The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 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 six months ended June 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):
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
|
|
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:
|
|
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 $0.1 million and $2.6 million during the three and six months ended June 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):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
69,971
|
|
|
$
|
142,483
|
|
Net income
|
|
|
6,331
|
|
|
|
8,755
|
|
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):
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
22,133
|
|
|
$
|
20,631
|
|
Work-in-process
|
|
|
1,122
|
|
|
|
1,416
|
|
Finished goods
|
|
|
5,018
|
|
|
|
5,489
|
|
Supplies
|
|
|
1,756
|
|
|
|
1,641
|
|
Total inventories
|
|
$
|
30,029
|
|
|
$
|
29,177
|
|
On June 30, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent (“Wells Fargo”), 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 (collectively 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. Beginning the fiscal month end July 31, 2021, the Credit Agreement requires the Company to regularly provide financial information to Wells Fargo. Beginning the fiscal quarter end September 30, 2021, the Credit Agreement also requires the Company 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'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 June 30, 2021 under the Credit Agreement, the Company had no outstanding borrowings, $1.6 million of outstanding letters of credit, and additional borrowing capacity of approximately $98 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. As of June 30, 2021 and December 31, 2020, the weighted-average interest rate for outstanding revolving loan borrowings was 1.63% and 1.73%, respectively. Swingline loans under the Credit Agreement bear interest at the Base Rate plus the Applicable Margin. 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.
5.
|
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 June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
4,496
|
|
|
$
|
3,813
|
|
|
$
|
683
|
|
|
$
|
-
|
|
Foreign currency forward contracts
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
Total financial assets
|
|
$
|
4,505
|
|
|
$
|
3,813
|
|
|
$
|
692
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(827
|
)
|
|
$
|
-
|
|
|
$
|
(827
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
|
$
|
4,717
|
|
|
$
|
3,884
|
|
|
$
|
833
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(1,150
|
)
|
|
$
|
-
|
|
|
$
|
(1,150
|
)
|
|
$
|
-
|
|
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, and accrued liabilities approximate fair value due to the short-term nature of these instruments.
6.
|
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 June 30, 2021 and December 31, 2020, the total notional amount of the foreign currency forward contracts designated as cash flow hedges was $9.5 million (CAD$11.7 million) and $15.3 million (CAD$19.5 million), respectively. As of June 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 June 30, 2021 and December 31, 2020, all foreign currency forward contracts were designated as cash flow hedges. For the three and six months ended June 30, 2021, losses recognized in Net sales from foreign currency forward contracts not designated as hedging instruments were $(0.1) million. For the three and six months ended June 30, 2020, gains (losses) recognized in Net sales from foreign currency forward contracts not designated as hedging instruments were $(0.1) million and $0.2 million, respectively. As of June 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.
7.
|
Share-based Compensation
|
The Company has one active stock incentive plan for employees and directors, the 2007 Stock Incentive Plan, which provides for awards of stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units (“RSUs”), and performance share awards (“PSAs”).
The Company recognizes the compensation cost of employee and director services received in exchange for awards of equity instruments based on the grant date estimated fair value of the awards. 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 June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
253
|
|
|
$
|
179
|
|
|
$
|
483
|
|
|
$
|
321
|
|
Selling, general, and administrative expense
|
|
|
890
|
|
|
|
794
|
|
|
|
1,357
|
|
|
|
1,112
|
|
Total
|
|
$
|
1,143
|
|
|
$
|
973
|
|
|
$
|
1,840
|
|
|
$
|
1,433
|
|
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, 2020
|
|
|
129,572
|
|
|
$
|
25.86
|
|
RSUs and PSAs granted
|
|
|
90,368
|
|
|
|
33.30
|
|
RSUs and PSAs vested (2)
|
|
|
(58,809
|
)
|
|
|
25.53
|
|
Unvested RSUs and PSAs as of June 30, 2021
|
|
|
161,131
|
|
|
|
30.26
|
|
|
(1)
|
The number of PSAs disclosed in this table are at the target level of 100%.
|
|
|
|
|
(2)
|
For the PSAs vested on March 31, 2021, the actual number of common shares that were issued was determined by multiplying the PSAs by a payout percentage based on the performance-based conditions achieved. The payout percentage was 126% for the 2019-2020 performance period and 200% for the 2020 performance period.
|
The unvested balance of RSUs and PSAs as of June 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 June 30, 2021, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $4.2 million, which is expected to be recognized over a weighted-average period of 1.8 years.
Stock Awards
For the six months ended June 30, 2021 and 2020, stock awards of 12,606 shares and 12,815 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 $25.37 in 2020.
8.
|
Commitments and Contingencies
|
Portland Harbor Superfund Site
In December 2000, a section of the lower Willamette River known as the Portland Harbor Superfund Site was included on the National Priorities List at the request of the United States Environmental Protection Agency (“EPA”). While the Company’s Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facility’s stormwater system drains into a neighboring property’s privately owned stormwater system and slip. 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 June 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 $0.8 million and $2.1 million for the three and six months ended June 30, 2021, respectively, and $0.6 million and $0.2 million for the three and six months ended June 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):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time
|
|
$
|
58,748
|
|
|
$
|
57,649
|
|
|
$
|
118,805
|
|
|
$
|
118,527
|
|
Point in time
|
|
|
15,064
|
|
|
|
12,322
|
|
|
|
27,318
|
|
|
|
20,367
|
|
Net sales
|
|
$
|
73,812
|
|
|
$
|
69,971
|
|
|
$
|
146,123
|
|
|
$
|
138,894
|
|
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 $0.9 million and $5.1 million during the three and six months ended June 30, 2021, respectively, and $4.3 million and $8.4 million during the three and six months ended June 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 June 30, 2021, backlog was approximately $195 million. The Company expects to recognize approximately 56% of the remaining performance obligations in 2021, 33% 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 2016.
The Company recorded income tax expense at an estimated effective income tax rate of 26.1% and 23.9% for the three and six months ended June 30, 2021, respectively, and 26.7% and 28.8% for the three and six months ended June 30, 2020, respectively. The Company’s estimated effective income tax rate for the three months ended June 30, 2021 approximates the statutory rate, while the estimated effective income tax rate for the six months ended June 30, 2021 was primarily impacted by the tax windfalls recognized upon the vesting of equity awards in the first three months of 2021. The Company’s estimated effective income tax rate for the three months ended June 30, 2020 approximates the statutory rate, while the estimated effective income tax rate for the six months ended June 30, 2020 was primarily impacted by costs associated with the acquisition of Geneva that are expected to be 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):
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,131
|
|
|
$
|
5,998
|
|
|
$
|
4,306
|
|
|
$
|
6,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
|
9,861
|
|
|
|
9,792
|
|
|
|
9,837
|
|
|
|
9,771
|
|
Effect of potentially dilutive common shares (1)
|
|
|
54
|
|
|
|
16
|
|
|
|
83
|
|
|
|
61
|
|
Diluted weighted-average common shares outstanding
|
|
|
9,915
|
|
|
|
9,808
|
|
|
|
9,920
|
|
|
|
9,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.61
|
|
|
$
|
0.44
|
|
|
$
|
0.67
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.61
|
|
|
$
|
0.43
|
|
|
$
|
0.67
|
|
|
(1)
|
The weighted-average number of antidilutive shares not included in the computation of diluted net income per share was approximately 90,000 for the three months ended June 30, 2020. There were no antidilutive shares for the three and six months ended June 30, 2021 and the six months ended June 30, 2020.
|
12.
|
Recent Accounting and Reporting Developments
|
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s 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.