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NORTHWEST PIPE CO - Quarter Report: 2019 June (Form 10-Q)

nwpx20190630_10q.htm
 

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 0-27140

 

NORTHWEST PIPE COMPANY

(Exact name of registrant as specified in its charter)

 

OREGON

93-0557988

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

201 NE Park Plaza Drive, Suite 100

Vancouver, Washington 98684

(Address of principal executive offices and Zip Code)

 

360-397-6250

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

         Title of each class         

    Trading Symbol(s)    

    Name of each exchange on which registered     

Common Stock, par value $0.01 per share

NWPX

Nasdaq Global Select Market

Preferred Stock Purchase Rights

n/a

Nasdaq Global Select Market

 

The number of shares outstanding of the registrant’s common stock as of July 31, 2019 was 9,744,827 shares.


 

 

 

NORTHWEST PIPE COMPANY

FORM 10-Q

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited):

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018

2

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

 

 

Item 4. Controls and Procedures

24

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

25

 

 

Item 1A. Risk Factors

25

 

 

Item 6. Exhibits

25

 

 

Signatures

26

 

 

Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net sales

  $ 69,203     $ 28,785     $ 131,846     $ 62,150  

Cost of sales

    60,985       30,023       117,057       62,040  

Gross profit (loss)

    8,218       (1,238 )     14,789       110  

Selling, general, and administrative expense

    4,705       3,806       8,952       7,191  

Restructuring expense

    -       783       -       1,088  

Operating income (loss)

    3,513       (5,827 )     5,837       (8,169 )

Other income

    25       20       184       190  

Interest income

    3       141       7       218  

Interest expense

    (120 )     (128 )     (251 )     (256 )

Income (loss) before income taxes

    3,421       (5,794 )     5,777       (8,017 )

Income tax expense (benefit)

    447       (108 )     638       (380 )

Net income (loss)

  $ 2,974     $ (5,686 )   $ 5,139     $ (7,637 )
                                 

Net income (loss) per share:

                               

Basic

  $ 0.31     $ (0.59 )   $ 0.53     $ (0.79 )

Diluted

  $ 0.31     $ (0.59 )   $ 0.53     $ (0.79 )
                                 

Shares used in per share calculations:

                               

Basic

    9,736       9,727       9,736       9,717  

Diluted

    9,753       9,727       9,745       9,717  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income (loss)

  $ 2,974     $ (5,686 )   $ 5,139     $ (7,637 )
                                 

Other comprehensive income (loss), net of tax:

                         

Pension liability adjustment

    27       37       53       61  

Unrealized gain (loss) on cash flow hedges

    -       10       (15 )     35  

Other comprehensive income, net of tax

    27       47       38       96  

Comprehensive income (loss)

  $ 3,001     $ (5,639 )   $ 5,177     $ (7,541 )

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

 

   

June 30,

2019

   

December 31,

2018

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 10,054     $ 6,677  

Trade and other receivables, less allowance for doubtful accounts of $558 and $660

    30,162       34,394  

Contract assets

    84,093       74,271  

Inventories

    33,513       39,376  

Prepaid expenses and other

    3,983       4,795  

Total current assets

    161,805       159,513  

Property and equipment, less accumulated depreciation and amortization of $81,050 and $76,861

    100,285       103,447  

Other assets

    16,962       8,390  

Total assets

  $ 279,052     $ 271,350  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 12,694     $ 19,784  

Accrued liabilities

    10,725       7,963  

Contract liabilities

    13,986       3,745  

Total current liabilities

    37,405       31,492  

Borrowings on line of credit

    -       11,464  

Other long-term liabilities

    17,205       9,804  

Total liabilities

    54,610       52,760  
                 

Commitments and contingencies (Note 9)

               
                 

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, 9,744,827 and 9,735,055 shares issued and outstanding

    97       97  

Additional paid-in-capital

    119,510       118,835  

Retained earnings

    106,568       101,194  

Accumulated other comprehensive loss

    (1,733 )     (1,536 )

Total stockholders’ equity

    224,442       218,590  

Total liabilities and stockholders’ equity

  $ 279,052     $ 271,350  


 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands)

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-In-

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

Balances, March 31, 2019

    9,735,055     $ 97     $ 118,857     $ 103,594     $ (1,760 )   $ 220,788  

Net income

    -       -       -       2,974       -       2,974  

Other comprehensive income:

                                               

Pension liability adjustment, net of tax expense of $0

    -       -       -       -       27       27  

Issuance of common stock under stock compensation plans

    9,772       -       -       -       -       -  

Share-based compensation expense

    -       -       653       -       -       653  

Balances, June 30, 2019

    9,744,827     $ 97     $ 119,510     $ 106,568     $ (1,733 )   $ 224,442  

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-In-

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

Balances, March 31, 2018

    9,723,883     $ 97     $ 118,635     $ 78,931     $ (1,396 )   $ 196,267  

Net loss

    -       -       -       (5,686 )     -       (5,686 )

Other comprehensive income:

                                               

Pension liability adjustment, net of tax expense of $0

    -       -       -       -       37       37  

Unrealized gain on cash flow hedges, net of tax expense of $3

    -       -       -       -       10       10  

Issuance of common stock under stock compensation plans

    11,172       -       -       -       -       -  

Share-based compensation expense

    -       -       200       -       -       200  

Balances, June 30, 2018

    9,735,055     $ 97     $ 118,835     $ 73,245     $ (1,349 )   $ 190,828  

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, Continued

(Unaudited)

(Dollar amounts in thousands)

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-In-

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

Balances, December 31, 2018

    9,735,055     $ 97     $ 118,835     $ 101,194     $ (1,536 )   $ 218,590  

Cumulative-effect adjustment for ASU 2018-02 (Note 14)

    -       -       -       235       (235 )     -  

Net income

    -       -       -       5,139       -       5,139  

Other comprehensive income (loss):

                                               

Pension liability adjustment, net of tax expense of $0

    -       -       -       -       53       53  

Unrealized loss on cash flow hedges, net of tax benefit of $8

    -       -       -       -       (15 )     (15 )

Issuance of common stock under stock compensation plans

    9,772       -       -       -       -       -  

Share-based compensation expense

    -       -       675       -       -       675  

Balances, June 30, 2019

    9,744,827     $ 97     $ 119,510     $ 106,568     $ (1,733 )   $ 224,442  

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-In-

   

Retained

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Loss

   

Equity

 

Balances, December 31, 2017

    9,619,755     $ 96     $ 119,856     $ 81,757     $ (1,445 )   $ 200,264  

Cumulative-effect adjustment for ASC Topic 606

    -       -       -       (875 )     -       (875 )
Net loss     -       -       -       (7,637 )     -       (7,637 )

Other comprehensive income:

                                               

Pension liability adjustment, net of tax expense of $0

    -       -       -       -       61       61  

Unrealized gain on cash flow hedges, net of tax expense of $8

    -       -       -       -       35       35  

Issuance of common stock under stock compensation plans

    115,300       1       (1,302 )     -       -       (1,301 )

Share-based compensation expense

    -       -       281       -       -       281  

Balances, June 30, 2018

    9,735,055     $ 97     $ 118,835     $ 73,245     $ (1,349 )   $ 190,828  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

   

Six Months Ended June 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net income (loss)

  $ 5,139     $ (7,637 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

               

Depreciation and finance lease amortization

    5,713       3,168  
Amortization of intangible assets     216       232  

Other, net

    1,097       (41 )

Changes in operating assets and liabilities:

               

Trade and other receivables

    3,319       12,389  

Contract assets, net

    1,870       (3,924 )

Inventories

    5,863       (1,516 )

Prepaid expenses and other assets

    1,064       1,078  

Accounts payable

    (7,891 )     (1,882 )

Accrued and other liabilities

    909       (1,244 )

Net cash provided by operating activities

    17,299       623  

Cash flows from investing activities:

               

Additions to property and equipment

    (2,645 )     (1,640 )

Proceeds from sale of property and equipment

    2       2  

Proceeds from insurance

    400       -  

Net cash used in investing activities from continuing operations

    (2,243 )     (1,638 )

Net cash provided by investing activities from discontinued operations

    -       750  

Net cash used in investing activities

    (2,243 )     (888 )

Cash flows from financing activities:

               

Borrowings on line of credit

    34,034       -  

Repayments on line of credit

    (45,498 )     -  
Tax withholdings related to net share settlements of restricted stock and performance share awards     -       (1,301 )

Payments on finance lease obligations

    (215 )     (193 )

Net cash used in financing activities

    (11,679 )     (1,494 )

Change in cash and cash equivalents

    3,377       (1,759 )

Cash and cash equivalents, beginning of period

    6,677       43,646  

Cash and cash equivalents, end of period

  $ 10,054     $ 41,887  
                 

Noncash investing and financing activities:

               

Accrued property and equipment purchases

  $ 1,137     $ 114  

Right-of-use assets obtained in exchange for operating lease liabilities

  $ 1,238     $ -  

Right-of-use assets obtained in exchange for finance lease liabilities

  $ -     $ 458  

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Basis of Presentation

 

The Condensed Consolidated Financial Statements include the accounts of Northwest Pipe Company (the “Company”) and its subsidiaries over which the Company exercises control as of the financial statement date. Intercompany accounts and transactions have been eliminated.

 

The Company operates in one business segment, Water Transmission, which produces steel pipeline systems, as well as reinforced concrete pipe and protective linings, primarily for use in drinking water infrastructure. These products are also used for hydroelectric power systems, wastewater systems, and other applications. In addition, the Company makes products for industrial plant piping systems and certain structural applications.

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are expressed in United States Dollars. The financial information as of December 31, 2018 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, 2018 (the “2018 Form 10-K”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. 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 2018 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 six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2019.

 

The Company recorded revenue of $1.2 million during the three and twelve months ended December 31, 2018, which should have been recorded in the three months ended March 31, 2019. The misstatement in the timing of revenue recognition was due to an error in the measurement of costs incurred to date relative to estimated total direct costs at a recently acquired Ameron Water Transmission Group, LLC (“Ameron”) facility. Management concluded that this out of period adjustment was not material to the consolidated financial results for the year ended December 31, 2018 or to the projected financial results for 2019.

 

2.

Business Combination

 

On July 27, 2018, the Company completed the acquisition of 100% of Ameron Water Transmission Group, LLC for a purchase price of $38.1 million in cash. The results of Ameron’s operations have been included in the consolidated financial statements since that date. Ameron was a major supplier of engineered welded steel pressure pipe as well as reinforced concrete pipe. In addition to strengthening the Company's position in the water transmission pipe market, this acquisition expands the Company’s bar-wrapped concrete cylinder pipe capabilities and adds reinforced concrete pipe and T-Lock®—a proprietary polyvinyl chloride (PVC) lining for concrete pipe sewer applications—to the Company’s product portfolio. In connection with the acquisition, the Company acquired pipe facilities in Tracy, California and San Luis Río Colorado, Mexico, as well as a protective lining facility in Brea, California.

 

 

The following table summarizes the purchase consideration and fair value of the assets acquired and liabilities assumed as of July 27, 2018 (in thousands):

 

Assets

       

Cash and cash equivalents

  $ 912  

Trade and other receivables

    8,887  

Contract assets

    12,018  

Inventories

    7,937  

Prepaid expenses and other

    3,777  

Property and equipment

    34,827  

Other assets

    320  

Total assets acquired

    68,678  
         

Liabilities

 

Accounts payable

    5,520  

Accrued liabilities

    1,599  

Contract liabilities

    123  

Deferred income taxes

    3,221  

Total liabilities assumed

    10,463  
         

Bargain purchase gain

    (20,080

)

         

Total purchase consideration

  $ 38,135  

 

The Company recorded no measurement period adjustments during the three and six months ended June 30, 2019.

 

The excess of the aggregate net fair value of assets acquired and liabilities assumed over the fair value of consideration transferred as the purchase price has been recorded as a bargain purchase gain. When it became apparent there was a potential for a bargain purchase gain, management reviewed the Ameron assets acquired and liabilities assumed as well as the assumptions utilized in estimating their fair values. Upon completion of this reassessment, the Company concluded that recording a bargain purchase gain with respect to Ameron was appropriate and required under U.S. GAAP. The Company believes the seller was motivated to complete the transaction as part of an overall repositioning of its business.

 

The Company incurred acquisition-related costs of approximately $0 and $0.1 million during the three and six months ended June 30, 2019, respectively, and $0.1 million during the three and six months ended June 30, 2018. These costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements Operations.

 

The following unaudited pro forma summary presents the consolidated results of the Company as if the acquisition of Ameron had occurred on January 1 of the year prior to the acquisition (in thousands):

 

   

Three Months Ended

June 30, 2018

   

Six Months Ended

June 30, 2018

 
                 

Net sales

  $ 42,152     $ 85,719  

Net loss

    (2,267 )     (24,881 )

 

This unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisition had occurred on January 1 of the year prior to the acquisition. Moreover, this information is not indicative of what the Company’s future operating results will be. The information prior to the acquisition is included based on prior accounting records maintained by Ameron. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Ameron to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied on January 1 of the year prior to the acquisition, and the consequential tax effects. There were no material, non-recurring adjustments to this unaudited pro forma information.

 

 

3.

Discontinued Operations

 

On December 26, 2017, the Company completed the sale of substantially all of the assets associated with the Company’s manufacturing facility in Atchison, Kansas, including all of the real and tangible personal property located at the site of that manufacturing facility. Total consideration of $37.2 million in cash was paid by the buyer, resulting in a nominal gain recognized on the sale. Of the proceeds received, $0.8 million was placed in escrow until it was released in February 2018 and $3.7 million was placed in escrow until it was released in December 2018. In accordance with applicable accounting guidance, cash flows from the Company’s discontinued operations are presented separately in the Condensed Consolidated Statements of Cash Flows.

 

4.

Inventories

 

Inventories consist of the following (in thousands):

 

   

June 30,

2019

   

December 31,

2018

 

 

               

Raw materials

  $ 29,564     $ 34,426  

Work-in-process

    1,515       2,368  

Finished goods

    915       1,075  

Supplies

    1,519       1,507  

Total inventories

  $ 33,513     $ 39,376  
 

5.

Leases

The Company has entered into various equipment and property leases with terms of ten years or less. Certain lease agreements include renewals and/or purchase options set to expire at various dates, and certain lease agreements include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is a lease at inception. Leases with an initial term of twelve months or less are not recorded on the balance sheet; costs for these leases are recognized on a straight-line basis over the lease term. Right-of-use assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of the Company's leases do not provide an implicit rate of return, the Company uses its asset-based lending rate in determining the present value of lease payments. Some of the Company's lease agreements contain non-lease components, which are accounted for separately.

 

Lease cost consists of the following (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2019

   

June 30, 2019

 

Finance lease cost:

               

Amortization of right-of-use assets

  $ 110     $ 219  

Interest on lease liabilities

    14       29  

Operating lease cost

    480       905  

Short-term lease cost

    313       575  

Variable lease cost

    35       75  

Total lease cost

  $ 952     $ 1,803  

 


The future maturities of lease liabilities as of June 30, 2019 are as follows (in thousands):

 

   

Finance

Leases

   

Operating

Leases

 
                 

Remainder of 2019

  $ 225     $ 1,019  

2020

    375       1,934  

2021

    258       1,257  

2022

    237       951  

2023

    34       802  

Thereafter

    -       4,478  

Total lease payments

    1,129       10,441  

Amount representing interest

    (89 )     (1,810 )

Present value of lease liabilities

    1,040       8,631  

Current portion of lease liabilities, included in Accrued liabilities

    (369 )     (1,667 )

Lease liabilities, less current portion, included in Other long-term liabilities

  $ 671     $ 6,964  

 

The following table summarizes the lease terms and discount rates for the lease liabilities:

 

   

June 30,

2019

 

Weighted-average remaining lease term (years)

       

Finance leases

    3.12  

Operating leases

    8.42  

Weighted-average discount rate

       

Finance leases

    5.06

%

Operating leases

    4.51

%

 

The following table presents other information related to the operating and finance leases (in thousands):

 

   

Six Months Ended

 
   

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from operating leases

  $ (887 )

Operating cash flows from finance leases

    (29 )

Financing cash flows from finance leases

    (215 )

Right-of-use assets obtained in exchange for operating lease liabilities

    1,238  

Right-of-use assets obtained in exchange for finance lease liabilities

    -  
 

6.

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 liabilities that are measured at fair value on a recurring basis (in thousands):

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

As of June 30, 2019

                               

Financial assets:

                               

Deferred compensation plan

  $ 5,265     $ 4,463     $ 802     $ -  
                                 

Financial liabilities:

                               

Foreign currency forward contracts

  $ (27 )   $ -     $ (27 )   $ -  
                                 

As of December 31, 2018

                               

Financial assets:

                               

Deferred compensation plan

  $ 4,719     $ 3,925     $ 794     $ -  

Foreign currency forward contracts

    101       -       101       -  

Total financial assets

  $ 4,820     $ 3,925     $ 895     $ -  

 

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 foreign currency forward contracts are derivatives valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and currency rates, and are classified as Level 2 within the fair value hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company. Foreign currency forward contracts are presented at their gross fair values. Foreign currency forward contract assets are included within Prepaid expenses and other and foreign currency forward contract liabilities are included within Accrued liabilities in the Condensed Consolidated Balance Sheets.

 

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

 

7.

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”).

 

The Company recognizes the compensation cost of employee and director services received in exchange for awards of equity instruments based on the grant date estimated fair value of the awards. Share-based compensation cost is recognized over the period during which the employee or director is required to provide service in exchange for the award and, as forfeitures occur, the associated compensation cost recognized to date is reversed. For awards with performance-based payout conditions, the Company recognizes compensation cost based on the probability of achieving the performance conditions, with changes in expectations recognized as an adjustment to earnings in the period of change. Any recognized compensation cost is reversed if the conditions are ultimately not met.

 

The following table summarizes share-based compensation expense recorded (in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Cost of sales

  $ 118     $ (5 )   $ 124     $ 12  

Selling, general, and administrative expense

    535       205       551       269  

Total

  $ 653     $ 200     $ 675     $ 281  

 

 

Stock Option Awards

 

A summary of option activity under the Company’s stock option plans is presented below:

 

   

Options Outstanding

   

Weighted-

Average

Exercise Price

   

Weighted-

Average

Remaining

Contractual

Life

   

Aggregate

Intrinsic Value

 
                   

(in years)

   

(In thousands)

 

Balance, December 31, 2018

    24,000     $ 24.15                  

Options granted

    -       -                  

Options exercised

    -       -                  

Options canceled

    -       -                  

Balance, June 30, 2019

    24,000       24.15                  

Exercisable, June 30, 2019

    24,000       24.15       0.75     $ 39  


Restricted Stock Units and Performance Share Awards

 

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 according to the terms of the grant and may have performance- and/or market-based payout conditions.

 

A summary of activity under the Company’s RSUs and PSAs is presented below:

 

   

Number of

RSUs and

PSAs (1)

   

Weighted-

Average Grant

Date Fair Value

 

Unvested PSAs as of December 31, 2018

    39,992     $ 19.97  

RSUs and PSAs granted

    86,701       23.56  

Unvested RSUs and PSAs canceled

    -       -  

PSAs vested (2)

    (39,992 )     19.97  

Unvested RSUs and PSAs as of June 30, 2019

    86,701       23.56  

 

 

(1)

The number of PSAs disclosed in this table are at the target level of 100%.

 

 

 

 

(2)

The PSAs vested on March 29, 2019; the actual number of common shares that were issued was determined by multiplying the PSAs by a payout percentage of 0% as the performance-based conditions were not achieved.

 

The unvested balance of RSUs and PSAs as of June 30, 2019 includes approximately 65,000 performance-based PSAs at a target level of performance. The vesting of these awards is subject to the achievement of specified performance-based conditions, and 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 150%.

 

As of June 30, 2019, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $1.9 million, which is expected to be recognized over a weighted-average period of 1.5 years.

 

Stock Awards

 

For the six months ended June 30, 2019 and 2018, stock awards of 9,772 shares and 11,172 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 $24.56 in 2019 and $21.48 in 2018.

 

 

8.

Shareholder Rights Plan

 

In June 1999, the Board of Directors adopted a Shareholder Rights Plan (“Plan”) designed to ensure fair and equal treatment for all shareholders in the event of a proposed acquisition of the Company by enhancing the ability of the Board of Directors to negotiate more effectively with a prospective acquirer, and reserved 150,000 shares of Series A Junior Participating Preferred Stock (“Preferred Stock”) for purposes of the Plan. In connection with the adoption of the Plan, the Board of Directors declared a dividend distribution of one non-detachable preferred stock purchase right (“Right”) per share of common stock, payable to shareholders of record on July 9, 1999. Each Right represents the right to purchase one one-hundredth of a share of Preferred Stock at a price of $83.00, subject to adjustment. The Rights will be exercisable only if a person or group acquires, or commences a tender offer to acquire, 15% or more of the Company’s outstanding shares of common stock. Subject to the terms of the Plan and upon the occurrence of certain events, each Right would entitle the holder to purchase common stock of the Company, or of an acquiring company in certain circumstances, having a market value equal to two times the exercise price of the Right. The Company may redeem the Rights at a price of $0.01 per Right under certain circumstances.

 

On June 18, 2009, the Company and Computershare (“Rights Agent”) entered into an Amended and Restated Rights Agreement (“Amended and Restated Rights Agreement”). The Amended and Restated Rights Agreement amended and restated the Rights Agreement dated as of June 28, 1999 between the Company and ChaseMellon Shareholder Services, L.L.C. (predecessor to the Rights Agent). The Rights Agreement extended the final expiration date of the Rights from June 28, 2009 to June 28, 2019. The Amended and Restated Rights Agreement also reflected certain changes in the rights and obligations of the Rights Agent and certain changes in procedural requirements under the Amended and Restated Rights Agreement.

 

On June 28, 2019, the Amended and Restated Rights Agreement expired in accordance with its terms and is of no further force or effect. The Rights distributed to holders of the Company’s common stock pursuant to the Amended and Restated Rights Agreement expired upon the expiration of the Amended and Restated Rights Agreement.

 

9.

Commitments and Contingencies

 

Portland Harbor Superfund Site

 

In December 2000, a section of the lower Willamette River known as the Portland Harbor Superfund Site was included on the National Priorities List at the request of the United States Environmental Protection Agency (“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”). A remedial investigation and feasibility study of the Portland Harbor Superfund Site was directed by a group of 14 potentially responsible parties known as the Lower Willamette Group under agreement with the EPA. The EPA finalized the remedial investigation report in February 2016, and the feasibility study in June 2016, which identified multiple remedial alternatives. In January 2017, the EPA issued its Record of Decision selecting the remedy for cleanup at the Portland Harbor Superfund Site, which it believes will cost approximately $1 billion and 13 years to complete. The EPA has not yet determined who is responsible for the costs of cleanup or how the cleanup costs will be allocated among the more than 150 potentially responsible parties. Because of the large number of potentially 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 Superfund Site matters, and no further adjustment to the Condensed Consolidated Financial Statements has been recorded as of the date of this filing.

 

In 2001, groundwater containing elevated volatile organic compounds was identified in one localized area of leased property adjacent to the Portland facility. In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (“Voluntary Agreement”) with the ODEQ, and has performed remedial investigation work required under the Voluntary Agreement. In 2016, the EPA and the ODEQ requested additional groundwater sampling. The results of this sampling, which is ongoing, have been generally consistent with previous sampling and modeling work. The Company anticipates it will file a final Remedial Investigation/Source Control Evaluation report with the ODEQ and the EPA in 2019; based on discussions with the ODEQ and the EPA, the Company believes the selected remedy will be Monitored Natural Attenuation.

 

 

Concurrent with the activities of the EPA and the 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 Superfund Site to determine the nature and extent of natural resource damages under CERCLA Section 107. The Trustees for the Portland Harbor Superfund Site consist of representatives from several Northwest Indian Tribes, three federal agencies, and one state agency. The Trustees act independently of the EPA and the 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. The Company has not assumed any additional payment obligations or liabilities with the participation with the NRDA. It is uncertain whether the Company will enter into an early settlement for natural resource damages or what costs it may incur in any such early settlement.

 

In January 2017, the Confederated Tribes and Bands of the Yakama Nation, a Trustee until they withdrew from the council in 2009, filed a complaint against the potentially responsible parties including the Company to recover costs related to their own injury assessment and compensation for natural resources damages. The Company does not have sufficient information to determine the likelihood of a loss in this matter or the amount of damages that could be allocated to the Company.

 

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.

 

All Sites

 

The Company operates its facilities under numerous governmental permits and licenses relating to air emissions, stormwater runoff, 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.

 

Other Contingencies and Legal Proceedings

 

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, the Company records accruals when such losses are considered probable and reasonably estimable. The Company believes that it is not presently a party to litigation, the outcome of which would have a material adverse effect on its business, financial condition, results of operations, or cash flows.

 

On April 21, 2019, there was an accidental fire at the Company’s Saginaw, Texas facility which resulted in damage to the coatings building. There were no injuries, but the ability to coat at this facility continues to be impaired while the Company repairs the damage. The Company’s other production locations have been deployed to absorb the lost production that has resulted. The Company has insurance coverage in place covering, among other things, property damage up to certain specified amounts, and is actively working with its insurance company to restore the facility to full service as safely and quickly as possible. As of June 30, 2019, the Company has written off $0.9 million of property and equipment and $0.1 million of inventories that were damaged in the fire, which was offset by $0.4 million of insurance proceeds and $0.5 million of insurance receivable. The Company also maintains business interruption insurance coverage. As of June 30, 2019, the Company has incurred $3.2 million in production costs resulting from the fire at the Saginaw facility. Insurance recoveries associated with these costs will be recorded as they are received in future quarters as the Company works with its insurer to settle the claim. No recovery of business interruption expenses has been recorded in the Condensed Consolidated Financial Statements as of June 30, 2019.

 

Guarantees

 

The Company has entered into certain letters of credit that total $1.6 million as of June 30, 2019. The letters of credit relate to workers’ compensation insurance.

 

 

10.

Revenue

 

The Company manufactures water infrastructure steel pipe products, which are generally made to custom specifications for installation contractors serving projects funded by public water agencies. Generally, each of the Company’s contracts with its customers contains a single performance obligation, as the promise to transfer products is not separately identifiable from other promises in the contract and, therefore, is not distinct.

 

For a majority of contracts, revenue is recognized over time as the manufacturing process progresses because of the Company’s right to payment for work performed to date plus a reasonable profit on cancellations for unique products that have no alternative use to the Company. Revenue is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract (cost-to-cost method). Contract costs include all material, labor, and other direct costs incurred in satisfying the performance obligations. The cost of steel material is recognized as a contract cost when the steel is introduced into the manufacturing process. Changes in job performance, job conditions, and estimated profitability, including those arising from contract change orders, contract penalty provisions, foreign currency exchange rate movements, changes in raw materials costs, and final contract settlements may result in revisions to estimates of revenue, costs, and income, and are recognized in the period in which the revisions are determined.

 

Provisions for losses on uncompleted contracts, included in Accrued liabilities, are estimated by comparing total estimated contract revenue to the total estimated contract costs and a loss is recognized during the period in which it becomes probable and can be reasonably estimated.

 

The Company does not recognize revenue on a contract until the contract has approval and commitment from both parties, the contract rights and payment terms can be identified, the contract has commercial substance, and its collectability is probable.

 

Revisions in contract estimates resulted in an increase (decrease) in revenue of approximately $0 and $(1.5) million for the three and six months ended June 30, 2019, respectively, and $(0.1) million and $0.7 million during the three and six months ended June 30, 2018, respectively.

 

Contract Assets and Liabilities

 

Contract assets primarily represent revenue earned over time but not yet billable based on the terms of the contracts. These amounts will be billed based on the terms of the contracts, which include achievement of milestones, partial shipments, or completion of the contracts. Payment terms of amounts billed vary based on the customer, but are typically due within 30 days of invoicing.

 

Contract liabilities represent advance billings on contracts, typically for steel. The Company recognized revenue that was included in the contract liabilities balance at the beginning of each period of $0.9 million and $3.4 million during the three and six months ended June 30, 2019, respectively, and $1.1 million and $2.5 million during the three and six months ended June 30, 2018, respectively.

 

Backlog

 

Backlog represents the balance of remaining performance obligations under signed contracts. As of June 30, 2019, backlog was approximately $180.2 million. The Company expects to recognize approximately 58% of the remaining performance obligations in 2019, 21% in 2020, and the balance thereafter.

 

11.

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. With few exceptions, the Company is no longer subject to United States Federal, state, or foreign income tax examinations for years before 2014.

 

The Company recorded an income tax expense (benefit) at an estimated effective income tax rate of 13.1% and 11.0% for the three and six months ended June 30, 2019, respectively, and 1.9% and 4.7% for the three and six months ended June 30, 2018, respectively. The Company’s estimated effective income tax rate for the three and six months ended June 30, 2019 was impacted by the final Section 965 regulations issued in June 2019 related to certain foreign tax credit aspects of the transition tax, as well as the estimated changes in the Company’s valuation allowance.

 

 

The Company had $4.4 million of unrecognized income tax benefits as of June 30, 2019 and December 31, 2018. The Company does not believe it is reasonably possible that the total amounts of unrecognized income tax benefits will change in the following twelve months; however, actual results could differ from those currently expected. Effectively all of the unrecognized income tax benefits would affect the Company’s effective income tax rate if recognized at some point in the future. The Company recognizes interest and penalties related to uncertain income tax positions in Income tax expense (benefit).

 

12.

Accumulated Other Comprehensive Loss

 

The following tables summarize changes in the components of Accumulated other comprehensive loss (in thousands). All amounts are net of income tax:

 

   

Pension

Liability Adjustment

   

Unrealized Gain

(Loss) on Cash

Flow Hedges

   

Total

 

Balance, December 31, 2018

  $ (1,551 )   $ 15     $ (1,536 )
                         

Cumulative-effect adjustment for ASU 2018-02 (Note 14)

    (235 )     -       (235 )
                         

Other comprehensive income (loss) before reclassifications

    47       (10 )     37  

Amounts reclassified from Accumulated other comprehensive loss

    6       (5 )     1  

Net current period adjustments to Other comprehensive income

    53       (15 )     38  
                         

Balance, June 30, 2019

  $ (1,733 )   $ -     $ (1,733 )

 

The following table provides additional detail about Accumulated other comprehensive loss components that were reclassified to the Condensed Consolidated Statements of Operations (in thousands):

 

Details about Accumulated

 

Amount reclassified from Accumulated Other Comprehensive Loss

    Affected line item in the
Other Comprehensive  

Three Months Ended June 30,

   

Six Months Ended June 30,

     Condensed Consolidated
Loss Components   

2019

   

2018

   

2019

   

2018

     Statements of Operations
                                     
Pension liability adjustment:                          
Net periodic pension cost:                          

Service cost

  $ (3 )   $ -     $ (6 )   $ -    

Cost of sales

      (3 )     -       (6 )     -    

Net of tax

                                     

Unrealized gain (loss) on cash flow hedges:

                             

Gain (loss) on cash flow hedges

    -       -       7       (3 )  

Net sales

Associated income tax (expense) benefit

    -       -       (2 )     1    

Income tax expense (benefit)

      -       -       5       (2 )  

Net of tax

                                     

Total reclassifications for the period

  $ (3 )   $ -     $ (1 )   $ (2 )    

 

 

13.

Net Income (Loss) per Share

 

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by giving effect to all potential shares of common stock, including stock options, RSUs, and PSAs, to the extent dilutive. Performance-based PSAs are considered dilutive when the related performance conditions have been met assuming the end of the reporting period represents the end of the performance period. In periods with a net loss, all potential shares of common stock are excluded from the computation of diluted net loss per share as the impact would be antidilutive.

 

Net income (loss) per basic and diluted weighted-average common share outstanding was calculated as follows (in thousands, except per share amounts):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income (loss)

  $ 2,974     $ (5,686 )   $ 5,139     $ (7,637 )
                                 

Basic weighted-average common shares outstanding

    9,736       9,727       9,736       9,717  

Effect of potentially dilutive common shares(1)

    17       -       9       -  

Diluted weighted-average common shares outstanding

    9,753       9,727       9,745       9,717  
                                 

Net income (loss) per common share:

                               

Basic

  $ 0.31     $ (0.59 )   $ 0.53     $ (0.79 )

Diluted

  $ 0.31     $ (0.59 )   $ 0.53     $ (0.79 )

 

 

(1)

The weighted-average number of antidilutive shares not included in the computation of diluted net loss per share was approximately 64,000 and 75,000 for the three and six months ended June 30, 2018, respectively, including approximately 40,000 and 37,000, respectively, of performance-based share awards, at the target level of 100%, that were not included because the performance conditions had not been met as of June 30, 2018.

 

14.

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 Condensed Consolidated Financial Statements and disclosures in Notes to Condensed Consolidated Financial Statements, from those disclosed in the Company’s 2018 Form 10-K, except for the following:

 

Accounting Changes

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to recognize on the balance sheet right-of-use assets and lease liabilities for the rights and obligations created by the majority of leases, including those historically accounted for as operating leases. During 2018 and 2019, the FASB issued additional ASUs that clarify the implementation guidance for ASU 2016-02 but do not change the core principle of the guidance. The Company adopted Accounting Standards Codification (“ASC”) Topic 842, “Leases” on January 1, 2019 using the modified retrospective transition method which allowed it to continue to apply legacy guidance for periods prior to 2019. The Company elected the package of transition practical expedients which, among other things, allowed it to keep the historical lease classifications and not reassess the lease classification for any existing leases as of the date of adoption. The Company also made an accounting policy election to apply the short-term lease exception, which allows it to keep leases with an initial term of twelve months or less off the balance sheet. Upon adoption on January 1, 2019, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $8.0 million.

 

 

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which better aligns risk management activities and financial reporting for hedging relationships, simplifies hedge accounting requirements, and improves disclosures of hedging arrangements. The Company adopted this guidance on January 1, 2019 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

 

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company adopted this guidance on January 1, 2019, which resulted in reclassification between Accumulated other comprehensive loss and Retained earnings of $0.2 million, and had no impact on the Company’s results of operations or cash flows.

 

In July 2018, the FASB issued Accounting Standards Update No. 2018-09, “Codification Improvements,” which clarifies, corrects errors in, or makes minor improvements to the ASC. The Company adopted this guidance on January 1, 2019 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

 

15.

Restructuring

 

In March 2018, the Company announced its plan to close its leased Permalok® manufacturing facility in Salt Lake City, Utah and move the production to the Permalok® production facility in St. Louis, Missouri, which was completed during the second quarter of 2018. Also in March 2018, the Company announced its plan to close its manufacturing facility in Monterrey, Mexico. Production ceased early in the second quarter of 2018, and the facility was sold in December 2018. The Company incurred restructuring expense of $0.8 million and $1.1 million during the three and six months ended June 30, 2018, which includes employee severance and termination related restructuring expense of $0.4 million and $0.6 million, respectively, and expense related to demobilization activities of $0.4 million and $0.5 million, respectively.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (“2019 Q2 Form 10-Q”) contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on current expectations, estimates, and projections about our business, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “forecasts,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include changes in demand and market prices for our products, product mix, bidding activity, the timing of customer orders and deliveries, production schedules, the price and availability of raw materials, price and volume of imported product, excess or shortage of production capacity, international trade policy and regulations, changes in tariffs and duties imposed on imports and exports and related impacts on us, our ability to identify and complete internal initiatives and/or acquisitions in order to grow our business, our ability to effectively integrate acquisitions into our business and operations and achieve significant administrative and operational cost synergies, the impacts of the Tax Cuts and Jobs Act of 2017, the adequacy of our insurance coverage, operating problems at our manufacturing operations including fires, explosions, inclement weather, and natural disasters, and other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) and from time to time in our other Securities and Exchange Commission filings and reports. Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this 2019 Q2 Form 10-Q. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

 

 

Overview

 

Northwest Pipe Company is the largest manufacturer of engineered welded steel pipe water systems in North America. Our manufacturing facilities are strategically positioned to meet North America’s growing needs for water and wastewater infrastructure. Our solution-based products serve a wide range of markets including water transmission, plant piping, tunnels, and river crossings. Our prominent position is based on a widely-recognized reputation for quality, service, and manufacturing to meet performance expectations in all categories including highly-corrosive environments. These pipeline systems are produced from several manufacturing facilities which are located in Portland, Oregon; San Luis Río Colorado, Mexico; Adelanto, California; Saginaw, Texas; Tracy, California; Parkersburg, West Virginia; St. Louis, Missouri; and Brea, California. In the second quarter of 2018, we closed our leased facility in Salt Lake City, Utah and ceased production at our Monterrey, Mexico facility. The Monterrey, Mexico facility was sold in December 2018.

 

In July 2018, we completed the acquisition of 100% of Ameron Water Transmission Group, LLC (“Ameron”) for a purchase price of $38.1 million. Ameron was a major supplier of engineered welded steel pressure pipe as well as reinforced concrete pipe. In addition to strengthening our position in the water transmission pipe market, this acquisition expands our bar-wrapped concrete cylinder pipe capabilities and adds reinforced concrete pipe and T-Lock®—a proprietary polyvinyl chloride (PVC) lining for concrete pipe sewer applications—to our product portfolio. In connection with the acquisition, we acquired pipe facilities in Tracy, California and San Luis Río Colorado, Mexico, as well as a protective lining facility in Brea, California.

 

On April 21, 2019, there was an accidental fire at our Saginaw, Texas facility which resulted in damage to the coatings building. There were no injuries, but the ability to coat at this facility continues to be impaired while we repair the damage. Our other production locations have been deployed to absorb the lost production that has resulted. We have insurance coverage in place covering, among other things, property damage up to certain specified amounts, and we are actively working with the insurance company to restore the facility to full service as safely and quickly as possible. We also maintain business interruption insurance coverage and are working with the insurer to settle the claim.

 

Our water infrastructure products are sold generally to installation contractors, who include our products in their bids to municipal agencies or privately-owned water companies for specific projects. We believe our sales are substantially driven by spending on new water infrastructure with a recent trend towards spending on water infrastructure replacement, repair, and upgrade. Within the total range of pipe products, our products tend to fit the larger-diameter, higher-pressure applications.

 

Our Current Economic Environment

 

We operate our business with a long-term time horizon. Projects are often planned for many years in advance, and are sometimes part of 50-year build-out plans. Long-term demand for water infrastructure projects in the United States appears strong. However, in the near term, we expect that strained governmental and water agency budgets along with increased capacity from competition could impact the business. Fluctuating steel costs will also be a factor, as the ability to adjust our selling prices as steel costs fluctuate depends on market conditions. Purchased steel represents a substantial portion of our cost of sales, and changes in our selling prices often correlate directly to changes in steel costs.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements included in Part I – Item 1. “Financial Statements” of this 2019 Q2 Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate all of our estimates, including those related to revenue recognition, business combinations, inventories, property and equipment, including depreciation and valuation, share-based compensation, income taxes, allowance for doubtful accounts, and litigation and other contingencies. Actual results may differ from these estimates under different assumptions or conditions.

 

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 30, 2019 as compared to the critical accounting policies and estimates disclosed in our 2018 Form 10-K.

 

 

Recent Accounting Pronouncements

 

For a description of recent accounting pronouncements affecting our company, including the dates of adoption and estimated effects on financial position, results of operations, and cash flows, see Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I – Item I. “Financial Statements” of this 2019 Q2 Form 10-Q.

 

Results of Operations

 

The following tables set forth, for the periods indicated, certain financial information regarding costs and expenses expressed in dollars (in thousands) and as a percentage of total Net sales.

 

   

Three Months Ended

June 30, 2019

   

Three Months Ended

June 30, 2018

 
         

% of Net Sales

       $    

% of Net Sales

 
                                 

Net sales

  $ 69,203       100.0

%

  $ 28,785       100.0

Cost of sales

    60,985       88.1       30,023       104.3  

Gross profit (loss)

    8,218       11.9       (1,238 )     (4.3 )

Selling, general, and administrative expense

    4,705       6.8       3,806       13.2  

Restructuring expense

    -       -       783       2.7  

Operating income (loss)

    3,513       5.1       (5,827 )     (20.2 )

Other income

    25       -       20       0.1  

Interest income

    3       -       141       0.4  

Interest expense

    (120 )     (0.2 )     (128 )     (0.4 )

Income (loss) before income taxes

    3,421       4.9       (5,794 )     (20.1 )

Income tax expense (benefit)

    447       0.6       (108 )     (0.3 )

Net income (loss)

  $ 2,974       4.3

%

  $ (5,686 )     (19.8 )%

 

 

   

Six Months Ended

June 30, 2019

   

Six Months Ended

June 30, 2018

 
   

$

   

% of Net Sales

   

$

   

% of Net Sales

 
                                 

Net sales

  $ 131,846       100.0

%

  $ 62,150       100.0

%

Cost of sales

    117,057       88.8       62,040       99.8  

Gross profit

    14,789       11.2       110       0.2  

Selling, general, and administrative expense

    8,952       6.8       7,191       11.5  

Restructuring expense

    -       -       1,088       1.8  

Operating income (loss)

    5,837       4.4       (8,169 )     (13.1 )

Other income

    184       0.1       190       0.3  

Interest income

    7       -       218       0.3  

Interest expense

    (251 )     (0.1 )     (256 )     (0.4 )

Income (loss) before income taxes

    5,777       4.4       (8,017 )     (12.9 )

Income tax expense (benefit)

    638       0.5       (380 )     (0.6 )

Net income (loss)

  $ 5,139       3.9

%

  $ (7,637 )     (12.3

)%

 

We have one business segment, Water Transmission, which manufactures large-diameter, high-pressure, engineered welded steel pipeline systems, as well as reinforced concrete pipe and protective linings, 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, we make products for industrial plant piping systems and certain structural applications. See Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I – Item I. “Financial Statements” of this 2019 Q2 Form 10-Q for information on our acquisition of Ameron in July 2018.

 

 

Three and Six Months Ended June 30, 2019 Compared to Three and Six Months Ended June 30, 2018

 

Net sales. Net sales increased 140.4% to $69.2 million for the second quarter of 2019 compared to $28.8 million for the second quarter of 2018 due to a 186% increase in tons produced, partially offset by a 16% decrease in selling price per ton. The increase in tons produced was due to increased demand coupled with the acquired Ameron operations, which contributed $13.8 million in net sales during the second quarter of 2019. The decrease in selling price per ton was due to a change in product mix. Net sales increased 112.1% to $131.8 million for the first six months of 2019 compared to $62.2 million for the first six months of 2018 primarily due to a 114% increase in tons produced. The increase in tons produced was due to increased demand coupled with the acquired Ameron operations, which contributed $25.6 million in net sales during the first six months of 2019. Bidding activity, backlog, and production levels may vary significantly from period to period affecting sales volumes.

 

Gross profit (loss). Gross profit increased to $8.2 million gross profit (11.9% of Net sales) for the second quarter of 2019 compared to a $1.2 million gross loss (4.3% of Net sales) for the second quarter of 2018 and increased to $14.8 million gross profit (11.2% of Net sales) for the first six months of 2019 compared to $0.1 million gross profit (0.2% of Net sales) for the first six months of 2018. The increase in gross profit was primarily due to increased production volume coupled with the addition of the Ameron operations. This was partially offset by $3.2 million in higher production costs resulting from the fire at our Saginaw facility. Insurance recoveries associated with these costs will be recorded as they are received in future quarters as we work with our insurer to settle the claim.

 

Selling, general, and administrative expense. Selling, general, and administrative expense increased 23.6% to $4.7 million (6.8% of total Net sales) for the second quarter of 2019 compared to $3.8 million (13.2% of total Net sales) for the second quarter of 2018 and increased 24.5% to $9.0 million (6.8% of total Net sales) for the first six months of 2019 compared to $7.2 million (11.5% of total Net sales) for the first six months of 2018. The increase in selling, general, and administrative expense for the second quarter of 2019 compared to the second quarter of 2018 was primarily due to $1.3 million in higher wages and incentive compensation-related expense offset by $0.3 million in lower professional fees. The increase in selling, general, and administrative expense for the first six months of 2019 compared to the first six months of 2018 was primarily due to $2.0 million in higher wages and incentive compensation-related expense offset by $0.2 million in lower professional fees.

 

Restructuring expense. In March 2018, we announced our plan to close our leased Permalok® manufacturing facility in Salt Lake City, Utah and move the production to our Permalok® production facility in St. Louis, Missouri, which was completed during the second quarter of 2018. Also in March 2018, we announced our plan to close our manufacturing facility in Monterrey, Mexico. Production ceased early in the second quarter of 2018, and the facility was sold in December 2018. We incurred restructuring expense of $0.8 million in the second quarter of 2018 and $1.1 million in the first six months of 2018, which includes employee severance and termination related restructuring expense of $0.4 million and $0.6 million, respectively, and expense related to demobilization activities of $0.4 million and $0.5 million, respectively.

 

Income taxes. Income tax expense was $0.4 million in the second quarter of 2019 (an effective income tax rate of 13.1%) compared to an income tax benefit of $0.1 million in the second quarter of 2018 (an effective income tax rate of 1.9%). Income tax expense was $0.6 million in the first six months of 2019 (an effective income tax rate of 11.0%) compared to an income tax benefit of $0.4 million in the first six months of 2018 (an effective income tax rate of 4.7%). The effective income tax rate for the second quarter and first six months of 2019 was impacted by the final Section 965 regulations issued in June 2019 related to certain foreign tax credit aspects of the transition tax, as well as the estimated changes in our valuation allowance. The effective income tax rate for the second quarter and first six months of 2018 was impacted by the estimated changes in our valuation allowance, as well as by the tax windfall from share-based compensation. The effective income tax rate can change significantly depending on the relationship of permanent income tax deductions and tax credits to estimated pre-tax income or loss and the changes in valuation allowances. Accordingly, the comparison of effective income tax rates between periods is not meaningful in all situations.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Our principal sources of liquidity generally include operating cash flows and the Credit Agreement with Wells Fargo Bank, N.A. dated October 25, 2018 (the “Credit Agreement”). From time to time our long-term capital needs may be met through the issuance of long-term debt or additional equity. Our principal uses of liquidity generally include capital expenditures, working capital, and debt service. Information regarding our cash flows for the six months ended June 30, 2019 and 2018 are presented in our Condensed Consolidated Statements of Cash Flows contained in Part I – Item 1. “Financial Statements” of this 2019 Q2 Form 10-Q, and are further discussed below.

 

 

As of June 30, 2019, our working capital (current assets minus current liabilities) was $124.4 million compared to $128.0 million as of December 31, 2018. Cash and cash equivalents totaled $10.1 million and $6.7 million as of June 30, 2019 and December 31, 2018, respectively.

 

Fluctuations in our working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. Our revenues are recognized over time as the manufacturing process progresses; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary by project, and from period to period.

 

There were no borrowings under the Credit Agreement as of June 30, 2019. Borrowings under the Credit Agreement were $11.5 million as of December 31, 2018.

 

Net cash provided by operating activities in the first six months of 2019 was $17.3 million. Cash provided by operating activities was primarily the result of our net income adjusted for noncash charges and the fluctuations in working capital accounts that included decreases in trade and other receivables, contract assets, net, inventories, and prepaid expenses and other and increases in accrued and other liabilities offset by a decrease in accounts payable.

 

Net cash used in investing activities in the first six months of 2019 was $2.2 million, primarily due to $2.6 million of capital expenditures, which was primarily standard capital replacement, offset by $0.4 million of insurance proceeds from the Saginaw fire. Total capital expenditures in 2019 are expected to be $12.1 million for standard capital replacement and replacement of fire damaged property and equipment at our Saginaw facility.

 

Net cash used in financing activities in the first six months of 2019 was $11.7 million, primarily due to net repayments on line of credit of $11.5 million.

 

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under the Credit Agreement will be adequate to fund our working capital and capital expenditure requirements for at least the next twelve months. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and finance and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may use a portion of our working capital or necessitate additional bank borrowings or other sources of funding.

 

On September 15, 2017, our registration statement on Form S-3 (Registration No. 333-216802) covering the potential future sale of up to $120 million of our equity and/or debt securities or combinations thereof, was declared effective by the Securities and Exchange Commission. This registration statement provides another potential source of capital, in addition to other alternatives already in place. We cannot be certain that funding will be available on favorable terms or available at all. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. As of the date of this 2019 Q2 Form 10-Q, we have not yet sold any securities under this registration statement, nor do we have an obligation to do so. Please refer to the factors discussed in Part I – Item 1A. “Risk Factors” in our 2018 Form 10-K.

 

Borrowings on Line of Credit

 

As of June 30, 2019, we had no outstanding borrowings and $1.6 million of outstanding letters of credit under the Credit Agreement. The Credit Agreement expires on October 25, 2023 and provides for revolving loans and letters of credit in the aggregate amount of up to $60 million, subject to a borrowing base (the “Revolver Commitment”). We have the ability to increase the Revolver Commitment to $100 million, subject to the provisions of the Credit Agreement.

 

The borrowing base is calculated by applying various advance rates to eligible accounts receivable, contract assets, inventories, and fixed assets, subject to various exclusions, adjustments, and sublimits. As of June 30, 2019, we had additional borrowing capacity of $49.4 million, net of outstanding letters of credit and the amount required to avoid a covenant trigger event. Based on our business plan and forecasts of operations, we expect to have sufficient credit availability to support our operations for at least the next twelve months.

 

 

Borrowings under the Credit Agreement bear interest at rates related to the daily three month London Interbank Offered Rate plus 1.5% to 2.0%. The Credit Agreement requires the payment of an unused line fee of between 0.25% and 0.375%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Credit Agreement) during any month. Such fee is payable monthly in arrears.

 

The Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants, events of default, and indemnification provisions in favor of the lender. The negative covenants include restrictions regarding the incurrence of liens and indebtedness and certain acquisitions and dispositions of assets and other matters, all subject to certain exceptions. The Credit Agreement also requires us to regularly provide financial information to Wells Fargo and to maintain a specified fixed charge coverage ratio upon certain triggers.

 

In connection with the execution and delivery of the Credit Agreement, we and certain of our subsidiaries also entered into a Guaranty and Security Agreement with Wells Fargo (the “Guaranty and Security Agreement”). Pursuant to the Guaranty and Security Agreement, our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position, results of operations, or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

For a discussion of our market risk associated with foreign currencies and interest rates, see Part II – Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of our 2018 Form 10-K.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. As a result of the assessment, our CEO and CFO have concluded that, as of June 30, 2019, our disclosure controls and procedures were effective.

 

As discussed in Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2019 Q2 Form 10-Q, we completed the acquisition of 100% of Ameron Water Transmission Group, LLC (“Ameron”) on July 27, 2018. As part of our post-closing integration activities, we are engaged in the process of assessing the internal controls of Ameron. We have begun to integrate policies, processes, people, technology, and operations for the post-acquisition combined company, and we will continue to evaluate the impact of any related changes to internal control over financial reporting. As permitted for newly acquired businesses by interpretive guidance issued by the staff of the SEC, management has excluded the internal control over financial reporting of Ameron from its evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2019. We have reported the operating results of Ameron in our condensed consolidated statements of operations and cash flows from the acquisition date through June 30, 2019. As of June 30, 2019, total assets related to Ameron represented approximately 16.4% of total assets. Revenues from Ameron comprised approximately 19.4% of total consolidated revenues for the six months ended June 30, 2019.

 

 

Changes in Internal Control over Financial Reporting

 

Except for changes in internal controls that we have made related to the integration of Ameron into the post-acquisition combined company, there were no significant changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Part II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material impact on our consolidated financial results. We are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties, and other costs in substantial amounts. See Note 9 of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2019 Q2 Form 10-Q.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this 2019 Q2 Form 10-Q, the factors discussed in Part I – Item 1A. “Risk Factors” in our 2018 Form 10-K could materially affect our business, financial condition, or operating results. The risks described in our 2018 Form 10-K are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, that may also materially adversely affect our business, financial condition, or operating results.

 

Item 6. Exhibits

 

(a) The exhibits filed as part of this 2019 Q2 Form 10-Q are listed below:

 

Exhibit

Number

 

Description

     

31.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Document

 

 

 

101.DEF

 

XBRL Taxonomy Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

* This exhibit constitutes a management contract or compensatory plan or arrangement.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: August 6, 2019

 

 

 

NORTHWEST PIPE COMPANY

 

 

 

By: 

/s/ Scott Montross

 

 

 

 

 

Scott Montross

 

 

Director, President, and Chief Executive Officer

 

 

(principal executive officer)

 

 

 

 

By: 

/s/ Robin Gantt

 

 

 

 

 

Robin Gantt

 

 

Senior Vice President, Chief Financial Officer, and Corporate Secretary

 

 

(principal financial and accounting officer)

 

26