Nov 9, 2012
Operator
[Operator Instructions]Today's conference is being recorded. If you have any objections you may disconnect at this time.
Now I will turn the meeting over to Mr. Rich Roman.
Richard Roman
Thank you, Corey. Good morning and welcome to Northwest Pipe's conference call.
My name is Rich Roman. I am President and CEO of the company.
I am joined by Scott Montross, our Chief Operating Officer and Robin Gantt, our Chief Financial Officer.
Richard Roman
As we begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements and actual results could differ materially. Please refer to our most recent SEC filing of Form 10-K for a discussion of risk factors that could cause actual results to differ materially from expectations.
Richard Roman
Before I turn this over to Robin for a discussion of our third quarter results, let me add that there are no developments to report since our most recent disclosures with regard to the shareholder litigation or SEC investigation. Now, Robin?
Robin Gantt
Thank you, Rich. Our net income was $3.4 million or $0.36 per diluted share in the third quarter of 2012, compared to $3.3 million or $0.35 per diluted share in the third quarter of 2011.
Net income was positively impacted by a net benefit from income taxes of $686,000. During the third quarter of 2012, we performed a research and development tax credit study for fiscal years 2010 and 2011.
This led us to record a tax benefit of $1.8 million in the third quarter.
Robin Gantt
Water Transmission sales decreased 17% to $63 million in the third quarter of 2012 from $77 million in the third quarter of 2011. Water Transmission gross profit decreased to 15.2% in the third quarter from 17.3% in the third quarter of last year.
The decrease in sales in the third quarter of 2012 compared to 2011 was due to a 16% decrease in selling price per ton and a 2% decrease in tons produced. The decrease in gross profit was driven by the mix of products produced and lower volumes which had a negative impact on the fixed portion of our cost to goods sold.
Robin Gantt
Tubular Products sales decreased 17% to $52 million in the third quarter of 2012 from $62 million in the third quarter of 2011. Volume decreased 18%, which was partially offset by a 2% increase in selling prices.
We sold 42,900 tons in the third quarter of 2012 as compared to 52,100 tons in the third quarter of 2011. Tubular Products gross profit was 3.7% in the current third quarter compared to 5.1% in the third quarter of last year.
Our energy products comprised approximately 69% of Tubular Products sales in the third quarter of 2012 compared to 71% in the third quarter of 2011.
Robin Gantt
Selling, general and administrative costs increased to $7.6 million in the third quarter of 2012 compared to $6.5 million in the third quarter of 2011. It was an increase in outside services and wages and benefits in the third quarter of 2012 as we have increased the accounting and finance staff and utilized outside resources to address our internal control for mediation efforts.
Robin Gantt
Interest expense was $1.3 million in the third quarter of 2012 and $2.2 million in the third quarter of 2011. The decrease was a result of lower average borrowings and lower average interest rates.
In the first half of 2012, the company generated $22.2 million in cash from operations to support the growth of the business, mainly through our net income and depreciation and increases in our accrued liability account. These were partially offset by an increase in our cost and estimated earnings in excess of billing and inventory.
Robin Gantt
Inventories have increased $24 million since December 31. With 14 million due to an increase in coil purchased for fourth quarter water transmission production.
The remaining 10 million is an increase in tubular products inventories related to customer owned inventory, so it could not be recognized as revenue until delivery occurs.
Robin Gantt
Capital expenditures were $11.3 million, primarily for environmental upgrades at our Portland, Oregon facility and planned capacity expansion in our tubular products plants. The remainder was for ongoing maintenance capital expenditures.
Robin Gantt
Now, I will turn it over to Rich for an update on our business.
Richard Roman
As of September 30, 2012, our backlog in water transmission was approximately $241 million. As of September 30, 2011, our backlog was approximately $187 million.
The backlog in water transmission has increased substantially with the addition of the Lake Texoma Project. Production for Lake Texoma started in August and will continue through the middle of 2013.
The addition of this project along with some smaller emergency drought related work in Texas will lead to higher net sales in the water transmission segment in the fourth quarter of 2012.
Richard Roman
In tubular products, we expect to see compressed margins for the foreseeable future, as imports have had a significantly negative impact on both volume and margins. We took some short-term production reductions in the third quarter and will consider additional reductions as we react to future changes in the market.
Richard Roman
In conclusion, we anticipate fourth quarter will be the strongest quarter in 2012 for our water transmission business while we anticipate a continued competition from imports of energy products will limit profitability for our tubular products segment at least through the balance of 2012 and the first quarter of 2013.
Richard Roman
At this time, we will be happy to answer your questions.
Operator
[Operator Instructions] Scott Graham of Jefferies.
R. Scott Graham
So the weakness on the water side, I was just wondering, first of all, how many shipments did we get? Was there a dollar number for the shipments on the, like some project for the quarter?
Richard Roman
For the third quarter, you are asking? Because we started production in August.
R. Scott Graham
That's correct.
Richard Roman
I don't have here the specific numbers for Texoma, but I can tell you that Texoma runs from August, when we started up, through the, probably, April or so, but through sometime in the second quarter of next year.
R. Scott Graham
Right. So I guess my point would be that, will we exclude that?
The base business was actually a little worse in the down 17. I was just wondering, what are you seeing out there in the marketplace that would have pushed the number so much different than what we saw in last couple of quarters?
Richard Roman
And you are talking with regard to water transmission?
R. Scott Graham
Yes, water transmission.
Richard Roman
See, the water transmission marketplace continues to be very much challenged by the difficulty that we are seeing with municipal financing. So to the extent that municipal budgets or water agency budgets continue to be constrained we are seeing a real limitation in the bidding activity.
So, and I think I have mentioned this before, the activity that we are seeing is largely related to emergency work, drought related work, that sort of project that we are seeing in Texas. We have seen a handful of them in 2012 in Texas alone.
And that really is the work that is enabling us to have the revenue numbers that we are having in water transmission. If you look, for example in California, there is very little going on with regard to water transmission activity.
In large part because public finances in California are so difficult that not much is happening that doesn’t absolutely need to happen. That by the way is a phenomenon that I see continuing for the near-term.
The good news is that we have quite a bit of work in Texas that's coming up. That’s more the result of growth in population in Texas as well as the drought conditions and that is a very large market for us.
Front Range of Colorado is another place where the demographics really have dictated that you have got to something with regard to water spending, but in a place like California, which really isn't growing or at least isn’t growing faster than the nation as a whole, in terms of population, there is not the same kind of demands with regard to building new water infrastructure, and they are very reluctant in their public finances to spend on existing infrastructure of all kinds.
R. Scott Graham
Understood. Another question.
This one on the other business in tubular. Is the pricing down to, and in the first half of the year, the pricing up, is that down to, which is obviously an average for the quarter, is that flat in the first part of the quarter and actually worse in the second part of the quarter?
Or is that kind of a run rate that you are thinking of, going forward?
Robin Gantt
Pretty much pricing did get worse during the quarter, and that’s consistent with we have been hearing from many companies in the same space. It is not flattening, and it hasn’t gotten any better.
So I would say that it has gone down during the quarter.
R. Scott Graham
So in the fourth quarter that number will be a larger number? A larger negative?
Robin Gantt
We do definitely see challenges in the fourth quarter. That’s for sure.
Richard Roman
The thing that imports continue to roll in, and we have seen this as sort of a progressive phenomenon, then there will continue to be challenges to the pricing because the imported stuff is coming in at a lower price point.
R. Scott Graham
Fair enough. To adjust to this environment, maybe could you talk a little bit at what you are doing on the cash flow side?
Maybe lowering your working capital? I can see that receivables were down in the quarter, but inventory was up.
I assume, in part, because of the Lake Texoma project, but what are you guys doing to, if we were looking at rougher next couple of quarters, I am even looking at the balance sheet, I am of seeing payables paid down. I'm just wondering what are the steps the next couple of quarters that we take here to prop up cash flow when things are weaker?
Robin Gantt
Well, the inventory, I did go through the change on that. When you look from the end of December to now, we had a $14 million increase due to the coil in water transmission, but we also had the remaining increases, all due to tubular products that is customer owned.
In other words, customer paid that we are not able to recognize revenue on yet. So that’s how we are managing that.
We are keeping it in inventory, but we have already received the cash for. In terms of the accounts payable going down, part of that is because we have been buying a lot less steel for the tubular products side, as you can imagine.
So all of that is coming through. We do continue, we watch our inventories, I will say weekly but practically more often than that.
Several times a week, we are looking at our inventory on a real-time basis and making sure that it is not getting out of hand, and we had a pretty strong hit from the market in terms of all of these imports and, yet the tubular side, when you take out these customer owned inventories, did not go up. So we work very hard to get to that.
We continue to work hard to get that number down more if we can. That’s what we are working on.
Richard Roman
This sheet that I have in front of me says Doug Graham, but is this Scott Graham?
R. Scott Graham
Yes. No relation to any Doug.
Richard Roman
I thought when Corey introduced you she said Doug Graham too, and I said that sounds like Scott Graham.
R. Scott Graham
That’s okay.
Richard Roman
Anyway, Scott. Two things going on.
One is that we really are focused on inventory, as Robin said. Because as we continue to experience difficulty in the tubular products arena, we really need to drive down that inventory number and control the inventory, and we really are focused on that.
The thing that obscures it a little bit is, in terms of working capital, is that the water transmission business is going to have a good fourth quarter, and that’s what -- we are already embarked on that. So the water transmission business actually uses a lot of working capital as it grows because we are spending money a long time before we get paid in that business.
So we need to be sensitive to the fact that as you look at the use of working capital, we are focused on bringing down, especially the inventory in tubular, but we are going to see the use of more working capital on the water transmission side.
R. Scott Graham
That’s fine, okay, understood. Last question is really just surrounding the outlook in, back to water.
I am with you on this. The municipalities, the states using more operational expenses from their budget to fix their water situations and not really opening up the capital budget, per se.
R. Scott Graham
What I am wondering though is that we are hearing an increasing level of inquiries, let’s call it feet work, if you will, and I was just wondering if you were seeing even a pickup in activity, even if it was in the booking, but are you seeing things that, hey, how much longer can we go without spitting on our water infrastructure, type stuff? I was wondering if you were seeing any of that whatsoever in there today?
Richard Roman
There is definitely conversation along those lines. It gets to reflected, in conversations among the engineers in the way that they focus their business.
So I don’t know if you cover the E&C segment, but if you look at what some of them are saying, they are saying, our business isn’t going to be so much building new stuff, our business as engineers, is going to fixing old stuff. Fixing old infrastructure.
So, there is a lot more discussion at that end of the spectrum, and we have yet to see if it is going to result in projects. Eventually it will result in projects because stuff breaks, but what the engineers are trying to do is reposition their business so that they can be at the proactive end of what I will call the maintenance part of infrastructure as opposed to being at the new construction end of infrastructure.
So I think that that discussion, you hear a little bit of, is going on not only in water transmission, but in other aspects of infrastructure and I think it is going to be a theme. Replacement and repair is going to be an important or more important part of the business than new construction, at least for a little while.
Operator
Barry Vogel of Barry Vogel & Associates.
Barry Vogel
I just wanted to start off with a little bit of color on the tubular operations. First of all, I know you gave us the tonnage for water transmission backlog at 241.
Can you give us the tubular backlog at the end of September?
Robin Gantt
With the backlog in tubular, it is really not a relevant number, and I know I have said that many times. So it's just something that we decided wasn’t as relevant anymore.
Barry Vogel
Well, I remember, it is not relevant. What do you mean?
It is so small that it is not relevant?
Robin Gantt
What I mean is it is not a true indication. It is a true indication of how your next couple of weeks may look, but it's not a true indication of your total quarter, whereas water transmission really gives you a good look ahead.
We have so much spot business. So that’s what I mean.
That it is not as relevant. It may not necessarily give you the flavor for what's there.
Richard Roman
Well, in fact, Barry, it sometimes goes the wrong way. That the backlog goes between $12 million and $25 million at any given time.
But sometimes it's at $25 million dollars when the business is falling off and at $12 million when the business is growing. So in some cases it can be a counter-indication and so thought that too for that reason and the reason that it’s a relatively small number that we would focus more on the water transmission backlog.
Barry Vogel
Okay. Now, of course you have been talking to us about your major expansions which were going to increase your capacity at some point to about 400,000 tons of tubular capacity.
Can you give us an idea, first of all, on average what was the utilization rate of your tubular capacity in the third quarter, and could you give us a similar number for October?
Robin Gantt
Our utilization rate has been about 50% in the third quarter, and unless something changes in these markets, as we said, we do see the continued pressure from the imports. I think that will continue, going forward.
If the situation gets worse, then that number could get lower.
Barry Vogel
Having said that, you had an operating profit in the quarter, I think it was 1134. Looking at current business conditions that’s so much breakeven, obviously, in terms of operating profits.
What's your worse case basis for operating profits in tubular? Considering you understand what is going on, you are being very protective, making sure you don’t over produce and don’t have a significant amount of inventories, but are we looking at a breakeven number for the fourth quarter in tubular?
Or can you lose money in tubular in the fourth quarter?
Richard Roman
We are not expecting to do better than we did in third quarter, Barry, but we are not looking at, in the projections that we have today, at anything that is a negative number, either.
Barry Vogel
Okay, so it will be at probably a very low level of operating profits in the fourth quarter in tubular.
Richard Roman
I think that is to fair to say.
Barry Vogel
Okay, and can you give us an idea of where we are, and I know this all over the lot, but those two major projects that you have talked about for the last nine or so months, one with Tarrant County and one was Houston. Can you give us some real good color on where we are in both of them?
Scott Montross
Yes, and I will take that question. The Tarrant County, or the IPL project right now, the current schedule is, the project will bid in either the June or July timeframe, and we expect to be making pipe, right now as it stands, sometime in the fourth quarter of 2013.
When you look at the Houston MSA project, which I believe was originally scheduled for some time in 2014, our best and most current information tells us that it is currently looking like it's going to be more like 2015 or maybe 2016. So we have seen a little bit of a push out in the Houston project, and right now the Tarrant County project, the IPL project, is similar to what we have expected in our forecasts.
Richard Roman
And, Barry, I would add on to that. I wouldn't be surprised as given the size of both IPL project, the Tarrant County project, I wouldn’t be surprised to see that slip a little bit.
So current projections are as Scott described, but don't be surprised by the fact that it could be delayed. There is a lot of things that Tarrant County still needs to put together to make that thing arrive on schedule.
Barry Vogel
Yes, going back to your capacity that you have talked about in several conference calls, and I know you have had different expansions, different parts, different quarters, can you give us an update of where you are in the fourth quarter? When the fourth quarter ends, what would you be -- your tubular capacity in place and what might it be in the first quarter, given the completion of some of these projects?
Scott Montross
I will take that one. I think as we end the year, we are probably looking at tubular products across all of our three tubular products mills of around 400,000 tons.
When we go into the first quarter of next year, we have got a first project that we will complete in the first quarter of next year that I think will take our capacity somewhere around 425,000 tons.
Barry Vogel
Okay, so at the end of the first quarter of '13, you would have 425,000 tons of capacity?
Scott Montross
Correct.
Barry Vogel
Now, are there any other projects in tubular that you have here that’s taking some of your thoughts, going forward? I am assuming that the industry improves, but are there other projects that you are thinking about beyond the last project in the first quarter to get you to 425,000?
Scott Montross
Yes, we already have two projects on the drawing board in tubular, Barry, that will take our production beyond the 400,000 to 425,000, but more importantly these projects will allow us to greatly expand our product offerings. So we will be able to manufacture a pipe that is of greater gauge, greater thickness in terms of the wall and that will give us the ability to be able to serve a much broader range of our clients' needs.
So that is much the motivation for those kind of investments as simply expanding production in terms of total tons.
Barry Vogel
Am I right in assuming that they would be higher value-added, higher-margin products?
Scott Montross
Exactly. We are trying to move up the chain in tubular.
Operator
Gerry Sweeney of Boenning.
Gerard Sweeney
Wondered if you can give any color on potential trade cases? I know that’s been talked about in the past.
It seems to be getting a little bit more press as well. And from your results, it looks like imports are impacting the industry more and more as go in to Q3 and Q4.
Scott Montross
I had made some comments on that. I think when you look at the amount of the market share that the imports are taking, on both the oil country side and line pipe side, you are looking at somewhere between 50% and 55% of the market.
I think those imports, as Robin stated before, are starting to have a depressing effect on the pricing, especially on OCTG products. We have seen prices and the market has seen prices really deteriorate over the last several months, and same has been true for line pipe.
So with all that being said with the prices being depressed and the compression that I believe everybody is seeing on margins at this point, I think it's pretty safe to say that the trade cases are being looked at more in earnest now than they have been.
Richard Roman
I don’t know, Gerry, whether you listened in on the Tenaris call yesterday, I think it was yesterday. U.S.
steel has been hinting at it, but the Tenaris comments, I thought were pretty much the strongest and the most direct that I have seen with regard to the potential for a trade case.
Gerard Sweeney
And I am hearing it from multiple sources. So the market share, you said, 50% to 55%.
What if there's a normalized level of what import has, do you know off the top of your head as what that would be?
Scott Montross
No, it's kind of difficult to define normal. Now I think when you look back into 2011, and I am trying to remember back that far.
Import levels were more along the lines of 40% to 45%, but I think when you look at what happens to those imports, and this is off the top of my head, after there is some kind of trade action taking place that obviously drops down significantly more. Probably into the 35% range, and that's a little bit of off the top of my head number.
I would say those numbers are probably, relatively sound.
Gerard Sweeney
That’s sort of the range that I have been hearing as well. Then one question on Lake Texoma project.
If you could walk us through, how quickly when you started the production, I guess it was probably mid-August, is there a ramp up time associated with that? Can we see a lot more the project running through, as I guess as a percentage of overall production in Q4?
If you could give any color on that?
Scott Montross
I think when you look at when we got the award for the Texoma project, it was probably early or mid-summer, I am digging back to. When we started the production, really in early to mid-August, and that was we were trying to get all coil in as fast as we could to the substrate to make production, to get it started.
And the ramp up on that took a little bit longer with getting all the coil in, and we really don't hit our stride on the Texoma project until really the October timeframe, and it continues through the fourth quarter and really into the March, April timeframe of next year and a little beyond depending on which one of our facilities that you are talking about.
Gerard Sweeney
Okay, so maybe it starts to decline, we'll say in April in terms of you start winding down the project, in terms of maybe production levels?
Scott Montross
I think the April timeframe is really probably a pretty good estimate on when the project starts to wind down a bit.
Richard Roman
Just for context, Gerry. Remember that this is roughly $70 million project, of we produced roughly $35 million in 2012 and the same in 2013.
And that is so, call it $35 million of annual revenues in the context of a business segment that’s making roughly $260 million in revenue. So it's important, but it's not completely dominant.
Gerard Sweeney
No, I understood. I imagine some of the margins in that is incrementally important than once doing and then it definitely has an incremental improvement across the board on the margins than just on the volume.
Richard Roman
Exactly, because for example, we are running the Texas plant now three shifts. We are running it around-the-clock, and that obviously has a positive impact with regard to the absorption of margin.
Absorbs the fixed cost from the margin.
Operator
Matt Sherwood of Cooper Creek Partners.
Matthew Sherwood
Just had a quick question on the relation between the backlog and the sales of the water transmission business. I guess if I look back to 2011, you had maybe $194 million, $200 million of backlog and then in the second and third quarter you were doing about $150 million run rate.
So about $75 million a quarter run rate of sales. Right now you are sitting with $241 million of water backlog, and it looks like sales have been in the $60 million range.
Can you help walk through the relationship between backlog and sales on the water side?
Richard Roman
The relationship, I think if you would have wanted to a more detailed analysis, you need a little more information because what the total number of backlog does not tell you is, when that work is scheduled to occur. So generally the work occurs within 12 months.
But the first question is, how much of it is beyond 12 months? So if get a particularly project, as we had in Utah, and that project that just finished this past spring.
That project went over a number of years. So when you have first cut what is your backlog that goes beyond a year and is that only 10%, as it might be at a particular in time, or 40% of your backlog.
Once you answer that question, then you can get a little closer to being able to relate the revenues to the backlog. Even then let's just say, you take everything within a year, you still have to know how it plays out by quarter because these projects are completely independent, and they occur across the country.
They have nothing to do with one another. So they can jam up in a quarter or conversely slow down or dissolve in a particular quarter.
So, it’s part of our job to figure out how to best fit these assignments through the manufacturing facilities, so that we obtain the best utilization of those facilities as we can, given the schedule that our customers have for production.
Matthew Sherwood
Right, I mean, just taking a step back. You have been doing about $60 million of revenue despite having a backlog in the $130 million, $260 million range.
Even if you back out the Lake Texoma Project, your backlog of $69 million, your backlog is higher than that. It's at, say, $175 million, and you said that this Lake Texoma project is going to go over the next three quarters, effectively of $69 million, which in my math should be at least $20 million a quarter.
It just seems like your revenue should ramp materially. It should be closer to $80 million, $85 million in the next few quarters.
Richard Roman
It will ramp significantly in the fourth quarter of this year and the first quarter of next year. I think we tried to signal out a little bit in the materials that we have here.
You are right, fourth quarter, as we said, the fourth quarter is going to be the best quarter for water transmission this year. It is going to be a very strong quarter with regard to revenue as you have identified.
Matthew Sherwood
But saying it’s the best quarter this year, your third quarter is the second best quarter and that was down 19% year-on-year. So I guess it just maybe seems like a little bit of a conservative statement.
Scott Montross
Conservative?
Richard Roman
It's going to be a good quarter.
Matthew Sherwood
I mean, I guess, just looking at water gross margins, your gross margins have been pretty solid this year on a lower sales level. How can we look at gross margins on a go forward basis?
Richard Roman
I look at both of these businesses. Now my focus is on trying to utilize the plants as effectively as we can because what really impacts your ability to make margin here is how much volume you are running through the plant.
Because you have a significant fixed cost and so these projects that are filling up the water transmission plants really help us with the margin. We haven't seen too much of that materialize yet.
We have been able to hold our own, but you have got a couple of phenomenon going on here. You have relatively small number of projects being bid.
So the environment is competitive, but as we begin to use our capacity more effectively as you will see here in the fourth quarter, we should have a better impact on the margin. Now that sword cuts in both directions because what we are seeing on the tubular side of the business is a fall in volume, and so we have the opposite going on where we don't have as much production to absorb the fixed cost.
So we are going to be challenged on the margin side in that part of the business.
Matthew Sherwood
Right, but less challenged than you would have been otherwise if you hadn’t put the accumulator on the small mill and then putting one on the big mill in the first quarter.
Richard Roman
Right. That’s right.
Matthew Sherwood
All right, great. I guess just a final question on the tubular side.
Scott, you had suggested that the trade case has increased the domestic share of volumes from, say, 45% to 60% in the past, which would be rough or broad-brush close to 50% increase in volumes if a trade case were filed and were somewhat successful. How can we look at the way that situation could conceivably affect Northwest if the industry decides to take that step?
Scott Montross
It's really just hard to speculate on what effect the trade cases are going to have, if indeed anything does happen with those. Obviously what it does is it gives some relief from the low-priced imports for a period of time and theoretically at least allows domestic capacity to fill that space.
One of the things that we are seeing now though that as everybody sees there is more domestic capacity coming online too, as we look out in to the future. So it really is hard to speculate at this point in time what the magnitude of the impact would be.
Obviously we believe that the impact is positive if low-priced imports are kept out of the market, but it's really difficult at this point in time to judge how exactly that looks.
Matthew Sherwood
All right, and then looking at your business -- your tubular business. You are going to have to spend some capital on putting the two new accumulators on and expanding the capacity at Atchison.
And in this case, you have said, in the first half of this year you were running at 7.5% to 8% gross margin. If you were to achieve better yet similar levels of capacity utilization, could we look at a materially higher gross margin in 2013?
Robin Gantt
Pretty much we have been saying all along that we do think that we are in the low teens on that. When we said that, that was having those capacity expansions in mind.
So we don’t see anything different from that right now, assuming, like you said, that the import levels go down, and we don’t have anything to change from the low teen number that we provided before.
Matthew Sherwood
So if that happens, you still think, longer-term you could hit a similar EBITDA targets and the longer-term targets you laid out in your presentation?
Richard Roman
Matt, even though we do have some investments to make, but the fundamental issue here is volume. We have to be able to get the volume in order to make those margins.
So we need to see what's happening with regard to not only the supply side of this equation, which Scott has mentioned in terms of additional production being available, imports coming in, but also the demand side. We are seeing now a rig count that’s pretty stable.
It's come down a little bit. It's about 1,800 rigs in the U.S.
now. As long as we stay there or go up, we should see pretty healthy demand continue.
However, from 2008 to 2009, we saw the rig count fall from 2,000 to 800. So there are a lot of factors at play here that make it difficult to have a very clear vision of what you think the results are going to be in a year or two.
Matthew Sherwood
Hopefully we don’t see '08, '09 situation in the near future.
Richard Roman
Matt, I don’t think we will. I didn’t mean to suggest that.
But I am just saying that you don't see that coming and so then when it arrives, you don’t achieve what you thought you were going to achieve. You have to understand what's going on.
Operator
David Fondrie of the Heartland.
David C. Fondrie
So I am trying to reconcile a little bit 50% capacity utilization and then adding capacity and then also, I guess, bringing out more capacity for more value-added, thicker, thickness?
Richard Roman
Gauge.
David C. Fondrie
Yes, so, when you put that thicker gauge in, will you take away some of that excess capacity you have in the tubular goods now because from what you are saying, absent trade cases, it sure doesn't sound like there is going to be any uptick in tubular goods?
Richard Roman
Yes, so there are a couple of things going on here. As I say, these capacity additions, as they have been described, are not, I don’t view them so much as total capacity additions, although they will at certain product mixes, allow us to run tons.
But what's really important about what we are doing beyond the two accumulators, the one which is already installed, and the one that goes in the first quarter next year. Beyond those accumulators, what we are doing is putting ourselves in a position to make a different kind of product.
Part of that has to do with what's called a standard wall product. So what's going on here, David, is that we will actually would be able to make some, I'll call it stouter stuff that goes into the standard and structural end of the business as opposed to the energy part of the business.
But if you are going to sell that kind of thing, and we are selling to that market a little bit in the less stout material, if you are going into that end of business, you need the commercial construction industry to get off its back. Because nothing is going on really.
It's very, very quiet. But to the extent that the commercial construction industry comes back, and we are able to make a standard schedule pipe, we will have a much broader market to sell our product in.
David C. Fondrie
That’s fair. That’s the heart of my question.
Will that utilize some of that excess capacity you currently have? So you start, a little bit?
Richard Roman
Yes. The short answer is yes.
If both commercial construction and energy were to remain very strong, you would end up having to make a decision as to which one you want to manufacturing?
David C. Fondrie
Okay, perfect. That helps because in this environment, again, absent trade cases, I can't see much of an argument for increased tubular goods used.
So if you can use some of that capacity, if indeed commercial construction comes back, then you are absorbing more capacity and should get better margins overall in tubular goods.
Richard Roman
That’s the idea.
David C. Fondrie
Okay. Secondly, I guess, I don't quite understand completely that you have sold tubular goods, but they remain in your inventory.
Does that mean that you have received the cash for them? So you have not recognized them in sales, or you have recognized them in sales?
Robin Gantt
They are not in our sales.
David C. Fondrie
So when you recognize those ultimately in sales, having already received the cash, is there a profit margin that’s yet to be recognized on those?
Robin Gantt
We will have revenue and cost of goods sold reported when those are recognized and when they come through. The thing that needs to happen is the delivery.
So they need to head off to their final destination. That’s what we are waiting on.
David C. Fondrie
When you recognize the sale that's a credit from an accounting standpoint. What's the debit?
Robin Gantt
Well, we will have…
Richard Roman
Accounts receivable, it is a little bit simple, David.
Robin Gantt
(Inaudible)
David C. Fondrie
You have already received the cash, so there is not, unless the liability out there?
Robin Gantt
Yes, this is deferred revenue, which appears in our accrued liability.
David C. Fondrie
Okay, but there still is a profit margin that you will recognize on those? Because you have not recognized the profit piece of it, I take it?
Richard Roman
Yes, we don’t recognize the profit margins until the sale is recognized. And just so you understand the flow of goods here, this is a material that we produce has now gone to a processor for further treatment, probably for heat treatment.
It is not recognized. As it goes from the heat treator to our customer, I will recognize it as a sale.
Until it leaves the heat treator and goes to the customer. It left our property some time ago.
David C. Fondrie
So, I guess, it would be fair to say that those profit margins are probably more along the line of the margins that we saw in the third quarter in tubular goods as opposed to some higher profit margins?
Richard Roman
Yes, I would not say that it should be any different than any other product that is going out of the plant, better or worse.
David C. Fondrie
Lastly, can you talk a little bit about steel pricing? What you are seeing in steel prices, and maybe more importantly, how that may reflect in the margins for tubular goods?
Richard Roman
Well, there has actually been a couple of events over the last probably two months in steel pricing. Probably about a month ago, the steel producers announced it was a $40 a ton increase, and that increase, it looks like it’s being accepted by the marketplace.
About a week ago, they announced an additional $50 a ton to bring the total up to $90. That additional $50 doesn't look like it is being as widely accepted by the marketplace at this point in time, but there's still upward pressure on pricing.
I think a lot of it is really just the steel people, being in the situation where they are still close to their costs that they are forcing or trying to force prices up. I don't think the demand is so great in the marketplace right now that it is pulling the prices up.
Richard Roman
Generally what we have seen over the last couple of years is that prices will run up in the fourth quarter of the year, and then as we get in to the first quarter of the year, prices start to deteriorate, and also what we have seen is that the price volatility of hot bands over the last three years has gotten left significant. If you look a few years ago, the volatility, the high and low was probably $250 to $300 a ton.
Last year, it was probably $150 to $175. We expect this year be closer to $100.
So there's not as much volatility. But I think to answer the second part of your question, I think along with prices coming down in the marketplace, obviously driven somewhat by the imports and steel prices moving up, that causes more of a compression on the market as we go into the first quarter of next year through the fourth quarter of this year.
So I do believe it has an effect on the margin.
David C. Fondrie
Yes, well, in that type of environment, it's almost imperative that trade cases be filed. Who has to initiate a trade case?
What is the process for initiating the trade case?
Richard Roman
Generally it's an industry group and not a company. Although, in some cases, it can be a company itself, if it sort of a big dog in the industry.
In the case of our industry, there is an industry group called The Committee on Pipe and Tube Imports. That group will be responsible for initiating the action with regard to imports.
Now U.S. steel, which is the largest tubular products manufacturer in the United States, is not a part of The Committee on Pipe and Tube Imports.
So they will file their, if they decide to do this, they would file their own actions separately.
David C. Fondrie
But I assume that you are part of this industry group. It is hard to believe they haven't already started to put together the information to file a trade case and that they haven't filed it yet.
Richard Roman
Yes, there is certainly analysis going on, Dave, with regard to these issues, and there has been quite a bit of news or statements in the press with the third quarter earnings release about this subject. So it's an area where we are doing analysis, and there will be more consideration of what the position should be as these months proceed here.
Operator
Diane Daggatt of McAdams Ragen.
Diane Daggatt
Robin, a question for you with regards to SG&A. You talked about how there were outside services and you have added to your finance staff, which you definitely needed to do.
Do you feel like you are at the right level now, and do you expect SG&A to continue to run at about this rate of $7.5 million per quarter?
Robin Gantt
I expect about $7 million to $7.5 million, going forward and certainly for the fourth quarter, and we will see about going forward. I do believe my staffing is where it needs to be, with our asset level now.
Some of the outside cost had to do with coming in and helping us until we got to that level as well as working on those internal control over mediation issues. But to answer your question, I do believe with that about $7 million to $7.5 million in the fourth quarter is what I am expecting.
Operator
Mason Stark, shareholder, you may ask your question.
Mason Stark
I have 2 questions, probably for Robin, and both of them have just n touched on, but the first one, just like to clarify on the accrued liabilities line since it has popped up two quarters in a row. In the last quarter, it was for the settlement and that sounds like this is the deferred revenue associated with this pipe that hasn't shipped yet.
If that's the case, could just go through exactly is this a large line pipe order or something to that nature or why there is a large tubular pipe deal and we see this on the water side but we don’t usually see this on the tubular side.
Robin Gantt
Well, tubular side is just expanding more in to OCTG business, trying to do more whereas we are doing more of the value-added products that's why we are sending in to the third party processors. So as we start doing this, this is more of how that business goes, and it has just become more and more of what we have done.
Now that particular balance from the end of June increased about $5.5 million and so that’s part of the cost that you are seeing in accrued liabilities just for last quarter.
Mason Stark
Okay, so basically, this is waiting to get shipped to a third-party to add coating or something to that extent.
Robin Gantt
It is already at the third-party. It is waiting for the final destination from the customer.
Mason Stark
Got you, okay. The other one is just a follow-up on the SG&A question.
A couple of quarter ago, I think after the first quarter, either first or second quarter, we were talking about getting the SG&A run rate down to $6.25 million , I think, by the end of the year, if not even this quarter. Now we are looking more like $7.25 million, $7.5 million.
I understand the basics of what you mentioned, but that’s a huge delta on a $9.5 million shares outstanding count. What has change to add, it looks like $4 million worth of SG&A annually to the business on that line item?
Robin Gantt
Some of the increase has to do with -- I have added several staff people. We also incurred a lot of costs related to our audits dealing with the aftermath of that from last year.
Going through and figuring out how to make sure that we don’t have to go through this again. So it was really just putting together an organization and a plan to go forward.
There has been a lot of people added. We also brought in some consultants to make sure that we were on the right path, and that’s where the outside services came in.
Those clearly wouldn’t be repeated. But we did go through because the ultimate cost of going through these restatements is a heck of a lot more than some of the cost that we have been putting in SG&A.
So we are going through and doing what we have to do, and we will be looking at those costs to make sure that they make sense going forward.
Mason Stark
Okay, I certainly agree with that. We don’t want to go through that again.
But since like six month ago, we thought we were going to be a bit lower than this. How much of this $1 million dollar a quarter increase is permanent, and how much of it is looks like it's more one time after we get done with using these outside consultants, et cetera?
Robin Gantt
Well, pretty much I think that we will probably see some of it through. I guess I am not quite ready to answer that yet.
We need to do some more work and see and get further along the process.
Operator
Brent Thielman of D.A. Davidson.
Taryn Kuida
This is Taryn, filling in for Brent. So most of my questions were answered, but I just wasn’t sure if you could maybe talk a little bit more about what percent of the Lake Texoma project we could expect in Q4 and the first half of 2013?
Richard Roman
Well, we don’t have that off the top of our head.
Scott Montross
It's Scott. It's going to divide roughly $35 million and $35 million, and there was a little bit, I am not sure how much was in the third quarter, off my head.
Richard Roman
It was a relatively small amount. I think the number of about $35 million and $35 million is pretty a sound number.
Taryn Kuida
So $35 million, including?
Robin Gantt
That’s including the $35 million in 2012 and $35 million in 2013. So we are predicting the total for Texoma in 2012 would be about $35 million.
We don’t look at it in terms of how it is going to be, but I would say, maybe two thirds of that $35 million would be in the fourth quarter?
Taryn Kuida
Okay, perfect. Then what are your feelings on your future EBITDA assumption?
Does it still remain the same?
Richard Roman
Sorry, Taryn, our feelings on what assumptions?
Taryn Kuida
On your future EBITDA assumptions doubling?
Robin Gantt
Well, we are still working towards that. Certainly everything we are doing is going into that direction.
But I guess we don’t have any updates to make to that at this time.
Richard Roman
It is still the target, Taryn. We haven’t changed that target in the last quarter.
Taryn Kuida
Perfect. Just one last.
Has there been any changes to your $22 million to $25 million CapEx assumptions for the year?
Robin Gantt
Let me grab that number really quick. I think that was mainly.
We expect between $18 million and $22 million right now. That’s mainly the timing on when things are coming in.
We haven’t necessarily changed our plans. Some things have moved out.
Some of it just from the practicality of being able to schedule the work in. Some of it giving some lead times on equipment coming in.
But we are expecting it between $18 million and $22 million right now for the year.
Operator
At this time, I show that we have no further questions.
Richard Roman
Okay, thank you, everybody. We will talk to you again, I guess it won't be until the spring.
Thanks very much now.
Operator
This concludes today's conference. Thank you for your participation and you may disconnect at this time.