nwpx20200930_10q.htm
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Table of Contents



 

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: September 30, 2020

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

 

The number of shares outstanding of the registrant’s common stock as of October 28, 2020 was 9,805,437 shares.

 



 

 
 

NORTHWEST PIPE COMPANY

FORM 10-Q

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited):

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019

3

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

5

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

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

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

 

 

Item 4. Controls and Procedures

29

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

30

 

 

Item 1A. Risk Factors

30

 

 

Item 6. Exhibits

31

 

 

Signatures

32

 

 

Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $77,632  $75,226  $216,526  $207,072 

Cost of sales

  62,013   59,751   178,370   176,808 

Gross profit

  15,619   15,475   38,156   30,264 

Selling, general, and administrative expense

  5,656   4,900   19,185   13,852 

Operating income

  9,963   10,575   18,971   16,412 

Other income

  157   2,792   815   2,976 

Interest income

  16   23   49   30 

Interest expense

  (238)  (114)  (719)  (365)

Income before income taxes

  9,898   13,276   19,116   19,053 

Income tax expense

  2,631   2,529   5,287   3,167 

Net income

 $7,267  $10,747  $13,829  $15,886 
                 

Net income per share:

                

Basic

 $0.74  $1.10  $1.41  $1.63 

Diluted

 $0.73  $1.10  $1.40  $1.63 
                 

Shares used in per share calculations:

                

Basic

  9,802   9,745   9,782   9,739 

Diluted

  9,861   9,785   9,851   9,762 

 

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

 

2

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income

  $ 7,267     $ 10,747     $ 13,829     $ 15,886  
                                 

Other comprehensive income (loss), net of tax:

                               

Pension liability adjustment

    25       25       74       78  

Unrealized gain (loss) on cash flow hedges

    19       (2 )     (57 )     (17 )

Other comprehensive income, net of tax

    44       23       17       61  

Comprehensive income

  $ 7,311     $ 10,770     $ 13,846     $ 15,947  

 

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

 

3

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

  

September 30, 2020

  

December 31, 2019

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $30,363  $31,014 

Trade and other receivables, less allowance for doubtful accounts of $719 and $801

  43,624   38,026 

Contract assets

  76,276   91,186 

Inventories

  31,945   30,654 

Prepaid expenses and other

  3,374   4,159 

Total current assets

  185,582   195,039 

Property and equipment, less accumulated depreciation and amortization  of $94,857 and $86,244

  109,172   99,631 

Operating lease right-of-use assets

  31,538   7,683 

Goodwill

  22,985   - 

Intangible assets, net

  11,116   1,231 

Other assets

  6,432   6,661 

Total assets

 $366,825  $310,245 
         

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Current portion of long-term debt

 $3,132  $- 

Accounts payable

  13,702   15,493 

Accrued liabilities

  14,046   12,150 

Contract liabilities

  4,540   12,281 

Current portion of operating lease liabilities

  2,303   1,642 

Total current liabilities

  37,723   41,566 

Long-term debt

  11,244   - 

Operating lease liabilities

  28,448   6,247 

Deferred income taxes

  14,611   4,265 

Other long-term liabilities

  11,107   10,009 

Total liabilities

  103,133   62,087 
         

Commitments and contingencies (Note 10)

          
         

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, 9,805,437 and 9,746,979 shares issued and outstanding

  98   97 

Additional paid-in-capital

  122,231   120,544 

Retained earnings

  143,160   129,331 

Accumulated other comprehensive loss

  (1,797)  (1,814)

Total stockholders’ equity

  263,692   248,158 

Total liabilities and stockholders’ equity

 $366,825  $310,245 

 

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

 

4

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands)

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 

Balances, June 30, 2020

  9,800,810  $98  $121,358  $135,893  $(1,841) $255,508 

Net income

  -   -   -   7,267   -   7,267 

Other comprehensive income:

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   25   25 

Unrealized gain on cash flow hedges, net of tax expense of $6

  -   -   -   -   19   19 

Issuance of common stock under stock compensation plans

  4,627   -   -   -   -   - 

Share-based compensation expense

  -   -   873   -   -   873 

Balances, September 30, 2020

  9,805,437  $98  $122,231  $143,160  $(1,797) $263,692 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 

Balances, June 30, 2019

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

Net income

  -   -   -   10,747   -   10,747 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   25   25 

Unrealized loss on cash flow hedges, net of tax benefit of $1

  -   -   -   -   (2)  (2)

Issuance of common stock under stock compensation plans

  2,152   -   -   -   -   - 

Share-based compensation expense

  -   -   541   -   -   541 

Balances, September 30, 2019

  9,746,979  $97  $120,051  $117,315  $(1,710) $235,753 

 

5

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, Continued

(Unaudited)

(Dollar amounts in thousands)

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 

Balances, December 31, 2019

  9,746,979  $97  $120,544  $129,331  $(1,814) $248,158 

Net income

  -   -   -   13,829   -   13,829 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   74   74 

Unrealized loss on cash flow hedges, net of tax benefit of $23

  -   -   -   -   (57)  (57)

Issuance of common stock under stock compensation plans

  58,458   1   (619)  -   -   (618)

Share-based compensation expense

  -   -   2,306   -   -   2,306 

Balances, September 30, 2020

  9,805,437  $98  $122,231  $143,160  $(1,797) $263,692 

 

                  

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

  -   -   -   235   (235)  - 

Net income

  -   -   -   15,886   -   15,886 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   78   78 

Unrealized loss on cash flow hedges, net of tax benefit of $9

  -   -   -   -   (17)  (17)

Issuance of common stock under stock compensation plans

  11,924   -   -   -   -   - 

Share-based compensation expense

  -   -   1,216   -   -   1,216 

Balances, September 30, 2019

  9,746,979  $97  $120,051  $117,315  $(1,710) $235,753 

 

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

 

6

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income

  $ 13,829     $ 15,886  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and finance lease amortization

    9,332       9,215  

Amortization of intangible assets

    1,607       269  

Deferred income taxes

    5,025       2,718  

Gain on insurance proceeds

    (1,147

)

    (431 )

Share-based compensation expense

    2,306       1,216  

Other, net

    869       157  

Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:

               

Trade and other receivables

    (354 )     (4,263 )

Contract assets, net

    8,298       (7,373 )

Inventories

    4,382       12,016  

Prepaid expenses and other assets

    3,787       2,507  

Accounts payable

    (3,343

)

    (12,337

)

Accrued and other liabilities

    (1,201

)

    1,786  

Net cash provided by operating activities

    43,390       21,366  

Cash flows from investing activities:

               

Acquisition of business, net of cash acquired

    (48,728

)

    -  

Purchases of property and equipment

    (9,787

)

    (5,925

)

Purchases of intangible assets

    (327 )     -  

Proceeds from sale of property and equipment

    -       15  

Proceeds from insurance

    1,637       1,400  

Net cash used in investing activities

    (57,205

)

    (4,510

)

Cash flows from financing activities:

               

Borrowings on line of credit

    41,377       41,744  

Repayments on line of credit

    (41,377

)

    (53,208

)

Borrowings on long-term debt

    15,879       -  

Payments on long-term debt

    (1,323

)

    -  

Payments of debt issuance costs

    (461

)

    -  

Payments on finance lease obligations

    (313

)

    (325

)

Tax withholdings related to net share settlements of restricted stock and performance share awards

    (618

)

    -  

Net cash provided by (used in) financing activities

    13,164       (11,789

)

Change in cash and cash equivalents

    (651

)

    5,067  

Cash and cash equivalents, beginning of period

    31,014       6,677  

Cash and cash equivalents, end of period

  $ 30,363     $ 11,744  
                 

Noncash investing and financing activities:

               

Accrued property and equipment purchases

  $ 876     $ 515  

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

  $ 4,471     $ 1,238  

 

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

 

7

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Organization and Basis of Presentation

 

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

 

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”). The financial information as of December 31, 2019 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, 2019 (“2019 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 2019 Form 10-K.

 

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2020, particularly in light of the coronavirus disease 2019 (“COVID-19”) pandemic and its effects on the domestic and global economies.

 

Impact of COVID-19

 

In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the economic impacts of the COVID-19 pandemic.

 

Consistent with national guidelines and with state and local orders to date, the Company currently continues to operate its manufacturing facilities in the United States as it produces critical water infrastructure products. The Company has taken proactive and precautionary steps to ensure the safety of its employees, customers, and suppliers, including frequent cleaning and disinfection of workspaces, property and equipment, instituting social distancing measures, and mandating remote working environments for certain employees.

 

In early April 2020, the Company was ordered to close its water infrastructure manufacturing facility in San Luis Río Colorado, Mexico (“SLRC”) as a result of mandates made by Mexican authorities that companies that do not carry out essential activities in Mexico must suspend business operations in order to combat and eradicate the existence and transmission of COVID-19. The Company diverted orders on a case-by-case basis to its United States-based facilities during this closure. In early June 2020, the Mexican authorities determined the SLRC facility was essential, and allowed weekly increases to the workforce. By July 2020, operations at the SLRC facility were fully restored.

 

8

 

While the COVID-19 pandemic has not had a material adverse effect on the Company's reported results for the first nine months of 2020, the Company is unable to predict the ultimate impact that the COVID-19 pandemic may have on its business, future results of operations, financial position, or cash flows. The extent to which the Company's 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 outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts on global and domestic economic conditions, including 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. The Company is closely monitoring the impact of the outbreak of COVID-19 on all aspects of its business.

 

Immaterial Correction of Error

 

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 an acquired Ameron Water Transmission Group, LLC facility. Management concluded that this out of period adjustment was not material to the consolidated financial results for the year ended December 31, 2019.

 

 

 

2.

Business Combination

 

On January 31, 2020, the Company completed the acquisition of 100% of Geneva Pipe and Precast Company (fka Geneva Pipe Company, Inc.) (“Geneva”) 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 preliminary fair value of the assets acquired and liabilities assumed as of January 31, 2020 (in thousands):

 

Assets

    

Cash and cash equivalents

 $691 

Trade and other receivables

  7,089 

Inventories

  5,673 

Prepaid expenses and other

  356 

Property and equipment

  9,096 

Operating lease right-of-use assets

  21,684 

Intangible assets

  11,165 

Total assets acquired

  55,754 
     

Liabilities

    

Accounts payable

  1,395 

Accrued liabilities

  1,189 

Operating lease liabilities

  20,454 

Deferred income taxes

  5,343 

Other long-term liabilities

  939 

Total liabilities assumed

  29,320 
     

Goodwill

  22,985 
     

Total purchase consideration

 $49,419 

 

9

 

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. The asset and liability fair value measurements primarily related to inventories, property and equipment, operating lease right-of-use assets and liabilities, identifiable intangible assets, goodwill, and deferred income taxes, are preliminary and subject to change as additional information is obtained. 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 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 following table summarizes the components of the intangible assets acquired and their estimated useful lives:

 

  

Estimated

Useful Life

  

Fair Value

 
  

(In years)

  

(In thousands)

 

Customer relationships

  11.0  $8,031 

Trade names

  10.0   2,093 

Backlog

  0.9   1,041 

Total intangible assets

  9.9  $11,165 

 

Goodwill arose from the acquisition of an assembled workforce, expansion of product offerings, and management’s industry know-how. The Company does not expect the goodwill to be 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, and $0.5 million during the three and nine months ended September 30, 2019. These transaction costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

 

Geneva operations contributed net sales of $12.5 million and $32.9 million to the Company’s continuing operations for the three months ended September 30, 2020 and the period from January 31, 2020 to September 30, 2020, respectively. It is impracticable to determine the effect on net income as a substantial portion of Geneva has been integrated into the Company’s ongoing 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):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $77,632  $88,053  $220,115  $241,477 

Net income

  7,589   11,282   16,344   17,153 

 

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.

 

10

 
 

3.

Inventories

 

Inventories consist of the following (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 
                 

Raw materials

  $ 23,960     $ 26,772  

Work-in-process

    1,215       1,579  

Finished goods

    5,197       683  

Supplies

    1,573       1,620  

Total inventories

  $ 31,945     $ 30,654  

 

 

 

4.

Goodwill and Intangible Assets

 

Goodwill

 

Goodwill represents the excess of purchase price over the assigned fair values of the assets and liabilities assumed in conjunction with an acquisition. The changes in the carrying amount of goodwill for the nine months ended September 30, 2020 were as follows (in thousands):

 

Goodwill, December 31, 2019

  $ -  

Acquisition of Geneva (Note 2)

    22,985  

Goodwill, September 30, 2020

  $ 22,985  

 

Goodwill is reviewed for impairment annually as of December 31. In testing goodwill for impairment, the Company has the option to perform a qualitative assessment to determine whether the existence of events or circumstances indicate that it is more-likely-than-not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. When performing a qualitative assessment, the Company evaluates factors such as industry and market conditions, cost factors, overall financial performance, and other relevant entity specific events and changes. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, or if the Company chooses not to perform the qualitative assessment, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require interim impairment testing. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and their impact on the Company as well as current market capitalization and forecasts. The Company determined that a triggering event has not occurred which would require an interim impairment test to be performed.

 

11

 

Intangible Assets

 

Intangible assets consist of the following (in thousands):

 

   

Gross Carrying

   

Accumulated

   

Intangible

 
   

Amount

   

Amortization

   

Assets, Net

 

As of September 30, 2020

                       

Customer relationships

  $ 9,409     $ (1,417 )   $ 7,992  

Trade names and trademarks

    3,225       (649 )     2,576  

Backlog

    1,041       (757 )     284  

Other

    327       (63 )     264  

Total

  $ 14,002     $ (2,886 )   $ 11,116  
                         

As of December 31, 2019

                       

Customer relationships

  $ 1,378     $ (827 )   $ 551  

Trade names and trademarks

    1,132       (452 )     680  

Total

  $ 2,510     $ (1,279 )   $ 1,231  

 

During the nine months ended September 30, 2020, intangible assets increased primarily due to the acquisition of Geneva. See Note 2, “Business Combination” for additional information related to this transaction.

 

Intangible assets are amortized using the straight-line method over estimated useful lives ranging from eleven months to 15 years. The estimated amortization expense for each of the next five years and thereafter is as follows (in thousands):

 

Year ending December 31,

    

Remainder of 2020

 $599 

2021

  1,262 

2022

  1,262 

2023

  1,171 

2024

  1,015 

Thereafter

  5,807 

Total amortization expense

 $11,116 

 

 

 

5.

Line of Credit and Long-Term Debt

 

The Company’s Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) dated October 25, 2018 (“Credit Agreement”), as amended on January 31, 2020 by the Consent and Amendment No. 1 to Credit Agreement with Wells Fargo (collectively the “Amended Credit Agreement”) provides for a term loan, as well as letters of credit and revolving loans in the aggregate amount of up to $74 million, subject to a borrowing base (“Revolver Commitment”). The borrowing base is calculated by applying various advance rates to eligible accounts receivable, contract assets, inventories, and equipment, subject to various exclusions, adjustments, and sublimits. The Amended Credit Agreement will expire on October 25, 2024.

 

The Amended Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants, events of default, and indemnification provisions in favor of the lender. The negative covenants include restrictions regarding the incurrence of liens and indebtedness and certain acquisitions and dispositions of assets and other matters, all subject to certain exceptions. The Amended Credit Agreement also requires the Company to regularly provide financial information to Wells Fargo and to maintain a Senior Leverage Ratio (as defined in the Amended Credit Agreement) not greater than 3.00 and a Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of at least 1.10 to 1.00. The Company was in compliance with its financial covenants as of September 30, 2020.

 

The Company's obligations under the Amended Credit Agreement are secured by a security interest in certain real property owned by the Company and its subsidiaries and substantially all of Company’s and its subsidiaries’ other assets.

 

12

 

Line of Credit

 

As of September 30, 2020, the Company had no outstanding revolving loan borrowings under the Amended Credit Agreement and additional revolving loan borrowing capacity of $54.8 million. As of December 31, 2019, the Company had no outstanding borrowings under the Credit Agreement. Revolving loan borrowings under the Amended Credit Agreement bear interest at rates related to the daily three month London Interbank Offered Rate (“LIBOR”) plus 1.5% to 2.0%. As of September 30, 2020 and December 31, 2019, the weighted-average interest rate for outstanding revolving loan borrowings was 1.74% and 3.43% respectively. The Amended Credit Agreement provides a mechanism for determining an alternative benchmark rate to the LIBOR. The Amended Credit Agreement requires the payment of an unused line fee of between 0.25% and 0.375%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Amended Credit Agreement) during any month. Such fee is payable monthly in arrears.

 

Long-Term Debt

 

Pursuant to the Amended Credit Agreement, on March 31, 2020, the Company entered into a term loan for $15.9 million with Wells Fargo that matures on October 25, 2024 and bears interest at the daily three month LIBOR plus 2.0% to 2.5%. The term loan requires monthly principal payments of $0.3 million plus accrued interest. As of September 30, 2020, the outstanding balance of the term loan was $14.6 million. The Company is obligated to prepay the term loan to the extent that the outstanding principal balance at any time exceeds 60% of the fair market value of specified real property securing the loan. The Company is also obligated to prepay the term loan in an amount equal to 20% of Excess Cash Flow (as defined in the Amended Credit Agreement). The potential amount of prepayment from Excess Cash Flow that may be required in 2021, if any, cannot be determined until the results for the year ended December 31, 2020 are final. Subject to certain limitations, the Company may also voluntarily prepay all or a portion of the loan balance upon ten business days’ written notice.

 

Future scheduled principal payments of long-term debt are as follows (in thousands):

 

Year ending December 31,

       

Remainder of 2020

  $ 794  

2021

    3,176  

2022

    3,176  

2023

    3,176  

2024

    4,234  

Total future principal payments

    14,556  

Less: Unamortized debt issuance costs

    (180 )

Less: Current portion of long-term debt

    (3,132 )

Long-term debt

  $ 11,244  

 

 

 

6.

Leases

 

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

 

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

 

13

 

The following table summarizes the Company’s leases recorded on the Condensed Consolidated Balance Sheets (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 

Right-of-use assets:

               

Finance leases, net, included in Property and equipment (1)

  $ 886     $ 1,203  

Operating leases

    31,538       7,683  

Total right-of-use assets

  $ 32,424     $ 8,886  
                 

Lease liabilities:

               

Finance leases

  $ 1,328     $ 1,641  

Operating leases

    30,751       7,889  

Total lease liabilities

  $ 32,079     $ 9,530  

 

 

(1)

Finance lease right-of-use assets are presented net of accumulated amortization of $1.2 million and $0.9 million as of September 30, 2020 and December 31, 2019, respectively.

 

Lease cost consists of the following (in thousands):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Finance lease cost:

                               

Amortization of right-of-use assets

  $ 105     $ 109     $ 316     $ 328  

Interest on lease liabilities

    19       13       61       42  

Operating lease cost

    957       514       2,709       1,419  

Short-term lease cost

    113       383       520       958  

Variable lease cost

    80       33       162       108  

Total lease cost

  $ 1,274     $ 1,052     $ 3,768     $ 2,855  

 

The future maturities of lease liabilities as of September 30, 2020 are as follows (in thousands):

 

   

Finance Leases

   

Operating Leases

 
                 

Remainder of 2020

  $ 125     $ 892  

2021

    382       3,178  

2022

    361       2,820  

2023

    158       2,561  

2024

    471       2,416  

Thereafter

    -       29,871  

Total lease payments

    1,497       41,738  

Amount representing interest

    (169 )     (10,987 )

Present value of lease liabilities

    1,328       30,751  

Current portion of lease liabilities (1)

    (352 )     (2,303 )

Long-term lease liabilities (2)

  $ 976     $ 28,448  

 

 

(1)

Current portion of finance lease liabilities are included in Accrued liabilities.

 

 

(2)

Long-term finance lease liabilities are included in Other long-term liabilities.

 

14

 

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

 

   

September 30, 2020

   

December 31, 2019

 

Weighted-average remaining lease term (years)

               

Finance leases

    3.27       3.79  

Operating leases

    18.23       8.31  

Weighted-average discount rate

               

Finance leases

    5.48

%

    5.40

%

Operating leases

    3.37

%

    4.50

%

 

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

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 

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

               

Operating cash flows from finance leases

  $ (61 )   $ (42 )

Operating cash flows from operating leases

    (2,588 )     (1,396 )

Financing cash flows from finance leases

    (313 )     (325 )

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

    4,471       1,238  

 

 

 

7.

Fair Value Measurements

 

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):

 

   

Total

   

Level 1

   

Level 2

   

Level 3

 

As of September 30, 2020

                               

Financial assets:

                               

Deferred compensation plan

  $ 4,801     $ 3,932     $ 869     $ -  

Foreign currency forward contracts

    2       -       2       -  

Total financial assets

  $ 4,803     $ 3,932     $ 871     $ -  
                                 

Financial liabilities:

                               

Foreign currency forward contracts

  $ (529 )   $ -     $ (529 )   $ -  
                                 

As of December 31, 2019

                               

Financial assets:

                               

Deferred compensation plan

  $ 5,150     $ 4,268     $ 882     $ -  
                                 

Financial liabilities:

                               

Foreign currency forward contracts

  $ (138 )   $ -     $ (138 )   $ -  

 

15

 

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. The Company is obligated to repay the carrying value of the Company’s long-term debt. The fair value of the Company’s long-term debt is calculated using interest rates for the Company’s existing debt arrangements which are classified as Level 2 inputs within the fair value hierarchy. As of September 30, 2020, the fair value of the Company’s long-term debt approximates the carrying value as the borrowings bear interest based on current market rates.

 

 

 

8.

Derivative Instruments and Hedging Activities

 

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, 2020 and December 31, 2019, the total notional amount of the foreign currency forward contracts designated as cash flow hedges was $16.7 million (CAD$22.3 million) and $6.1 million (CAD$7.9 million), respectively. All of the Company’s foreign currency forward contracts are subject to an enforceable master netting arrangement.

 

As of September 30, 2020, three of the Company's foreign currency forward contracts with notional amounts totaling $11.2 million (CAD$14.9 million) had remaining maturities between 15 and 20 months, and the remaining contracts had maturities less than twelve months.

 

As of September 30, 2020 and December 31, 2019, 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 $(0.2) million and approximately $0 for the three and nine months ended September 30, 2020, respectively, and $0.1 million and approximately $0 for the three and nine months ended September 30, 2019, respectively. As of September 30, 2020, unrealized pretax losses on outstanding foreign currency forward contracts in Accumulated other comprehensive loss was $(0.1) million, of which approximately $0 is 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.

 

 

 

9.

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”).

 

16

 

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):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Cost of sales

  $ 255     $ 125     $ 576     $ 249  

Selling, general, and administrative expense

    618       416       1,730       967  

Total

  $ 873     $ 541     $ 2,306     $ 1,216  

 

Stock Option Awards

 

The Company’s stock incentive plan provides that options become exercisable according to vesting schedules, which range from immediate to ratably over a 60-month period. Options terminate ten years from the date of grant. During the nine months ended September 30, 2020, 24,000 stock options at a weighted-average exercise price of $24.15 were exercised. As of September 30, 2020, there were no stock options outstanding.

 

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:

 

   

Number of

RSUs and

PSAs (1)

   

Weighted-

Average

Grant Date Fair

Value

 

Unvested RSUs and PSAs as of December 31, 2019

    85,170     $ 23.56  

RSUs and PSAs granted

    97,834       26.61  

Unvested RSUs and PSAs canceled

    (3,752

)

    23.56  

RSUs and PSAs vested (2)

    (49,680

)

    23.56  

Unvested RSUs and PSAs as of September 30, 2020

    129,572       25.86  

 

 

(1)

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

 

 

 

 

(2)

For the PSAs vested on March 31, 2020, the actual number of common shares that were issued was determined by multiplying the PSAs by a payout percentage of 136%, based on the performance-based conditions achieved.

 

The unvested balance of RSUs and PSAs as of September 30, 2020 includes approximately 91,000 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 200%.

 

As of September 30, 2020, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $2.9 million, which is expected to be recognized over a weighted-average period of 1.6 years.

 

17

 

Stock Awards

 

For the nine months ended September 30, 2020 and 2019, stock awards of 17,442 shares and 11,924 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 $25.81 in 2020 and $25.16 in 2019.

 

 

 

10.

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. 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. 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 the remediation assessed. However, the Company can provide no assurance that those policies will cover all of the costs which the Company may incur.

 

18

 

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 September 30, 2020. The letters of credit relate to workers’ compensation insurance.

 

 

 

11.

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, 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 (decrease) in revenue of $0.9 million and $1.1 million for the three and nine months ended September 30, 2020, respectively and $0.4 million and $(1.1) million for the three and nine months ended September 30, 2019, respectively.

 

Revenue for water infrastructure 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.

 

19

 

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):

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Over time

  $ 65,077     $ 75,226     $ 183,604     $ 207,072  

Point in time

    12,555       -       32,922       -  

Net sales

  $ 77,632     $ 75,226     $ 216,526     $ 207,072  

 

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 $3.9 million and $11.2 million during the three and nine months ended September 30, 2020, respectively, and $6.5 million and $3.3 million during the three and nine months ended September 30, 2019, respectively.

 

Backlog

 

Backlog represents the balance of remaining performance obligations under signed contracts for water infrastructure steel pipe products. As of September 30, 2020, backlog was approximately $143 million. The Company expects to recognize approximately 41% of the remaining performance obligations in 2020, 50% in 2021, and the balance thereafter.

 

 

 

12.

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 2016.

 

The Company recorded income tax expense at an estimated effective income tax rate of 26.6% and 27.7% for the three and nine months ended September 30, 2020, respectively, and 19.0% and 16.6% for the three and nine months ended September 30, 2019, respectively. The Company’s estimated effective income tax rate for the three months ended September 30, 2020 approximates the statutory rate, while the estimated effective income tax rate for the nine months ended September 30, 2020 was impacted primarily by costs associated with the acquisition of Geneva that are expected to be non-deductible for tax purposes. The Company’s estimated effective income tax rate for the three and nine months ended September 30, 2019 was primarily impacted by the estimated changes in the Company’s valuation allowance.

 

 

 

13.

Net Income per Share

 

Basic net income per share is computed by dividing the 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.

 

20

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net income

  $ 7,267     $ 10,747     $ 13,829     $ 15,886  
                                 

Basic weighted-average common shares outstanding

    9,802       9,745       9,782       9,739  

Effect of potentially dilutive common shares

    59       40       69       23  

Diluted weighted-average common shares outstanding

    9,861       9,785       9,851       9,762  
                                 

Net income per common share:

                               

Basic

  $ 0.74     $ 1.10     $ 1.41     $ 1.63  

Diluted

  $ 0.73     $ 1.10     $ 1.40     $ 1.63  

 

 

 

14.

Recent Accounting and Reporting Developments

 

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s Condensed Consolidated Financial Statements and disclosures in Notes to Condensed Consolidated Financial Statements, from those disclosed in the Company’s 2019 Form 10-K, except for the following:

 

Accounting Changes

 

In August 2018, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The Company adopted ASU 2018-13 on January 1, 2020 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

 

 

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, 2020 (“2020 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:

 

 

changes in demand and market prices for our products;

 

 

product mix;

 

 

bidding activity;

 

21