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

 

Table of Contents

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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: March 31, 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 May 1, 2019 was 9,735,055 shares.

 

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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 months ended March 31, 2019 and 2018	2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018	3
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	4
Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018	5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 6. Exhibits	24
Signatures	25

 

 

 

		Three Months Ended March 31,
		2019				2018
Net sales		$	62,643			$	33,365
Cost of sales			56,072				32,017
Gross profit			6,571				1,348
Selling, general, and administrative expense			4,247				3,385
Restructuring expense			-				305
Operating income (loss)			2,324				(2,342	)
Other income			159				170
Interest income			4				77
Interest expense			(131	)			(128	)
Income (loss) before income taxes			2,356				(2,223	)
Income tax expense (benefit)			191				(272	)
Net income (loss)		$	2,165			$	(1,951	)
Net income (loss) per share:
Basic		$	0.22			$	(0.20	)
Diluted		$	0.22			$	(0.20	)
Shares used in per share calculations:
Basic			9,735				9,707
Diluted			9,735				9,707

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		Three Months Ended March 31,
		2019				2018
Net income (loss)		$	2,165			$	(1,951	)
Other comprehensive income (loss), net of tax:
Pension liability adjustment			26				24
Unrealized gain (loss) on cash flow hedges			(15	)			25
Other comprehensive income, net of tax			11				49
Comprehensive income (loss)		$	2,176			$	(1,902	)

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		March 31, 2019				December 31, 2018
Assets
Current assets:
Cash and cash equivalents		$	3,843			$	6,677
Trade and other receivables, less allowance for doubtful accounts of $564 and $660			27,791				34,394
Contract assets			70,267				74,271
Inventories			41,116				39,376
Prepaid expenses and other			4,505				4,795
Total current assets			147,522				159,513
Property and equipment, less accumulated depreciation and amortization of $79,438 and $76,861			102,397				103,447
Other assets			16,606				8,390
Total assets		$	266,525			$	271,350
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	15,524			$	19,784
Accrued liabilities			8,916				7,963
Contract liabilities			4,530				3,745
Total current liabilities			28,970				31,492
Borrowings on line of credit			-				11,464
Other long-term liabilities			16,767				9,804
Total liabilities			45,737				52,760
Commitments and contingencies (Note 8)
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, 9,735,055 shares issued and outstanding			97				97
Additional paid-in-capital			118,857				118,835
Retained earnings			103,594				101,194
Accumulated other comprehensive loss			(1,760	)			(1,536	)
Total stockholders’ equity			220,788				218,590
Total liabilities and stockholders’ equity		$	266,525			$	271,350

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																		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 13)			-				-				-				235				(235	)			-
Net income			-				-				-				2,165				-				2,165
Other comprehensive income (loss):
Pension liability adjustment, net of tax expense of $0			-				-				-				-				26				26
Unrealized loss on cash flow hedges, net of tax benefit of $8			-				-				-				-				(15	)			(15	)
Share-based compensation expense			-				-				22				-				-				22
Balances, March 31, 2019			9,735,055			$	97			$	118,857			$	103,594			$	(1,760	)		$	220,788

																		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			-				-				-				(1,951	)			-				(1,951	)
Other comprehensive income:
Pension liability adjustment, net of tax expense of $0			-				-				-				-				24				24
Unrealized gain on cash flow hedges, net of tax expense of $5			-				-				-				-				25				25
Issuance of common stock under stock compensation plans			104,128				1				(1,302	)			-				-				(1,301	)
Share-based compensation expense			-				-				81				-				-				81
Balances, March 31, 2018			9,723,883			$	97			$	118,635			$	78,931			$	(1,396	)		$	196,267

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		Three Months Ended March 31,
		2019				2018
Cash flows from operating activities:
Net income (loss)		$	2,165			$	(1,951	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and finance lease amortization			2,669				1,522
Amortization of intangible assets			108				119
Amortization of debt issuance costs			22				42
Provision for doubtful accounts			(81	)			87
Deferred income taxes			(10	)			(330	)
Loss on disposal of property and equipment			3				71
Share-based compensation expense			22				81
Unrealized (gain) loss on foreign currency forward contracts			86				(32	)
Changes in operating assets and liabilities:
Trade and other receivables			5,856				4,196
Contract assets, net			5,616				(3,236	)
Inventories			(1,740	)			610
Prepaid expenses and other assets			300				650
Accounts payable			(4,264	)			(3,045	)
Accrued and other liabilities			(395	)			(1,050	)
Net cash provided by (used in) operating activities			10,357				(2,266	)
Cash flows from investing activities:
Additions to property and equipment			(1,622	)			(744	)
Proceeds from sale of property and equipment			2				-
Net cash used in investing activities from continuing operations			(1,620	)			(744	)
Net cash provided by investing activities from discontinued operations			-				750
Net cash provided by (used in) investing activities			(1,620	)			6
Cash flows from financing activities:
Borrowings on line of credit			12,003				-
Repayments on line of credit			(23,467	)			-
Tax withholdings related to net share settlements of restricted stock and performance share awards			-				(1,301	)
Payments on finance lease obligations			(107	)			(94	)
Net cash used in financing activities			(11,571	)			(1,395	)
Change in cash and cash equivalents			(2,834	)			(3,655	)
Cash and cash equivalents, beginning of period			6,677				43,646
Cash and cash equivalents, end of period		$	3,843			$	39,991
Noncash investing and financing activities:
Accrued property and equipment purchases		$	339			$	168
Right-of-use assets obtained in exchange for operating lease liabilities		$	506			$	-
Right-of-use assets obtained in exchange for finance lease liabilities		$	-			$	458

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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 months ended March 31, 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 preliminary fair value of the assets acquired and liabilities assumed as of July 27, 2018 (in thousands):

 

 

The asset and liability fair value measurements are preliminary, primarily related to income, deferred, and foreign taxes, and are subject to change as additional information is obtained and certain tax returns are finalized. The Company recorded no measurement period adjustments during the three months ended March 31, 2019. The purchase price allocation will be finalized as soon as practicable within the measurement period, but not later than one year following the acquisition date.

 

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 during the three months ended March 31, 2019 and 2018 of $0.1 million and approximately $0, respectively. 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):

 

 

 

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):

 

 

 

 

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. The Company has lease agreements with lease and non-lease components, which are accounted for separately.

 

 

Lease cost consists of the following (in thousands):

 

The future maturities of lease liabilities as of March 31, 2019 are as follows (in thousands):

 

 

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

 

 

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

 

 

 

 

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):

 

 

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, which are derivatives accounted for as cash flow hedges, 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 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):

 

 

Stock Option Awards

 

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

 

 

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:

 

 

	(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 March 31, 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 March 31, 2019, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $2.2 million, which is expected to be recognized over a weighted-average period of 2.2 years.

 

 

 

8.	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.

 

Guarantees

 

The Company has entered into certain letters of credit that total $1.6 million as of March 31, 2019. The letters of credit relate to workers’ compensation insurance.

 

 

 

9.

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). For a small number of contracts, revenue is recognized when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred, and collectability is reasonably assured. 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 $(1.5) million and $0.8 million for the three months ended March 31, 2019 and 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 amounts billed based on the terms of the contracts in advance of costs incurred and revenue earned.

 

Revenue recognized that was included in the Contract liabilities balance at the beginning of each period was $3.3 million and $1.7 million during the three months ended March 31, 2019 and 2018, respectively.

 

 

Backlog

 

Backlog represents the balance of remaining performance obligations under signed contracts. As of March 31, 2019, backlog was approximately $167.3 million. The Company expects to recognize approximately 71% of the remaining performance obligations in 2019, 25% in 2020, and the balance thereafter.

 

 

 

10.	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 8.1% and 12.2% for the three months ended March 31, 2019 and 2018, respectively. The Company’s estimated effective income tax rate for the three months ended March 31, 2019 was impacted by the estimated changes in the Company’s valuation allowance.

 

The Company had $4.4 million of unrecognized income tax benefits as of March 31, 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).

 

 

 

11.	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:

 

 

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

 

 

 

 

12.	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):

 

 

(1)

The weighted-average number of antidilutive shares not included in the computation of diluted net income per share was 24,000 for the three months ended March 31, 2019. The weighted-average number of antidilutive shares not included in the computation of diluted net loss per share was approximately 87,000 for the three months ended March 31, 2018, including approximately 34,000 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 March 31, 2018.

 

 

 

13.	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.

 

 

 

14.	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 $0.3 million during the three months ended March 31, 2018, which includes employee severance and termination related restructuring expense of $0.2 million and expense related to demobilization activities of $0.1 million.

 

 

 

15.	Subsequent Event

 

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 will be impaired while the Company assesses and repairs the damage. The Company’s other production locations can be deployed to absorb whatever lost production it has as a result. The Company has insurance coverage in place covering, among other things, property damage and business interruption up to certain specified amounts, and has notified its insurers of the incident.

 

 

 

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