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Northwest Pipe(NWPX) - 2018 Q4 - Annual Report

Cautionary Statement Regarding Forward-Looking Statements The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially - Forward-looking statements based on current expectations, estimates, and projections, which are subject to risks and uncertainties that could cause actual results to differ materially16 - Key factors that could impact actual results include changes in demand and market prices for products, product mix, bidding activity, timing of orders, raw material prices, production capacity, international trade policy, tariffs, ability to complete and integrate acquisitions, and impacts of the Tax Cuts and Jobs Act of 2017 (TCJA)16 - The company does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the report date16 Part I Item 1. Business Northwest Pipe Company is North America's largest manufacturer of engineered welded steel pipe water systems, serving water transmission, wastewater, and industrial markets, strategically expanding through acquisitions and optimizing its manufacturing footprint - Northwest Pipe Company is the largest manufacturer of engineered welded steel pipe water systems in North America, serving water transmission, plant piping, tunnels, and river crossings20 - In July 2018, the company acquired Ameron Water Transmission Group, LLC for $38.1 million, strengthening its market position, expanding bar-wrapped concrete cylinder pipe capabilities, and adding reinforced concrete pipe and T-Lock lining to its product portfolio23 - The U.S. water infrastructure is aging and requires substantial investment; the EPA estimates $473 billion needed by 2034 for safe drinking water, and ASCE estimates $150 billion by 2025 for water and wastewater infrastructure26 - The company's core market is large-diameter, high-pressure water transmission pipelines, with an estimated total addressable market of approximately $2.1 billion over the next three years27 - Backlog, including confirmed orders, increased significantly from $88 million as of December 31, 2017, to $252 million as of December 31, 201842 Item 1A. Risk Factors The company faces significant risks including market overcapacity, intense price competition, and potential adverse effects from downturns in government spending on public water projects - The business faces overcapacity and vigorous price competition, which can negatively affect sales, gross margins, and profitability, especially with new competitors entering the market57 - Dependence on public water transmission projects means a downturn in government funding or project delays could adversely affect the business5963 - Tariffs on imported steel (25% by the U.S.) and retaliatory tariffs (25% by Mexico and Canada) could increase raw material costs, impact finished product pricing, and potentially lead to project delays or facility shutdowns, particularly affecting the newly acquired San Luis Río Colorado, Mexico facility62 - Steel prices are highly cyclical and volatile, with costs per ton fluctuating significantly (e.g., $818 in 2018 vs. $474 in 2016), impacting gross profit if price increases cannot be passed to customers6668 - The company's backlog of $81 million as of December 31, 2018, is subject to reduction and cancellation, which could materially reduce future revenues70 - Failure to successfully integrate acquired businesses, such as Ameron, or to implement effective internal controls at these entities, could lead to operational inefficiencies or material weaknesses in financial reporting60619596 Item 1B. Unresolved Staff Comments There are no unresolved staff comments from the SEC - The company has no unresolved staff comments103 Item 2. Properties The company operates multiple manufacturing facilities across North America, strategically located in Oregon, Mexico, California, Texas, West Virginia, and Missouri, with sufficient capacity Operating Facilities as of December 31, 2018 | Location | Manufacturing Space (approx. sq. ft.) | Property Size (approx. acres) | Number and Type of Mills | | :----------------------- | :------------------------------------ | :---------------------------- | :------------------------------------ | | Portland, Oregon | 300,000 | 25 | 3 Spiral mills | | San Luis Río Colorado, Mexico | 273,000 | 105 | 2 Spiral mills, 1 Plate roll | | Adelanto, California | 200,000 | 100 | 3 Spiral mills, 1 Plate roll | | Saginaw, Texas (2 facilities) | 170,000 | 50 | 2 Spiral mills | | Tracy, California | 165,000 | 87 | 2 Spiral mills | | Parkersburg, West Virginia | 145,000 | 90 | 2 Spiral mills | | St. Louis, Missouri | 100,000 | 20 | 2 Plate rolls | | Brea, California | 73,000 | 5 | 2 Extruders | - The company owns most of its facilities, with some in Saginaw, St. Louis, and Brea being leased, along with adjacent land for parking/storage in Portland and Saginaw106 Item 3. Legal Proceedings The company is involved in various legal actions arising from normal business operations, including potential claims for punitive damages, and is a potentially responsible party at the Portland Harbor Superfund Site - The company is party to various legal actions in the normal course of business, with plaintiffs occasionally seeking punitive damages107 - The company does not believe normal and routine litigation will have a material impact on its consolidated financial results107 - The company is identified as a potentially responsible party at the Portland Harbor Superfund Site, facing potential environmental investigation and cleanup liabilities49107 Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to Northwest Pipe Company108 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Northwest Pipe Company's common stock is listed on Nasdaq under 'NWPX', with 24 shareholders of record as of March 4, 2019, and no intention to pay cash dividends in the foreseeable future - Common stock is quoted on Nasdaq under the symbol 'NWPX'111 - As of March 4, 2019, there were 24 shareholders of record and 9,735,055 shares of common stock outstanding6111 - The company does not intend to pay cash dividends in the foreseeable future111 - A Form S-3 registration statement for up to $120 million in equity and/or debt securities was declared effective on September 15, 2017, providing a potential source of capital, though no securities have been sold under it yet112173 Stock Performance Graph (Indexed Return) | | Northwest Pipe Company | Russell 2000 Index | Peer Group | | :---------------- | :----------------------- | :----------------- | :--------- | | December 31, 2013 | 100.00 | 100.00 | 100.00 | | December 31, 2014 | 79.77 | 104.89 | 102.29 | | December 31, 2015 | 29.63 | 100.26 | 90.96 | | December 31, 2016 | 45.60 | 121.63 | 121.71 | | December 31, 2017 | 50.69 | 139.44 | 125.52 | | December 31, 2018 | 61.68 | 124.09 | 101.65 | Item 6. Selected Financial Data This section provides a five-year summary of selected consolidated financial data, highlighting trends in net sales, gross profit, net income (loss), EPS, total assets, long-term debt, and stockholders' equity Consolidated Statement of Operations Data (In thousands, except per share amounts) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :------------------------------------ | :----- | :----- | :----- | :----- | :----- | | Net sales | $172,149 | $132,780 | $149,387 | $173,160 | $238,545 | | Gross profit | 12,096 | 5,815 | 64 | 945 | 39,770 | | Income (loss) from continuing operations | 20,312 | (8,392) | (6,741) | (17,812) | 10,439 | | Loss on discontinued operations | - | (1,771) | (2,522) | (11,576) | (28,326) | | Net income (loss) | 20,312 | (10,163) | (9,263) | (29,388) | (17,887) | | Basic - Income (loss) from continuing operations | $2.09 | $(0.88) | $(0.71) | $(1.86) | $1.10 | | Basic - Net income (loss) per share | $2.09 | $(1.06) | $(0.97) | $(3.07) | $(1.88) | | Diluted - Net income (loss) per share assuming dilution | $2.09 | $(1.06) | $(0.97) | $(3.07) | $(1.86) | Consolidated Balance Sheet Data (In thousands) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :------------------------------------ | :----- | :----- | :----- | :----- | :----- | | Total assets | $271,350 | $230,324 | $241,555 | $259,380 | $351,882 | | Long-term debt and capital lease obligations, less current portion | 12,303 | 737 | 602 | 676 | 45,701 | | Stockholders' equity | 218,590 | 200,264 | 209,213 | 217,560 | 245,635 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the impact of strategic acquisitions, economic factors like steel tariffs, and critical accounting policies on financial performance, detailing results for 2018 vs. 2017 and 2017 vs. 2016, and liquidity Overview Northwest Pipe Company is North America's largest manufacturer of engineered welded steel pipe water systems, strategically expanding its product portfolio through the Ameron acquisition - Northwest Pipe Company is the largest manufacturer of engineered welded steel pipe water systems in North America, with facilities strategically located across the U.S. and Mexico122 - The company completed the acquisition of Ameron in July 2018 for $38.1 million, expanding its product portfolio to include reinforced concrete pipe and T-Lock PVC lining123 - Sales are primarily driven by new water infrastructure spending and a growing trend towards replacement, repair, and upgrade of existing infrastructure, focusing on large-diameter, higher-pressure applications124 Our Current Economic Environment Long-term demand for U.S. water infrastructure projects is strong, but near-term challenges include strained governmental budgets, increased competition, and fluctuating steel costs - Long-term demand for U.S. water infrastructure projects is strong, but near-term challenges include strained governmental budgets, increased competition, and fluctuating steel costs125 - Tariffs imposed by the U.S., Mexico, and Canada on steel products in 2018 cover primary raw materials and finished steel pipe, potentially leading to project delays or cancellations and impacting the newly acquired SLRC facility126 Critical Accounting Policies and Estimates This section outlines critical accounting policies for revenue recognition, business combinations, inventory valuation, property and equipment, and income taxes, which require significant management judgment and estimates - Revenue for most contracts is recognized over time using the cost-to-cost method, requiring significant judgment in estimating total costs and project completion progress129 - Business combinations are accounted for using the acquisition method, requiring management to make significant estimates and assumptions in determining the fair value of acquired assets and assumed liabilities132133 - Inventories are valued at the lower of cost and net realizable value, with cost for steel raw materials on a specific identification or average cost basis, and other inventories on an average cost basis134135 - Property and equipment are depreciated using the units of production or straight-line method, with impairment assessed when circumstances indicate carrying values may not be recoverable136137 - Income taxes are recorded using an asset and liability approach, requiring significant judgment in determining the provision for income taxes, including valuation allowances and unrecognized income tax benefits140141 Results of Operations The company saw a significant increase in net sales and gross profit in 2018, partly due to the Ameron acquisition and improved pricing, leading to a bargain purchase gain and a turnaround in net income Consolidated Statement of Operations Data (In thousands, except per share amounts) | | Year Ended December 31, 2018 | Year Ended December 31, 2017 | Year Ended December 31, 2016 | | :------------------------------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | | Net sales | $172,149 | $132,780 | $149,387 | | Cost of sales | 160,053 | 126,965 | 149,323 | | Gross profit | 12,096 | 5,815 | 64 | | Selling, general, and administrative expense | 16,663 | 14,143 | 16,921 | | Gain on sale of facilities | (2,960) | - | (7,860) | | Restructuring expense | 1,364 | 881 | 990 | | Operating loss | (2,971) | (9,209) | (9,987) | | Bargain purchase gain | 20,080 | - | - | | Income (loss) from continuing operations before income taxes | 17,060 | (9,492) | (10,839) | | Income tax benefit | (3,252) | (1,100) | (4,098) | | Income (loss) from continuing operations | 20,312 | (8,392) | (6,741) | | Net income (loss) | $20,312 | $(10,163) | $(9,263) | - Net sales from continuing operations increased 29.6% to $172.1 million in 2018 from $132.8 million in 2017, with $30.2 million attributed to the Ameron acquisition146 - Gross profit increased to $12.1 million (7.0% of Net sales) in 2018 from $5.8 million (4.4% of Net sales) in 2017, driven by improved pricing and the Ameron acquisition148 - A bargain purchase gain of $20.1 million was recorded in 2018 due to the Ameron acquisition, where the fair value of acquired assets exceeded the purchase price152 - Net sales from continuing operations decreased 11.1% to $132.8 million in 2017 from $149.4 million in 2016, primarily due to a 45% decrease in tons produced, offset by a 62% increase in selling price per ton154 Liquidity and Capital Resources Working capital increased in 2018, but cash and cash equivalents decreased due to the Ameron acquisition and operating activities, with the company relying on operating cash flows and its Credit Agreement for liquidity - Working capital increased to $128.0 million as of December 31, 2018, from $123.8 million as of December 31, 2017, while cash and cash equivalents decreased from $43.6 million to $6.7 million, primarily due to the Ameron acquisition161 - Net cash used in operating activities from continuing operations was $18.4 million in 2018, primarily due to increases in contract assets and inventories, and decreases in accrued liabilities164 - Net cash used in investing activities from continuing operations was $32.4 million in 2018, mainly due to the $37.2 million Ameron acquisition and $3.8 million in capital expenditures, partially offset by $8.5 million from facility sales167 - Net cash provided by financing activities from continuing operations was $9.3 million in 2018, primarily from $11.5 million in net borrowings on the line of credit170 - As of December 31, 2018, the company had $11.5 million in outstanding borrowings and $38.0 million in additional borrowing capacity under its $60 million Credit Agreement, which expires in October 2023174175 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to commodity risk from steel price volatility, interest rate risk from variable-rate debt, and foreign currency exchange rate risk, which it manages through forward contracts - Steel is the most significant commodity risk, comprising 25% to 30% of project costs, and its price volatility can significantly affect gross profit183184 - As of December 31, 2018, $11.5 million of outstanding debt accrues interest at a variable rate, but a hypothetical 1.0% change in interest rates would not materially impact interest expense in 2018 or 2017185 - The company uses foreign currency forward contracts to offset risks from Canadian currency sales contracts, with a total notional amount of $1.7 million (CAD$2.3 million) as of December 31, 2018187 - A hypothetical 10% change in Canadian Dollar or Mexican Peso exchange rates would not materially impact reported Net income (loss) from continuing operations in 2018 or 2017188 Item 8. Financial Statements and Supplementary Data This section refers to the consolidated financial statements, including the statements of operations, comprehensive income (loss), balance sheets, stockholders' equity, and cash flows, along with their accompanying notes and supplementary schedules - The Consolidated Financial Statements and supplementary data are included on pages F-1 to F-31 and Schedule S-1189 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure matters - There are no changes in or disagreements with accountants on accounting and financial disclosure190 Item 9A. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2018, excluding Ameron's internal controls, which represented 18.5% of total assets and 17.5% of consolidated revenues - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2018192 - Management excluded the internal control over financial reporting of Ameron (acquired July 27, 2018) from its assessment, as permitted by SEC guidance. Ameron represented approximately 18.5% of total assets and 17.5% of consolidated revenues as of and for the year ended December 31, 2018193197 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018, based on COSO criteria196 - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2018, except for those related to the integration of Ameron199 Item 9B. Other Information There is no other information required to be disclosed in this section - There is no other information to report in this section200 Part III Item 10. Directors, Executive Officers and Corporate Governance This section provides information on the company's directors and executive officers, their positions, and references the Code of Business Conduct and Ethics and Code of Ethics for Senior Financial Officers Executive Officers of Northwest Pipe Company (as of December 31, 2018) | Name | Age | Current Position with Northwest Pipe Company | | :------------ | :-- | :--------------------------------------------------------- | | Scott Montross | 54 | Director, President and Chief Executive Officer | | Robin Gantt | 47 | Senior Vice President, Chief Financial Officer and Corporate Secretary | | William Smith | 63 | Executive Vice President of Water Transmission Engineered Systems | | Aaron Wilkins | 44 | Vice President of Finance and Corporate Controller | | Miles Brittain | 55 | Vice President of Operations for Water Transmission Engineered Systems | - The company has adopted a Code of Business Conduct and Ethics for all employees and a Code of Ethics for Senior Financial Officers, available on its website209 Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2019 Annual Meeting of Shareholders - Executive compensation information is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement211 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans as of December 31, 2018, and incorporates security ownership information by reference from the proxy statement Securities Authorized for Issuance under Equity Compensation Plans (as of December 31, 2018) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (1) | Weighted-average exercise price of outstanding options, warrants and rights (b) (2) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :---------------------------------------------- | :-------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------------------------------------------ | | Equity compensation plans approved by security holders | 63,992 | $24.15 | 537,978 | | Equity compensation plans not approved by security holders (3) | - | - | - | | Total | 63,992 | $24.15 | 537,978 | - Security ownership information for beneficial owners and management is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement214 Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2019 Annual Meeting of Shareholders - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement215 Item 14. Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for the 2019 Annual Meeting of Shareholders - Information on principal accounting fees and services is incorporated by reference from the 2019 Annual Meeting of Shareholders proxy statement216 Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the consolidated financial statements, including the report of independent registered public accounting firm, and a schedule of valuation and qualifying accounts, along with a comprehensive list of exhibits - Includes Consolidated Financial Statements (Statements of Operations, Comprehensive Income (Loss), Balance Sheets, Stockholders' Equity, Cash Flows, and Notes) and Schedule II Valuation and Qualifying Accounts218219 - A detailed list of exhibits is provided, including the Membership Interest Purchase Agreement for Ameron, corporate charter documents, and various compensation plans220222 Item 16. Form 10-K Summary This section indicates that no Form 10-K Summary is provided - No Form 10-K Summary is included225 Report of Independent Registered Public Accounting Firm Moss Adams LLP issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting, excluding Ameron - Moss Adams LLP, the independent registered public accounting firm, issued an unqualified opinion on the consolidated financial statements as of December 31, 2018 and 2017, and for the three years ended December 31, 2018228229 - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2018, based on COSO criteria229 - The company changed its method of accounting for revenue recognition in 2018 due to the adoption of ASC Topic No. 606230 - The audit of internal control over financial reporting excluded Ameron, whose financial statements constituted 18.5% of total assets and 17.5% of consolidated net revenues as of and for the year ended December 31, 2018234 Consolidated Financial Statements Consolidated Statements of Operations The Consolidated Statements of Operations show a significant turnaround in 2018, with net income of $20.3 million, driven by increased net sales, higher gross profit, and a substantial bargain purchase gain Consolidated Statements of Operations (In thousands, except per share amounts) | | 2018 | 2017 | 2016 | | :------------------------------------------------ | :----- | :----- | :----- | | Net sales | $172,149 | $132,780 | $149,387 | | Gross profit | 12,096 | 5,815 | 64 | | Operating loss | (2,971) | (9,209) | (9,987) | | Bargain purchase gain | 20,080 | - | - | | Income (loss) from continuing operations | 20,312 | (8,392) | (6,741) | | Net income (loss) | $20,312 | $(10,163) | $(9,263) | | Basic Net income (loss) per share | $2.09 | $(1.06) | $(0.97) | | Diluted Net income (loss) per share | $2.09 | $(1.06) | $(0.97) | - Net sales increased by 29.6% from $132.8 million in 2017 to $172.1 million in 2018240 - Gross profit significantly improved from $5.8 million in 2017 to $12.1 million in 2018240 - A bargain purchase gain of $20.1 million was recognized in 2018240 Consolidated Statements of Comprehensive Income (Loss) The Consolidated Statements of Comprehensive Income (Loss) reflect a comprehensive income of $20.2 million in 2018, a significant improvement from prior years' losses, adjusted for pension liability and cash flow hedge items Consolidated Statements of Comprehensive Income (Loss) (In thousands) | | 2018 | 2017 | 2016 | | :------------------------------------ | :----- | :----- | :----- | | Net income (loss) | $20,312 | $(10,163) | $(9,263) | | Other comprehensive income (loss), net of tax: | | | | | Pension liability adjustment | (115) | 57 | 131 | | Unrealized gain (loss) on cash flow hedges | 24 | (19) | (76) | | Other comprehensive income (loss), net of tax | (91) | 38 | 55 | | Comprehensive income (loss) | $20,221 | $(10,125) | $(9,208) | - Comprehensive income for 2018 was $20.2 million, a substantial increase from comprehensive losses in prior years242 - Other comprehensive income (loss) in 2018 was a net loss of $91 thousand, primarily due to pension liability adjustments242 Consolidated Balance Sheets Total assets increased to $271.4 million in 2018, largely due to the Ameron acquisition, while cash decreased, and total liabilities and stockholders' equity also increased Consolidated Balance Sheets (Dollar amounts in thousands) | | December 31, 2018 | December 31, 2017 | | :-------------------------------------------------------------------------------- | :------------------ | :------------------ | | Assets | | | | Cash and cash equivalents | $6,677 | $43,646 | | Trade and other receivables, net | 34,394 | 28,990 | | Contract assets | 74,271 | 44,502 | | Inventories | 39,376 | 17,055 | | Total current assets | 159,513 | 140,755 | | Property and equipment, net | 103,447 | 78,756 | | Total assets | $271,350 | $230,324 | | Liabilities and Stockholders' Equity | | | | Accounts payable | $19,784 | $7,521 | | Accrued liabilities | 7,547 | 6,563 | | Contract liabilities | 3,745 | 2,599 | | Total current liabilities | 31,492 | 17,001 | | Borrowings on line of credit | 11,464 | - | | Total liabilities | 52,760 | 30,060 | | Total stockholders' equity | 218,590 | 200,264 | - Total assets increased by $41.0 million (17.8%) from $230.3 million in 2017 to $271.4 million in 2018245 - Cash and cash equivalents decreased significantly from $43.6 million in 2017 to $6.7 million in 2018245 - Borrowings on the line of credit increased to $11.5 million in 2018 from zero in 2017245 - Stockholders' equity increased by $18.3 million (9.1%) from $200.3 million in 2017 to $218.6 million in 2018245 Consolidated Statements of Stockholdings' Equity Retained earnings increased significantly in 2018 due to net income, despite a cumulative-effect adjustment for revenue recognition, contributing to an overall increase in total stockholders' equity Consolidated Statements of Stockholders' Equity (Dollar amounts in thousands) | | Shares | Common Stock Amount | Additional Paid-In-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | | :-------------------------- | :------- | :------------------ | :------------------------- | :---------------- | :----------------------------------- | :------------------------- | | Balances, December 31, 2015 | 9,564,752 | $96 | $117,819 | $101,183 | $(1,538) | $217,560 | | Balances, December 31, 2016 | 9,601,011 | 96 | 118,680 | 91,920 | (1,483) | 209,213 | | Balances, December 31, 2017 | 9,619,755 | 96 | 119,856 | 81,757 | (1,445) | 200,264 | | Cumulative-effect adjustment (Note 2) | - | - | - | (875) | - | (875) | | Balances, January 1, 2018 | 9,619,755 | 96 | 119,856 | 80,882 | (1,445) | 199,389 | | Net income | - | - | - | 20,312 | - | 20,312 | | Balances, December 31, 2018 | 9,735,055 | $97 | $118,835 | $101,194 | $(1,536) | $218,590 | - Retained earnings increased from $81.8 million at December 31, 2017, to $101.2 million at December 31, 2018, after a cumulative-effect adjustment of $(0.9) million for revenue recognition248 - Total stockholders' equity increased by $18.3 million in 2018, reaching $218.6 million248 Consolidated Statements of Cash Flows Net cash decreased by $37.0 million in 2018, primarily due to significant cash used in investing activities for the Ameron acquisition and operating activities, partially offset by financing activities Consolidated Statements of Cash Flows (In thousands) | | 2018 | 2017 | 2016 | | :------------------------------------------------ | :----- | :----- | :----- | | Net cash used in operating activities from continuing operations | $(18,400) | $(5,793) | $(1,793) | | Net cash provided by (used in) operating activities from discontinued operations | - | (1,727) | 3,312 | | Net cash provided by (used in) operating activities | $(18,400) | $(7,520) | $1,519 | | Net cash provided by (used in) investing activities from continuing operations | $(32,364) | $(2,705) | $11,655 | | Net cash provided by investing activities from discontinued operations | 4,465 | 32,505 | - | | Net cash provided by (used in) investing activities | $(27,899) | $29,800 | $11,655 | | Net cash provided by (used in) financing activities from continuing operations | $9,330 | $(463) | $(1,543) | | Net cash provided by (used in) financing activities | $9,330 | $(463) | $(1,654) | | Change in cash and cash equivalents | $(36,969) | $21,817 | $11,520 | | Cash and cash equivalents, end of period | $6,677 | $43,646 | $21,829 | - Net cash used in operating activities from continuing operations increased to $18.4 million in 2018 from $5.8 million in 2017250 - Net cash used in investing activities from continuing operations was $32.4 million in 2018, primarily due to the $37.2 million Ameron acquisition250 - Net cash provided by financing activities from continuing operations was $9.3 million in 2018, driven by $11.5 million in net borrowings on the line of credit252 Notes to Consolidated Financial Statements These notes provide detailed explanations of accounting policies, significant transactions, and financial statement line items, including revenue recognition, the Ameron acquisition, and commitments 1. ORGANIZATION Northwest Pipe Company operates in one business segment, Water Transmission, producing steel pipeline systems, reinforced concrete pipe, and protective linings for water infrastructure across multiple North American facilities - Northwest Pipe Company operates in one business segment, Water Transmission, producing steel pipeline systems, reinforced concrete pipe, and protective linings for water infrastructure255 - Manufacturing facilities are located in Oregon, Mexico, California, Texas, West Virginia, and Missouri255 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section details the company's significant accounting policies, including the adoption of new revenue recognition standards, accounting for business combinations, inventory valuation, and the upcoming adoption of new lease accounting standards - The company adopted ASC Topic 606, 'Revenue from Contracts with Customers,' on January 1, 2018, using the modified retrospective method, resulting in a $0.9 million decrease to retained earnings290291 - Revenue for most contracts is recognized over time using the cost-to-cost method due to the right to payment for work performed and lack of alternative use for unique products275 - Business combinations are accounted for under the acquisition method, recognizing acquired assets and assumed liabilities at fair value, with any excess of fair value over consideration recorded as a bargain purchase gain258 - Inventories are stated at the lower of cost and net realizable value, with steel raw materials on a specific identification or average cost basis263 - The company will adopt ASC Topic 842, 'Leases,' on January 1, 2019, using the modified retrospective method, expecting to recognize approximately $8.0 million in right-of-use assets and lease liabilities for operating leases297 3. BUSINESS COMBINATION On July 27, 2018, the company acquired Ameron Water Transmission Group, LLC for $38.1 million, resulting in a preliminary bargain purchase gain of $20.1 million and contributing $30.2 million in net sales - On July 27, 2018, the company acquired 100% of Ameron Water Transmission Group, LLC for $38.1 million in cash304 - The acquisition resulted in a preliminary bargain purchase gain of $20.1 million, as the net fair value of acquired assets and assumed liabilities exceeded the purchase price305306 - Ameron contributed $30.2 million in net sales to the company's continuing operations from July 27, 2018, to December 31, 2018308 - Acquisition-related costs of $2.6 million were incurred and expensed in 2018307 4. DISCONTINUED OPERATIONS On December 26, 2017, the company sold its Atchison, Kansas manufacturing facility for $37.2 million, and its financial results are presented as discontinued operations, with the company now operating solely in the Water Transmission segment - On December 26, 2017, the company sold substantially all assets of its Atchison, Kansas manufacturing facility for $37.2 million in cash, resulting in a nominal gain310 - The financial results of the Atchison facility are presented as discontinued operations, and the company now operates solely in the Water Transmission segment311 Operating Results for Discontinued Operations (In thousands) | | Year Ended December 31, 2017 | Year Ended December 31, 2016 | | :------------------------------------ | :--------------------------- | :--------------------------- | | Net sales | $12 | $6,869 | | Gross loss | (1,780) | (2,908) | | Operating loss | (1,773) | (3,165) | | Net loss | $(1,771) | $(2,522) | 5. INVENTORIES Total current inventories significantly increased from $17.1 million in 2017 to $39.4 million in 2018, primarily in raw materials Inventories (In thousands) | | December 31, 2018 | December 31, 2017 | | :-------------------- | :---------------- | :---------------- | | Raw materials | $34,426 | $13,700 | | Work-in-process | 2,368 | 1,268 | | Finished goods | 1,075 | 464 | | Supplies | 1,507 | 1,623 | | Total current inventories | $39,376 | $17,055 | | Noncurrent inventories: | | | | Finished goods | 65 | 820 | | Total inventories | $39,441 | $17,875 | - Total current inventories increased significantly from $17.1 million in 2017 to $39.4 million in 2018313 6. PROPERTY AND EQUIPMENT Net property and equipment increased by $24.7 million to $103.4 million in 2018, with a portion located in Mexico, and the company sold two facilities during the year Property and Equipment, Net (In thousands) | | December 31, 2018 | December 31, 2017 | | :-------------------------- | :---------------- | :---------------- | | Land and improvements | $22,940 | $20,185 | | Buildings | 40,477 | 30,301 | | Machinery and equipment | 112,884 | 100,438 | | Equipment under capital lease | 1,683 | 1,171 | | Less accumulated depreciation and amortization | (76,861) | (74,311) | | Construction in progress | 2,324 | 972 | | Property and equipment, net | $103,447 | $78,756 | - Net property and equipment increased by $24.7 million (31.4%) from $78.8 million in 2017 to $103.4 million in 2018314 - All property and equipment is located in the United States, except for $21.6 million in Mexico as of December 31, 2018315 - In 2018, the company sold its Monterrey, Mexico facility for $2.7 million (gain of $0.2 million) and property in Houston, Texas for $5.8 million (gain of $2.8 million)315 7. INTANGIBLE ASSETS Total intangible assets, net, decreased to $1.6 million in 2018, with backlog acquired from Ameron having a weighted-average amortization period of eleven months Intangible Assets, Net (In thousands) | | Gross Carrying Amount | Accumulated Amortization | Intangible Assets, Net | | :---------------------- | :-------------------- | :----------------------- | :--------------------- | | As of December 31, 2018 | | | | | Customer relationships | $1,378 | $(689) | $689 | | Trade names and trademarks | 1,132 | (377) | 755 | | Backlog | 200 | (91) | 109 | | Total | $2,710 | $(1,157) | $1,553 | | As of December 31, 2017 | | | | | Customer relationships | $1,378 | $(551) | $827 | | Patents | 1,162 | (929) | 233 | | Trade names and trademarks | 1,132 | (302) | 830 | | Other | 176 | (163) | 13 | | Total | $3,848 | $(1,945) | $1,903 | - Total intangible assets, net, decreased from $1.9 million in 2017 to $1.6 million in 2018317 - Backlog, acquired with Ameron in July 2018, has a weighted-average amortization period of eleven months317 8. LINE OF CREDIT The company entered a new $60 million Credit Agreement in October 2018, with $11.5 million outstanding and $38.0 million additional borrowing capacity as of December 31, 2018 - The company entered into a new Credit Agreement with Wells Fargo Bank, N.A. on October 25, 2018, providing for revolving loans and letters of credit up to $60 million, expiring October 25, 2023319 - As of December 31, 2018, outstanding borrowings were $11.5 million, with an additional borrowing capacity of $38.0 million320 - Borrowings bear interest at rates related to daily three-month LIBOR plus 1.5% to 2.0%, with a weighted-average interest rate of 4.56% as of December 31, 2018320 - The Credit Agreement is secured by substantially all of the company's and its subsidiaries' assets322 9. LEASES Total capital lease obligations were $1.3 million as of December 31, 2018, and total operating lease rental expense was $2.7 million in 2018 - Total capital lease obligations outstanding were $1.3 million as of December 31, 2018, with a weighted-average interest rate of 5.01%325 Future Minimum Capital Lease Payments (In thousands) | Year | Amount | | :--- | :----- | | 2019 | $470 | | 2020 | 375 | | 2021 | 258 | | 2022 | 237 | | 2023 | 33 | | Total | $1,373 | - Total rental expense from continuing operations for operating leases was $2.7 million in 2018, down from $3.0 million in 2017 and 2016326 Future Minimum Operating Lease Payments (In thousands) | Year | Amount | | :--------- | :----- | | 2019 | $1,582 | | 2020 | 1,456 | | 2021 | 1,145 | | 2022 | 959 | | 2023 | 762 | | Thereafter | 4,347 | | Total | $10,251 | 10. FAIR VALUE MEASUREMENTS The company measures financial assets and liabilities at fair value using a three-level hierarchy, with deferred compensation plan assets and foreign currency forward contracts being key items - The company measures financial assets and liabilities at fair value using a three-level hierarchy (Level 1: quoted prices, Level 2: observable inputs, Level 3: unobservable inputs)328 Financial Assets and Liabilities Measured at Fair Value (In thousands) | | Total | Level 1 | Level 2 | Level 3 | | :-------------------------- | :---- | :------ | :------ | :------ | | As of December 31, 2018 | | | | | | Financial assets: | | | | | | Deferred compensation plan | $4,719 | $3,925 | $794 | $- | | Foreign currency forward contracts | 101 | - | 101 | - | | Total financial assets | $4,820 | $3,925 | $895 | $- | | As of December 31, 2017 | | | | | | Financial assets: | | | | | | Deferred compensation plan | $6,244 | $5,251 | $993 | $- | | Financial liabilities: | | | | | | Foreign currency forward contracts | $(60) | - | $(60) | - | - Deferred compensation plan assets include publicly traded mutual funds (Level 1) and guaranteed investment contracts (Level 2)329 - Foreign currency forward contracts are valued using pricing models or discounted cash flow analyses with observable market parameters (Level 2)330 11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The company uses foreign currency forward contracts as cash flow hedges to offset risks from Canadian currency sales contracts, with a total notional amount of $1.7 million as of December 31, 2018 - The company uses foreign currency forward contracts as cash flow hedges to offset risks from foreign currency exposures, primarily Canadian currency sales contracts332 - As of December 31, 2018, the total notional amount of designated cash flow hedges was $1.7 million (CAD$2.3 million), with all contracts having maturities less than twelve months333334 - Gains recognized in Net sales from continuing operations from non-designated foreign currency forward contracts were approximately $0.2 million in 2018335 12. RETIREMENT PLANS The company maintains a defined contribution plan and two frozen defined benefit plans, with an accrued pension liability of $1.7 million and a frozen non-qualified deferred compensation plan of $4.7 million as of December 31, 2018 - The company has a defined contribution retirement plan with a company match and two frozen noncontributory defined benefit plans336337 - As of December 31, 2018, an accrued pension liability of $1.7 million was recorded, with an unrecognized actuarial loss of $1.6 million338 - The company also has a frozen non-qualified deferred compensation plan for officers and highly compensated employees, with balances of $4.7 million recorded in Other assets and Other long-term liabilities as of December 31, 2018341 - Total expense for all retirement plans was $0.9 million in 2018 and 2017, and $1.4 million in 2016342 13. SHARE-BASED COMPENSATION Share-based compensation expense decreased significantly to $0.3 million in 2018, with 24,000 stock options outstanding and unvested PSAs deemed unlikely to achieve performance conditions - The company's 2007 Stock Incentive Plan allows for awards of stock options, RSUs, and PSAs to employees and directors343 - Total share-based compensation expense recorded was $0.3 million in 2018, significantly down from $1.2 million in 2017 and $1.8 million in 2016345 - As of December 31, 2018, there were 24,000 stock options outstanding with a weighted-average exercise price of $24.15, all exercisable346 - The unvested balance of PSAs as of December 31, 2018, was 39,992 at target level, but the likelihood of achieving performance conditions was deemed remote, resulting in $0 unrecognized compensation expense348349 14. SHAREHOLDER RIGHTS PLAN The company's Shareholder Rights Plan, extended to June 28, 2019, grants one non-detachable preferred stock purchase right per common share, exercisable if a person or group acquires 15% or more of common stock - The company has a Shareholder Rights Plan, adopted in 1999 and amended in 2009, designed to ensure fair treatment for shareholders in potential acquisitions352353 - The plan grants one non-detachable preferred stock purchase right per common share, exercisable if a person or group acquires 15% or more of common stock352 - The Rights Agreement was extended to June 28, 2019353 15. COMMITMENTS AND CONTINGENCIES The company is a potentially responsible party at the Portland Harbor Superfund Site, facing potential environmental liabilities, and maintains insurance coverage for product liability and defense costs - The company is a potentially responsible party at the Portland Harbor Superfund Site, facing potential liability for cleanup costs estimated at $1 billion by the EPA354 - The company is unable to estimate its specific obligation for the Superfund site cleanup costs, and no further adjustment has been recorded354 - The company participates in the Natural Resource Damage Assessment (NRDA) process for Portland Harbor, contributing $0.4 million for assessment funding357 - The company maintains insurance coverage for potential product liability and defense costs, which it believes to be adequate41359 - As of December 31, 2018, the company had $1.6 million in letters of credit related to workers' compensation insurance362 16. REVENUE Net sales from continuing operations were $172.1 million in 2018, primarily from the United States, with no single customer accounting for 10% or more of sales, and a backlog of $81.3 million expected to be recognized over the next two years Net Sales from Continuing Operations by Geographic Region (In thousands) | | 2018 | 2017 | 2016 | | :------------------------------------------ | :----- | :----- | :----- | | United States | $161,415 | $122,179 | $137,411 | | Canada | 10,734 | 10,601 | 11,976 | | Total | $172,149 | $132,780 | $149,387 | - No single customer accounted for 10% or more of total Net sales from continuing operations in 2018 or 2017363 - Backlog as of December 31, 2018, was approximately $81.3 million, with 83% expected to be recognized in 2019 and 13% in 2020367 17. INCOME TAXES The effective income tax benefit rate was 19.1% in 2018, impacted by a non-taxable bargain purchase gain and changes in valuation allowance, with significant federal and state net operating loss carryforwards Income Tax Benefit from Continuing Operations (In thousands) | | 2018 | 2017 | 2016 | | :------------------------------------ | :----- | :----- | :----- | | Total current income tax expense (benefit) | $377 | $(405) | $(842) | | Total deferred income tax benefit | $(3,629) | $(695) | $(3,256) | | Total income tax benefit | $(3,252) | $(1,100) | $(4,098) | - The effective income tax benefit rate was 19.1% in 2018, impacted by a non-taxable bargain purchase gain and changes in valuation allowance153369 - The Tax Cuts and Jobs Act of 2017 (TCJA) resulted in a $0.9 million additional income tax expense in 2017, primarily due to deferred income tax asset/liability remeasurement and transition tax142368 - As of December 31, 2018, the company had $45.4 million in federal net operating loss carryforwards and $56.7 million in state net operating loss carryforwards371 - Unrecognized income tax benefits totaled $4.4 million at December 31, 2018, with no material change expected in the next twelve months374 18. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss increased slightly to $(1.5) million in 2018, primarily due to pension liability adjustments, with $61 thousand reclassified to the Statements of Operations Accumulated Other Comprehensive Loss (In thousands) | | December 31, 2018 | December 31, 2017 | | :-------------------------------------------------------------------------------- | :---------------- | :---------------- | | Pension liability adjustment, net of income tax benefit | $(1,551) | $(1,436) | | Unrealized gain (loss) on cash flow hedges, net of income tax expense (benefit) | 15 | (9) | | Total | $(1,536) | $(1,445) | - Accumulated other comprehensive loss increased slightly from $(1.4) million in 2017 to $(1.5) million in 2018, primarily due to pension liability adjustments376 - Amounts reclassified from Accumulated other comprehensive loss to the Consolidated Statements of Operations totaled $61 thousand in 2018378 19. RESTRUCTURING The company incurred $1.4 million in restructuring expense in 2018 related to facility closures and production relocation, following similar expenses in prior years for other facility closures - In March 2018, the company announced plans to close its Salt Lake City Permalok facility and move production to St. Louis, and to close and sell its Monterrey, Mexico facility, which was completed in December 2018379 - Restructuring expense in 2018 was $1.4 million, including $0.6 million for employee severance and $0.8 million for demobilization activities379 - Restructuring expenses of $0.9 million in 2017 and $1.0 million in 2016 were related to the closure and sale of the Denver, Colorado facility380 20. QUARTERLY DATA (UNAUDITED) This section provides summarized unaudited quarterly financial data for 2018 and 2017, highlighting fluctuations in net sales, gross profit, operating income (loss), and net income (loss) per share Summarized Quarterly Financial Data for 2018 (In thousands, except per share amounts) | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | | :-------------------- | :------------ | :------------- | :------------ | :------------- | :------ | | Net sales | $33,365 | $28,785 | $52,455 | $57,544 | $172,149 | | Gross profit (loss) | 1,348 | (1,238) | 5,203 | 6,783 | 12,096 | | Operating income (loss) | (2,342) | (5,827) | 2,497 | 2,701 | (2,971) | | Net income (loss) | (1,951) | (5,686) | 27,801 | 148 | 20,312 | | Basic income (loss) per share | $(0.20) | $(0.59) | $2.86 | $0.02 | $2.09 | Summarized Quarterly Financial Data for 2017 (In thousands, except per share amounts) | | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | | :-------------------- | :------------ | :------------- | :------------ | :------------- | :------- | | Net sales | $29,657 | $28,692 | $38,804 | $35,627 | $132,780 | | Gross profit | 1,243 | 746 | 1,993 | 1,833 | 5,815 | | Operating loss | (3,478) | (2,826) | (1,430) | (1,475) | (9,209) | | Net loss | (3,868) | (2,068) | (2,069) | (2,158) | (10,163) | | Basic and diluted loss per share | $(0.40) | $(0.22) | $(0.21) | $(0.23) | $(1.06) | - Third quarter 2018 net income includes a preliminary bargain purchase gain of $21.9 million, while fourth quarter 2018 net income includes a $1.8 million adjustment to decrease this gain384 Schedule II Valuation and Qualifying Accounts Schedule II details changes in the Allowance for doubtful accounts and Valuation allowance for deferred income tax assets for 2018, 2017, and 2016 Valuation and Qualifying Accounts (Dollars in thousands) | | Balance at Beginning of Period | Charged to Profit and Loss | Deduction from Reserves | Balance at End of Period | | :------------------------------------ | :----------------------------- | :------------------------- | :---------------------- | :----------------------- | | Year Ended December 31, 2018: | | | | | | Allowance for doubtful accounts | $477 | $449 | $(266) | $660 | | Valuation allowance for deferred income tax assets | 10,413 | 1,785 | (2,765) | 9,433 | | Year Ended December 31, 2017: | | | | | | Allowance for doubtful accounts | $515 | $637 | $(675) | $477 | | Valuation allowance for deferred income tax assets | 8,217 | 2,196 | - | 10,413 | | Year Ended December 31, 2016: | | | | | | Allowance for doubtful accounts | $751 | $295 | $(531) | $515 | | Valuation allowance for deferred income tax assets | 7,057 | 1,160 | - | 8,217 | - The allowance for doubtful accounts increased from $477 thousand in 2017 to $660 thousand in 2018386 - The valuation allowance for deferred income tax assets decreased from $10.4 million in 2017 to $9.4 million in 2018386 SIGNATURES The report was signed on March 15, 2019, by key executives including the Director, President, Chief Executive Officer, and Chief Financial Officer - The report was signed on March 15, 2019, by Scott Montross (Director, President and Chief Executive Officer) and Robin Gantt (Senior Vice President, Chief Financial Officer and Corporate Sec