SecProbe.io

CORRESP
1
filename1.htm

Correspondence Letter

 January 26, 2011

 United States Securities and Exchange Commission

 1 Station Place, N.E.

Mail Stop 4631

 Washington, D.C. 20549-4631

 Attn: Terence O’Brien, Accounting Branch Chief

RE:
Northwest Pipe Company

 Form 10-K for the Fiscal Year Ended December 31, 2009

 Filed
November 4, 2010

 File No. 000-27140

 Dear Mr. O’Brien:

 Thank you for your comments regarding the above referenced filing.
The following sets forth the comments made in your letter dated December 21, 2010 and our responses thereto:

 Form 10-K for the Fiscal
Year Ended December 31, 2009

 Note 2 – Restatements of Consolidated Financial Statements, page F-12

Allocation of Certain Overhead and Support Costs, page F-13

 1. Comment: Please provide us with a detailed explanation of the errors in your method of allocating manufacturing overhead variances and indirect support costs. Provide us a detailed explanation
of the original methods, assumptions and judgments, the reasons you believe the original accounting was a mistake in the application of GAAP, a mathematical mistake, or an oversight or misuse of facts that existed at the time the financial
statements were prepared as discussed in ASC 250-10-20, and an explanation of the new methods, assumptions and judgments.

 Response:

 In order to provide a detailed explanation of the errors in our method of allocating manufacturing overhead variances and indirect support
costs, we have provided additional detail below of the impact of the restatement adjustment associated with the Allocation of Certain Overhead and Support Costs amounts described on page F-13 in our Form 10-K for the fiscal year ended
December 31, 2009.

 5721 SE Columbia Way | Suite 200 | Vancouver, WA 98661

Telephone (360) 397-6250 | Fax (360) 397-6257 | Wats (800) 978-2561

 www.nwpipe.com

 The following table presents the impact of the components of the Allocation of Certain Overhead and Support
Costs restatement adjustment, net of tax, on the Company’s previously reported consolidated retained earnings at January 1, 2007 (in thousands):

Retained earnings at January 1, 2007

 Allocation of overhead and indirect support

$
(5,233
)

 Cost pools applied to purchased materials

(2,260
)

 Other

(117
)

 Total allocation of certain overhead and support costs

$
(7,610
)

 The impact of the components of the Allocation of Certain Overhead and Support Costs restatement adjustment on the
Company’s previously reported consolidated statements of operations for the years ended December 31, 2007 and 2008 is shown in the following tables (in thousands):

 Year Ended December 31, 2007

Allocation of
overhead and
indirect support

Cost pools applied
to purchased
materials

Other

Total

 Net sales

$
(6,560
)

$
—

$
—

$
(6,560
)

 Cost of sales

—

(968
)

(15
)

(983
)

 Gross profit

(6,560
)

968

15

(5,577
)

 Selling, general and administrative

—

—

—

—

 Income before income taxes

(6,560
)

968

15

(5,577
)

 Provision for income taxes

(2,512
)

371

5

(2,136
)

 Net income

$
(4,048
)

$
597

$
10

$
(3,441
)

 Year Ended December 31, 2008

Allocation of
overhead
and
indirect support

Cost pools applied
to purchased
materials

Other

Total

 Net sales

$
(6,028
)

$
—

$
(1
)

$
(6,029
)

 Cost of sales

—

1,192

(78
)

1,114

 Gross profit

(6,028
)

(1,192
)

77

(7,143
)

 Selling, general and administrative

—

—

—

—

 Income before income taxes

(6,028
)

(1,192
)

77

(7,143
)

 Provision for income taxes

(2,317
)

(458
)

30

(2,745
)

 Net income

$
(3,711
)

$
(734
)

$
47

$
(4,398
)

 The impact of the components of the Allocation of Certain Overhead and Support Costs restatement adjustment
on the Company’s previously reported balance sheet at December 31, 2008 is as follows (in thousands):

 As of December 31, 2008

Allocation of
overhead and
indirect support

Cost pools applied
to purchased
materials

Other

Total

 Assets

 Current assets:

 Costs and estimated earnings in excess of billings on uncompleted contracts

$
(21,175
)

$
—

$
—

$
(21,175
)

 Inventories

—

(3,925
)

—

(3,925
)

 Deferred income taxes

8,183

1,528

37

9,748

 Total current assets

(12,992
)

(2,397
)

37

(15,352
)

 Total assets

$
(12,992
)

$
(2,397
)

$
37

$
(15,352
)

 Liabilities and Stockholders’ Equity

 Current liabilities:

 Accrued liabilities

$
—

$
—

$
97

$
97

 Total current liabilities

—

—

97

97

 Total liabilities

—

—

97

97

 Commitments and contingencies

 Stockholders’ equity:

 Retained earnings

(12,992
)

(2,397
)

(60
)

(15,449
)

 Total stockholders’ equity

(12,992
)

(2,397
)

(60
)

(15,449
)

 Total liabilities and stockholders’ equity

$
(12,992
)

$
(2,397
)

$
37

$
(15,352
)

 Allocation of Overhead and Indirect Support

 The most significant component of the error resulting in restatement related to the manner in which we applied manufacturing overhead variances and indirect support costs (which include project estimating
and management, corporate purchasing, corporate quality control, information technology, and other support functions) to the population of projects in process at a point in time. The indirect support costs included in the allocation consisted of
those costs incurred that meet the definition of contract costs, specifically indirect costs allocable to contracts, as provided in ASC 605-35-25-37b. The manufacturing overhead variances and indirect support costs were historically accumulated by
us in the aggregate instead of being allocated to individual contracts.

 Original Methods, Assumptions and Judgments. In determining
the costs to be applied to projects in process, we historically included manufacturing overhead variances and indirect support costs in the aggregate total contract costs incurred to date on projects in process. We estimated the amount of
manufacturing overhead variance and indirect support costs associated with projects in process and included that amount, plus the related estimated earnings, in the balance of Costs and estimated earnings in excess of billings and Net sales.
Earnings were estimated based on the average projected margin in the backlog. These manufacturing overhead variances and indirect support costs were not specifically included in the estimated cost of each contract or in the estimated gross profit
used in the percentage of completion calculations.

 Determination of Error. ASC 605-35-25-4 states, “The basic presumption should
be that each contract is the profit center for revenue recognition, cost accumulation, and income measurement. That presumption may be overcome only if a contract or series of contracts meets the conditions described for combining or segmenting
contracts.” In the course of the Audit Committee investigation we determined that our population of contracts did not meet the conditions described for combining contracts. Consequently, we concluded that the historical method of applying
manufacturing overhead variances and indirect support costs to the combined population of projects in process at a point in time was a mistake in the application of GAAP.

 In addition, our historic periodic analysis indicated that our plants overestimated contract costs in their initial cost estimate by an amount at least equal to the manufacturing overhead variances and
indirect support costs to be applied. In the course of our restatement, we performed additional review of the assumptions used in the aggregate method and recognized the flaw in our judgment that overhead variances and indirect support costs were
effectively reflected in estimated contract costs. Thus, the total estimated cost of each job in process was understated and, therefore, the gross margin was overstated. Consequently, we determined that the manufacturing overhead variance and
indirect support costs should be included in the actual contract cost and estimated cost to complete each individual contract to correctly calculate the gross margin and percentage of completion.

 New Method of Accounting. When performing our percentage of completion calculation, our new method
allocates manufacturing variances and indirect support costs to the total costs incurred for each contract on an individual basis. The new method also includes the manufacturing overhead variance in total estimated cost to complete in the period the
variance occurs, and includes an estimate of indirect support costs in total estimated cost to complete at the inception of the contract.

Cost Pools Applied to Purchased Materials

A second component of the error included in the Allocation of Overhead and Indirect Support Costs restatement adjustment relates to the manner in which we
historically have developed certain cost pools, specifically the material handling and quality inspection cost pools, which we used to apply indirect costs to purchased materials recorded in inventory.

Original Methods, Assumptions and Judgments. When material is purchased for production, costs are incurred related to activities such as
procurement, receiving and inspection. Historically, cost pools for these activities were developed for each business segment and an amount was recorded to raw material inventory (steel coil and other purchased materials). Our practice was to
include the total costs for these activities in the development of the pool rather than including only the portion attributed to raw materials.

Determination of Error. ASC 330-10-30-1 states, “The primary basis of accounting for inventories is cost, which has been defined generally as
the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and
location. It is understood to mean acquisition and production cost, and its determination involves many considerations.” In the course of our restatement we reviewed the method of developing these cost pools and noted that our original
methodology did not properly estimate the costs to be allocated to raw material inventory.

 New Method of Accounting. Our new method
collects cost information from each manufacturing facility to establish the cost pool that includes only the portion of costs attributable to raw materials. Using these updated costs pools, we then apply the costs incurred related to procurement,
receiving and inspection to the raw materials inventory.

 Capitalization and Depreciation, page F-13

2. Comment: Please provide us with a detailed explanation of how you originally determined the economic lives and residual values of the equipment
and the reasons you believe this accounting was an error as defined in ASC 250-10-20. Explain how you identified the error. Discuss your new accounting treatment. Explain why the determination certain equipment carrying values were overstated does
not represent an impairment event, to be treated as an impairment loss in the period identified pursuant to ASC-360-10-35. Explain why the change in economic lives and depreciation methods has not been treated prospectively as change in estimate
pursuant to paragraph 17 and 18 of ASC 250-10-45.

 Response:

 In order to provide a detailed explanation of the Capitalization and Depreciation errors, we have provided additional detail of the impact of the restatement adjustment associated with the Capitalization
and Depreciation amounts described on page F-13 in our Form 10-K for the fiscal year ended December 31, 2009.

 The following table
presents the impacts of the components of the Capitalization and Depreciation restatement adjustment, net of tax, on the Company’s previously reported consolidated retained earnings at January 1, 2007 (in thousands):

Retained earnings at January 1, 2007

 Capitalization of labor of Pooled Assets

$
(11,554
)

 Economic life and salvage value of Pooled Assets

(3,205
)

 Other

(540
)

 Total allocation of capitalization and depreciation

$
(15,299
)

 The impact of the components of the Capitalization and Depreciation restatement adjustment on the Company’s previously
reported consolidated statements of operations for the years ended December 31, 2007 and 2008 is shown in the following tables

 (in
thousands):

 Year Ended December 31, 2007

Capitalization of
labor of Pooled
Assets

Economic life and
salvage value of
Pooled Assets

Other

Total

 Net sales

$
—

$
—

$
—

$
—

 Cost of sales

1,063

1,748

205

3,016

 Gross profit

(1,063
)

(1,748
)

(205
)

(3,016
)

 Selling, general and administrative

—

—

(70
)

(70
)

 Operating income

(1,063
)

(1,748
)

(135
)

(2,946
)

 Other income

—

—

(2
)

(2
)

 Income before income taxes

(1,063
)

(1,748
)

(133
)

(2,944
)

 Provision for income taxes

(407
)

(670
)

(51
)

(1,128
)

 Net income

$
(656
)

$
(1,078
)

$
(82
)

$
(1,816
)

 Year Ended December 31, 2008

Capitalization of
labor of Pooled
Assets

Economic life and
salvage value of
Pooled Assets

Other

Total

 Net sales

$
—

$
—

$
—

$
—

 Cost of sales

—

2,165

219

2,384

 Gross profit

—

(2,165
)

(219
)

(2,384
)

 Selling, general and administrative

—

—

(55
)

(55
)

 Operating income

—

(2,165
)

(164
)

(2,329
)

 Other income

—

—

(94
)

(94
)

 Income before income taxes

—

(2,165
)

(70
)

(2,235
)

 Provision for income taxes

—

(831
)

(27
)

(858
)

 Net income

$
—

$
(1,334
)

$
(43
)

$
(1,377
)

 The impact of the components of the Capitalization and Depreciation restatement adjustment on the
Company’s previously reported balance sheet at December 31, 2008 is as follows (in thousands):

 As of December 31, 2008

Capitalization of
labor of Pooled
Assets

Economic life and
salvage value of
Pooled Assets

Other

Total

 Assets

 Current assets:

 Inventories

$
—

$
—

$
313

$
313

 Total current assets

—

—

313

313

 Property and equipment, net

(19,924
)

(9,132
)

(1,412
)

(30,468
)

 Total assets

$
(19,924
)

$
(9,132
)

$
(1,099
)

$
(30,155
)

 Liabilities and Stockholders’ Equity

 Deferred income taxes

$
(7,714
)

$
(3,515
)

$
(434
)

$
(11,663
)

 Total liabilities

(7,714
)

(3,515
)

(434
)

(11,663
)

 Commitments and contingencies

 Stockholders’ equity:

 Retained earnings

(12,210
)

(5,617
)

(665
)

(18,492
)

 Total stockholders’ equity

(12,210
)

(5,617
)

(665
)

(18,492
)

 Total liabilities and stockholders’ equity

$
(19,924
)

$
(9,132
)

$
(1,099
)

$
(30,155
)

 Overview

In the course of the Audit Committee investigation, we reviewed significant accounting policies and procedures, including Capitalization and Depreciation.
We had a practice of accumulating costs related to major maintenance, improvement and upgrade activities for property and equipment and capitalizing those accumulated costs as “Pooled Assets”. This practice was discontinued in mid-2008, at
which time we began to individually identify and capitalize major maintenance projects.

 We discuss in more detail below the following two
errors related to the Capitalization and Depreciation restatement adjustment: an error related to the capitalization of labor for Pooled Assets, and an error related to the original economic life and estimated salvage value determinations for Pooled
Assets. Since we concluded these items were errors, there was no impairment loss that should be recognized in the period identified.

Capitalization of Labor of Pooled Assets

The capitalized costs for Pooled Assets included the cost of a variety of purchased items as well as external and internal labor. Prior to 2008, internal
repair and maintenance labor costs were proportionately capitalized into the Pooled Assets using the ratio of capitalized material costs to total repair and maintenance material cost. There was no detailed timekeeping to support the actual amount of
labor applied to pooled capital projects until 2007, when we began keeping time records for maintenance cost center personn