NORTHWEST PIPE CO - Quarter Report: 2021 September (Form 10-Q)

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)

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

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

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)

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)

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, Continued

(Unaudited)

(Dollar amounts in thousands)

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)

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)

Northwest Pipe Company (the “Company”) is a leading manufacturer for water related infrastructure products. In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, the Company produces high-quality precast and reinforced concrete products, Permalok® steel casing pipe, bar-wrapped concrete cylinder pipe, as well as linings, coatings, joints, and one of the largest offerings of fittings and specialized components. The Company provides solution-based products for a wide range of markets including water transmission and infrastructure, water and wastewater plant piping, structural stormwater and sewer systems, trenchless technology, and pipeline rehabilitation. The Company’s chief operating decision maker, its Chief Executive Officer, evaluates performance of the Company and makes decisions regarding allocation of resources based on total Company results. Therefore, the Company has determined that it operates in one segment, Water Infrastructure.

The Condensed Consolidated Financial Statements are expressed in United States Dollars and include the accounts of 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 accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The financial information as of December 31, 2020 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, 2020 (“2020 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 and the accounting standards for interim financial statements. 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 2020 Form 10‑K.

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2021, particularly in light of the coronavirus disease 2019 pandemic and its effects on the domestic and global economies.

On January 31, 2020, the Company completed the acquisition of 100% of Geneva Pipe and Precast Company (“Geneva”) (fka Geneva Pipe Company, Inc.) for a purchase price of $49.4 million in cash. Geneva is a concrete pipe and precast concrete products manufacturer based in Utah. This acquisition expanded the Company’s water infrastructure product capabilities by adding additional reinforced concrete pipe capacity and a full line of precast concrete products including storm drains and manholes, catch basins, vaults, and curb inlets as well as innovative lined products that extend the life of concrete pipe and manholes for sewer applications. Operations have continued with Geneva's previous management and workforce at the three Utah manufacturing facilities located in Salt Lake City, Orem, and St. George. Consistent with prior periods and considering the chief operating decision maker's evaluation of post-acquisition performance is based on total Company results, the Company continues to report as one segment.

The following table summarizes the purchase consideration and fair value of the assets acquired and liabilities assumed as of January 31, 2020 (in thousands):

The purchase consideration for this business combination was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase consideration recorded as goodwill. As a result of additional information obtained during the measurement period about facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments during the three months ended June 30, 2020 which resulted in a $0.1 million balance sheet reclassification between trade and other receivables and inventories.

The following table summarizes the components of the intangible assets acquired and their estimated useful lives:

Goodwill arose from the acquisition of an assembled workforce, expansion of product offerings, and management’s industry know-how. The goodwill was not deductible for tax purposes.

The Company incurred transaction costs associated with this acquisition of approximately $0 and $2.6 million during the three and nine months ended September 30, 2020, respectively. These transaction costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

The following unaudited pro forma summary presents the consolidated results of the Company as if the acquisition of Geneva 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 Geneva. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Geneva 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. Adjustments also include an increase of interest expense as if the Company’s debt obtained in connection with the acquisition had been outstanding since January 1 of the year prior to the acquisition. The unaudited pro forma financial information includes non-recurring adjustments to remove transaction costs directly attributable to the acquisition. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

Inventories consist of the following (in thousands):

On June 30, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the lenders from time to time party thereto, including the initial sole lender, Wells Fargo (the “Lenders”) that provides for a revolving loan, swingline loan, and letters of credit in the aggregate amount of up to $100 million, with an option for the Company to increase that amount by $25 million, subject to the provisions of the Credit Agreement. The Credit Agreement will expire, and all obligations outstanding will mature, on June 30, 2024. The Company may prepay outstanding amounts in its discretion without penalty at any time, subject to applicable notice requirements. In conjunction with entering into the Credit Agreement, also effective June 30, 2021, the Company terminated the Credit Agreement with Wells Fargo dated October 25, 2018, as amended on January 31, 2020 by the Consent and Amendment No. 1 to Credit Agreement with Wells Fargo (together, the “Former Credit Agreement”), and all outstanding debt under the Former Credit Agreement, including long-term debt, was repaid.

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 Lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, annual capital expenditures, certain investments, acquisitions, and dispositions, and other matters, all subject to certain exceptions. The Credit Agreement requires the Company to regularly provide financial information to Wells Fargo and to maintain a consolidated senior leverage ratio no greater than 2.50 to 1.00 (subject to certain exceptions), a consolidated fixed charge coverage ratio no less than 1.25 to 1.00, and a minimum consolidated earnings before interest, taxes, depreciation, and amortization of at least $25 million for the four consecutive fiscal quarters most recently ended. Pursuant to the Credit Agreement, the Company has also agreed that it will not sell, assign, or otherwise dispose or encumber, any of its owned real property. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. The Company was in compliance with its financial covenants as of September 30, 2021.

The Company's obligations under the Credit Agreement are secured by a senior security interest in substantially all of the Company’s and its subsidiaries’ assets.

Line of Credit (Revolving and Swingline Loans)

As of September 30, 2021 under the Credit Agreement, the Company had $2.2 million of outstanding revolving loan borrowings, $1.6 million of outstanding letters of credit, and additional borrowing capacity of approximately $96 million. As of December 31, 2020 under the Former Credit Agreement, the Company had no outstanding revolving loan borrowings and $1.6 million of outstanding letters of credit. Revolving loans under the Credit Agreement bear interest at rates related to, at the Company’s option and subject to the provisions of the Credit Agreement including certain London Interbank Offered Rate (“LIBOR”) transition provisions, either: (i) Base Rate (as defined in the Credit Agreement) plus the Applicable Margin; (ii) LIBOR plus the Applicable Margin; or (iii) the daily one month LIBOR plus the Applicable Margin. The “Applicable Margin” is 1.75% to 2.25%, depending on the Company’s Senior Leverage Ratio (as defined in the Credit Agreement). Interest on outstanding revolving loans is payable quarterly. Swingline loans under the Credit Agreement bear interest at the Base Rate plus the Applicable Margin. As of September 30, 2021 and December 31, 2020, the weighted-average interest rate for outstanding borrowings was 1.84% and 1.73%, respectively. The Credit Agreement requires the payment of a commitment fee of between 0.30% and 0.40%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Credit Agreement). Such fee is payable quarterly in arrears. The Company is also obligated to pay additional fees customary for credit facilities of this size and type.

Fair value 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. Deferred compensation plan assets are included within Other assets in the Condensed Consolidated Balance Sheets.

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.

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

As of September 30, 2021 and December 31, 2020, the total notional amount of the foreign currency forward contracts designated as cash flow hedges was $7.5 million (CAD$9.5 million) and $15.3 million (CAD$19.5 million), respectively. As of September 30, 2021, the Company’s foreign currency forward contracts mature at various dates through September 2022 and are subject to an enforceable master netting arrangement.

As of September 30, 2021 and December 31, 2020, all foreign currency forward contracts were designated as cash flow hedges. Gains (losses) recognized in Net sales from foreign currency forward contracts not designated as hedging instruments were $0.1 million and approximately $0 for the three and nine months ended September 30, 2021, respectively, and $(0.2) million and approximately $0 for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, unrealized pretax losses on outstanding foreign currency forward contracts in Accumulated other comprehensive loss was approximately $0. Typically, outstanding foreign currency forward contract balances in Accumulated other comprehensive loss are expected to be reclassified to Net sales within the next twelve months as a result of underlying hedged transactions also being recorded in Net sales.

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. The Company estimates the fair value of RSUs and PSAs using the value of the Company’s stock on the date of grant. 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):

Restricted Stock Units and Performance Share Awards

The Company’s stock incentive plan provides for equity instruments, such as RSUs and PSAs, which grant the right to receive a specified number of shares over a specified period of time. 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 have performance-based payout conditions.

The following table summarizes the Company’s RSU and PSA activity:

The unvested balance of RSUs and PSAs as of September 30, 2021 includes approximately 116,000 PSAs. 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 200%.

As of September 30, 2021, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $3.3 million, which is expected to be recognized over a weighted-average period of 1.7 years.

Stock Awards

For the nine months ended September 30, 2021 and 2020, stock awards of 12,606 shares and 17,442 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 $30.94 in 2021 and $25.81 in 2020.

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. Also in December 2000, 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.

The ODEQ is separately providing oversight of voluntary investigations and source control activities by the Company involving the Company's site, which are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because the extent of contamination and the Company's responsibility for the contamination have not yet been determined.

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, nor does the Company expect to incur significant future costs in the resolution of the NRDA.

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 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 thereunder 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 September 30, 2021. The letters of credit relate to workers’ compensation insurance.

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, as well as precast and reinforced concrete products. 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.

Revenue for water infrastructure steel pipe products 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.

Revisions in contract estimates resulted in an increase in revenue of approximately $0 and $2.1 million for the three and nine months ended September 30, 2021, respectively, and $0.9 million and $1.1 million for the three and nine months ended September 30, 2020, respectively.

Revenue for water infrastructure concrete pipe and precast concrete products is recognized at the time control is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the products. All variable consideration that may affect the total transaction price, including contractual discounts, returns, and credits, is included in net sales. Estimates for variable consideration are based on historical experience, anticipated performance, and management's judgment. The Company's contracts do not contain significant financing.

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.

Disaggregation of Revenue

The following table disaggregates revenue by recognition over time or at a point in time, as the Company believes it best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors (in thousands):

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 can include certain 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 $1.5 million and $6.2 million during the three and nine months ended September 30, 2021, respectively, and $3.9 million and $11.2 million during the three and nine months ended September 30, 2020, respectively.

Backlog

Backlog represents the balance of remaining performance obligations under signed contracts for water infrastructure steel pipe products for which revenue is recognized over time. As of September 30, 2021, backlog was approximately $191 million. The Company expects to recognize approximately 33% of the remaining performance obligations in 2021, 53% in 2022, and the balance thereafter.

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 2017.

The Company recorded income tax expense at an estimated effective income tax rate of 27.9% and 26.1% for the three and nine months ended September 30, 2021, respectively, and 26.6% and 27.7% for the three and nine months ended September 30, 2020, respectively. The Company’s estimated effective income tax rates for the three and nine months ended September 30, 2021 were primarily impacted by non-deductible permanent differences. The Company’s estimated effective income tax rates for the three and nine months ended September 30, 2020 were primarily impacted by costs associated with the acquisition of Geneva that were non-deductible for tax purposes.

Basic net income per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income 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 per basic and diluted weighted-average common share outstanding was calculated as follows (in thousands, except per share amounts):

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 2020 Form 10‑K, except for the following:

Accounting Changes

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018‑14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715‑20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018‑14”), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year and the amount and timing of plan assets expected to be returned to the employer. The new disclosures include an explanation of significant gains and losses related to changes in benefit obligations. The Company adopted ASU 2018‑14 on a retrospective basis on January 1, 2021 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

In December 2019, the FASB issued Accounting Standards Update No. 2019‑12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019‑12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes” (“Topic 740”). ASU 2019‑12 also improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted ASU 2019‑12 on January 1, 2021 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

Business Combination

On October 5, 2021, the Company completed the acquisition of 100% of Park Environmental Equipment, LLC (“ParkUSA”) for a purchase price of approximately $87.4 million, net of cash acquired, and subject to a post-closing adjustment based on changes in net working capital. ParkUSA is a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. Operations have continued at ParkUSA’s three Texas manufacturing facilities located in San Antonio, Houston, and Ferris. The Company incurred transaction costs associated with this acquisition of $0.6 million and $0.8 million during the three and nine months ended September 30, 2021. These costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations. The initial accounting for the business combination is incomplete at the time of this filing due to the limited amount of time since the acquisition date and the ongoing status of the valuation. Therefore, it is impracticable for the Company to provide the major classes of assets acquired and liabilities assumed and the pro forma results of operations related to this acquisition.

Credit Agreement

On October 22, 2021, the Company and its wholly-owned subsidiaries NWPC, LLC, Geneva Pipe and Precast Company, and ParkUSA, along with certain of the Company’s other wholly-owned subsidiaries, entered into an Incremental Amendment (“Incremental Amendment”) with Wells Fargo, as administrative agent and the lenders from time to time party thereto, including the initial sole lender, Wells Fargo, to exercise the option to increase the aggregate amount available under the Credit Agreement by $25 million. The Credit Agreement, as amended by the Incremental Amendment (together, the “Amended Credit Agreement”), provides for a revolving loan, swingline loan, and letters of credit in the aggregate amount of up to $125 million. As of October 22, 2021, the Company had $87.2 million in outstanding revolving loan borrowings under the Amended Credit Agreement, and additional borrowing capacity of approximately $36 million. The Amended Credit Agreement provides for the inclusion of historic earnings from ParkUSA in the consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) calculation and revises the Company’s covenant by increasing the minimum consolidated EBITDA that must be maintained to $31.5 million for the four consecutive fiscal quarters most recently ended, starting with the fourth quarter of 2021. In addition, the Amended Credit Agreement removes the covenant to maintain a minimum consolidated fixed charge coverage ratio.

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 September 30, 2021 (“2021 Q3 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:

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 2021 Q3 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 a leading manufacturer for water related infrastructure products. In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, we produce high-quality precast and reinforced concrete products, Permalok® steel casing pipe, bar-wrapped concrete cylinder pipe, as well as linings, coatings, joints, and one of the largest offerings of fittings and specialized components. Our ten manufacturing facilities are strategically positioned to meet growing water and wastewater infrastructure needs. We provide solution-based products for a wide range of markets including water transmission and infrastructure, water and wastewater plant piping, structural stormwater and sewer systems, trenchless technology, and pipeline rehabilitation. 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. We have manufacturing facilities located in Portland, Oregon; Adelanto, California; Saginaw, Texas; Tracy, California; Parkersburg, West Virginia; Salt Lake City, Utah; Orem, Utah; St. George, Utah; St. Louis, Missouri; and San Luis Río Colorado, Mexico.

On January 31, 2020, we completed the acquisition of 100% of Geneva Pipe and Precast Company (fka Geneva Pipe Company, Inc.) for a purchase price of $49.4 million. Geneva is a concrete pipe and precast concrete products manufacturer based in Utah. This acquisition expanded our water infrastructure product capabilities by adding additional reinforced concrete pipe capacity and a full line of precast concrete products including storm drains and manholes, catch basins, vaults, and curb inlets as well as innovative lined products that extend the life of concrete pipe and manholes for sewer applications. Operations have continued with Geneva's previous management and workforce at its three manufacturing facilities.

On October 5, 2021, we completed the acquisition of 100% of Park Environmental Equipment, LLC for a purchase price of approximately $87.4 million, net of cash acquired, and subject to a post-closing adjustment based on changes in net working capital. ParkUSA is a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. Operations have continued at ParkUSA’s three Texas manufacturing facilities located in San Antonio, Houston, and Ferris. The financial information included in this Management's Discussion and Analysis of Financial Condition and Results of Operations is that of Northwest Pipe Company prior to the acquisition of ParkUSA because the acquisition was completed after the period covered by the financial statements included in our 2021 Q3 Form 10‑Q. Accordingly, the historical information included in our 2021 Q3 Form 10‑Q, unless otherwise indicated, is that of Northwest Pipe Company prior to this acquisition.

Our water infrastructure products are sold generally to installation contractors, who include our products in their bids to federal, state, and municipal agencies, privately-owned water companies, or developers for specific projects. We believe our sales are substantially driven by spending on urban growth and new water infrastructure with a recent trend towards spending on water infrastructure replacement, repair, and upgrade. Within the total range of products, our steel pipe tends to fit larger-diameter, higher-pressure pipeline applications, while our precast concrete products mainly serve stormwater and sanitary sewer systems.

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 and financing along with increased manufacturing 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 of steel pipe products, and changes in our selling prices often correlate directly to changes in steel costs. Recently, steel markets have become extremely volatile, and the cost of steel introduced into the manufacturing process increased 49% in the first nine months of 2021 compared to the first nine months of 2020. Due to production and delivery lead times for steel, these costs in the first nine months of 2021 were not indicative of current market prices, and we expect continued challenges procuring steel, including extended lead times to receive the raw material in addition to higher costs.

Impact of the COVID‑19 Pandemic on Our Business

In March 2020, the World Health Organization declared COVID‑19 a pandemic. We have taken proactive and precautionary steps to ensure the safety of our employees, customers, and suppliers, including frequent cleaning and disinfection of workspaces, providing personal protective equipment, instituting social distancing measures, and offering remote working environments for certain employees. While the COVID‑19 pandemic has not had a direct material adverse effect on our reported results for the first nine months of 2021, we are unable to predict the ultimate impact that the COVID‑19 pandemic may have on our business, future results of operations, financial position, or cash flows. The extent to which our operations may be impacted by the COVID‑19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the pandemic or treat its impact. Beginning in the second quarter of 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID‑19, as well as an easing of restrictions on individual, business, and government activities. The easing of restrictions and the existence of variant strains of COVID‑19 may lead to a rise in infections, which could result in the reinstatement of some of the restrictions previously in place. Recently, the United States Department of Labor’s Occupational Health and Safety Administration issued an emergency temporary standard requiring employers with more than 100 employees to establish, implement, and enforce a mandatory COVID‑19 vaccination policy or testing protocols, among other requirements, to minimize the risk of COVID‑19 transmission in the workplace. Implementation of this standard could have an adverse effect on our workforce, labor relations, and operations. The impacts on global and domestic economic conditions, including the impacts of labor and raw material shortages, the long-term potential to reduce or delay funding of municipal projects, and the continued disruptions to and volatility in the financial markets remain unknown. We continue to monitor the impact of the COVID‑19 pandemic on all aspects of our business.

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.

We have one operating segment, Water Infrastructure, which produces high-quality engineered steel water pipe, precast and reinforced concrete products, Permalok® steel casing pipe, bar-wrapped concrete cylinder pipe, as well as linings, coatings, joints, fittings, and specialized components. These products are primarily used in water infrastructure including water transmission, water and wastewater plant piping, structural stormwater and sewer systems, trenchless technology, and pipeline rehabilitation. See Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2021 Q3 Form 10‑Q for information on our acquisition of Geneva in January 2020.

Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

Net sales. Net sales increased 9.0% to $84.6 million for the third quarter of 2021 compared to $77.6 million for the third quarter of 2020 and increased 6.6% to $230.8 million for the first nine months of 2021 compared to $216.5 million for the first nine months of 2020. These increases were due to both higher pricing and shipments of precast concrete products, which contributed $2.6 million and $9.6 million to the increase in net sales during the third quarter and first nine months of 2021, respectively, as well as increases in net sales at our steel pipe facilities. The 7% increase in net sales at our steel pipe facilities for the third quarter of 2021 compared to the third quarter of 2020 was attributable to a 17% increase in selling price per ton due to increased materials costs and changes in product mix, partially offset by a 9% decrease in tons produced resulting from changes in project timing. The 3% increase in net sales at our steel pipe facilities for the first nine months of 2021 compared to the first nine months of 2020 was attributable to a 7% increase in selling price per ton due to increased materials costs and changes in product mix, partially offset by a 4% decrease in tons produced resulting from changes in project timing. Bidding activity, backlog, and production levels may vary significantly from period to period affecting sales volumes.

Gross profit. Gross profit decreased 20.8% to $12.4 million (14.6% of Net sales) for the third quarter of 2021 compared to $15.6 million (20.1% of Net sales) for the third quarter of 2020 and decreased 19.6% to $30.7 million (13.3% of Net sales) for the first nine months of 2021 compared to $38.2 million (17.6% of Net sales) for the first nine months of 2020. The decrease was primarily due to the combination of changes in product mix and pressure on project pricing realized at our steel pipe facilities, partially offset by increased gross profit on higher precast concrete revenues. Gross profit in the first nine months of 2020 included $1.4 million of business interruption insurance recovery (net of incremental production costs) resulting from the fire at our Saginaw facility in April 2019, as well as $0.3 million in acquisition-related inventory charges.

Selling, general, and administrative expense. Selling, general, and administrative expense decreased 1.7% to $5.6 million (6.6% of Net sales) for the third quarter of 2021 compared to $5.7 million (7.3% of Net sales) for the third quarter of 2020 and decreased 7.6% to $17.7 million (7.7% of Net sales) for the first nine months of 2021 compared to $19.2 million (8.8% of Net sales) for the first nine months of 2020. The decrease for the third quarter of 2021 compared to the third quarter of 2020 was due to $0.6 million in lower compensation-related expense and $0.2 million in lower professional fees, partially offset by $0.6 million in higher acquisition-related transaction costs related to the ParkUSA acquisition which was completed in October 2021 and $0.1 million in higher travel costs. The decrease for the first nine months of 2021 compared to the first nine months of 2020 was primarily due to $1.8 million in lower acquisition-related transaction costs.

Income taxes. Income tax expense was $1.9 million in the third quarter of 2021 (an effective income tax rate of 27.9%) compared to $2.6 million in the third quarter of 2020 (an effective income tax rate of 26.6%) and was $3.3 million in the first nine months of 2021 (an effective income tax rate of 26.1%) compared to $5.3 million in the first nine months of 2020 (an effective income tax rate of 27.7%). Our estimated effective income tax rates for the third quarter of 2021 and the first nine months of 2021 were primarily impacted by non-deductible permanent differences. Our estimated effective income tax rates for the third quarter of 2020 and the first nine months of 2020 were primarily impacted by costs associated with the acquisition of Geneva that were non-deductible for tax purposes. Our estimated 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 estimated 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 our line of credit. 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, acquisitions, and debt service. Information regarding our cash flows for the nine months ended September 30, 2021 and 2020 are presented in our Condensed Consolidated Statements of Cash Flows contained in Part I – Item 1. “Financial Statements” of this 2021 Q3 Form 10‑Q, and are further discussed below.

As we cannot predict the duration or scope of the COVID‑19 pandemic and its impact on our customers and suppliers, the potential negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and believe we have liquidity to meet our anticipated funding requirements and other near-term obligations.

As of September 30, 2021, our working capital (current assets minus current liabilities) was $152.9 million compared to $146.1 million as of December 31, 2020. Cash and cash equivalents totaled $3.2 million and $37.9 million as of September 30, 2021 and December 31, 2020, respectively. The decrease is primarily attributable to the repayment of long-term debt and changes in working capital in the first nine months of 2021.

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. A portion of 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.

As of September 30, 2021, we had $2.2 million of outstanding revolving loan borrowings, $32.4 million of operating lease liabilities, and $2.3 million of finance lease liabilities.

Net cash provided by (used in) operating activities in the first nine months of 2021 was $(13.6) million compared to $43.4 million in the first nine months of 2020. Net income, adjusted for non-cash items, generated $21.0 million of operating cash flow in the first nine months of 2021 compared to $31.8 million in the first nine months of 2020. The net change in working capital resulted in an increase (decrease) to net cash provided by operations of $(34.6) million in the first nine months of 2021 compared to $11.6 million in the first nine months of 2020.

Net cash used in investing activities in the first nine months of 2021 was $7.8 million compared to $57.2 million in the first nine months of 2020. Capital expenditures were $8.1 million in the first nine months of 2021 compared to $9.8 million in the first nine months of 2020, which was primarily for standard capital replacement. We currently expect capital expenditures in 2021 to be approximately $11 million to $12 million primarily for standard capital replacement. Net cash used in investing activities in the first nine months of 2020 includes the acquisition of Geneva for $48.7 million, net of cash acquired, and insurance proceeds of $1.4 million related to the fire at our Saginaw facility.

Net cash provided by (used in) financing activities in the first nine months of 2021 was $(13.3) million compared to $13.2 million in the first nine months of 2020. Net borrowings on line of credit were $2.2 million in the first nine months of 2021 compared to $0 in the first nine months of 2020. Net borrowings (repayments) on long-term debt were $(13.8) million in the first nine months of 2021 compared to $14.6 million in the first nine months of 2020, primarily related to financing a portion of the acquisition of Geneva. Tax withholdings related to net share settlements of restricted stock and performance share awards were $(1.2) million in the first nine months of 2021 compared to $(0.6) million in the first nine months of 2020.

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under the line of credit will be adequate to fund our working capital, debt service, 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 necessitate additional bank borrowings or other sources of funding. As previously discussed, we acquired ParkUSA in October 2021 which was funded primarily by borrowings on the line of credit.

On November 3, 2020, our registration statement on Form S‑3 (Registration No. 333‑249637) covering the potential future sale of up to $150 million of our equity and/or debt securities or combinations thereof, was declared effective by the SEC. This registration statement, which replaced the registration statement on Form S‑3 that expired on September 15, 2020, 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 2021 Q3 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 2020 Form 10‑K.

Credit Agreement

The Credit Agreement (the “Credit Agreement”) dated June 30, 2021 with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the lenders from time to time party thereto, including the initial sole lender, Wells Fargo (the “Lenders”), as amended by the Incremental Amendment dated October 22,2021 (together, the “Amended Credit Agreement”), provides for a revolving loan, swingline loan, and letters of credit in the aggregate amount of up to $125 million. The Amended Credit Agreement will expire, and all obligations outstanding will mature, on June 30, 2024. We may prepay outstanding amounts in our discretion without penalty at any time, subject to applicable notice requirements. As of September 30, 2021 under the Credit Agreement, we had $2.2 million of outstanding revolving loan borrowings, $1.6 million of outstanding letters of credit, and additional borrowing capacity of approximately $96 million. 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.

Revolving loans under the Amended Credit Agreement bear interest at rates related to, at our option and subject to the provisions of the Amended Credit Agreement including certain London Interbank Offered Rate (“LIBOR”) transition provisions, either: (i) Base Rate (as defined in the Amended Credit Agreement) plus the Applicable Margin; (ii) LIBOR plus the Applicable Margin; or (iii) the daily one month LIBOR plus the Applicable Margin. The “Applicable Margin” is 1.75% to 2.25%, depending on our Senior Leverage Ratio (as defined in the Amended Credit Agreement). Interest on outstanding revolving loans is payable quarterly. Swingline loans under the Amended Credit Agreement bear interest at the Base Rate plus the Applicable Margin. The Amended Credit Agreement requires the payment of a commitment fee of between 0.30% and 0.40%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Amended Credit Agreement). Such fee is payable quarterly in arrears. We are also obligated to pay additional fees customary for credit facilities of this size and type.

The letters of credit outstanding as of September 30, 2021 relate to workers’ compensation insurance. Based on the nature of these arrangements and our historical experience, we do not expect to make any material payments under these arrangements.

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 Lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, annual capital expenditures, certain investments, acquisitions, and dispositions, and other matters, all subject to certain exceptions. The Credit Agreement requires us to regularly provide financial information to Wells Fargo and to maintain a consolidated senior leverage ratio no greater than 2.50 to 1.00 (subject to certain exceptions), a consolidated fixed charge coverage ratio no less than 1.25 to 1.00, and a minimum consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of at least $25 million for the four consecutive fiscal quarters most recently ended. Pursuant to the Credit Agreement, we have also agreed that we will not sell, assign, or otherwise dispose or encumber, any of our owned real property. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. We were in compliance with all financial covenants as of September 30, 2021.

The Amended Credit Agreement provides for the inclusion of historic earnings from ParkUSA, which we acquired on October 5, 2021, in the consolidated EBITDA calculation, and revises our covenant by increasing the minimum consolidated EBITDA that must be maintained to $31.5 million for the four consecutive fiscal quarters most recently ended, starting with the fourth quarter of 2021. In addition, the Amended Credit Agreement removes the covenant to maintain a minimum consolidated fixed charge coverage ratio. Based on our business plan and forecasts of operations, we believe we will remain in compliance with our financial covenants for the next twelve months.

Our obligations under the Amended Credit Agreement are secured by a senior security interest in substantially all of our and our subsidiaries’ assets.

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 12 of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2021 Q3 Form 10‑Q.

Critical Accounting 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 2021 Q3 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, goodwill, 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 estimates during the nine months ended September 30, 2021 as compared to the critical accounting estimates disclosed in our 2020 Form 10‑K.

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 2020 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 (the “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 September 30, 2021, 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 September 30, 2021. As a result of the assessment, our CEO and CFO have concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

We are party to a variety of legal actions arising out of the ordinary 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 8 of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2021 Q3 Form 10‑Q.

Item 1A. Risk Factors

In addition to the other information set forth in this 2021 Q3 Form 10‑Q, the factors discussed in Part I – Item 1A. “Risk Factors” in our 2020 Form 10‑K could materially affect our business, financial condition, or operating results. The risks described in our 2020 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 2021 Q3 Form 10‑Q are listed below:

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: November 9, 2021