Northwest Pipe(NWPX) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements and notes, detailing financial performance, balance sheet, and cash flow Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $73,812 | $69,971 | $146,123 | $138,894 | | Cost of sales | $64,274 | $57,013 | $127,810 | $116,357 | | Gross profit | $9,538 | $12,958 | $18,313 | $22,537 | | Operating income | $3,201 | $7,374 | $6,146 | $9,008 | | Income before income taxes | $2,883 | $8,182 | $5,660 | $9,218 | | Net income | $2,131 | $5,998 | $4,306 | $6,562 | | Basic Net income per share | $0.22 | $0.61 | $0.44 | $0.67 | | Diluted Net income per share | $0.21 | $0.61 | $0.43 | $0.67 | - Net sales increased by 5.5% for the three months ended June 30, 2021, and by 5.2% for the six months ended June 30, 2021, compared to the respective prior periods[8] - Gross profit decreased by 26.4% for the three months ended June 30, 2021, and by 18.7% for the six months ended June 30, 2021, compared to the respective prior periods[8] - Net income decreased by 64.5% for the three months ended June 30, 2021, and by 34.4% for the six months ended June 30, 2021, compared to the respective prior periods[8] Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income | $2,131 | $5,998 | $4,306 | $6,562 | | Other comprehensive income (loss), net of tax | $45 | $(131) | $106 | $(27) | | Comprehensive income | $2,176 | $5,867 | $4,412 | $6,535 | - Other comprehensive income (loss) improved from a loss of $(131) thousand in Q2 2020 to a gain of $45 thousand in Q2 2021, and from a loss of $(27) thousand to a gain of $106 thousand for the six months ended June 30, 2021[11] Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $23,198 | $37,927 | | Trade and other receivables | $33,778 | $42,680 | | Contract assets | $90,504 | $76,985 | | Inventories | $30,029 | $29,177 | | Total current assets | $181,544 | $191,963 | | Total assets | $364,109 | $373,015 | | Current portion of long-term debt | $- | $7,701 | | Accounts payable | $15,460 | $12,993 | | Total current liabilities | $35,576 | $45,901 | | Long-term debt | $- | $5,888 | | Total liabilities | $89,397 | $103,389 | | Total stockholders' equity | $274,712 | $269,626 | - Cash and cash equivalents decreased by $14.7 million from December 31, 2020, to June 30, 2021[13] - Total current assets decreased by $10.4 million, while total current liabilities decreased by $10.3 million, resulting in stable working capital[13] - Long-term debt was fully repaid as of June 30, 2021, down from $5.9 million at December 31, 2020[13] - Total stockholders' equity increased by $5.1 million from December 31, 2020, to June 30, 2021[13] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Balances, Dec 31, 2020 | Net Income | Other Comprehensive Income | Stock Compensation Plans | Balances, June 30, 2021 | | :--------------------------------- | :--------------------- | :--------- | :------------------------- | :----------------------- | :---------------------- | | Common Stock (Amount) | $98 | - | - | $1 | $99 | | Additional Paid-In-Capital | $123,013 | - | - | $673 | $123,686 | | Retained Earnings | $148,381 | $4,306 | - | - | $152,687 | | Accumulated Other Comprehensive Loss | $(1,866) | - | $106 | - | $(1,760) | | Total Stockholders' Equity | $269,626 | $4,306 | $106 | $674 | $274,712 | - Total stockholders' equity increased by $5.1 million from December 31, 2020, to June 30, 2021, driven by net income, other comprehensive income, and share-based compensation[17] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $5,072 | $28,787 | | Net cash used in investing activities | $(4,677) | $(54,665) | | Net cash provided by (used in) financing activities | $(15,124) | $14,070 | | Change in cash and cash equivalents | $(14,729) | $(11,808) | | Cash and cash equivalents, end of period | $23,198 | $19,206 | - Net cash provided by operating activities significantly decreased to $5.1 million in the first six months of 2021 from $28.8 million in the same period of 2020[20] - Net cash used in investing activities decreased to $4.7 million in the first six months of 2021, compared to $54.7 million in 2020, primarily due to the absence of a major acquisition like Geneva in 2021[20] - Net cash used in financing activities was $(15.1) million in the first six months of 2021, a shift from $14.1 million provided in 2020, mainly due to debt repayments[20] Notes to Condensed Consolidated Financial Statements 1. Organization and Basis of Presentation - Northwest Pipe Company is a leading manufacturer of water-related infrastructure products, including engineered steel water pipeline systems, precast and reinforced concrete products, and specialized components[21] - The Company operates in a single segment, 'Water Infrastructure,' as its CEO evaluates performance and allocates resources based on total Company results[21] - The unaudited interim financial statements are prepared in conformity with U.S. GAAP, with certain information condensed or omitted per SEC rules for interim reporting[23] 2. Business Combination - On January 31, 2020, the Company acquired 100% of Geneva Pipe and Precast Company for $49.4 million in cash, expanding its water infrastructure product capabilities with reinforced concrete pipe and precast concrete products[26] Summary of Geneva Acquisition (January 31, 2020, in thousands) | Category | Amount | | :--------------------------------- | :----- | | Total assets acquired | $55,754 | | Total liabilities assumed | $29,320 | | Goodwill | $22,985 | | Total purchase consideration | $49,419 | Intangible Assets Acquired from Geneva (in thousands) | Intangible Asset | Estimated Useful Life (Years) | Fair Value | | :--------------------------------- | :---------------------------- | :--------- | | Customer relationships | 11.0 | $8,031 | | Trade names | 10.0 | $2,093 | | Backlog | 0.9 | $1,041 | | Total intangible assets | 9.9 | $11,165 | - Goodwill from the acquisition arose from an assembled workforce, expanded product offerings, and management's industry know-how, and is not expected to be tax-deductible[29] Unaudited Pro Forma Consolidated Results (in thousands) as if Geneva acquired Jan 1, 2019 | Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | | Net sales | $69,971 | $142,483 | | Net income | $6,331 | $8,755 | 3. Inventories Inventories (in thousands) | Category | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :------------ | :---------------- | | Raw materials | $22,133 | $20,631 | | Work-in-process | $1,122 | $1,416 | | Finished goods | $5,018 | $5,489 | | Supplies | $1,756 | $1,641 | | Total inventories | $30,029 | $29,177 | - Total inventories increased slightly from $29.2 million at December 31, 2020, to $30.0 million at June 30, 2021, primarily due to an increase in raw materials[32] 4. Credit Agreement - On June 30, 2021, the Company entered into a new Credit Agreement for up to $100 million (with an option to increase by $25 million), expiring June 30, 2024, replacing the Former Credit Agreement[33] - As of June 30, 2021, there were no outstanding borrowings under the new Credit Agreement, with $1.6 million in outstanding letters of credit and approximately $98 million in additional borrowing capacity[36] - The Credit Agreement includes customary covenants, such as maintaining a consolidated senior leverage ratio no greater than 2.50 to 1.00 and a consolidated fixed charge coverage ratio no less than 1.25 to 1.00, starting September 30, 2021[34] - Revolving loans bear interest at rates related to Base Rate or LIBOR plus an Applicable Margin of 1.75% to 2.25%, depending on the Senior Leverage Ratio[36] 5. Fair Value Measurements - The Company measures financial assets and liabilities at fair value using a three-level hierarchy (Level 1: quoted prices in active markets, Level 2: observable inputs, Level 3: unobservable inputs)[38] Financial Assets and Liabilities Measured at Fair Value (in thousands) | Category | June 30, 2021 (Total) | June 30, 2021 (Level 1) | June 30, 2021 (Level 2) | Dec 31, 2020 (Total) | Dec 31, 2020 (Level 1) | Dec 31, 2020 (Level 2) | | :--------------------------------- | :-------------------- | :-------------------- | :-------------------- | :------------------- | :------------------- | :------------------- | | Deferred compensation plan (assets) | $4,496 | $3,813 | $683 | $4,717 | $3,884 | $833 | | Foreign currency forward contracts (assets) | $9 | - | $9 | - | - | - | | Foreign currency forward contracts (liabilities) | $(827) | - | $(827) | $(1,150) | - | $(1,150) | - Deferred compensation plan assets include publicly traded stock and bond mutual funds (Level 1) and guaranteed investment contracts (Level 2)[40] - Foreign currency forward contracts are valued using observable market parameters and classified as Level 2[41] 6. Derivative Instruments and Hedging Activities - The Company uses foreign currency forward contracts as cash flow hedges to offset changes in cash flows of hedged items, formally documenting hedge relationships and effectiveness[43] - The total notional amount of foreign currency forward contracts designated as cash flow hedges decreased from $15.3 million (CAD$19.5 million) as of December 31, 2020, to $9.5 million (CAD$11.7 million) as of June 30, 2021[44] - For the three and six months ended June 30, 2021, losses recognized in Net sales from non-designated foreign currency forward contracts were $(0.1) million[45] 7. Share-based Compensation - The Company's 2007 Stock Incentive Plan provides for various equity awards, including stock options, RSUs, and PSAs, with compensation cost recognized over the service period based on grant date fair value[46][47] Share-based Compensation Expense (in thousands) | Category | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Cost of sales | $253 | $179 | $483 | $321 | | Selling, general, and administrative expense | $890 | $794 | $1,357 | $1,112 | | Total | $1,143 | $973 | $1,840 | $1,433 | - Unrecognized compensation expense related to unvested RSUs and PSAs was $4.2 million as of June 30, 2021, expected to be recognized over a weighted-average period of 1.8 years[52] - The unvested balance of RSUs and PSAs as of June 30, 2021, was 161,131, with a weighted-average grant date fair value of $30.26[51] 8. Commitments and Contingencies - The Company is a potentially responsible party for the Portland Harbor Superfund Site cleanup, with the EPA estimating a $1 billion cost over 13 years, but the Company is currently unable to estimate its specific obligation[54] - The Company agreed to fund $0.4 million for the Natural Resource Damage Assessment (NRDA) for the Portland Harbor Superfund Site but does not expect significant future costs for its resolution[56] - The Company maintains insurance policies for defense costs and indemnification, which it believes will provide reimbursement for remediation, but cannot assure full coverage[58] - The Company has $1.6 million in outstanding letters of credit as of June 30, 2021, related to workers' compensation insurance, with no material payments expected[61] 9. Revenue - Revenue for water infrastructure steel pipe products is recognized over time using the cost-to-cost method, while revenue for concrete pipe and precast products is recognized at a point in time when control is transferred to customers[63][65] Disaggregation of Revenue (in thousands) | Recognition Method | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Over time | $58,748 | $57,649 | $118,805 | $118,527 | | Point in time | $15,064 | $12,322 | $27,318 | $20,367 | | Net sales | $73,812 | $69,971 | $146,123 | $138,894 | - Contract assets, representing revenue earned but not yet billable, increased to $90.5 million as of June 30, 2021, from $77.0 million at December 31, 2020[13][68] - Backlog for water infrastructure steel pipe products was approximately $195 million as of June 30, 2021, with 56% expected to be recognized in 2021 and 33% in 2022[70] 10. Income Taxes Estimated Effective Income Tax Rates | Period | 2021 | 2020 | | :--------------------------------- | :--- | :--- | | Three Months Ended June 30 | 26.1% | 26.7% | | Six Months Ended June 30 | 23.9% | 28.8% | - The effective tax rate for the six months ended June 30, 2021, was primarily impacted by tax windfalls from equity award vesting, while the 2020 rate was impacted by non-deductible acquisition costs related to Geneva[72] 11. Net Income per Share Net Income per Share Calculation (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income | $2,131 | $5,998 | $4,306 | $6,562 | | Basic weighted-average common shares outstanding | 9,861 | 9,792 | 9,837 | 9,771 | | Diluted weighted-average common shares outstanding | 9,915 | 9,808 | 9,920 | 9,832 | | Basic Net income per common share | $0.22 | $0.61 | $0.44 | $0.67 | | Diluted Net income per common share | $0.21 | $0.61 | $0.43 | $0.67 | - Basic and diluted EPS decreased significantly for both the three and six months ended June 30, 2021, compared to the prior year, reflecting the decline in net income[74] 12. Recent Accounting and Reporting Developments - The Company adopted ASU 2018-14 (Disclosure Requirements for Defined Benefit Plans) and ASU 2019-12 (Simplifying the Accounting for Income Taxes) on January 1, 2021[76][77] - The adoption of these new accounting standards did not have a material impact on the Company's financial position, results of operations, or cash flows[76][77] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and operational results, including COVID-19 impact and liquidity Forward-Looking Statements - The report contains forward-looking statements based on current expectations, estimates, and projections, which are subject to risks and uncertainties that could cause actual results to differ materially[78] - Key factors that could cause actual results to differ include changes in demand, product mix, raw material prices, production capacity, international trade policy, acquisition integration, and impacts of pandemics like COVID-19[79][85] Overview - Northwest Pipe Company is a leading manufacturer of water-related infrastructure products, including engineered steel water pipeline systems and precast/reinforced concrete products, with ten manufacturing facilities[82] - The January 2020 acquisition of Geneva Pipe and Precast Company expanded the Company's capabilities in reinforced concrete pipe and precast concrete products[83] - Sales are primarily driven by spending on urban growth and new water infrastructure, with a growing trend towards replacement, repair, and upgrade projects[84] - Long-term demand for water infrastructure projects in the U.S. is strong, but near-term challenges include strained governmental budgets, increased competition, and volatile steel costs[85][86] Impact of the COVID‑19 Pandemic on Our Business - The Company implemented proactive safety measures for employees, customers, and suppliers in response to the COVID-19 pandemic[87] - While COVID-19 has not had a direct material adverse effect on reported results for the first six months of 2021, the ultimate impact on future operations, financial position, or cash flows remains uncertain[87] - Potential future impacts include labor and raw material shortages, reduced or delayed funding for municipal projects, and continued financial market volatility[87] Results of Operations Key Financial Performance Metrics (in thousands, as % of Net Sales) | Metric | Q2 2021 ($) | Q2 2021 (%) | Q2 2020 ($) | Q2 2020 (%) | YTD 2021 ($) | YTD 2021 (%) | YTD 2020 ($) | YTD 2020 (%) | | :--------------------------------- | :---------- | :---------- | :---------- | :---------- | :----------- | :----------- | :----------- | :----------- | | Net sales | $73,812 | 100.0% | $69,971 | 100.0% | $146,123 | 100.0% | $138,894 | 100.0% | | Cost of sales | $64,274 | 87.1% | $57,013 | 81.5% | $127,810 | 87.5% | $116,357 | 83.8% | | Gross profit | $9,538 | 12.9% | $12,958 | 18.5% | $18,313 | 12.5% | $22,537 | 16.2% | | Selling, general, and administrative expense | $6,337 | 8.6% | $5,584 | 8.0% | $12,167 | 8.3% | $13,529 | 9.7% | | Operating income | $3,201 | 4.3% | $7,374 | 10.5% | $6,146 | 4.2% | $9,008 | 6.5% | | Net income | $2,131 | 2.9% | $5,998 | 8.6% | $4,306 | 2.9% | $6,562 | 4.7% | - Net sales increased by 5.5% in Q2 2021 and 5.2% in YTD 2021, primarily driven by higher shipments from Geneva operations, which contributed $15.0 million and $27.3 million in net sales for the respective periods[92] - Gross profit decreased by 26.4% in Q2 2021 and 18.7% in YTD 2021, mainly due to changes in product mix and pressure on project pricing at steel pipe facilities, despite increased precast concrete revenues[93] - Selling, general, and administrative expense increased by 13.5% in Q2 2021 due to higher compensation and professional fees, but decreased by 10.1% in YTD 2021 primarily due to lower acquisition-related transaction costs from the Geneva acquisition in 2020[94] - Income tax expense decreased in both periods, with effective tax rates of 26.1% for Q2 2021 and 23.9% for YTD 2021, impacted by tax windfalls from equity award vesting in 2021 and non-deductible acquisition costs in 2020[95] Liquidity and Capital Resources - Principal liquidity sources include operating cash flows and revolving loans, with long-term capital potentially met through debt or equity issuance[96] - Working capital was $146.0 million as of June 30, 2021, consistent with $146.1 million at December 31, 2020[98] - Cash and cash equivalents decreased to $23.2 million at June 30, 2021, from $37.9 million at December 31, 2020, primarily due to long-term debt repayment[98] - Net cash provided by operating activities decreased to $5.1 million for the first six months of 2021 from $28.8 million in 2020[101] - Net cash used in investing activities decreased to $4.7 million for the first six months of 2021, compared to $54.7 million in 2020, which included the $48.7 million Geneva acquisition[102] - Net cash used in financing activities was $(15.1) million for the first six months of 2021, a shift from $14.1 million provided in 2020, mainly due to $13.8 million in long-term debt repayments[103] - The Company expects existing cash, operating cash flows, and the new Credit Agreement to be adequate for funding requirements for at least the next twelve months[104] - The new Credit Agreement provides for up to $100 million in revolving, swingline loans, and letters of credit, with approximately $98 million in additional borrowing capacity as of June 30, 2021[106] Recent Accounting Pronouncements - For details on recent accounting pronouncements, refer to Note 12 of the Notes to Condensed Consolidated Financial Statements[112] Critical Accounting Estimates - There have been no significant changes in critical accounting estimates during the six months ended June 30, 2021, compared to those disclosed in the 2020 Form 10-K[114] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Company's 2020 Form 10-K for a discussion of market risks associated with foreign currencies and interest rates - For a discussion of market risk associated with foreign currencies and interest rates, refer to Part II – Item 7A. 'Quantitative and Qualitative Disclosures About Market Risk' of the Company's 2020 Form 10-K[115] Item 4. Controls and Procedures Evaluates disclosure controls and procedures, confirming effectiveness and no material changes in internal control Evaluation of Disclosure Controls and Procedures - Management, under the supervision of the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2021[118] - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021[118] Changes in Internal Control over Financial Reporting - There were no significant changes in internal control over financial reporting during the quarter ended June 30, 2021, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[119] PART II - OTHER INFORMATION Item 1. Legal Proceedings Addresses the Company's involvement in legal actions, noting routine litigation is not expected to materially impact financial results - The Company is involved in various legal actions arising from ordinary business operations, but does not believe routine litigation will have a material impact on consolidated financial results[120] - For additional information on legal actions, including those asserting substantial claims or fines, refer to Note 8 of the Notes to Condensed Consolidated Financial Statements[120] Item 1A. Risk Factors Refers to the 2020 Form 10-K for comprehensive risk factors, noting potential material impacts from known and unknown risks - Readers should refer to Part I – Item 1A. 'Risk Factors' in the Company's 2020 Form 10-K for a comprehensive discussion of factors that could materially affect the business, financial condition, or operating results[121] - The risks discussed in the 2020 Form 10-K are not exhaustive, and additional unknown or currently immaterial risks may also adversely affect the Company[121] Item 6. Exhibits Lists all exhibits filed as part of the 2021 Q2 Form 10-Q, including various agreements, certifications, and XBRL-related documents - The exhibits filed include a Change in Control Agreement, a Credit Agreement, a Guaranty and Security Agreement, and various certifications (e.g., Sarbanes-Oxley Act certifications)[122] - The filing also includes Inline XBRL documents for instance, schema, calculation, definition, label, and presentation linkbases, and the cover page interactive data file[122] Signatures Contains duly authorized signatures of the CEO and CFO, certifying the filing of the report - The report is signed by Scott Montross, Director, President, and Chief Executive Officer (principal executive officer), and Aaron Wilkins, Senior Vice President, Chief Financial Officer, and Corporate Secretary (principal financial and accounting officer)[125] - The report was dated August 5, 2021[125]