you got to look back into 2013 and look at how low the bidding level was, especially in the middle part of 2013, which is -- really, the middle of 2013, which is the stuff that we are producing now. There were some months where we booked $3 million worth of work and the next month $5 million worth of work. And it wasn't just a Northwest Pipe thing; it's an entire market thing, with all the bidding activity being so far off of the number of jobs that we normally seen. So what you saw is very competitive pricing and very aggressive stances by everybody bidding on that.

And at that point in time, when the activity is so low, it's really like throwing a group of starving people a sandwich. Everybody is going after it with everything they have. And we are seeing some of the results of that in the first quarter. Now we have seen a little bit of an uptick in the bidding activity, with things that we have bidded in the late fourth quarter of last year into the first quarter of this year, which starts making the look going forward a bit better.

But that first quarter is, what I would say, is definitely in the trough of the business. So the difference was the low number of jobs bidding and the aggressive stance of pretty much everybody in the market in quoting on those jobs.

Okay, that makes sense. And then just another -- maybe a question on the overall market. Obviously, Water Transmission is municipally driven. It seems as though state finances, maybe even some municipal finances, are starting to repair themselves. A lot of talk about some drought, climate change in the West. Water's a big issue there. What do you watch as to, are we going to start getting a potential sea change here? What do you watch to see if there's a pickup in demand, how things may change?

Well, we have got about a three-year horizon on jobs out there that we are tracking. Obviously, the third-year out is a little bit fuzzy. But we've got a pretty solid look at what it looks like two years out in jobs that are out there. Now, obviously, those jobs can get pushed out or pulled up. So we've got a pretty good look at that. So we know that the jobs are out there.

I think when you are looking at state funding, and the one that, the state is obviously in really good shape, because of the activity that's going on there is Texas. And that is a significant amount of what we are seeing, obviously IPL driven. As we go out into the future, there's a couple very large segments of the San Antonio job in 2015 and 2016.

So Texas is curing a lot of the load on state funding. And obviously, they are the ones that are spending the money due to the drought situation right now currently. And that's a big reason why we invested in upgrading the plant in Saginaw, Texas with what we think is in front of us and our ability to compete and to participate on those jobs. So we watch those jobs out of the future.

The other thing is obviously, which has been in the news recently, is the drought condition in California. And I was looking at a drought map of California a couple days ago, and virtually 95% of the state is in a severe-to-exceptional drought situation.

So we haven't really seen anything popping in California yet. Obviously, there's some reliner work and repair work going on down there to existing pipelines. But one would assume that that drought situation is going to create something as we go forward. We just haven't seen anything yet. And I think the recovery of the housing market and housing starts in the way that they are actually driving the improvement in construction market ultimately starts to transition into requirements for more water in various places, especially in more arid regions where there's a lot of population growth going on.

So we watch a pretty wide swath of things to make sure that we've got a good view on what the market is doing.

Okay, great, thanks a lot. That's all from my end.

Sir, at this time we don't have any questions on the queue. (Operator Instructions)

Any other questions?

Yes. We have a question here coming from Mr. Barry Vogel.

You had a lot of questions answered but I've got a couple that perhaps you could help me on. Scott, if you had to talk about your bolt-on acquisition strategy going forward; this is after, obviously, you bought this Permalok, which seems to make a lot of sense. What would your strategy be going forward, if you had to describe it briefly, in acquisitions.

Well, and we don't really talk about our M&A type activity. But I think, Barry, if you look back to the press release that we did back in September, we talked about certainly making sure that we are, not only fortifying our Water Transmission business, but driving growth in our Water Transmission business. So I think that gives a little bit of an insight into the things that we are looking at.

And I don't know. The Permalok acquisition was a smaller acquisition, a bolt-on. But I think that we've looked at the wide range of acquisitions that may make sense, all the way from something that's really big to things that are small that may be in developing sectors in the water-related market, whether it's wastewater or potable water, or whatever it is. We are constantly looking at those things and making sure that we are taking a view of where we are going.

But I would say that my contention has been that the Company has a lot of strength in the Water Transmission business and that we certainly need to be able to build on the strength of the Water Transmission business. Now, with that being said, obviously we have invested a lot of money in our line pipe business in Atchison, Kansas, and certainly we expect that to bear fruit going forward. But I think you really have to look back at and look at the press release to get that view of where we are focused.

Now, as far as Atchison is concerned, and you have talked about it in the past. As of, let's say, the middle of this calendar year, given an average mix of business for the facility, what would your capacity be in tons by the middle of 2014?

At the Atchison facility alone?

Yes.

Okay, so we are -- before the modernization project, we are somewhere in the area of about 250,000 tons of capacity after the installation of the two accumulators. We think that we will be about 325,000 tons of capacity or have the ability to run 325,000 tons.

Now, the whole idea behind this is also to have equipment that we can operate better, and better conversion costs, and better yields to be even more competitive on the same volume that we have now at the Atchison facility, even without increasing the bond. So I think the focus is, is how to we continue to drive cost out of that and make Atchison a bigger part of the profitability picture as we go forward.

I think the extra capacity online just is something that we will begin to, I guess, move into as we have a heavier wall and higher-strength level products. But I think you can say right now, depending on the mix, that our capacity at Atchison is somewhere in the area of 325,000 tons.

So if we go into 2015, other than maintenance costs, do you foresee trying to expand one way or the other the capacity of the Atchison facility because it's such a good facility?

Well, we are always looking at that. What we have planned out in the future right now, obviously, is the maintenance capital related to that. But there are other potential things that can be done with Atchison to continue to drive cost out of that business. So we are evaluating those every quarter as we review where we are in our three-year strategic plan. So there are things that we could look at to continue to expand that, yes.

Now, were you serious when you said you were in the first inning as it concerns cost reduction?

Yes.

And Water Transmission?

Yes.

Even though you have accomplished a lot in a very short time?

I think that when you go into a program like this, you tend to get significant gains early on and then the gains get a little bit harder to get. But we are in the mode with we have to continue to drive cost out, drive cost out, until the operating people say, hey, this is what we can do with the current configuration of the equipment. In order to do something different we have to look at a different configuration of the plants or the plant, the way the plant is laid out.

But we, I think, Barry -- we have quite a ways to go on the cost reduction side from where we are right now. A lot of it right now has been focused on making sure that we get our headcounts right and that when the market's slow that we are reducing our headcounts where we have to.

But we are just implementing the Lean manufacturing model in our Water Transmission plants now. It has gone in at Saginaw. They are through phase 1 and moving into phase 2 of that, and it is going into Denver next. And they are just getting into phase 1 at Denver. We have the rest of the Water Transmission plants to do throughout this year. We may not get to the Permalok facilities this year because we are really still integrating them into the culture of the Company. But I think Lean manufacturing is going to play big into this as we go forward.

How long do you think it would take, given the number of plants that you have and the fact you are in the first inning, how long do you think it would take objectively to accomplish all of this?

Well, you never finish working on cost. Right? So I think, one, we've got to get a market situation that allows us to run and operate our assets at what I would call a relatively normal level. And you can see, obviously, in the fourth quarter of 2013, how low they were. And you are hearing us allude to what 2014 first-quarter looks like.

I think, once you get to a normal level, which may not be until sometime in 2015, then you get to a point where I can start giving you a decent projection on how long I think it takes to get there. But I would tell you that you will probably never hear me say we are much pass the fifth inning because there's always more to do on the cost side.

Okay, that's good. I have two questions for Robin. Robin, what is your D&A projection for 2014?

I would project it to be around $24 million.

And on that credit agreement that, I think you used the term, and I wasn't sure what you are talking about, you said you had $63 million left on a credit agreement. What did that mean?

I think that was in my statement. We had about $63 million used out of our revolver at this point, and that was down $25 million from year-end.

Oh, okay.

We focused hard on our current assets and driving those down to give us maximum flexibility going forward.

And Robin, can you tell us the terms of that note?

It is a $165 million credit facility. It -- we refinanced it just over a year ago. It expires in October 2017. And it has some financial covenants in it, but basically just looking at what our income is compared to our debt.

What is the interest -- what is the cost of the facility percentage-wise?

Here at about LIBOR plus -- or, excuse me, it's LIBOR plus. And so right at the end of the year it was about 26%.

That's great. Thank you very much. Continue the good work that you guys are doing under tough conditions in terms of venues and markets.

Thanks, Barry.

At this time we don't have any questions on the queue.

Okay. Well, I would like to thank everybody for attending the call and we look forward to our next call, which is at the beginning of May, to talk about what the first quarter looks like. And at that point, we will see everybody then. Thank you very much.

Thank you.

Thank you, and that concludes today's conference. Thank you for joining and you may now disconnect.