NORTHWEST PIPE CO - Quarter Report: 2016 September (Form 10-Q)

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Table Of Contents

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Table Of Contents

		September 30, 2016				December 31, 2015
Assets
Current assets:
Cash and cash equivalents		$	11,805			$	10,309
Trade and other receivables, less allowance for doubtful accounts of $459 and $751			22,615				27,567
Costs and estimated earnings in excess of billings on uncompleted contracts			46,063				42,592
Inventories			20,606				29,475
Refundable income taxes			341				3,413
Assets held for sale			6,075				-
Prepaid expenses and other			962				1,923
Total current assets			108,467				115,279
Property and equipment, less accumulated depreciation and amortization  of $84,455 and $86,451			120,164				131,848
Other assets			11,638				12,253
Total assets		$	240,269			$	259,380
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of capital lease obligations		$	358			$	340
Accounts payable			4,979				4,739
Accrued liabilities			12,285				15,971
Billings in excess of costs and estimated earnings on uncompleted contracts			4,147				520
Total current liabilities			21,769				21,570
Capital lease obligations, less current portion			667				718
Deferred income taxes			2,461				5,124
Pension and other long-term liabilities			12,321				14,408
Total liabilities			37,218				41,820
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding			-				-
Common stock, $.01 par value, 15,000,000 shares authorized, 9,601,011 and 9,564,752 shares issued and outstanding			96				96
Additional paid-in-capital			118,207				117,819
Retained earnings			86,086				101,183
Accumulated other comprehensive loss			(1,338	)			(1,538	)
Total stockholders’ equity			203,051				217,560
Total liabilities and stockholders’ equity		$	240,269			$	259,380

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Table Of Contents

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net sales		$	41,088			$	52,335			$	117,077			$	191,046
Cost of sales			38,965				54,846				122,553				192,259
Gross profit (loss)			2,123				(2,511	)			(5,476	)			(1,213	)
Restructuring expense			282				-				282				-
Selling, general and administrative expense			3,904				4,773				12,594				17,199
Impairment of Water Transmission goodwill			-				-				-				5,282
Operating loss			(2,063	)			(7,284	)			(18,352	)			(23,694	)
Other income			16				24				51				82
Interest income			10				10				14				173
Interest expense			(134	)			(195	)			(371	)			(898	)
Loss before income taxes			(2,171	)			(7,445	)			(18,658	)			(24,337	)
Income tax benefit			(2,898	)			(5,930	)			(3,561	)			(8,642	)
Net income (loss)		$	727			$	(1,515	)		$	(15,097	)		$	(15,695	)
Basic income (loss) per share		$	0.08			$	(0.16	)		$	(1.58	)		$	(1.64	)
Diluted income (loss) per share		$	0.08			$	(0.16	)		$	(1.58	)		$	(1.64	)
Shares used in per share calculations:
Basic			9,597				9,565				9,583				9,558
Diluted			9,620				9,565				9,583				9,558

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Table Of Contents

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net income (loss)		$	727			$	(1,515	)		$	(15,097	)		$	(15,695	)
Other comprehensive income (loss):
Pension liability adjustment, net of tax			100				109				299				327
Deferred gain (loss) on cash flow derivatives, net of tax			17				15				(99	)			(16	)
Other comprehensive income			117				124				200				311
Comprehensive income (loss)		$	844			$	(1,391	)		$	(14,897	)		$	(15,384	)

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Table Of Contents

		Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities:
Net loss		$	(15,097	)		$	(15,695	)
Adjustments to reconcile net loss to net cash provided by  operating activities:
Depreciation			7,373				6,664
Impairment of goodwill			-				5,282
Amortization of intangible assets			392				410
Provision for doubtful accounts			(292	)			(200	)
Amortization of debt issuance costs			124				203
Deferred income taxes			(3,575	)			(2,415	)
Stock based compensation expense			1,332				1,340
Unrealized loss (gain) on foreign currency forward contracts			294				(173	)
Adjustments to contingent consideration			(1,042	)			276
Other, net			14				31
Changes in operating assets and liabilities:
Trade and other receivables, net			5,244				19,121
Insurance settlements			-				2,625
Costs and estimated earnings in excess of billings on uncompleted contracts, net			156				5,007
Inventories			8,931				23,946
Refundable income taxes			3,072				(3,523	)
Prepaid expenses and other assets			710				1,321
Accounts payable			489				(4,129	)
Accrued and other liabilities			(3,303	)			(2,287	)
Net cash provided by operating activities			4,822				37,804
Cash flows from investing activities:
Additions to property and equipment			(1,790	)			(7,704	)
Proceeds from sale of business			-				4,300
Proceeds from sale of property and equipment			20				55
Collections on notes receivable			-				7,219
Net cash provided by (used in) investing activities			(1,770	)			3,870
Cash flows from financing activities:
Tax withholdings related to net share settlements of restricted stock and performance stock awards			(31	)			(423	)
Borrowings on line of credit			-				77,750
Repayments on line of credit			-				(116,785	)
Payments on capital lease obligations			(292	)			(2,127	)
Payments of contingent consideration			(1,233	)			-
Other financing activities			-				19
Net cash used in financing activities			(1,556	)			(41,566	)
Change in cash and cash equivalents			1,496				108
Cash and cash equivalents, beginning of period			10,309				527
Cash and cash equivalents, end of period		$	11,805			$	635
Non-Cash Investing Activity:
Capital lease additions		$	259			$	16
Accrued property and equipment purchases		$	147			$	356

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Table Of Contents

1.	Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Northwest Pipe Company (the “Company”) and its subsidiaries in which the Company exercises control as of the financial statement date. Intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The financial information as of December 31, 2015 is derived from the audited consolidated financial statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature) for the fair statement of the results of the interim periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2015 Form 10-K.

 

Certain amounts from the prior year financial statements have been reclassified in order to conform to the current year presentation.

 

Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2016.

 

2.	Inventories

 

Inventories are stated at the lower of cost or market and consist of the following (in thousands):

 

 

 

Long-term inventories are recorded in other assets.

 

3.	Assets Held for Sale

 

The Company classifies assets as held for sale when all the following criteria are met: (i) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (ii) the asset or disposal group is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (iv) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale, within one year, with a few exceptions; and (v) the asset or disposal group is being actively marketed for sale at a price that is reasonable, in relation to its current fair value.

 

As of September 30, 2016, assets held for sale of $6.1 million consists of a disposal group comprised of real estate and certain equipment at the Company's Denver, Colorado location, which is part of the Water Transmission segment. The decision to close the Denver facility and sell the property was driven primarily by the need to address the significant imbalance between production capacity and demand in the steel water pipe market. As the fair value less costs to sell of the disposal group exceeds the carrying value, no impairment charge has been recorded in the accompanying financial statements. Assets are no longer depreciated once classified as held for sale. See Note 16 for discussion of the sale of Denver subsequent to September 30, 2016.

  

 

For the three and nine months ended September 30, 2016, pre-tax loss generated by the Denver facility was $0.2 million and $2.9 million, respectively. For the three and nine months ended September 30, 2015, pre-tax loss of $0.9 million and $0.5 million, respectively, was generated by the Denver facility.

 

4.	Fair Value Measurements

 

The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.

 

The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. These levels are: Level 1 (inputs are quoted prices in active markets for identical assets or liabilities); Level 2 (inputs are other than quoted prices that are observable, either directly or indirectly through corroboration with observable market data); and Level 3 (inputs are unobservable, with little or no market data that exists, such as internal financial forecasts). The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

 

The following table summarizes information regarding the Company’s financial assets and financial liabilities that are measured at fair value (in thousands):

 

  

 

 

The deferred compensation plan assets consist of cash and several publicly traded stock and bond mutual funds, valued using quoted market prices in active markets, classified as Level 1 within the fair value hierarchy, as well as guaranteed investment contracts, valued at principal plus interest credited at contract rates, classified as Level 2 within the fair value hierarchy.

 

The Company’s derivatives consist of foreign currency forward contracts, which are accounted for as cash flow hedges, and are valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and currency rates, classified as Level 2 within the valuation hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company.

  

 

The contingent consideration liability is associated with the acquisition of Permalok Corporation in December 2013 and represents the probability weighted average contingent payment as a percentage of high, mid, and low revenue projections. The inputs used to measure contingent consideration are classified as Level 3 within the valuation hierarchy. The valuation is not supported by market criteria and reflects the Company’s internal revenue forecasts. Changes in the fair value of the contingent consideration obligation will be reflected in cost of sales during the period the change occurs.

 

The net carrying amounts of cash and cash equivalents, trade and other receivables, accounts payable, accrued liabilities and borrowings on line of credit approximate fair value due to the short-term nature of these instruments.

 

5.	Derivative Instruments and Hedging Activities

 

The Company conducts business in various foreign countries and, from time to time, settles transactions in foreign currencies. The Company has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures, typically arising from sales contracts denominated in Canadian currency. Instruments that do not qualify for cash flow hedge accounting treatment are remeasured at fair value on each balance sheet date and resulting gains and losses are recognized in income. As of September 30, 2016 and December 31, 2015, all derivative contracts held by the Company were designated as cash flow hedges. As of September 30, 2016 and December 31, 2015, the total notional amount of the derivative contracts designated as cash flow hedges was $4.7 million (CAD$6.1 million) and $6.3 million (CAD$8.7 million), respectively. Derivative assets are included within prepaid expenses and other current assets and derivative liabilities are included within accrued liabilities in the condensed consolidated balance sheets. All of the Company’s foreign currency forward contracts are subject to an enforceable master netting arrangement. The Company presents the assets and liabilities associated with its foreign currency forward contracts at their gross fair values within the condensed consolidated balance sheets.

 

For each derivative contract entered into in which the Company seeks to obtain cash flow hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific firm commitments or forecasted transactions and designating the derivatives as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative contracts that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective portion of these hedged items is reflected in other comprehensive income in stockholders’ equity. If it is determined that a derivative contract is not highly effective, or that it has ceased to be a highly effective hedge, the Company will be required to discontinue hedge accounting with respect to that derivative contract prospectively.

 

All of the Company’s Canadian forward contracts have maturities of 12 months or less as of September 30, 2016.

 

For the three and nine months ended September 30, 2016, gains (losses) recognized in net sales from derivative contracts not designated as hedging instruments were $76,000 and ($133,000), respectively. For both the three and nine months ended September 30, 2015, gains from derivative contracts not designated as hedging instruments recognized in net sales totaled $0.2 million. At September 30, 2016 and September 30, 2015, there was ($20,000) and $18,000, respectively, of unrealized pretax gains (losses) on outstanding derivatives in accumulated other comprehensive loss. Substantially all of the amount in accumulated other comprehensive loss at September 30, 2016 is expected to be reclassified to net sales within the next 12 months as a result of underlying hedged transactions also being recorded in net sales. See Note 11, “Accumulated Other Comprehensive Loss” for additional quantitative information regarding derivative gains and losses.

 

6.	Commitments and Contingencies

 

Portland Harbor Superfund

 

On December 1, 2000, a section of the lower Willamette River known as the Portland Harbor Site was included on the National Priorities List at the request of the United States Environmental Protection Agency (the “EPA”). While the Company’s Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facility’s stormwater system drains into a neighboring property’s privately owned stormwater system and slip. Since the listing of the site, the Company was notified by the EPA and the Oregon Department of Environmental Quality (“ODEQ”) of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”). In 2008, the Company was asked to file information disclosure reports with the EPA (CERCLA 104 (e) information request). A remedial investigation and feasibility study (“RI/FS”) of the Portland Harbor Site has been directed by a group of 14 potentially responsible parties known as the Lower Willamette Group (the “LWG”) under agreement with the EPA. The remedial investigation report was finalized in February 2016. The feasibility study (“FS”) was finalized in June 2016 by the EPA, and identified multiple remedial alternatives. The EPA published its Proposed Plan for public comment in June 2016. The Proposed Plan recommends an Alternative Remedy that EPA believes will take 7 years and $745 million to construct. The Proposed Plan does not determine who is responsible for the costs of cleanup or how the cleanup costs will be allocated among the potentially responsible parties.

  

 

In 2001, groundwater containing elevated volatile organic compounds (“VOCs”) was identified in one localized area of leased property adjacent to the Portland facility furthest from the river. Assessment work was conducted in 2002 and 2003 to further characterize the groundwater. In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (the “Agreement”) with ODEQ. The Company performed RI work required under the Agreement and submitted a draft RI/Source Control Evaluation Report (“SCE”) in December 2005, a revised draft RI/SCE Report in January 2014, and a further revised RI/SCE Report in March 2015. In May 2015, and subsequently in August and October 2015, the Company received the EPA’s and ODEQ’s comments, respectively, requesting additional information and modifications to the revised RI/SCE Report, including the request to conduct additional groundwater sampling. The Company provided a Supplemental Groundwater Sampling Work Plan (“proposed Work Plan”) in December 2015. The DEQ and EPA provided comments to the proposed Work Plan in January 2016 and made additional requests in February 2016. The Company provided a Final Supplemental Groundwater Sampling Work Plan in the third quarter of 2016, and the DEQ approved work to proceed.     

 

Concurrent with the activities of the EPA and ODEQ, the Portland Harbor Natural Resources Trustee Council (“Trustees”) sent some or all of the same parties, including the Company, a notice of intent to perform a Natural Resource Damage Assessment (“NRDA”) for the Portland Harbor Site to determine the nature and extent of natural resource damages under CERCLA section 107. The Trustees for the Portland Harbor Site consist of representatives from several Northwest Indian Tribes, three federal agencies and one state agency. The Trustees act independently of the EPA and ODEQ. The Trustees have encouraged potentially responsible parties to voluntarily participate in the funding of their injury assessments and several of those parties have agreed to do so. In June 2014, the Company agreed to participate in the injury assessment process, which included funding $0.4 million of the assessment; of this amount, $0.2 million was paid in July 2014 and the remainder was paid in January 2015. The Company has not assumed any additional payment obligations or liabilities with the participation with the NRDA.

 

The Company’s potential liability is a portion of the costs of the remedy the EPA will select for the entire Portland Harbor Superfund Site. The cost of that remedy is expected to be allocated among more than 100 potentially responsible parties. Because of the large number of responsible parties and the variability in the range of remediation alternatives, the Company is unable to estimate an amount or an amount within a range of costs for its obligation with respect to the Portland Harbor Site matters, and no further adjustment to the consolidated financial statements has been recorded as of the date of this filing. The Company has insurance policies for defense costs, as well as indemnification policies it believes will provide reimbursement for any share of the remediation assessed. However, the Company can provide no assurance that those policies will cover all of the costs which the Company may incur.

 

In December 2014, a federal district court approved settlements between the Company and two of its insurance carriers. The Company released its interests in the related insurance policies, and received $2.6 million in January 2015 for reimbursement of past indemnification and defense costs incurred by the Company associated with the Portland Harbor Site, substantially all of which reduced cost of sales in 2014. Notwithstanding these settlements, the Company continues to have insurance coverage for indemnification and defense costs related to the Portland Harbor Site as described above.

 

Houston Environmental Issue

 

In connection with the Company’s sale of its oil country tubular goods (“OCTG”) business, a Limited Phase II Environmental Site Assessment was conducted at the Houston, Texas plant and completed in March 2014, which revealed the presence of VOCs in the groundwater and certain metals in the soil. In June 2014, the Company was accepted into the Texas Commission on Environmental Quality (“TCEQ”) Voluntary Cleanup Program (“VCP”) to address these issues and obtain a Certificate of Completion (“COC”) from TCEQ. The cost of any potential assessment and cleanup will not be covered by insurance. However, any costs incurred will be reimbursed by the purchaser of the OCTG business if the purchaser exercises its option to purchase the property under certain circumstances after the COC is obtained.

 

The proposed remediation approach includes a municipal ordinance to prevent consumption of shallow groundwater from beneath the property, thereby eliminating the need for more costly remediation measures. In February 2016, the Company submitted an application to the City of Houston under the municipal ordinance, and is currently in the process of satisfying the requirements of the City and TCEQ to obtain approval of the application. 

 

While the final remediation approach has not yet been determined, the Company has completed an initial assessment and currently estimates that the future costs associated with the VCP will be between $0.1 million and $1.6 million. At September 30, 2016, the Company has a $0.2 million accrual for remediation costs based on the low-end estimate of future costs using a probability-weighted analysis of remediation approaches, and estimates that completion of the VCP process will occur between the third quarter of 2017 and the third quarter of 2019.

  

 

All Sites

 

The Company operates its facilities under numerous governmental permits and licenses relating to air emissions, storm water run-off, and other environmental matters. The Company’s operations are also governed by many other laws and regulations, including those relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations there under which, among other requirements, establish noise and dust standards. The Company believes it is in material compliance with its permits and licenses and these laws and regulations, and the Company does not believe that future compliance with such laws and regulations will have a material adverse effect on its financial position, results of operations or cash flows.

 

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of its business. The Company maintains insurance coverage against potential claims in amounts that are believed to be adequate. To the extent that insurance does not cover legal, defense, and indemnification costs associated with a loss contingency, such costs will be expensed as incurred. The Company believes that it is not presently a party to any other litigation, the outcome of which would have a material adverse effect on its business, financial condition, results of operations or cash flows.

 

Guarantees

 

The Company has entered into certain stand-by letters of credit that total $2.0 million at September 30, 2016. The stand-by letters of credit relate to workers’ compensation insurance.

 

7.     Segment Information

 

The Company’s business is the manufacturing of welded steel pipe. Within this business, the Company’s operations are organized into two reportable segments: the Water Transmission Group and the Tubular Products Group. These reportable segments are based on the nature of the products and the manufacturing process. The two segments represent distinct business activities, which management evaluates based on segment gross profit and operating income. Transfers between segments in the periods presented were not material.

 

The Water Transmission Group manufactures large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, which are primarily related to drinking water systems. These products are also used for hydroelectric power systems, wastewater systems and other applications. In addition, the Water Transmission Group makes products for industrial plant piping systems and certain structural applications.

 

The Tubular Products Group manufactures and markets smaller diameter, electric resistance welded steel pipe used in a wide range of applications, including energy, construction, agriculture and industrial systems.  

  

 

 

 

(1)     Operating loss for the Water Transmission Group for the nine months ended September 30, 2015 includes the write-off of Water Transmission goodwill of $5.3 million in the second quarter of 2015.

 

8.     Share-based Compensation      

 

The Company has one active stock incentive plan for employees and directors: the 2007 Stock Incentive Plan, which provides for awards of stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units (RSUs) and performance share awards (PSAs). In addition, the Company has one inactive stock option plan, the 1995 Stock Option Plan for Nonemployee Directors, under which previously granted options remain outstanding.

 

The Company recognizes compensation cost as service is rendered based on the fair value of the awards. The following table summarizes share-based compensation expense recorded (in thousands):

 

 

 

As of September 30, 2016, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $1.5 million, which is expected to be recognized over a weighted average period of 1.1 years.

  

 

 Stock Option Awards

 

A summary of the status of the Company’s stock options as of September 30, 2016 and changes during the nine months then ended is presented below:

 

 

 

Restricted Stock Units and Performance Stock Awards

 

A summary of the status of the Company’s RSUs and PSAs as of September 30, 2016 and changes during the nine months then ended is presented below:

 

 

 

 

RSUs and PSAs are measured at the estimated fair value on the date of grant. RSUs are service-based awards and vest according to vesting schedules, which range from immediate to ratably over a three-year period. PSAs are service-based awards that vest over a three-year period and have a market-based payout condition. Vesting of the market-based PSAs is dependent upon the performance of the market price of the Company’s stock relative to a peer group of companies. The unvested balance of RSUs and PSAs at September 30, 2016 includes approximately 47,000 PSAs at a target level of performance; the actual number of common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 200%.

 

Stock Awards

 

For the nine months ended September 30, 2016 and 2015, stock awards of 27,640 and 10,464 shares, respectively, were granted to non-employee directors, which vested immediately upon issuance. The Company recorded compensation expense based on the weighted average fair market value per share of the awards on the grant date of $9.95 and $21.02 in 2016 and 2015, respectively.

 

9.     Income Taxes

 

The Company files income tax returns in the United States Federal jurisdiction, in a limited number of foreign jurisdictions, and in many state jurisdictions. Internal Revenue Service examinations have been completed for years prior to 2011. With few exceptions, the Company is no longer subject to U.S. Federal, state or foreign income tax examinations for years before 2012.

 

The Company recorded an income tax benefit at an estimated effective tax rate of 133.5% and 19.1% for the three and nine months ended September 30, 2016, and an income tax benefit at an estimated effective tax rate of 79.7% and 35.5% for the three and nine months ended September 30, 2015. The income tax benefit in the third quarter of 2016 is due primarily to a reduction in the expected increase in the valuation allowance for 2016, driven by updates to forecasted earnings and the taxable gain associated with the sale of the Denver facility in the fourth quarter of 2016 (see Note 16). The Company’s effective tax rate for the nine months ended September 30, 2016 is lower than statutory rates because a portion of the Company’s net operating losses from the period are subject to a valuation allowance.

  

 

The Company had $4.9 million of unrecognized tax benefits at September 30, 2016 and December 31, 2015. The Company does not believe it is reasonably possible that the total amounts of unrecognized tax benefits will change in the following twelve months; however, actual results could differ from those currently expected. Effectively all the unrecognized tax benefits would affect the Company’s effective tax rate if recognized at some point in the future. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

 

During the three months ended September 30, 2016, the Company determined that it no longer considers the earnings of its Mexican subsidiary to be indefinitely reinvested outside the United States. This change was made to allow the Company to more efficiently manage its cash balances and working capital. The change did not have a significant effect on the Company’s income taxes.

 

10.     Income (Loss) per Share

 

Income (loss) per basic and diluted weighted average common share outstanding were calculated as follows for the three and nine months ended September 30, 2016 and 2015 (in thousands, except per share data):

 

 

     

(1)	Represents the effect of the assumed exercise of stock options and the vesting of restricted stock units and performance stock awards, based on the treasury stock method.

 

Due to the Company’s net loss in the nine month period ended September 30, 2016, and the net loss in the three and nine month periods ended September 30, 2015, the assumed exercise of stock options and the vesting of restricted stock units and performance stock awards using the treasury stock method would have had an antidilutive effect and were therefore excluded from the computation of diluted loss per share. The weighted average number of such antidilutive shares not included in the computation of diluted loss per share was 181,000 for the nine month period ended September 30, 2016, and 163,000 and 185,000 for the three and nine month periods ended September 30, 2015, respectively.

 

In the three months ended September 30, 2016, there were 27,000 shares from the assumed exercise of stock options and the vesting of restricted stock units using the treasury stock method that were excluded from the calculation of diluted earnings per share because to include these shares would have had an antidilutive effect.

 

11.     Accumulated Other Comprehensive Loss

 

The following tables summarize changes in the components of accumulated other comprehensive loss during the nine months ended September 30, 2016 and 2015 (in thousands). All amounts are net of tax:

 

 

  

 

 

 

The following table provides additional detail about accumulated other comprehensive income (loss) components that were reclassified to the condensed consolidated statement of operations during the nine months ended September 30, 2016 and 2015 (in thousands):

 

 

 

12.      Recent Accounting and Reporting Developments

 

 

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and footnote disclosures, from those disclosed in the Company’s 2015 Annual Report on Form 10-K, except for the following:

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which will replace most existing revenue recognition guidance in accordance with U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning January 1, 2018, including interim periods in 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of evaluating its revenue streams to determine accounting treatment under the ASU. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing”. In May 2016, the FASB issued ASU No. 2016-11, “Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16” and ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”. These four ASUs do not change the core principle of the guidance in ASU 2014-09, but rather provide further clarification to improve the operability and understandability of the implementation guidance included in ASU 2014-09.The effective date for these ASUs is the same as the effective date of ASU 2014-09. The Company is currently assessing the impact of these ASUs on its consolidated financial statements.

  

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). Among other things, the amendments in ASU 2016-07 eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”   (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The guidance will be effective for the fiscal year beginning after December 15, 2016, including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more useful information about expected credit losses on financial assets held by a reporting entity at each reporting date. The new standard replaces the existing incurred loss impairment methodology with a methodology that requires consideration of a broader range of reasonable and supportable forward-looking information to estimate all expected credit losses. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2019 and early adoption is permitted for fiscal years and interim periods within those years beginning after December 15, 2018. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies whether eight specifically identified cash flow issues, which previous GAAP did not address, should be categorized as operating, investing or financing activities in the statement of cash flows. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

 

13. Restructuring

 

In June 2016, the Company made a decision to close the Denver facility (part of the Water Transmission segment) and sell the property. Employee severance and termination related restructuring expenses associated with the closure of approximately $0.3 million were incurred during the three months ended September 30, 2016. The Company expects to incur additional restructuring costs of $0.3 million related to employee severance and termination, which will result in future cash outlays, and additional restructuring costs related to demobilization activities at the Denver facility, of approximately $1.0 million to $2.0 million, which will also result in future cash outlays.

 

In April 2015, the Company initiated a production curtailment at its Atchison, Kansas facility within the Tubular Products Group. Severance related restructuring expenses associated with the production curtailment of approximately $0.5 million were incurred and paid during the three months ended June 30, 2015, and included in Cost of sales for that period.

  

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14.          Goodwill

 

Goodwill represents the excess of the purchase price over the assigned fair values of the assets and liabilities assumed in conjunction with an acquisition, and is reviewed for impairment annually at December 31 or whenever events occur or circumstances change that indicate goodwill may be impaired.

 

Due to Water Transmission market conditions in 2015, goodwill of $5.3 million related to the Company’s Water Transmission Group was quantitatively evaluated using a weighted average of income and market approaches. The income approach is primarily driven by inputs from the Company’s internal financial forecasts. The market approach incorporates inputs from market participant data, as well as inputs derived from Company assumptions. The Company determined that its Water Transmission Group goodwill was impaired at June 30, 2015, and it was completely written off in the second quarter of 2015.

 

15.            Related Party Transaction

 

In the second quarter of 2015, the Company engaged Raymond James & Associates, an affiliate of Eagle Asset Management, to provide investment banking services related to a possible disposition of the Company’s Tubular Products business. Eagle Asset Management was a substantial stockholder of the Company (owning more than 10 percent of the Company’s common stock) until September 30, 2015, when Eagle Asset Management reported that it then owned less than 5 percent of the Company’s common stock.

 

Less than $5,000 was billed by Raymond James during the three and nine month periods ended September 30, 2016. Approximately $17,000 of reimbursable expenses were billed by Raymond James during the nine month period ended September 30, 2015, of which $12,000 was paid by September 30, 2015. Professional fees payable to Raymond James will be contingent upon completion of a future transaction, which may or may not occur.

 

16.            Subsequent Event

 

On October 4, 2016, the Company sold its Denver facility for $14.4 million, and anticipates recording a gain on the sale of approximately $7.8 million in the fourth quarter of 2016. Under the terms of the sale, the Company will lease the property through December 31, 2016 (with two options to extend the lease period by 30 days each), in order to conclude production at the facility, complete final shipments, and transfer certain equipment assets to other Company facilities.

 

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