See Note 12 of the condensed consolidated financial statements in Part I—Item I, “Financial Statements” for a description of recent accounting pronouncements, including the dates of adoption and estimated effects on financial position, results of operations and cash flows.
Results of Operations
The following tables set forth, for the period indicated, certain financial information regarding costs and expenses expressed as a percentage of total net sales and net sales of our business segments from continuing operations. The results of our OCTG business have been classified as discontinued operations and have been excluded from the tables below.
| Three months ended September 30, 2014 | Three months ended September 30, 2013 |
| $ | % of Net Sales | $ | % of Net Sales |
| Net sales |
| Water Transmission | $ | 76,857 | 66.0 | % | $ | 46,835 | 59.6 | % |
| Tubular Products | 39,648 | 34.0 | 31,692 | 40.4 |
| Total net sales | 116,505 | 100.0 | 78,527 | 100.0 |
| Cost of sales | 100,685 | 86.4 | 67,273 | 85.7 |
| Gross profit | 15,820 | 13.6 | 11,254 | 14.3 |
| Selling, general and administrative expense | 6,489 | 5.6 | 5,556 | 7.1 |
| Operating income | 9,331 | 8.0 | 5,698 | 7.2 |
| Other income | 39 | 0.0 | (242 | ) | (0.3 | ) |
| Interest income | 220 | 0.2 | 94 | 0.1 |
| Interest expense | (457 | ) | (0.4 | ) | (893 | ) | (1.1 | ) |
| Income before income taxes | 9,133 | 7.8 | 4,657 | 5.9 |
| Income tax expense | 3,275 | 2.8 | 1,923 | 2.4 |
| Income from continuing operations | $ | 5,858 | 5.0 | % | $ | 2,734 | 3.5 | % |
| Gross profit (loss) as a percentage of segment net sales: |
| Water Transmission | 21.5 | % | 16.9 | % |
| Tubular Products | (1.9 | ) | 10.5 |

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Nine months ended September 30, 2014 Nine months ended September 30, 2013 $ % of Net Sales $ % of Net Sales Net sales Water Transmission $ 182,061 60.5 % $ 183,596 67.1 % Tubular Products 119,079 39.5 90,208 32.9 Total net sales 301,140 100.0 273,804 100.0 Cost of sales 269,689 89.6 224,421 82.0 Gross profit 31,451 10.4 49,383 18.0 Selling, general and administrative expense 17,847 5.9 17,527 6.4 Operating income 13,604 4.5 31,856 11.6 Other income (expense) 2 0.0 (279 ) (0.1 ) Interest income 383 0.1 337 0.1 Interest expense (1,796 ) (0.6 ) (2,717 ) (1.0 ) Income before income taxes 12,193 4.0 29,197 10.6 Income tax expense 4,364 1.4 9,940 3.6 Income from continuing operations $ 7,829 2.6 % $ 19,257 7.0 % Gross profit as a percentage of segment net sales: Water Transmission 16.3 % 21.7 % Tubular Products 1.5 10.5 Three Months and Nine months Ended September 30, 2014 Compared to Three Months and Nine months Ended September 30, 2013 Net sales. Net sales from continuing operations increased 48.4% to $116.5 million for the third quarter of 2014 compared to $78.5 million for the third quarter of 2013 and increased 10.0% to $301.1 million for the first nine months of 2014 compared to $273.8 million for the first nine months of 2013. One customer from the Water Transmission segment accounted for 27.1% of total net sales from continuing operations in the third quarter of 2014. The same customer from the Water Transmission segment accounted for 18.4% of total net sales from continuing operations in the first nine months of 2014. No single customer accounted for more than 10% of total net sales in the third quarter of 2013. One customer in the Water Transmission segment accounted for 18.4% of total net sales from continuing operations in the first nine months of 2013. Water Transmission sales from continuing operations increased 64.1% to $76.9 million for the third quarter of 2014 compared to $46.8 million for the third quarter of 2013 and decreased 0.8% to $182.1 million for the first nine months of 2014 compared to $183.6 million for the first nine months of 2013. The increase in sales in the third quarter of 2014 compared to the third quarter of 2013 was due to a 175% increase in tons produced, partially offset by a 40% decrease in selling prices per ton. The increase in tons produced was due to the continuing work on the Tarrant County Integrated Pipeline Project and the Madison Gillette project in Wyoming. The decrease in selling prices per ton in the third quarter of 2014 was due to an overall 31% decrease in material costs per ton including steel. The decrease in sales in the first nine months of 2014 compared to the first nine months of 2013 was due to a 22% decrease in average selling price per ton partially offset by a 28% increase in tons produced. The decrease in selling prices per ton in the first nine months of 2014 was due to a 14% decrease in material costs per ton including steel. We have experienced significant competition on recent project bids, which has also contributed to decreased selling prices. Bidding activity, backlog and production levels may vary significantly from period to period affecting sales volumes. Tubular Products sales from continuing operations increased 25.1% to $39.6 million in the third quarter of 2014 compared to $31.7 million in the third quarter of 2013 and increased 32.0% to $119.1 million in the first nine months of 2014 compared to $90.2 million in the first nine months of 2013. The sales increase in the third quarter of 2014 compared to the third quarter of 2013 was due to a 23% increase in tons sold and a 2% increase in selling price per ton. We sold 39,700 tons in the third quarter of 2014 compared to 32,400 tons in the third quarter of 2013. The increase in tons sold was primarily due to increased production volumes obtained after the completion of our modernization project, which increased our capacity. The sales increase in the first nine months of 2014 compared to the same period in 2013 was due to a 33% increase in tons sold from 89,700 tons to 119,600 tons partially offset by a 1% decrease in selling price per ton. The increase in tons sold in the first nine months of 2014 was due to increased production volume capacity obtained following the completion of our modernization project and pipe shipped during the first quarter of 2014 for the Double H Pipeline project, the largest line pipe project in Company history. Energy pipe sales volume increased 26% from 21,900 tons in the third quarter of 2013 to 27,600 tons in the third quarter of 2014, and increased 52% from 59,500 tons in the first nine months of 2013 to 90,400 tons in the first nine months of 2014. Gross profit. Gross profit increased 40.6% to $15.8 million (13.6% of total net sales from continuing operations) in the third quarter of 2014 compared to $11.3 million (14.3% of total net sales from continuing operations) in the third quarter of 2013 and decreased 36.3% to $31.5 million (10.4% of total net sales from continuing operations) in the first nine months of 2014 compared to $49.4 million (18.0% of total net sales from continuing operations) in the first nine months of 2013. 18 Water Transmission gross profit increased $8.6 million, or 108.8%, to $16.6 million (21.5% of segment net sales from continuing operations) for the third quarter of 2014 compared to $7.9 million (16.9% of net sales from continuing operations) for the third quarter of 2013. Water Transmission gross profit decreased $10.2 million, or 25.6% to $29.7 million (16.3% of segment net sales from continuing operations) for the first nine months of 2014 compared to $39.9 million (21.7% of segment net sales from continuing operations) for the first nine months of 2013. The increase in gross profit as a percent of net sales in the third quarter of 2014 compared to the third quarter of 2013 was due to the mix of projects produced. The most significant factor in the reduction of gross profit for the first nine months of 2014 was the lower selling price per ton described above coupled with historically low demand in the first quarter of 2014. The mix of projects produced also contributed to the decrease in gross profit as well as $2.0 million from non-cash inventory purchase adjustments and intangible asset amortization related to our acquisition of Permalok. These decreases were partially offset by $1.7 million in reductions in estimated Permalok contingent consideration recorded through September 2014. These adjustments to gross profit were based on revisions to Permalok revenue projections. Gross profit from Tubular Products decreased $4.1 million, or 122.2%, to a $0.7 million gross loss (negative 1.9% of segment net sales from continuing operations) in the third quarter of 2014 compared to a $3.3 million gross profit (10.5% of segment net sales from continuing operations) in the third quarter of 2013 and decreased $7.7 million, or 81.7%, to $1.7 million (1.5% of segment net sales from continuing operations) in the first nine months of 2014 compared to $9.5 million (10.5% of segment net sales from continuing operations) in the first nine months of 2013. Margins were negatively impacted by a 9% increase in steel cost per ton in the quarter compared to average selling prices that increased 2%. The decrease in gross profit and gross profit as a percent of net sales in the first nine months of 2014 were negatively impacted by a 9% increase in steel coil cost per ton compared to average selling prices that increased 1%. In addition, we had an unfavorable lower of cost or market inventory adjustment of $1.4 million in the first nine months of 2014. Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.9 million to $6.5 million (5.6% of total net sales from continuing operations) for the third quarter of 2014 compared to $5.6 million (7.1% of total net sales from continuing operations) for the third quarter of 2013 and increased to $17.8 million (5.9% of total net sales from continuing operations) for the first nine months of 2014 compared to $17.5 million (6.4% of total net sales from continuing operations) for the first nine months of 2013. The increase for the third quarter of 2014 compared to the third quarter of 2013 was primarily due to higher stock incentive and bonus plan expense, additional spending with outside service providers and the inclusion of amortization expense for intangible assets associated with our acquisition of Permalok in December 2013. Interest expense. Interest expense from continuing operations was $0.5 million for the third quarter of 2014 compared to $0.9 million for the third quarter of 2013 and $1.8 million for the first nine months of 2014 compared to $2.7 million for the first nine months of 2013. The decrease in interest expense primarily was a result of lower average borrowings and lower capital lease balances during the third quarter and first nine months of of 2014 compared to the third quarter and first nine months of 2013. Income Taxes. The tax expense from continuing operations was $3.3 million in the third quarter of 2014 (an effective tax rate of 35.9%) compared to $1.9 million in the third quarter of 2013 (an effective tax rate of 41.3%) and $4.4 million in the first nine months of 2014 (an effective tax rate of 35.8%) compared to $9.9 million in the first nine months of 2013 (an effective tax rate of 34.0%). Our effective tax rate in the third quarter of 2013 was greater than our federal statutory rate of 35% primarily due to an increase in the valuation allowance related to an investment in which we were anticipating a future capital loss. Our effective tax rate was less than our federal statutory rate for the first nine months of 2013 primarily due to the favorable impact of the research and development tax credit. Liquidity and Capital Resources Sources and Uses of Cash Our principal sources of liquidity generally include operating cash flows and our bank credit agreement (“Credit Agreement”). Our principal uses of liquidity generally include capital expenditures, working capital and debt service. The condensed consolidated statements of cash flows include the impacts from discontinued operations. As of September 30, 2014, our working capital (current assets minus current liabilities) was $161.3 million compared to $195.4 million as of December 31, 2013. The primary reason for the decrease in working capital was the sale of the working capital assets associated with the OCTG business. Net cash provided by operating activities in the first nine months of 2014 was $31.2 million, including net cash provided by discontinued operations of $11.7 million. Cash from operating activities was primarily the result of fluctuations in working capital accounts including a decrease in trade receivables, an increase in billings in excess of cost on uncompleted contracts and a decrease in inventories, partially offset by increases in refundable income taxes, and prepaid expenses and other assets and a decrease in accrued liabilities. 19 Net cash provided by operating activities in the first nine months of 2013 was $21.4 million, net of $2.4 million used for discontinued operations. Our primary source of operating cash flow in the first nine months of 2013 was net income of $16.1 million and a decrease in cost and estimated earnings in excess of billings. This was partially offset by an increase in accounts receivable and a decrease in accrued and other liabilities. Fluctuations in our working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. Our revenues in the Water Transmission segment are recognized on a percentage-of-completion method; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary by project, and from period to period. Net cash provided by investing activities in the first nine months of 2014 was $18.2 million, primarily due to net proceeds of $29.8 million received from the sale of substantially all of the assets and liabilities associated with the OCTG business, partially offset by capital expenditures of $11.6 million. Capital expenditures during the first nine months of 2014 included $2.9 million for the replacement of the existing front end of our 16 inch mill and $1.5 million for a new hydro tester at our Atchison plant. Net cash used for investing activities for discontinued operations in the first nine months of 2014 was not material. Capital expenditures in 2014 are expected to be approximately $15 million to $16 million. Net cash used in investing activities in the first nine months of 2013 was $26.3 million, primarily for capital expenditures of $22.1 million related to strategic investments and funds disbursed under a notes receivable arrangement of $5.7 million. Expenditures for these strategic investments during the first nine months of 2013 included $4.0 million for the replacement of the existing front end of our 16 inch mill and $1.4 million for a new hydrotester at our Atchison plant, and $8.6 million for expansion projects at our Saginaw plant. This was partially offset by proceeds received from the sale of property and equipment of $1.7 million. Net cash used for investing activities for discontinued operations in the first nine months of 2013 was $1.9 million. Net cash used by financing activities in the first nine months of 2014 was $49.9 million, which resulted primarily from net repayments under our Credit Agreement and long-term debt totaling $41.3 million. Net cash used for financing activities for discontinued operations in the first nine months of 2014 was $0.3 million. Net cash provided by financing activities in the first nine months of 2013 was $4.9 million, which resulted primarily from net borrowings under our Credit Agreement and long-term debt of $8.1 million. Net cash used in financing activities for discontinued operations in the first nine months of 2013 was $0.9 million. We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under our credit agreements will be adequate to fund our working capital and capital requirements for the foreseeable future. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and capital and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may use a portion of our working capital or necessitate additional bank borrowings or other sources of funding. Line of Credit and Long-Term Debt At September 30, 2014, our debt consisted of $46.6 million in borrowings pursuant to its $165.0 million Credit Agreement. The Credit Agreement bears interest at rates related to LIBOR plus 1.75% to 2.75%, or the lending institution’s prime rate, plus 0.75% to 1.75%. We were able to borrow at LIBOR plus 2.00% under the Credit Agreement at September 30, 2014. Borrowings under the Credit Agreement are collateralized by substantially all of our personal property. The Credit Agreement will expire on October 24, 2017. At September 30, 2014, we had $60.2 million available under the Credit Agreement while remaining in compliance with our financial covenants, net of outstanding letters of credit. The Credit Agreement bears interest at a weighted average rate of 2.24% at September 30, 2014. During the nine month period ended September 30, 2014, we paid all principal balances related to our Series A, Series B, Series C, and Series D Term Notes, (“Term Notes”) and have no outstanding Term Note balances as of September 30, 2014. We had a total of $1.8 million in capital lease obligations outstanding at September 30, 2014. The weighted average interest rate on all of our capital leases is 9.87%. Our capital leases are for certain equipment used in the manufacturing process. 20 The Credit Agreement places various restrictions on our ability to, among other things, incur certain additional indebtedness, create liens or other encumbrances on assets, and incur additional capital expenditures. The Credit Agreement requires us to be in compliance with certain financial covenants. The results of our financial covenants as of September 30, 2014 are below. • The Consolidated Total Leverage Ratio must not be greater than 3.5:1.0. Our ratio as of September 30, 2014 is 1.53:1.0. • The Consolidated Tangible Net Worth must be greater than $214.4 million. Our Tangible Net Worth as of September 30, 2014 is $234.0 million. • The Consolidated Fixed Charge Coverage Ratio must not be less than 1.25:1.0. Our ratio at September 30, 2014 is 3.58:1.0 As of September 30, 2014, we are in compliance with all financial covenants. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position, results of operations or cash flows.
Forward Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 and Section 21E of the Exchange Act that are based on current expectations, estimates and projections about our business, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “forecasts,” “should,” “could”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include changes in demand and market prices for our products, product mix, bidding activity, the timing of customer orders and deliveries, production schedules, the price and availability of raw materials, excess or shortage of production capacity, international trade policy and regulations and other risks discussed in our Annual Report on Form 10-K/A for the year ended December 31, 2013 (the “2013 Form 10-K”) and from time to time in our other SEC filings and reports. Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.
Overview
We are a leading North American manufacturer of large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, which are primarily related to drinking water systems, and we also manufacture other welded steel pipe products for use in a wide range of applications, including energy, construction, agriculture, and industrial systems. Our pipeline systems are also used for hydroelectric power systems, wastewater systems and other applications, and we also make products for industrial plant piping systems and certain structural applications. These pipeline systems are produced by our Water Transmission Group from eight manufacturing facilities located in Portland, Oregon; Denver, Colorado; Adelanto, California; Parkersburg, West Virginia; Saginaw, Texas; St. Louis, Missouri; Salt Lake City, Utah; and Monterrey, Mexico. Our Water Transmission Group accounted for approximately 60.5% of net sales from continuing operations in the first nine months of 2014.
Our water infrastructure products are generally sold to installation contractors, who include our products in their bids to municipal agencies or privately-owned water companies for specific projects. Within the total pipeline system, our products best fit the larger-diameter, higher-pressure applications. We believe our sales are substantially driven by spending on new water infrastructure with additional spending on water infrastructure upgrades, replacements, and repairs. Pricing of our water infrastructure products is largely determined by the competitive environment in each regional market, and the regional markets generally operate independently of each other. We operate our Water Transmission business with a long-term time horizon. Projects are often planned for many years in advance and are sometimes part of fifty-year build out plans. In the near-term, we expect strained municipal budgets will continue to impact the Water Transmission Group.
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Our Tubular Products Group manufactures other welded steel products in Atchison, Kansas. The oil country tubular goods (“OCTG”) division of our business, which previously operated out of Houston, Texas and Bossier City, Louisiana, was sold on March 30, 2014 and has been classified as discontinued operations. We produce a range of products used in several different markets, including energy, construction, agriculture, and industrial systems, which are sold to distributors and used in many different applications. Our Tubular Products Group’s sales volume is typically driven by energy spending, non-residential construction spending, and general economic conditions. Our Tubular Products Group generated approximately 39.5% of net sales from continuing operations in the first nine months of 2014. Purchased steel represents a substantial portion of our cost of sales, and changes in our selling prices often correlate directly to changes in steel costs. This correlation is the greatest in our Tubular Products Group as its margins are highly sensitive to changes in steel costs, although margins are also influenced by the current level of imports and overall demand in the marketplace. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our condensed consolidated financial statements is set forth in our 2013 Form 10-K. Recent Accounting Pronouncements See Note 12 of the condensed consolidated financial statements in Part I—Item I, “Financial Statements” for a description of recent accounting pronouncements, including the dates of adoption and estimated effects on financial position, results of operations and cash flows. Results of Operations The following tables set forth, for the period indicated, certain financial information regarding costs and expenses expressed as a percentage of total net sales and net sales of our business segments from continuing operations. The results of our OCTG business have been classified as discontinued operations and have been excluded from the tables below. Three months ended September 30, 2014 Three months ended September 30, 2013 $ % of Net Sales $ % of Net Sales Net sales Water Transmission $ 76,857 66.0 % $ 46,835 59.6 % Tubular Products 39,648 34.0 31,692 40.4 Total net sales 116,505 100.0 78,527 100.0 Cost of sales 100,685 86.4 67,273 85.7 Gross profit 15,820 13.6 11,254 14.3 Selling, general and administrative expense 6,489 5.6 5,556 7.1 Operating income 9,331 8.0 5,698 7.2 Other income 39 0.0 (242 ) (0.3 ) Interest income 220 0.2 94 0.1 Interest expense (457 ) (0.4 ) (893 ) (1.1 ) Income before income taxes 9,133 7.8 4,657 5.9 Income tax expense 3,275 2.8 1,923 2.4 Income from continuing operations $ 5,858 5.0 % $ 2,734 3.5 % Gross profit (loss) as a percentage of segment net sales: Water Transmission 21.5 % 16.9 % Tubular Products (1.9 ) 10.5 17 Nine months ended September 30, 2014 Nine months ended September 30, 2013 $ % of Net Sales $ % of Net Sales Net sales Water Transmission $ 182,061 60.5 % $ 183,596 67.1 % Tubular Products 119,079 39.5 90,208 32.9 Total net sales 301,140 100.0 273,804 100.0 Cost of sales 269,689 89.6 224,421 82.0 Gross profit 31,451 10.4 49,383 18.0 Selling, general and administrative expense 17,847 5.9 17,527 6.4 Operating income 13,604 4.5 31,856 11.6 Other income (expense) 2 0.0 (279 ) (0.1 ) Interest income 383 0.1 337 0.1 Interest expense (1,796 ) (0.6 ) (2,717 ) (1.0 ) Income before income taxes 12,193 4.0 29,197 10.6 Income tax expense 4,364 1.4 9,940 3.6 Income from continuing operations $ 7,829 2.6 % $ 19,257 7.0 % Gross profit as a percentage of segment net sales: Water Transmission 16.3 % 21.7 % Tubular Products 1.5 10.5 Three Months and Nine months Ended September 30, 2014 Compared to Three Months and Nine months Ended September 30, 2013 Net sales. Net sales from continuing operations increased 48.4% to $116.5 million for the third quarter of 2014 compared to $78.5 million for the third quarter of 2013 and increased 10.0% to $301.1 million for the first nine months of 2014 compared to $273.8 million for the first nine months of 2013. One customer from the Water Transmission segment accounted for 27.1% of total net sales from continuing operations in the third quarter of 2014. The same customer from the Water Transmission segment accounted for 18.4% of total net sales from continuing operations in the first nine months of 2014. No single customer accounted for more than 10% of total net sales in the third quarter of 2013. One customer in the Water Transmission segment accounted for 18.4% of total net sales from continuing operations in the first nine months of 2013. Water Transmission sales from continuing operations increased 64.1% to $76.9 million for the third quarter of 2014 compared to $46.8 million for the third quarter of 2013 and decreased 0.8% to $182.1 million for the first nine months of 2014 compared to $183.6 million for the first nine months of 2013. The increase in sales in the third quarter of 2014 compared to the third quarter of 2013 was due to a 175% increase in tons produced, partially offset by a 40% decrease in selling prices per ton. The increase in tons produced was due to the continuing work on the Tarrant County Integrated Pipeline Project and the Madison Gillette project in Wyoming. The decrease in selling prices per ton in the third quarter of 2014 was due to an overall 31% decrease in material costs per ton including steel. The decrease in sales in the first nine months of 2014 compared to the first nine months of 2013 was due to a 22% decrease in average selling price per ton partially offset by a 28% increase in tons produced. The decrease in selling prices per ton in the first nine months of 2014 was due to a 14% decrease in material costs per ton including steel. We have experienced significant competition on recent project bids, which has also contributed to decreased selling prices. Bidding activity, backlog and production levels may vary significantly from period to period affecting sales volumes. Tubular Products sales from continuing operations increased 25.1% to $39.6 million in the third quarter of 2014 compared to $31.7 million in the third quarter of 2013 and increased 32.0% to $119.1 million in the first nine months of 2014 compared to $90.2 million in the first nine months of 2013. The sales increase in the third quarter of 2014 compared to the third quarter of 2013 was due to a 23% increase in tons sold and a 2% increase in selling price per ton. We sold 39,700 tons in the third quarter of 2014 compared to 32,400 tons in the third quarter of 2013. The increase in tons sold was primarily due to increased production volumes obtained after the completion of our modernization project, which increased our capacity. The sales increase in the first nine months of 2014 compared to the same period in 2013 was due to a 33% increase in tons sold from 89,700 tons to 119,600 tons partially offset by a 1% decrease in selling price per ton. The increase in tons sold in the first nine months of 2014 was due to increased production volume capacity obtained following the completion of our modernization project and pipe shipped during the first quarter of 2014 for the Double H Pipeline project, the largest line pipe project in Company history. Energy pipe sales volume increased 26% from 21,900 tons in the third quarter of 2013 to 27,600 tons in the third quarter of 2014, and increased 52% from 59,500 tons in the first nine months of 2013 to 90,400 tons in the first nine months of 2014. Gross profit. Gross profit increased 40.6% to $15.8 million (13.6% of total net sales from continuing operations) in the third quarter of 2014 compared to $11.3 million (14.3% of total net sales from continuing operations) in the third quarter of 2013 and decreased 36.3% to $31.5 million (10.4% of total net sales from continuing operations) in the first nine months of 2014 compared to $49.4 million (18.0% of total net sales from continuing operations) in the first nine months of 2013. 18 Water Transmission gross profit increased $8.6 million, or 108.8%, to $16.6 million (21.5% of segment net sales from continuing operations) for the third quarter of 2014 compared to $7.9 million (16.9% of net sales from continuing operations) for the third quarter of 2013. Water Transmission gross profit decreased $10.2 million, or 25.6% to $29.7 million (16.3% of segment net sales from continuing operations) for the first nine months of 2014 compared to $39.9 million (21.7% of segment net sales from continuing operations) for the first nine months of 2013. The increase in gross profit as a percent of net sales in the third quarter of 2014 compared to the third quarter of 2013 was due to the mix of projects produced. The most significant factor in the reduction of gross profit for the first nine months of 2014 was the lower selling price per ton described above coupled with historically low demand in the first quarter of 2014. The mix of projects produced also contributed to the decrease in gross profit as well as $2.0 million from non-cash inventory purchase adjustments and intangible asset amortization related to our acquisition of Permalok. These decreases were partially offset by $1.7 million in reductions in estimated Permalok contingent consideration recorded through September 2014. These adjustments to gross profit were based on revisions to Permalok revenue projections. Gross profit from Tubular Products decreased $4.1 million, or 122.2%, to a $0.7 million gross loss (negative 1.9% of segment net sales from continuing operations) in the third quarter of 2014 compared to a $3.3 million gross profit (10.5% of segment net sales from continuing operations) in the third quarter of 2013 and decreased $7.7 million, or 81.7%, to $1.7 million (1.5% of segment net sales from continuing operations) in the first nine months of 2014 compared to $9.5 million (10.5% of segment net sales from continuing operations) in the first nine months of 2013. Margins were negatively impacted by a 9% increase in steel cost per ton in the quarter compared to average selling prices that increased 2%. The decrease in gross profit and gross profit as a percent of net sales in the first nine months of 2014 were negatively impacted by a 9% increase in steel coil cost per ton compared to average selling prices that increased 1%. In addition, we had an unfavorable lower of cost or market inventory adjustment of $1.4 million in the first nine months of 2014. Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.9 million to $6.5 million (5.6% of total net sales from continuing operations) for the third quarter of 2014 compared to $5.6 million (7.1% of total net sales from continuing operations) for the third quarter of 2013 and increased to $17.8 million (5.9% of total net sales from continuing operations) for the first nine months of 2014 compared to $17.5 million (6.4% of total net sales from continuing operations) for the first nine months of 2013. The increase for the third quarter of 2014 compared to the third quarter of 2013 was primarily due to higher stock incentive and bonus plan expense, additional spending with outside service providers and the inclusion of amortization expense for intangible assets associated with our acquisition of Permalok in December 2013. Interest expense. Interest expense from continuing operations was $0.5 million for the third quarter of 2014 compared to $0.9 million for the third quarter of 2013 and $1.8 million for the first nine months of 2014 compared to $2.7 million for the first nine months of 2013. The decrease in interest expense primarily was a result of lower average borrowings and lower capital lease balances during the third quarter and first nine months of of 2014 compared to the third quarter and first nine months of 2013. Income Taxes. The tax expense from continuing operations was $3.3 million in the third quarter of 2014 (an effective tax rate of 35.9%) compared to $1.9 million in the third quarter of 2013 (an effective tax rate of 41.3%) and $4.4 million in the first nine months of 2014 (an effective tax rate of 35.8%) compared to $9.9 million in the first nine months of 2013 (an effective tax rate of 34.0%). Our effective tax rate in the third quarter of 2013 was greater than our federal statutory rate of 35% primarily due to an increase in the valuation allowance related to an investment in which we were anticipating a future capital loss. Our effective tax rate was less than our federal statutory rate for the first nine months of 2013 primarily due to the favorable impact of the research and development tax credit. Liquidity and Capital Resources Sources and Uses of Cash Our principal sources of liquidity generally include operating cash flows and our bank credit agreement (“Credit Agreement”). Our principal uses of liquidity generally include capital expenditures, working capital and debt service. The condensed consolidated statements of cash flows include the impacts from discontinued operations. As of September 30, 2014, our working capital (current assets minus current liabilities) was $161.3 million compared to $195.4 million as of December 31, 2013. The primary reason for the decrease in working capital was the sale of the working capital assets associated with the OCTG business. Net cash provided by operating activities in the first nine months of 2014 was $31.2 million, including net cash provided by discontinued operations of $11.7 million. Cash from operating activities was primarily the result of fluctuations in working capital accounts including a decrease in trade receivables, an increase in billings in excess of cost on uncompleted contracts and a decrease in inventories, partially offset by increases in refundable income taxes, and prepaid expenses and other assets and a decrease in accrued liabilities. 19 Net cash provided by operating activities in the first nine months of 2013 was $21.4 million, net of $2.4 million used for discontinued operations. Our primary source of operating cash flow in the first nine months of 2013 was net income of $16.1 million and a decrease in cost and estimated earnings in excess of billings. This was partially offset by an increase in accounts receivable and a decrease in accrued and other liabilities. Fluctuations in our working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. Our revenues in the Water Transmission segment are recognized on a percentage-of-completion method; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary by project, and from period to period. Net cash provided by investing activities in the first nine months of 2014 was $18.2 million, primarily due to net proceeds of $29.8 million received from the sale of substantially all of the assets and liabilities associated with the OCTG business, partially offset by capital expenditures of $11.6 million. Capital expenditures during the first nine months of 2014 included $2.9 million for the replacement of the existing front end of our 16 inch mill and $1.5 million for a new hydro tester at our Atchison plant. Net cash used for investing activities for discontinued operations in the first nine months of 2014 was not material. Capital expenditures in 2014 are expected to be approximately $15 million to $16 million. Net cash used in investing activities in the first nine months of 2013 was $26.3 million, primarily for capital expenditures of $22.1 million related to strategic investments and funds disbursed under a notes receivable arrangement of $5.7 million. Expenditures for these strategic investments during the first nine months of 2013 included $4.0 million for the replacement of the existing front end of our 16 inch mill and $1.4 million for a new hydrotester at our Atchison plant, and $8.6 million for expansion projects at our Saginaw plant. This was partially offset by proceeds received from the sale of property and equipment of $1.7 million. Net cash used for investing activities for discontinued operations in the first nine months of 2013 was $1.9 million. Net cash used by financing activities in the first nine months of 2014 was $49.9 million, which resulted primarily from net repayments under our Credit Agreement and long-term debt totaling $41.3 million. Net cash used for financing activities for discontinued operations in the first nine months of 2014 was $0.3 million. Net cash provided by financing activities in the first nine months of 2013 was $4.9 million, which resulted primarily from net borrowings under our Credit Agreement and long-term debt of $8.1 million. Net cash used in financing activities for discontinued operations in the first nine months of 2013 was $0.9 million. We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under our credit agreements will be adequate to fund our working capital and capital requirements for the foreseeable future. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and capital and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may use a portion of our working capital or necessitate additional bank borrowings or other sources of funding. Line of Credit and Long-Term Debt At September 30, 2014, our debt consisted of $46.6 million in borrowings pursuant to its $165.0 million Credit Agreement. The Credit Agreement bears interest at rates related to LIBOR plus 1.75% to 2.75%, or the lending institution’s prime rate, plus 0.75% to 1.75%. We were able to borrow at LIBOR plus 2.00% under the Credit Agreement at September 30, 2014. Borrowings under the Credit Agreement are collateralized by substantially all of our personal property. The Credit Agreement will expire on October 24, 2017. At September 30, 2014, we had $60.2 million available under the Credit Agreement while remaining in compliance with our financial covenants, net of outstanding letters of credit. The Credit Agreement bears interest at a weighted average rate of 2.24% at September 30, 2014. During the nine month period ended September 30, 2014, we paid all principal balances related to our Series A, Series B, Series C, and Series D Term Notes, (“Term Notes”) and have no outstanding Term Note balances as of September 30, 2014. We had a total of $1.8 million in capital lease obligations outstanding at September 30, 2014. The weighted average interest rate on all of our capital leases is 9.87%. Our capital leases are for certain equipment used in the manufacturing process. 20 The Credit Agreement places various restrictions on our ability to, among other things, incur certain additional indebtedness, create liens or other encumbrances on assets, and incur additional capital expenditures. The Credit Agreement requires us to be in compliance with certain financial covenants. The results of our financial covenants as of September 30, 2014 are below. • The Consolidated Total Leverage Ratio must not be greater than 3.5:1.0. Our ratio as of September 30, 2014 is 1.53:1.0. • The Consolidated Tangible Net Worth must be greater than $214.4 million. Our Tangible Net Worth as of September 30, 2014 is $234.0 million. • The Consolidated Fixed Charge Coverage Ratio must not be less than 1.25:1.0. Our ratio at September 30, 2014 is 3.58:1.0 As of September 30, 2014, we are in compliance with all financial covenants. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position, results of operations or cash flows.
For a discussion of the Company’s market risk associated with foreign currencies and interest rates, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in Part II of the Company’s 2013 Form 10-K/A.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosures.
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2014. Based upon this evaluation our CEO and CFO have concluded our disclosure controls and procedures were not effective as of September 30, 2014 due to the material weakness in internal control over financial reporting described below.
At the time that our Annual Report on Form 10-K for the year ended December 31, 2013 was filed on March 17, 2014 and when our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 was filed on May 9, 2014, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2013 and March 31, 2014, respectively, and management concluded that our internal control over financial reporting was effective as of December 31, 2013. Subsequent to these evaluations, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2013 and March 31, 2014 and management concluded that our internal control over financial reporting was not effective as of December 31, 2013 because of the material weakness in our internal control over financial reporting described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management has identified the following control deficiency that constituted a material weakness in our internal control over financial reporting as of June 30, 2014, which management has also determined to exist as of December 31, 2013, March 31, 2014, June 30, 2014 and September 30, 2014:
|  | We did not design and maintain effective controls over our impairment assessment of goodwill. Specifically, we did not design and maintain effective controls related to the critical review of assumptions, data inputs and results of the goodwill impairment analysis, and the identification of changes in events and circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests. |

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The control deficiency did not result in any adjustments to our annual or interim consolidated financial statements; however, the control deficiency could result in misstatements to the goodwill and impairment of goodwill account balances and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, we have determined that this control deficiency constitutes a material weakness. Plans for Remediation of Material Weakness In response to the material weakness described above, our management, with the oversight from our Audit Committee of the Board of Directors, plans to take measures to remediate the underlying causes of the material weakness. We will take the following actions to improve the design of our internal control in order to remediate this weakness: • Review, expand, and enhance documentation of the processes related to the impairment assessment of goodwill. • Design, document, and implement additional control procedures related to the review of the assumptions and data inputs used in the analysis, as well as review of the results of the goodwill impairment analysis. • Design, document, and implement control procedures specifically related to the evaluation of changes in events and circumstances which occur between annual impairment tests. • Test and evaluate the design and operating effectiveness of the control procedures. • Conclude on the effectiveness of the remediation plan. We believe these additional internal controls will be effective in remediating the material weakness described above; however, we may determine to modify the remediation plan described above. Until the remediation steps set forth above are fully implemented, the material weakness described above will continue to exist. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2014 that materially affected or are reasonably likely to materially affect our internal control over financial reporting. Part II – Other Information
Information required by this Item 1 is contained in Note 6 to the condensed consolidated financial statements, Part I—Item 1, “Financial Statements” of this report, under the caption “Commitments and Contingencies.” The text under such caption is incorporated by reference into this Item 1.
In addition to the other information set forth in this report, the factors discussed in Part I—Item 1A, “Risk Factors” in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2013 could materially affect our business, financial condition or operating results. The risks described in our Annual Report on Form 10-K/A are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, that may also materially adversely affect our business, financial condition, or operating results.
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(a) The exhibits filed as part of this Report are listed below:
| Exhibit Number | Description |
| 31.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Document |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |

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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 4, 2014 NORTHWEST PIPE COMPANY By: /s/ SCOTT MONTROSS Scott Montross Director, President and Chief Executive Officer By: /s/ ROBIN GANTT Robin Gantt Senior Vice President, Chief Financial Officer and Assistant Secretary (Principal Financial Officer) 24

Question: What is the percentage change in the company's operating income to sales ratio from the three months ended in September 2013 to those of September 2014?

Python solution:
def solution():
     #Define variables name and value
    operation_income_2014 = 9331 
    net_sales_2014 = 116505
    operation_income_2013 = 5698
    net_sales_2013 = 78527

    #Do math calculation to get the answer
    ratio_change = (operation_income_2014 / net_sales_2014) - (operation_income_2013 / net_sales_2013)
    answer = ratio_change * 100
    return answer


Answer: 0.7529953255