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Form 10-Q NORTHWEST PIPE CO For: Jun 30

August 9, 2022 10:55 AM EDT

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0001001385 Northwest Pipe Co. false --12-31 Q2 2022 421 503 112,485 106,957 0.01 0.01 10,000,000 10,000,000 0 0 0 0 0.01 0.01 15,000,000 15,000,000 9,927,360 9,927,360 9,870,567 9,870,567 0 106 77 0 5 0 59 77 0 13 2 0.1 25.2 7.4 1.4 24.1 1 100 1 1 0 The number of PSAs disclosed in this table are at the target level of 100%. For the PSAs vested on March 31, 2022, 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 141% for the 2020-2021 performance period and 93% for the 2021 performance period. 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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: June 30, 2022

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)

 

3603976250

(Registrant’s telephone number, including area code)

 

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

 

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  ☒

 

The number of shares outstanding of the registrant’s common stock as of August 1, 2022 was 9,927,360 shares.

 



 

 

 

NORTHWEST PIPE COMPANY

FORM 10Q

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

 
   

Item 1. Financial Statements (Unaudited):

 
   

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021

2

   

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021

3

   

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

4

   

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021

5

   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021

7

   

Notes to Condensed Consolidated Financial Statements

8

   

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

20

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

   

Item 4. Controls and Procedures

26

   

PART II - OTHER INFORMATION

 
   

Item 1. Legal Proceedings

27

   

Item 1A. Risk Factors

27

   

Item 6. Exhibits

28

   

Signatures

29

 

 

 

 

Part I  FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net sales

 $118,522  $73,812  $227,853  $146,123 

Cost of sales

  94,442   64,274   188,987   127,810 

Gross profit

  24,080   9,538   38,866   18,313 

Selling, general, and administrative expense

  10,127   6,337   19,495   12,167 

Operating income

  13,953   3,201   19,371   6,146 

Other income

  1   30   45   89 

Interest expense

  (869

)

  (348

)

  (1,429

)

  (575

)

Income before income taxes

  13,085   2,883   17,987   5,660 

Income tax expense

  3,412   752   4,755   1,354 

Net income

 $9,673  $2,131  $13,232  $4,306 
                 

Net income per share:

                

Basic

 $0.98  $0.22  $1.34  $0.44 

Diluted

 $0.97  $0.21  $1.33  $0.43 
                 

Shares used in per share calculations:

                

Basic

  9,918   9,861   9,900   9,837 

Diluted

  9,968   9,915   9,971   9,920 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net income

  $ 9,673     $ 2,131     $ 13,232     $ 4,306  
                                 

Other comprehensive income (loss), net of tax:

                               

Pension liability adjustment

    22       29       44       58  

Unrealized gain (loss) on foreign currency forward contracts designated as cash flow hedges

    (96

)

    16       (403

)

    48  

Unrealized gain on interest rate swap designated as cash flow hedge

    233       -       233       -  

Other comprehensive income (loss), net of tax

    159       45       (126

)

    106  

Comprehensive income

  $ 9,832     $ 2,176     $ 13,106     $ 4,412  

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

  

June 30, 2022

  

December 31, 2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $3,543  $2,997 

Trade and other receivables, less allowance for doubtful accounts of $421 and $503

  63,047   52,664 

Contract assets

  125,158   107,170 

Inventories

  74,247   59,651 

Prepaid expenses and other

  3,837   5,744 

Total current assets

  269,832   228,226 

Property and equipment, less accumulated depreciation and amortization of $112,485 and $106,957

  124,651   121,266 

Operating lease right-of-use assets

  95,628   98,507 

Goodwill

  53,684   53,684 

Intangible assets, net

  37,073   39,376 

Other assets

  5,715   6,620 

Total assets

 $586,583  $547,679 
         

Liabilities and Stockholders Equity

        

Current liabilities:

        

Accounts payable

 $49,640  $32,267 

Accrued liabilities

  29,240   24,498 

Contract liabilities

  8,127   2,623 

Current portion of operating lease liabilities

  4,769   4,704 

Total current liabilities

  91,776   64,092 

Borrowings on line of credit

  86,713   86,761 

Operating lease liabilities

  91,374   93,725 

Deferred income taxes

  11,285   10,984 

Other long-term liabilities

  8,491   8,734 

Total liabilities

  289,639   264,296 
         

Commitments and contingencies (Note 7)

          
         

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, 9,927,360 and 9,870,567 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively

  99   99 

Additional paid-in-capital

  125,517   125,062 

Retained earnings

  173,136   159,904 

Accumulated other comprehensive loss

  (1,808

)

  (1,682

)

Total stockholders’ equity

  296,944   283,383 

Total liabilities and stockholders’ equity

 $586,583  $547,679 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(Unaudited)

(Dollar amounts in thousands)

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, March 31, 2022

  9,915,980  $99  $125,403  $163,463  $(1,967

)

 $286,998 

Net income

  -   -   -   9,673   -   9,673 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   22   22 

Unrealized loss on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $106

  -   -   -   -   (96

)

  (96

)

Unrealized gain on interest rate swap designated as cash flow hedge, net of tax expense of $77

  -   -   -   -   233   233 

Issuance of common stock under stock compensation plans, net of tax withholdings

  11,380   -   (559

)

  -   -   (559

)

Share-based compensation expense

  -   -   673   -   -   673 

Balances, June 30, 2022

  9,927,360  $99  $125,517  $173,136  $(1,808

)

 $296,944 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, March 31, 2021

  9,857,961  $99  $123,487  $150,556  $(1,805

)

 $272,337 

Net income

  -   -   -   2,131   -   2,131 

Other comprehensive income:

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   29   29 

Unrealized gain on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $5

  -   -   -   -   16   16 

Issuance of common stock under stock compensation plans, net of tax withholdings

  12,606   -   (944

)

  -   -   (944

)

Share-based compensation expense

  -   -   1,143   -   -   1,143 

Balances, June 30, 2021

  9,870,567  $99  $123,686  $152,687  $(1,760

)

 $274,712 

 

 

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, 2021

  9,870,567  $99  $125,062  $159,904  $(1,682

)

 $283,383 

Net income

  -   -   -   13,232   -   13,232 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   44   44 

Unrealized loss on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $59

  -   -   -   -   (403

)

  (403

)

Unrealized gain on interest rate swap designated as cash flow hedge, net of tax expense of $77

  -   -   -   -   233   233 

Issuance of common stock under stock compensation plans, net of tax withholdings

  56,793   -   (853

)

  -   -   (853

)

Share-based compensation expense

  -   -   1,308   -   -   1,308 

Balances, June 30, 2022

  9,927,360  $99  $125,517  $173,136  $(1,808

)

 $296,944 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, December 31, 2020

  9,805,437  $98  $123,013  $148,381  $(1,866

)

 $269,626 

Net income

  -   -   -   4,306   -   4,306 

Other comprehensive income:

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   58   58 

Unrealized gain on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $13

  -   -   -   -   48   48 

Issuance of common stock under stock compensation plans, net of tax withholdings

  65,130   1   (1,167

)

  -   -   (1,166

)

Share-based compensation expense

  -   -   1,840   -   -   1,840 

Balances, June 30, 2021

  9,870,567  $99  $123,686  $152,687  $(1,760

)

 $274,712 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net income

  $ 13,232     $ 4,306  

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

         

Depreciation and finance lease amortization

    6,065       5,805  

Amortization of intangible assets

    2,303       631  

Deferred income taxes

    299       67  

Share-based compensation expense

    1,308       1,840  

Other, net

    (14

)

    286  

Changes in operating assets and liabilities:

         

Trade and other receivables

    (10,529

)

    8,516  

Contract assets, net

    (12,484

)

    (16,987

)

Inventories

    (14,596

)

    (805

)

Prepaid expenses and other assets

    5,908       3,385  

Accounts payable

    17,125       1,962  

Accrued and other liabilities

    1,552       (3,934

)

Net cash provided by operating activities

    10,169       5,072  

Cash flows from investing activities:

               

Purchases of property and equipment

    (8,456

)

    (4,778

)

Other investing activities

    30       101  

Net cash used in investing activities

    (8,426

)

    (4,677

)

Cash flows from financing activities:

               

Borrowings on line of credit

    80,908       -  

Repayments on line of credit

    (80,956

)

    -  

Payments on long-term debt

    -       (13,762

)

Payments on finance lease obligations

    (265

)

    (196

)

Tax withholdings related to net share settlements of equity awards

    (853

)

    (1,166

)

Other financing activities

    (31

)

    -  

Net cash used in financing activities

    (1,197

)

    (15,124

)

Change in cash and cash equivalents

    546       (14,729

)

Cash and cash equivalents, beginning of period

    2,997       37,927  

Cash and cash equivalents, end of period

  $ 3,543     $ 23,198  
                 

Noncash investing and financing activities:

               

Accrued property and equipment purchases

  $ 1,035     $ 831  

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

  $ 26     $ 4,669  

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

  $ 894     $ 371  

 

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

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Organization and Basis of Presentation

 

Northwest Pipe Company (collectively with its subsidiaries, the “Company”) is a leading manufacturer of water related infrastructure products, and operates in two segments, Engineered Steel Pressure Pipe (“SPP”) and Precast Infrastructure and Engineered Systems (“Precast”). This segment presentation is consistent with how the Company’s chief operating decision maker, its Chief Executive Officer, evaluates performance of the Company and makes decisions regarding the allocation of resources.

 

In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, the Company manufactures high-quality precast and reinforced concrete products; water, wastewater, and stormwater equipment; steel casing pipe, bar-wrapped concrete cylinder pipe, and one of the largest offerings of pipeline system joints, fittings, and specialized components. Strategically positioned to meet growing water and wastewater infrastructure needs, the Company provides solution-based products for a wide range of markets under the ParkUSA, Geneva Pipe and Precast, Permalok®, and Northwest Pipe Company lines. The Company is headquartered in Vancouver, Washington, and has 13 manufacturing facilities across North America.

 

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.

 

Effective in the fourth quarter of 2021, as a result of the acquisition of Park Environmental Equipment, LLC (“ParkUSA”), the Company revised its historical one segment position and identified the new operating segments, SPP and Precast, to align with changes made in its internal management structure and its reporting structure of financial information used to assess performance and allocate resources. See Note 12, “Segment Information” for detailed descriptions of these segments. As a result, certain amounts from the prior year financial statements have been reclassified in order to conform to the current year presentation.

 

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, 2021 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, 2021 (“2021 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 2021 Form 10‑K.

 

Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2022.

 

 

2.

Business Combination

 

On October 5, 2021, the Company completed the acquisition of 100% of Park Environmental Equipment, LLC for a purchase price of approximately $88.4 million in cash, subject to a post-closing adjustment based on changes in net working capital, and is included in the Precast segment for all periods following the acquisition date. ParkUSA is a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. Operations continue with ParkUSA’s previous management and workforce at its three Texas manufacturing facilities located in Houston, Dallas, and San Antonio.

 

8

 

The following table summarizes the purchase consideration and fair value of the assets acquired and liabilities assumed as of October 5, 2021 (in thousands):

 

Assets

    

Cash and cash equivalents

 $278 

Trade and other receivables

  11,034 

Inventories

  12,773 

Prepaid expenses and other

  293 

Property and equipment

  8,076 

Operating lease right-of-use assets

  58,301 

Intangible assets

  31,000 

Deferred income taxes

  347 

Total assets acquired

  122,102 
     

Liabilities

    

Accounts payable

  2,029 

Accrued liabilities

  4,067 

Operating lease liabilities

  58,301 

Total liabilities assumed

  64,397 
     

Goodwill

  30,699 
     

Total purchase consideration

 $88,404 

 

The tangible and intangible assets acquired and liabilities assumed were recognized based on their estimated fair values on the acquisition date, with the excess purchase consideration recorded as goodwill. The asset and liability fair value measurements primarily related to inventories, identifiable intangible assets, deferred income taxes, accrued liabilities, and goodwill, are preliminary and subject to change as additional information is obtained. The acquisition accounting 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

  10.0  $19,800 

Trade names and trademarks

  10.0   9,600 

Patents

  21.0   1,300 

Backlog

  0.6   300 

Total intangible assets

  10.2  $31,000 

 

Goodwill arose from the acquisition of an assembled workforce, expansion of product offerings, and management’s industry know-how, and is expected to be deductible for tax purposes.

 

The Company incurred transaction costs associated with this acquisition of $0.1 million during the three and six months ended June 30, 2022 and $0.1 million and $0.2 million during the three and six months ended June 30, 2021, respectively. These transaction costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

 

9

 

Unaudited Pro Forma Disclosures

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

June 30, 2021

  

June 30, 2021

 
         

Net sales

 $92,130  $177,660 

Net income

  5,798   9,770 

 

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 of ParkUSA 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 ParkUSA. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of ParkUSA 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 of ParkUSA had been outstanding since January 1 of the year prior to the acquisition. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

 

 

3.

Inventories

 

Inventories consist of the following (in thousands):

 

   

June 30, 2022

   

December 31, 2021

 
                 

Raw materials

  $ 56,735     $ 44,697  

Work-in-process

    2,914       3,018  

Finished goods

    12,701       10,096  

Supplies

    1,897       1,840  

Total inventories

  $ 74,247     $ 59,651  

 

 

4.

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.

 

10

 

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, 2022

                

Financial assets:

                

Deferred compensation plan

 $3,610  $3,109  $501  $- 

Interest rate swap

  310   -   310   - 

Foreign currency forward contracts

  30   -   30   - 

Total financial assets

 $3,950  $3,109  $841  $- 
                 

Financial liabilities:

                

Foreign currency forward contracts

 $(714

)

 $-  $(714

)

 $- 
                 

As of December 31, 2021

                

Financial assets:

                

Deferred compensation plan

 $4,321  $3,830  $491  $- 

Foreign currency forward contracts

  17   -   17   - 

Total financial assets

 $4,338  $3,830  $508  $- 
                 

Financial liabilities:

                

Foreign currency forward contracts

 $(661

)

 $-  $(661

)

 $- 

 

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 foreign currency forward contracts and interest rate swap 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. The foreign currency forward contracts and interest rate swap are presented at their gross fair values. Foreign currency forward contract and interest rate swap 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.

 

 

5.

Derivative Instruments and Hedging Activities

 

In the normal course of business, the Company is exposed to interest rate and foreign currency exchange rate fluctuations. Consistent with the Company’s strategy for financial risk management, the Company has established a program that utilizes foreign currency forward contracts and interest rate swaps to offset the risks associated with the effects of these exposures.

 

For each derivative 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 derivatives to specific firm commitments or forecasted transactions and designating the derivatives as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives 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 derivative 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 derivative prospectively.

 

11

 

As of June 30, 2022, the total notional amount of the foreign currency forward contracts was $19.5 million (CAD$25.2 million) and $7.8 million (EUR$7.4 million), which included $1.1 million (CAD$1.4 million) of foreign currency forward contracts not designated as cash flow hedges. As of December 31, 2021, the total notional amount of the foreign currency forward contracts was $19.0 million (CAD$24.1 million), and all foreign currency forward contracts were designated as cash flow hedges. As of June 30, 2022, the Company’s foreign currency forward contracts mature at various dates through October 2023 and are subject to an enforceable master netting arrangement.

 

As of June 30, 2022, the interest rate swap which effectively converts a portion of the Company’s variable-rate debt to fixed-rate debt was designated as a cash flow hedge. The Company receives floating interest payments monthly based on the Secured Overnight Financing Rate and pays a fixed rate of 1.941% to the counterparty. As of June 30, 2022, the total notional amount was $36.7 million, which will amortize ratably on a monthly basis to zero by the April 2024 maturity date.

 

The following table summarizes the gains (losses) recognized on derivatives in the Condensed Consolidated Financial Statements (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Foreign currency forward contracts:

                

Net sales

 $230  $(146

)

 $242  $(101

)

Property and equipment

  (127)  -   (127)  - 
                 

Interest rate swap:

                

Interest expense

  (82

)

  -   (82

)

  - 

Total

 $21  $(146

)

 $33  $(101

)

 

As of June 30, 2022, unrealized pretax gains (losses) on outstanding cash flow hedges in Accumulated other comprehensive loss was $(0.3) million, of which approximately $0, $(0.6) million, and $0.2 million are expected to be reclassified to Net sales, Property and equipment, and Interest expense, respectively, within the next twelve months as a result of underlying hedged transactions also being recorded in these line items. See Note 10, “Accumulated Other Comprehensive Loss” for additional information regarding foreign currency forward contract gains and losses.

 

 

6.

Share-based Compensation

 

The Company has one active stock incentive plan for employees and directors, the 2022 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”). In addition, the Company has one inactive stock incentive plan, the 2007 Stock Incentive Plan, under which previously granted awards remain outstanding.

 

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.

 

12

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Cost of sales

 $108  $253  $348  $483 

Selling, general, and administrative expense

  565   890   960   1,357 

Total

 $673  $1,143  $1,308  $1,840 

 

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 and PSAs are service-based awards that vest according to the terms of the grant. PSAs 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, 2021

  161,131  $30.26 

RSUs and PSAs granted

  116,622   30.68 

Unvested RSUs and PSAs canceled

  (8,248

)

  31.18 

RSUs and PSAs vested (2)

  (68,581

)

  29.29 

Unvested RSUs and PSAs as of June 30, 2022

  200,924   30.80 

 

(1)

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

  

(2)

For the PSAs vested on March 31, 2022, the actual number of common shares that were issued was determined by multiplying the PSAs at the target level of 100%, as disclosed in this table, by a payout percentage based on the performance-based conditions achieved. The payout percentage was 141% for the 2020-2021 performance period and 93% for the 2021 performance period.

 

The unvested balance of RSUs and PSAs as of June 30, 2022 includes approximately 149,000 PSAs at the target level of 100%. 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%.

 

Based on the estimated level of achievement of the performance targets associated with the PSAs as of June 30, 2022, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $5.5 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, 2022 and 2021, stock awards of 11,380 shares and 12,606 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 $30.75 in 2022 and $30.94 in 2021.

 

13

 

7.

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 at net present value 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 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.

 

14

 

Other Contingencies and Legal Proceedings

 

From time to time, the Company is party to a variety of legal actions, including claims, suits, complaints, and investigations arising out of the ordinary 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 legal actions, the outcomes of which would have a material adverse effect on its business, financial condition, results of operations, or cash flows.

 

Commitments

 

As of June 30, 2022, the Company’s commitments include approximately $7.7 million relating to its investment in a new reinforced concrete pipe mill for which the Company has not yet received the equipment.

 

Guarantees

 

The Company has entered into certain letters of credit that total $1.1 million as of June 30, 2022. The letters of credit relate to workers’ compensation insurance.

 

 

8.

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.

 

SPP 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 SPP net sales of $0.4 million and $(0.4) million for the three and six months ended June 30, 2022, respectively, and $0.8 million and $2.1 million for the three and six months ended June 30, 2021, respectively.

 

Precast 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.

 

15

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Over time (Engineered Steel Pressure Pipe)

 $77,068  $58,748  $151,783  $118,805 

Point in time (Precast Infrastructure and Engineered Systems)

  41,454   15,064   76,070   27,318 

Net sales

 $118,522  $73,812  $227,853  $146,123 

 

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 $2.9 million and $2.7 million during the three and six months ended June 30, 2022, respectively and $0.9 million and $5.1 million during the three and six months ended June 30, 2021, respectively.

 

Backlog

 

Backlog represents the balance of remaining performance obligations under signed contracts for SPP water infrastructure steel pipe products for which revenue is recognized over time. As of June 30, 2022, backlog was approximately $303 million. The Company expects to recognize approximately 45% of the remaining performance obligations in 2022, 41% in 2023, and the balance thereafter.

 

 

9.

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 2017.

 

The Company recorded income tax expense at an estimated effective income tax rate of 26.1% and 26.4% for the three and six months ended June 30, 2022, respectively and 26.1% and 23.9% for the three and six months ended June 30, 2021, respectively. The Company’s estimated effective income tax rates for the three and six months ended June 30, 2022 were primarily impacted by non-deductible permanent differences. The Company’s estimated effective income tax rate for the three months ended June 30, 2021 was primarily impacted by non-deductible permanent differences, 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.

 

16

 

10.

Accumulated Other Comprehensive Loss

 

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

 

   

Pension Liability Adjustment

   

Unrealized Loss on Foreign Currency Forward Contracts Designated as Cash Flow Hedges

   

Unrealized Gain on Interest Rate Swap Designated as Cash Flow Hedge

   

Total

 
                                 

Balances, December 31, 2021

  $ (1,487

)

  $ (195

)

  $ -     $ (1,682

)

                                 

Other comprehensive income (loss) before reclassifications

    41       (598

)

    171       (386

)

Amounts reclassified from Accumulated other comprehensive loss

    3       195       62

 

    260  

Net current period other comprehensive income (loss)

    44       (403

)

    233       (126

)

                                 

Balances, June 30, 2022

  $ (1,443

)

  $ (598

)

  $ 233     $ (1,808

)

 

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

 

Details about Accumulated  

Amount reclassified from

Accumulated Other Comprehensive Loss

   

Affected line item in

the Condensed Consolidated

Other Comprehensive  

Three Months Ended June 30,

   

Six Months Ended June 30,

    Statements of
Loss Components  

2022

   

2021

   

2022

   

2021

    Operations
                                     

Pension liability adjustment:

                                   

Net periodic pension cost:

                                   

Service cost

  $ (1

)

  $ (4

)

  $ (3

)

  $ (8

)

 

Cost of sales

      (1

)

    (4

)

    (3

)

    (8

)

 

Net of tax

                                     

Unrealized loss on foreign currency forward contracts:

                                   

Loss on cash flow hedges

    (105

)

    (20

)

    (91

)

    (56

)

 

Net sales

Loss on cash flow hedges

    (127

)

    -       (127

)

    -    

Property and equipment

Associated income tax benefit

    26       5       23       14    

Income tax expense

      (206

)

    (15

)

    (195

)

    (42

)

 

Net of tax

                                     

Unrealized loss on interest rate swap:

                                   

Loss on cash flow hedge

    (82 )     -       (82 )     -    

Interest expense

Associated income tax benefit

    20

 

    -       20

 

    -    

Income tax expense

      (62 )     -       (62 )     -    

Net of tax

                                     

Total reclassifications for the period

  $ (269

)

  $ (19

)

  $ (260

)

  $ (50

)

   

 

17

 

11.

Net Income per Share

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net income

 $9,673  $2,131  $13,232  $4,306 
                 

Basic weighted-average common shares outstanding

  9,918   9,861   9,900   9,837 

Effect of potentially dilutive common shares (1)

  50   54   71   83 

Diluted weighted-average common shares outstanding

  9,968   9,915   9,971   9,920 
                 

Net income per common share:

                

Basic

 $0.98  $0.22  $1.34  $0.44 

Diluted

 $0.97  $0.21  $1.33  $0.43 

 

(1)

The weighted-average number of antidilutive shares not included in the computation of diluted net income per share was approximately 5,000 and 3,000 for the three and six months ended June 30, 2022, respectively. There were no antidilutive shares for the three and six months ended June 30, 2021.

 

 

12.

Segment Information

 

The operating segments reported below are based on the nature of the products sold and the manufacturing process used by the Company and are the segments of the Company for which separate financial information is available and for which operating results are regularly evaluated by the Company’s chief operating decision maker, its Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance. Management evaluates segment performance based on gross profit. The Company does not allocate selling, general, and administrative expenses, interest, other non-operating income or expense items, or taxes to segments.

 

The Company’s Engineered Steel Pressure Pipe segment (SPP) manufactures large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, which are primarily related to drinking water systems. These products are also used for hydroelectric power systems, wastewater systems, and other applications. In addition, SPP makes products for industrial plant piping systems and certain structural applications. SPP has manufacturing facilities located in Adelanto and Tracy, California; St. Louis, Missouri; Portland, Oregon; Saginaw, Texas; Parkersburg, West Virginia; and San Luis Río Colorado, Mexico.

 

The Company’s Precast Infrastructure and Engineered Systems segment (Precast) manufactures high-quality precast and reinforced concrete products, including manholes, box culverts, vaults, catch basins, oil water separators, pump lift stations, biofiltration, and other environmental and engineered solutions. Precast has manufacturing facilities located in Dallas, Houston, and San Antonio, Texas; and Orem, Salt Lake City, and St. George, Utah.

 

18

 

The following table disaggregates revenue and gross profit based on the Company’s reportable segments (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net sales:

                

Engineered Steel Pressure Pipe

 $77,068  $58,748  $151,783  $118,805 

Precast Infrastructure and Engineered Systems

  41,454   15,064   76,070   27,318 

Total

 $118,522  $73,812  $227,853  $146,123 
                 

Gross profit:

                

Engineered Steel Pressure Pipe

 $11,105  $6,615  $18,294  $13,769 

Precast Infrastructure and Engineered Systems

  12,975   2,923   20,572   4,544 

Total

 $24,080  $9,538  $38,866  $18,313 

 

 

13.

Recent Accounting and Reporting Developments

 

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s Condensed Consolidated Financial Statements and disclosures in Notes to Condensed Consolidated Financial Statements, from those disclosed in the Company’s 2021 Form 10‑K.

 

19

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10‑Q for the quarter ended June 30, 2022 (“2022 Q2 Form 10‑Q”) contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on current expectations, estimates, and projections about our business, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “forecasts,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include:

 

 

changes in demand and market prices for our products;

 

product mix;

 

bidding activity and order cancelations;

 

timing of customer orders and deliveries;

 

production schedules;

 

price and availability of raw materials;

 

excess or shortage of production capacity;

 

international trade policy and regulations;

 

changes in tariffs and duties imposed on imports and exports and related impacts on us;

 

interest rate risk and changes in market interest rates;
 

our ability to identify and complete internal initiatives and/or acquisitions in order to grow our business;

 

our ability to effectively integrate Park Environmental Equipment, LLC (“ParkUSA”) and other acquisitions into our business and operations and achieve significant administrative and operational cost synergies and accretion to financial results;

 

impacts of U.S. tax reform legislation on our results of operations;

 

adequacy of our insurance coverage;

 

supply chain challenges;

 

labor shortages;

 

ongoing military conflicts in Ukraine and related consequences;

 

operating problems at our manufacturing operations including fires, explosions, inclement weather, and floods and other natural disasters;

 

impacts of pandemics, epidemics, or other public health emergencies, such as coronavirus disease 2019 (“COVID‑19”); and

 

other risks discussed in our Annual Report on Form 10‑K for the year ended December 31, 2021 (“2021 Form 10‑K”) and from time to time in our other Securities and Exchange Commission (“SEC”) filings and reports.

 

Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this 2022 Q2 Form 10‑Q. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

 

Overview

 

Northwest Pipe Company is a leading manufacturer of water related infrastructure products. In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, we manufacture high-quality precast and reinforced concrete products; water, wastewater, and stormwater equipment; steel casing pipe, bar-wrapped concrete cylinder pipe, and one of the largest offerings of pipeline system joints, fittings, and specialized components. Strategically positioned to meet growing water and wastewater infrastructure needs, we provide solution-based products for a wide range of markets under the ParkUSA, Geneva Pipe and Precast, Permalok®, and Northwest Pipe Company lines. Our diverse team is committed to quality and innovation while demonstrating our core values of accountability, commitment, and teamwork. We are headquartered in Vancouver, Washington, and have 13 manufacturing facilities across North America.

 

 

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

 

In October 2021 we acquired Park Environmental Equipment, LLC, a precast concrete and steel fabrication-based company in Texas that develops and manufactures water, wastewater, and environmental solutions. Effective in the fourth quarter of 2021, as a result of the acquisition of ParkUSA, we revised our historical one segment position and identified the new operating segments, Engineered Steel Pressure Pipe (“SPP”) and Precast Infrastructure and Engineered Systems (“Precast”), to align with changes made in our internal management structure and our reporting structure of financial information used to assess performance and allocate resources. For detailed descriptions of these segments, see Note 12, “Segment Information” of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2022 Q2 Form 10‑Q.

 

Our Current Economic Environment

 

Demand for our Precast products is generally influenced by general economic conditions such as housing starts, population growth, interest rates, and rates of inflation. According to the United States Census Bureau, privately-owned housing starts in June 2022 were at a seasonally adjusted annual rate of 1.6 million and the population of the United States is expected to increase by approximately 2 million people in 2022. Additionally, while recent and anticipated future increases in the federal funds rate by the Federal Reserve are expected to temper demand for housing, the immediate impacts have been muted by the demand for housing stymied by recent labor and commodity shortages currently limiting the supply of new homes.

 

Our SPP projects are often planned for many years in advance, as we operate that business with a long-term time horizon for which the projects are sometimes part of 50‑year build-out plans. Long-term demand for water infrastructure projects in the United States appears strong. However, in the near term, we expect that strained governmental and water agency budgets and financing along with increased manufacturing capacity from competition could impact the business. Additionally, we have experienced effects of a current labor shortage at certain manufacturing facilities, for which we are mitigating the impact through the use of overtime and third-party outsourcing as warranted. It is possible that a prolonged shortage of qualified, available workers could have an adverse effect on our business.

 

Purchased steel typically represents between 25% and 35% of cost of sales, and higher steel costs generally result in higher selling prices and revenue; however, volatile fluctuations in steel markets can affect our business. SPP contracts are generally quoted on a fixed-price basis, and volatile steel markets can result in selling prices that no longer correlate to the cost available at the time of steel purchase. Steel prices have been volatile during the first half of 2022, dropping significantly during the first quarter from their peaks realized at the end of 2021, only to begin to rebound before continuing to drop by the end of the second quarter. These lower steel costs from purchases in the first half of 2022 are beginning to be realized in our financial results.

 

Russia’s invasion of Ukraine is considered to be largely responsible for increased fuel costs, increasing our delivery costs. While these costs are generally passed along to the customer, there can be no assurance that all of these increased costs will be recouped, which could be material until world economic forces stabilize. Freight costs represent approximately 5% of cost of sales of our SPP business, for which the risk is more significant due to the long lead times between when an SPP contract is entered and the product is shipped.

 

Impact of the COVID19 Pandemic on Our Business

 

In March 2020, the World Health Organization declared COVID‑19 a pandemic. The impacts of the COVID‑19 pandemic, and the resurgence of new COVID‑19 virus variants, on global and domestic economic conditions, including the impacts of labor and raw material shortages, the long-term potential to reduce or delay funding of municipal projects, and the continued disruptions to and volatility in the financial markets remain uncertain. While the COVID‑19 pandemic has caused various direct and indirect financial impacts associated with project bidding, execution, and product deliveries over the past couple of years, we remain unable to predict the ultimate impact that the COVID‑19 pandemic may have on our business, future results of operations, financial position, or cash flows. We continue to monitor the impact of the COVID‑19 pandemic on all aspects of our business.

 

 

Results of Operations

 

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

 

   

Three Months Ended June 30, 2022

   

Three Months Ended June 30, 2021

 
      $    

% of Net Sales

      $    

% of Net Sales

 
                                 

Net sales:

                               

Engineered Steel Pressure Pipe

  $ 77,068       65.0

%

  $ 58,748       79.6

%

Precast Infrastructure and Engineered Systems

    41,454       35.0       15,064       20.4  

Total net sales

    118,522       100.0       73,812       100.0  

Cost of sales:

                               

Engineered Steel Pressure Pipe

    65,963       55.7       52,133       70.7  

Precast Infrastructure and Engineered Systems

    28,479       24.0       12,141       16.4  

Total cost of sales

    94,442       79.7       64,274       87.1  

Gross profit:

                               

Engineered Steel Pressure Pipe

    11,105       9.3       6,615       8.9  

Precast Infrastructure and Engineered Systems

    12,975       11.0       2,923       4.0  

Total gross profit

    24,080       20.3       9,538       12.9  

Selling, general, and administrative expense

    10,127       8.5       6,337       8.6  

Operating income

    13,953       11.8       3,201       4.3  

Other income

    1       -       30       -  

Interest expense

    (869

)

    (0.8

)

    (348

)

    (0.4

)

Income before income taxes

    13,085       11.0       2,883       3.9  

Income tax expense

    3,412       2.8       752       1.0  

Net income

  $ 9,673       8.2

%

  $ 2,131       2.9

%

 

   

Six Months Ended June 30, 2022

   

Six Months Ended June 30, 2021

 
       $    

% of Net Sales

       $    

% of Net Sales

 
                                 

Net sales:

                               

Engineered Steel Pressure Pipe

  $ 151,783       66.6

%

  $ 118,805       81.3

%

Precast Infrastructure and Engineered Systems

    76,070       33.4       27,318       18.7  

Total net sales

    227,853       100.0