Northwest Pipe (NWPX) 10-Q 2019 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2019

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 0-27140

NORTHWEST PIPE COMPANY

(Exact name of registrant as specified in its charter)

OREGON	93-0557988
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

201 NE Park Plaza Drive, Suite 100

Vancouver, Washington 98684

(Address of principal executive offices and Zip Code)

360-397-6250

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	NWPX	Nasdaq Global Select Market

The number of shares outstanding of the registrant’s common stock as of October 22, 2019 was 9,746,979 shares.

NORTHWEST PIPE COMPANY

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018	2
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018	3
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	4
Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018	5
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	7
Notes to Condensed Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Controls and Procedures	25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 6. Exhibits	26
Signatures	27

1

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales	$	75,226		$	52,455		$	207,072		$	114,605
Cost of sales		59,751			47,252			176,808			109,292
Gross profit		15,475			5,203			30,264			5,313
Selling, general, and administrative expense		4,900			5,332			13,852			12,523
Gain on sale of facilities		-			(2,760	)		-			(2,760	)
Restructuring expense		-			134			-			1,222
Operating income (loss)		10,575			2,497			16,412			(5,672	)
Bargain purchase gain		-			21,880			-			21,880
Other income		2,792			59			2,976			249
Interest income		23			38			30			256
Interest expense		(114	)		(129	)		(365	)		(385	)
Income before income taxes		13,276			24,345			19,053			16,328
Income tax expense (benefit)		2,529			(3,456	)		3,167			(3,836	)
Net income	$	10,747		$	27,801		$	15,886		$	20,164
Net income per share:
Basic	$	1.10		$	2.86		$	1.63		$	2.07
Diluted	$	1.10		$	2.86		$	1.63		$	2.07
Shares used in per share calculations:
Basic		9,745			9,735			9,739			9,723
Diluted		9,785			9,735			9,762			9,732

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

2

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	10,747		$	27,801		$	15,886		$	20,164
Other comprehensive income (loss), net of tax:
Pension liability adjustment		25			23			78			84
Unrealized gain (loss) on cash flow hedges		(2	)		(16	)		(17	)		19
Other comprehensive income, net of tax		23			7			61			103
Comprehensive income	$	10,770		$	27,808		$	15,947		$	20,267

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

3

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	11,744		$	6,677
Trade and other receivables, less allowance for doubtful accounts of $532 and $660		36,632			34,394
Contract assets		90,800			74,271
Inventories		27,287			39,376
Prepaid expenses and other		3,178			4,795
Total current assets		169,641			159,513
Property and equipment, less accumulated depreciation and amortization of $84,477 and $76,861		99,440			103,447
Other assets		16,232			8,390
Total assets	$	285,313		$	271,350
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,626		$	19,784
Accrued liabilities		12,174			7,963
Contract liabilities		10,862			3,745
Total current liabilities		30,662			31,492
Borrowings on line of credit		-			11,464
Other long-term liabilities		18,898			9,804
Total liabilities		49,560			52,760
Commitments and contingencies (Note 9)
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, 9,746,979 and 9,735,055 shares issued and outstanding		97			97
Additional paid-in-capital		120,051			118,835
Retained earnings		117,315			101,194
Accumulated other comprehensive loss		(1,710	)		(1,536	)
Total stockholders’ equity		235,753			218,590
Total liabilities and stockholders’ equity	$	285,313		$	271,350

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

4

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands)

									Accumulated
					Additional				Other			Total
	Common Stock				Paid-In-		Retained		Comprehensive			Stockholders'
	Shares		Amount		Capital		Earnings		Loss			Equity
Balances, June 30, 2019		9,744,827	$	97	$	119,510	$	106,568	$	(1,733	)	$	224,442
Net income		-		-		-		10,747		-			10,747
Other comprehensive income (loss):
Pension liability adjustment, net of tax expense of $0		-		-		-		-		25			25
Unrealized loss on cash flow hedges, net of tax benefit of $1		-		-		-		-		(2	)		(2	)
Issuance of common stock under stock compensation plans		2,152		-		-		-		-			-
Share-based compensation expense		-		-		541		-		-			541
Balances, September 30, 2019		9,746,979	$	97	$	120,051	$	117,315	$	(1,710	)	$	235,753

									Accumulated
					Additional				Other			Total
	Common Stock				Paid-In-		Retained		Comprehensive			Stockholders'
	Shares		Amount		Capital		Earnings		Loss			Equity
Balances, June 30, 2018		9,735,055	$	97	$	118,835	$	73,245	$	(1,349	)	$	190,828
Net income		-		-		-		27,801		-			27,801
Other comprehensive income (loss):
Pension liability adjustment, net of tax expense of $0		-		-		-		-		23			23
Unrealized loss on cash flow hedges, net of tax benefit of $5		-		-		-		-		(16	)		(16	)
Balances, September 30, 2018		9,735,055	$	97	$	118,835	$	101,046	$	(1,342	)	$	218,636

5

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, Continued

(Unaudited)

(Dollar amounts in thousands)

									Accumulated
					Additional				Other			Total
	Common Stock				Paid-In-		Retained		Comprehensive			Stockholders'
	Shares		Amount		Capital		Earnings		Loss			Equity
Balances, December 31, 2018		9,735,055	$	97	$	118,835	$	101,194	$	(1,536	)	$	218,590
Cumulative-effect adjustment for ASU 2018-02 (Note 14)		-		-		-		235		(235	)		-
Net income		-		-		-		15,886		-			15,886
Other comprehensive income (loss):
Pension liability adjustment, net of tax expense of $0		-		-		-		-		78			78
Unrealized loss on cash flow hedges, net of tax benefit of $9		-		-		-		-		(17	)		(17	)
Issuance of common stock under stock compensation plans		11,924		-		-		-		-			-
Share-based compensation expense		-		-		1,216		-		-			1,216
Balances, September 30, 2019		9,746,979	$	97	$	120,051	$	117,315	$	(1,710	)	$	235,753

											Accumulated
					Additional						Other			Total
	Common Stock				Paid-In-			Retained			Comprehensive			Stockholders'
	Shares		Amount		Capital			Earnings			Loss			Equity
Balances, December 31, 2017		9,619,755	$	96	$	119,856		$	81,757		$	(1,445	)	$	200,264
Cumulative-effect adjustment for ASC Topic 606		-		-		-			(875	)		-			(875	)
Net income		-		-		-			20,164			-			20,164
Other comprehensive income:
Pension liability adjustment, net of tax expense of $0		-		-		-			-			84			84
Unrealized gain on cash flow hedges, net of tax expense of $3		-		-		-			-			19			19
Issuance of common stock under stock compensation plans		115,300		1		(1,302	)		-			-			(1,301	)
Share-based compensation expense		-		-		281			-			-			281
Balances, September 30, 2018		9,735,055	$	97	$	118,835		$	101,046		$	(1,342	)	$	218,636

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

6

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	15,886		$	20,164
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Bargain purchase gain		-			(21,880	)
Depreciation and finance lease amortization		9,215			5,644
Gain on sale of facilities		-			(2,760	)
Amortization of intangible assets		269			382
Deferred income taxes		2,718			(3,915	)
Gain on insurance proceeds		(431	)		-
Share-based compensation expense		1,216			281
Other, net		157			630
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade and other receivables		(4,263	)		6,014
Contract assets, net		(7,373	)		(11,142	)
Inventories		12,016			(7,063	)
Prepaid expenses and other assets		2,507			1,131
Accounts payable		(12,337	)		6,291
Accrued and other liabilities		1,786			(1,007	)
Net cash provided by (used in) operating activities		21,366			(7,230	)
Cash flows from investing activities:
Acquisition of business, net of cash acquired		-			(37,223	)
Additions to property and equipment		(5,925	)		(3,087	)
Proceeds from sale of facilities		-			5,848
Proceeds from sale of property and equipment		15			106
Proceeds from insurance		1,400			-
Net cash used in investing activities from continuing operations		(4,510	)		(34,356	)
Net cash provided by investing activities from discontinued operations		-			750
Net cash used in investing activities		(4,510	)		(33,606	)
Cash flows from financing activities:
Borrowings on line of credit		41,744			190
Repayments on line of credit		(53,208	)		-
Tax withholdings related to net share settlements of restricted stock and performance share awards		-			(1,301	)
Payments on finance lease obligations		(325	)		(152	)
Net cash used in financing activities		(11,789	)		(1,263	)
Change in cash and cash equivalents		5,067			(42,099	)
Cash and cash equivalents, beginning of period		6,677			43,646
Cash and cash equivalents, end of period	$	11,744		$	1,547
Noncash investing and financing activities:
Accrued property and equipment purchases	$	515		$	144
Right-of-use assets obtained in exchange for operating lease liabilities	$	1,238		$	-
Right-of-use assets obtained in exchange for finance lease liabilities	$	-		$	458

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

7

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The Condensed Consolidated Financial Statements are expressed in United States Dollars and include the accounts of Northwest Pipe Company (the “Company”) and its subsidiaries over which the Company exercises control as of the financial statement date. Intercompany accounts and transactions have been eliminated.

The Company produces engineered pipeline systems including steel pipe, reinforced concrete pipe, and protective linings. These pipeline systems are primarily used in water infrastructure including drinking water, hydroelectric power systems, wastewater systems, industrial plant piping systems, certain structural applications, and other applications. The Company’s chief operating decision maker, its Chief Executive Officer, evaluates performance of the Company and makes decisions regarding allocation of resources based on total Company results. Therefore, the Company has determined that it operates in one segment, Water Infrastructure.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The financial information as of December 31, 2018 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, 2018 (“2018 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 (the “SEC”). 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 2018 Form 10‑K.

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

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2019.

The Company recorded revenue of $1.2 million during the three and twelve months ended December 31, 2018, which should have been recorded in the three months ended March 31, 2019. The misstatement in the timing of revenue recognition was due to an error in the measurement of costs incurred to date relative to estimated total direct costs at a recently acquired Ameron Water Transmission Group, LLC (“Ameron”) facility. Management concluded that this out of period adjustment was not material to the consolidated financial results for the year ended December 31, 2018 or to the projected financial results for 2019.

2. Business Combination

On July 27, 2018, the Company completed the acquisition of 100% of Ameron Water Transmission Group, LLC for a purchase price of $38.1 million in cash. The results of Ameron’s operations have been included in the consolidated financial statements since that date. Ameron was a major supplier of engineered welded steel pressure pipe and reinforced concrete pipe. In addition to strengthening the Company's position in the water infrastructure market, this acquisition expanded the Company’s bar-wrapped concrete cylinder pipe capabilities and added reinforced concrete pipe and T-Lock^®—a proprietary polyvinyl chloride (PVC) lining for concrete pipe sewer applications—to the Company’s product portfolio. In connection with the acquisition, the Company acquired pipe facilities in Tracy, California and San Luis Río Colorado, Mexico, as well as protective lining equipment in Brea, California.

8

The following table summarizes the purchase consideration and fair value of the assets acquired and liabilities assumed as of July 27, 2018 (in thousands):

Assets
Cash and cash equivalents	$	912
Trade and other receivables		8,887
Contract assets		12,018
Inventories		7,937
Prepaid expenses and other		3,777
Property and equipment		34,827
Other assets		320
Total assets acquired		68,678
Liabilities
Accounts payable		5,520
Accrued liabilities		1,599
Contract liabilities		123
Deferred income taxes		3,221
Total liabilities assumed		10,463
Bargain purchase gain		(20,080	)
Total purchase consideration	$	38,135

The Company recorded no measurement period adjustments during the three and nine months ended September 30, 2019. As a result of additional information obtained about facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments during the fourth quarter of 2018, which resulted in a net decrease of the bargain purchase gain of $1.8 million. The adjustments primarily included reclassifications between balance sheet categories and a $2.0 million reduction in inventories.

The excess of the aggregate net fair value of assets acquired and liabilities assumed over the fair value of consideration transferred as the purchase price has been recorded as a bargain purchase gain. When it became apparent there was a potential for a bargain purchase gain, management reviewed the Ameron assets acquired and liabilities assumed as well as the assumptions utilized in estimating their fair values. Upon completion of this reassessment, the Company concluded that recording a bargain purchase gain with respect to Ameron was appropriate and required under U.S. GAAP. The Company believes the seller was motivated to complete the transaction as part of an overall repositioning of its business.

The Company incurred costs associated with this acquisition of $1.9 million and $2.0 million during the three and nine months ended September 30, 2018. These costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

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

	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Net sales	$	57,250	$	142,969
Net income (loss)		6,822		(18,059	)

9

This unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisition had occurred on January 1 of the year prior to the acquisition. Moreover, this information is not indicative of what the Company’s future operating results will be. The information prior to the acquisition is included based on prior accounting records maintained by Ameron. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Ameron 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, and the consequential tax effects. Aside from revising the 2018 net income for the effect of the bargain purchase gain, there were no material, non-recurring adjustments to this unaudited pro forma information.

3. Discontinued Operations

On December 26, 2017, the Company completed the sale of substantially all of the assets associated with the Company’s manufacturing facility in Atchison, Kansas, including all of the real and tangible personal property located at the site of that manufacturing facility. Total consideration of $37.2 million in cash was paid by the buyer, resulting in a nominal gain recognized on the sale. Of the proceeds received, $0.8 million was placed in escrow until it was released in February 2018 and $3.7 million was placed in escrow until it was released in December 2018. In accordance with applicable accounting guidance, cash flows from the Company’s discontinued operations are presented separately in the Condensed Consolidated Statements of Cash Flows.

4. Inventories

Inventories consist of the following (in thousands):

	September 30, 2019		December 31, 2018
Raw materials	$	23,103	$	34,426
Work-in-process		1,616		2,368
Finished goods		937		1,075
Supplies		1,631		1,507
Total inventories	$	27,287	$	39,376

5. Leases

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

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

10

Lease cost consists of the following (in thousands):

	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Finance lease cost:
Amortization of right-of-use assets	$	109	$	328
Interest on lease liabilities		13		42
Operating lease cost		514		1,419
Short-term lease cost		383		958
Variable lease cost		33		108
Total lease cost	$	1,052	$	2,855

The future maturities of lease liabilities as of September 30, 2019 are as follows (in thousands):

	Finance Leases			Operating Leases
Remainder of 2019	$	103		$	510
2020		375			1,934
2021		258			1,257
2022		237			951
2023		34			802
Thereafter		-			4,478
Total lease payments		1,007			9,932
Amount representing interest		(76	)		(1,714	)
Present value of lease liabilities		931			8,218
Current portion of lease liabilities, included in Accrued liabilities		(345	)		(1,654	)
Lease liabilities, less current portion, included in Other long-term liabilities	$	586		$	6,564

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

	September 30, 2019
Weighted-average remaining lease term (years)
Finance leases		2.97
Operating leases		8.38
Weighted-average discount rate
Finance leases		5.10	%
Operating leases		4.51	%

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

	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(1,396	)
Operating cash flows from finance leases		(42	)
Financing cash flows from finance leases		(325	)
Right-of-use assets obtained in exchange for operating lease liabilities		1,238
Right-of-use assets obtained in exchange for finance lease liabilities		-

11

6. Fair Value Measurements

The Company records its financial assets and liabilities at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.

The authoritative guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. These levels are: Level 1 (inputs are quoted prices in active markets for identical assets or liabilities); Level 2 (inputs are other than quoted prices that are observable, either directly or indirectly through corroboration with observable market data); and Level 3 (inputs are unobservable, with little or no market data that exists, such as internal financial forecasts). The Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The following table summarizes information regarding the Company’s financial assets and liabilities that are measured at fair value on a recurring basis (in thousands):

	Total			Level 1		Level 2			Level 3
As of September 30, 2019
Financial assets:
Deferred compensation plan	$	5,072		$	4,270	$	802		$	-
Foreign currency forward contracts		1			-		1			-
Total financial assets	$	5,073		$	4,270	$	803		$	-
Financial liabilities:
Foreign currency forward contracts	$	(18	)	$	-	$	(18	)	$	-
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		$	-

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.

The Company’s foreign currency forward contracts are derivatives valued using various pricing models or discounted cash flow analyses that incorporate observable market parameters, such as interest rate yield curves and currency rates, and are classified as Level 2 within the fair value hierarchy. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or the Company. Foreign currency forward contracts are presented at their gross fair values. Foreign currency forward contract assets are included within Prepaid expenses and other and foreign currency forward contract liabilities are included within Accrued liabilities in the Condensed Consolidated Balance Sheets.

The net carrying amounts of cash and cash equivalents, trade and other receivables, accounts payable, accrued liabilities, and borrowings on the line of credit approximate fair value due to the short-term nature of these instruments.

7. Share-based Compensation

The Company has one active stock incentive plan for employees and directors, the 2007 Stock Incentive Plan, which provides for awards of stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units (“RSUs”), and performance share awards (“PSAs”).

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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. Share-based compensation cost is recognized over the period during which the employee or director is required to provide service in exchange for the award and, as forfeitures occur, the associated compensation cost recognized to date is reversed. For awards with performance-based payout conditions, the Company recognizes compensation cost based on the probability of achieving the performance conditions, with changes in expectations recognized as an adjustment to earnings in the period of change. Any recognized compensation cost is reversed if the conditions are ultimately not met.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of sales	$	125	$	-	$	249	$	12
Selling, general, and administrative expense		416		-		967		269
Total	$	541	$	-	$	1,216	$	281

Stock Option Awards

The following table summarizes stock option activity:

	Options Outstanding		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value
					(in years)		(In thousands)
Balance, December 31, 2018		24,000	$	24.15
Options granted		-		-
Options exercised		-		-
Options canceled		-		-
Balance, September 30, 2019		24,000		24.15
Exercisable, September 30, 2019		24,000		24.15		0.50	$	96

Restricted Stock Units and Performance Share Awards

RSUs and PSAs are measured at the estimated fair value on the date of grant. RSUs are service-based awards and vest according to vesting schedules, which range from immediate to ratably over a three-year period. PSAs are service-based awards that vest according to the terms of the grant and may have performance- and/or market-based payout conditions.

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The following table summarizes RSU and PSA activity:

	Number of RSUs and PSAs (1)			Weighted-Average Grant Date Fair Value
Unvested PSAs as of December 31, 2018		39,992		$	19.97
RSUs and PSAs granted		86,701			23.56
Unvested RSUs and PSAs canceled		(1,531	)		23.56
PSAs vested (2)		(39,992	)		19.97
Unvested RSUs and PSAs as of September 30, 2019		85,170			23.56

(1)	The number of PSAs disclosed in this table are at the target level of 100%.
(2)	The PSAs vested on March 29, 2019; the actual number of common shares that were issued was determined by multiplying the PSAs by a payout percentage of 0% as the performance-based conditions were not achieved.

The unvested balance of RSUs and PSAs as of September 30, 2019 includes approximately 64,000 performance-based PSAs at a target level of performance. The vesting of these awards is subject to the achievement of specified performance-based conditions, and the actual number of common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 150%.

As of September 30, 2019, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $1.5 million, which is expected to be recognized over a weighted-average period of 1.3 years.

Stock Awards

For the nine months ended September 30, 2019 and 2018, stock awards of 11,924 shares and 11,172 shares, respectively, were granted to non-employee directors, which vested immediately upon issuance. The Company recorded compensation expense based on the weighted-average fair market value per share of the awards on the grant date of $25.16 in 2019 and $21.48 in 2018.

8. Shareholder Rights Plan

In June 1999, the Board of Directors adopted a Shareholder Rights Plan (“Plan”) designed to ensure fair and equal treatment for all shareholders in the event of a proposed acquisition of the Company by enhancing the ability of the Board of Directors to negotiate more effectively with a prospective acquirer, and reserved 150,000 shares of Series A Junior Participating Preferred Stock (“Preferred Stock”) for purposes of the Plan. In connection with the adoption of the Plan, the Board of Directors declared a dividend distribution of one non-detachable preferred stock purchase right (“Right”) per share of common stock, payable to shareholders of record on July 9, 1999. Each Right represents the right to purchase one one-hundredth of a share of Preferred Stock at a price of $83.00, subject to adjustment. The Rights will be exercisable only if a person or group acquires, or commences a tender offer to acquire, 15% or more of the Company’s outstanding shares of common stock. Subject to the terms of the Plan and upon the occurrence of certain events, each Right would entitle the holder to purchase common stock of the Company, or of an acquiring company in certain circumstances, having a market value equal to two times the exercise price of the Right. The Company may redeem the Rights at a price of $0.01 per Right under certain circumstances.

On June 18, 2009, the Company and Computershare (“Rights Agent”) entered into an Amended and Restated Rights Agreement (“Amended and Restated Rights Agreement”). The Amended and Restated Rights Agreement amended and restated the Rights Agreement dated as of June 28, 1999 between the Company and ChaseMellon Shareholder Services, L.L.C. (predecessor to the Rights Agent). The Amended and Restated Rights Agreement extended the final expiration date of the Rights from June 28, 2009 to June 28, 2019. The Amended and Restated Rights Agreement also reflected certain changes in the rights and obligations of the Rights Agent and certain changes in procedural requirements under the Amended and Restated Rights Agreement.

On June 28, 2019, the Amended and Restated Rights Agreement expired in accordance with its terms and is of no further force or effect. The Rights distributed to holders of the Company’s common stock pursuant to the Amended and Restated Rights Agreement expired upon the expiration of the Amended and Restated Rights Agreement.

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9. 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. Since the listing of the site, the Company was notified by the EPA and the Oregon Department of Environmental Quality (“ODEQ”) of potential liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). A remedial investigation and feasibility study of the Portland Harbor Superfund Site was directed by a group of 14 potentially responsible parties known as the Lower Willamette Group under agreement with the EPA. The EPA finalized the remedial investigation report in February 2016, and the feasibility study in June 2016, which identified multiple remedial alternatives. In January 2017, the EPA issued its Record of Decision selecting the remedy for cleanup at the Portland Harbor Superfund Site, which it believes will cost approximately $1 billion and 13 years to complete. The EPA has not yet determined who is responsible for the costs of cleanup or how the cleanup costs will be allocated among the more than 150 potentially responsible parties. Because of the large number of potentially responsible parties and the variability in the range of remediation alternatives, the Company is unable to estimate an amount or an amount within a range of costs for its obligation with respect to the Portland Harbor Superfund Site matters, and no further adjustment to the Condensed Consolidated Financial Statements has been recorded as of the date of this filing.

In 2001, groundwater containing elevated volatile organic compounds was identified in one localized area of leased property adjacent to the Portland facility. In February 2005, the Company entered into a Voluntary Agreement for Remedial Investigation and Source Control Measures (“Voluntary Agreement”) with the ODEQ, and has performed remedial investigation work required under the Voluntary Agreement. In 2016, the EPA and the ODEQ requested additional groundwater sampling. The results of this sampling, which is ongoing, have been generally consistent with previous sampling and modeling work. The Company anticipates it will file a final Remedial Investigation/Source Control Evaluation report with the ODEQ and the EPA in 2019. Based on discussions with the ODEQ and the EPA, the Company believes the selected remedy will be Monitored Natural Attenuation.

Concurrent with the activities of the EPA and the ODEQ, the Portland Harbor Natural Resources Trustee Council (“Trustees”) sent some or all of the same parties, including the Company, a notice of intent to perform a Natural Resource Damage Assessment (“NRDA”) for the Portland Harbor Superfund Site to determine the nature and extent of natural resource damages under CERCLA Section 107. The Trustees for the Portland Harbor Superfund Site consist of representatives from several Northwest Indian Tribes, three federal agencies, and one state agency. The Trustees act independently of the EPA and the ODEQ. The Trustees have encouraged potentially responsible parties to voluntarily participate in the funding of their injury assessments and several of those parties have agreed to do so. In June 2014, the Company agreed to participate in the injury assessment process, which included funding $0.4 million of the assessment. The Company has not assumed any additional payment obligations or liabilities with the participation with the NRDA. It is uncertain whether the Company will enter into an early settlement for natural resource damages or what costs it may incur in any such early settlement.

In January 2017, the Confederated Tribes and Bands of the Yakama Nation, a Trustee until they withdrew from the council in 2009, filed a complaint against the potentially responsible parties including the Company to recover costs related to their own injury assessment and compensation for natural resources damages. The Company does not have sufficient information to determine the likelihood of a loss in this matter or the amount of damages that could be allocated to the Company.

The Company has insurance policies for defense costs, as well as indemnification policies it believes will provide reimbursement for any share of 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.

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Other Contingencies and Legal Proceedings

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of its business. The Company maintains insurance coverage against potential claims in amounts that are believed to be adequate. To the extent that insurance does not cover legal, defense, and indemnification costs associated with a loss contingency, the Company records accruals when such losses are considered probable and reasonably estimable. The Company believes that it is not presently a party to litigation, the outcome of which would have a material adverse effect on its business, financial condition, results of operations, or cash flows.

On April 21, 2019, there was an accidental fire at the Company’s Saginaw, Texas facility which resulted in damage to the coatings building. There were no injuries, but the ability to coat at this facility was impaired while the Company repaired the damage. The Company’s other production locations were deployed to absorb the lost production that resulted. The Company has insurance coverage in place covering, among other things, property damage up to certain specified amounts, and worked with its insurance company to restore the facility to full service as safely and quickly as possible. The Saginaw facility resumed operations in October 2019. As of September 30, 2019, the Company had written off $0.9 million of property and equipment and $0.1 million of inventories that were damaged in the fire, which was offset by $1.4 million of insurance proceeds resulting in a gain of $0.4 million recognized in Other income. The Company also maintains business interruption insurance coverage. During the nine months ended September 30, 2019, the Company incurred $3.9 million in incremental production costs resulting from the fire at the Saginaw facility, which was offset by $1.0 million of business interruption insurance proceeds received and recorded in Cost of sales. Any insurance recoveries associated with these costs will be recorded as they are received in future quarters as the Company works with its insurer to settle the claim.

Guarantees

The Company has entered into certain letters of credit that total $1.6 million as of September 30, 2019. The letters of credit relate to workers’ compensation insurance.

10. 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. 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.

For a majority of contracts, revenue 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.

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.

Revisions in contract estimates resulted in an increase (decrease) in revenue of $0.4 million and $(1.1) million for the three and nine months ended September 30, 2019, respectively, and $(0.2) million and $0.5 million during the three and nine months ended September 30, 2018, respectively.

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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 include achievement of 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 $6.5 million and $3.3 million during the three and nine months ended September 30, 2019, respectively, and $0.1 million and $2.2 million during the three and nine months ended September 30, 2018, respectively.

Backlog

Backlog represents the balance of remaining performance obligations under signed contracts. As of September 30, 2019, backlog was approximately $211.3 million. The Company expects to recognize approximately 35% of the remaining performance obligations in 2019, 47% in 2020, and the balance thereafter.

11. 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 2015.

The Company recorded an income tax expense (benefit) at an estimated effective income tax rate of 19.0% and 16.6% for the three and nine months ended September 30, 2019, respectively, and 14.2% and 23.5% for the three and nine months ended September 30, 2018, respectively. The Company’s estimated effective income tax rate for the three and nine months ended September 30, 2019 was impacted by the final Section 965 regulations issued in June 2019 related to certain foreign tax credit aspects of the transition tax, as well as the estimated changes in the Company’s valuation allowance.

The Company had $4.4 million of unrecognized income tax benefits as of September 30, 2019 and December 31, 2018. The Company does not believe it is reasonably possible that the total amounts of unrecognized income tax benefits will change in the following twelve months; however, actual results could differ from those currently expected. Effectively all of the unrecognized income tax benefits would affect the Company’s effective income tax rate if recognized at some point in the future. The Company recognizes interest and penalties related to uncertain income tax positions in Income tax expense (benefit).

12. Accumulated Other Comprehensive Loss

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

	Pension Liability Adjustment			Unrealized Gain (Loss) on Cash Flow Hedges			Total
Balance, December 31, 2018	$	(1,551	)	$	15		$	(1,536	)
Cumulative-effect adjustment for ASU 2018-02 (Note 14)		(235	)		-			(235	)
Other comprehensive income (loss) before reclassifications		70			(10	)		60
Amounts reclassified from Accumulated other comprehensive loss		8			(7	)		1
Net current period adjustments to Other comprehensive income		78			(17	)		61
Balance, September 30, 2019	$	(1,708	)	$	(2	)	$	(1,710	)

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

	Amount reclassified from Accumulated Other Comprehensive Loss
Details about Accumulated Other	Three Months Ended September 30,						Nine Months Ended September 30,						Affected line item in the Condensed Consolidated
Comprehensive Loss Components	2019			2018			2019			2018			Statements of Operations
Pension liability adjustment:
Net periodic pension cost:
Service cost	$	(2	)	$	-		$	(8	)	$	-		Cost of sales
		(2	)		-			(8	)		-		Net of tax
Unrealized gain (loss) on cash flow hedges:
Gain		3			12			10			9		Net sales
Associated income tax expense		(1	)		(3	)		(3	)		(2	)	Income tax expense (benefit)
		2			9			7			7		Net of tax
Total reclassifications for the period	$	-		$	9		$	(1	)	$	7

13. Net Income per Share

Basic net income per share is computed by dividing the net income by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share is computed by giving effect to all potential shares of common stock, including stock options, RSUs, and PSAs, to the extent dilutive. Performance-based PSAs are considered dilutive when the related performance conditions have been met assuming the end of the reporting period represents the end of the performance period. In periods with a net loss, all potential shares of common stock are excluded from the computation of diluted net loss per share as the impact would be antidilutive.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income	$	10,747	$	27,801	$	15,886	$	20,164
Basic weighted-average common shares outstanding		9,745		9,735		9,739		9,723
Effect of potentially dilutive common shares(1)		40		-		23		9
Diluted weighted-average common shares outstanding		9,785		9,735		9,762		9,732
Net income per common share:
Basic	$	1.10	$	2.86	$	1.63	$	2.07
Diluted	$	1.10	$	2.86	$	1.63	$	2.07

(1) The weighted-average number of antidilutive shares not included in the computation of diluted net income per share was approximately 64,000 and 62,000 for the three and nine months ended September 30, 2018, respectively, including approximately 40,000 and 38,000, respectively, of performance-based share awards, at the target level of 100%, that were not included because the performance conditions had not been met as of September 30, 2018.

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14. Recent Accounting and Reporting Developments

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s Condensed Consolidated Financial Statements and disclosures in Notes to Condensed Consolidated Financial Statements, from those disclosed in the Company’s 2018 Form 10-K, except for the following:

Accounting Changes

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑02, “Leases (Topic 842)” (“ASU 2016‑02”), which requires lessees to recognize on the balance sheet right-of-use assets and lease liabilities for the rights and obligations created by the majority of leases, including those historically accounted for as operating leases. During 2018 and 2019, the FASB issued additional ASUs that clarify the implementation guidance for ASU 2016-02 but do not change the core principle of the guidance. The Company adopted Accounting Standards Codification (“ASC”) Topic 842, “Leases” on January 1, 2019 using the modified retrospective transition method which allowed it to continue to apply legacy guidance for periods prior to 2019. The Company elected the package of transition practical expedients which, among other things, allowed it to keep the historical lease classifications and not reassess the lease classification for any existing leases as of the date of adoption. The Company also made an accounting policy election to apply the short-term lease exception, which allows it to keep leases with an initial term of twelve months or less off the balance sheet. Upon adoption on January 1, 2019, the Company recognized right-of-use assets and lease liabilities for operating leases of approximately $8.0 million.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which better aligns risk management activities and financial reporting for hedging relationships, simplifies hedge accounting requirements, and improves disclosures of hedging arrangements. The Company adopted this guidance on January 1, 2019 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The Company adopted this guidance on January 1, 2019, which resulted in reclassification between Accumulated other comprehensive loss and Retained earnings of $0.2 million, and had no impact on the Company’s results of operations or cash flows.

In July 2018, the FASB issued Accounting Standards Update No. 2018-09, “Codification Improvements,” which clarifies, corrects errors in, or makes minor improvements to the ASC. The Company adopted this guidance on January 1, 2019 and the impact was not material to the Company’s financial position, results of operations, or cash flows.

In July 2019, the FASB issued Accounting Standards Update No. 2019-07, “Codification Updates to SEC Sections—Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update),” which aligns the guidance in various SEC sections of the FASB ASC with the requirements of certain already effective SEC final rules. The Company adopted this guidance upon issuance and the impact was not material to the Company's Condensed Consolidated Financial Statements.

15. Restructuring

In March 2018, the Company announced its plan to close its leased Permalok^® manufacturing facility in Salt Lake City, Utah and move the production to the Permalok^® production facility in St. Louis, Missouri, which was completed during the second quarter of 2018. Also in March 2018, the Company announced its plan to close its manufacturing facility in Monterrey, Mexico. Production ceased early in the second quarter of 2018, and the facility was sold in December 2018. The Company incurred restructuring expense of $0.1 million and $1.2 million during the three and nine months ended September 30, 2018, which includes employee severance and termination related restructuring expense of approximately $0 and $0.6 million, respectively, and expense related to demobilization activities of $0.1 million and $0.6 million, respectively.

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

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (“2019 Q3 Form 10-Q”) contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on current expectations, estimates, and projections about our business, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “forecasts,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include changes in demand and market prices for our products, product mix, bidding activity, the timing of customer orders and deliveries, production schedules, the price and availability of raw materials, price and volume of imported product, 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, our ability to identify and complete internal initiatives and/or acquisitions in order to grow our business, our ability to effectively integrate acquisitions into our business and operations and achieve significant administrative and operational cost synergies, the impacts of the Tax Cuts and Jobs Act of 2017, the adequacy of our insurance coverage, operating problems at our manufacturing operations including fires, explosions, inclement weather, and natural disasters, and other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) and from time to time in our other Securities and Exchange Commission 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 2019 Q3 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 the largest manufacturer of engineered steel water pipeline systems in North America. Our manufacturing facilities are strategically positioned to meet North America’s growing needs for water and wastewater infrastructure. Our solution-based products serve a wide range of markets including water transmission, plant piping, tunnels, and river crossings. Our prominent position is based on a widely-recognized reputation for quality, service, and manufacturing to meet performance expectations in all categories including highly-corrosive environments. These pipeline systems are produced from several manufacturing facilities which are located in Portland, Oregon; San Luis Río Colorado, Mexico; Adelanto, California; Saginaw, Texas; Tracy, California; Parkersburg, West Virginia; St. Louis, Missouri; and Brea, California. In the second quarter of 2018, we closed our leased facility in Salt Lake City, Utah and ceased production at our Monterrey, Mexico facility. The Monterrey, Mexico facility was sold in December 2018.

In July 2018, we completed the acquisition of 100% of Ameron Water Transmission Group, LLC (“Ameron”) for a purchase price of $38.1 million. Ameron was a major supplier of engineered welded steel pressure pipe and reinforced concrete pipe. In addition to strengthening our position in the water infrastructure market, this acquisition expanded our bar-wrapped concrete cylinder pipe capabilities and added reinforced concrete pipe and T-Lock^®—a proprietary polyvinyl chloride (PVC) lining for concrete pipe sewer applications—to our product portfolio. In connection with the acquisition, we acquired pipe facilities in Tracy, California and San Luis Río Colorado, Mexico, as well as protective lining equipment in Brea, California.

On April 21, 2019, there was an accidental fire at our Saginaw, Texas facility which resulted in damage to the coatings building. There were no injuries, but the ability to coat at this facility was impaired while we repaired the damage. Our other production locations were deployed to absorb the lost production that resulted. We have insurance coverage in place covering, among other things, property damage up to certain specified amounts, and worked with the insurance company to restore the facility to full service as safely and quickly as possible. The Saginaw facility resumed operations in October 2019. We also maintain business interruption insurance coverage and are working with the insurer to settle the claim.

Our water infrastructure products are sold generally to installation contractors, who include our products in their bids to municipal agencies or privately-owned water companies for specific projects. We believe our sales are substantially driven by spending on new water infrastructure with a recent trend towards spending on water infrastructure replacement, repair, and upgrade. Within the total range of pipe products, our products tend to fit the larger-diameter, higher-pressure applications.

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Our Current Economic Environment

We operate our business with a long-term time horizon. Projects are often planned for many years in advance, and 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 along with increased capacity from competition could impact the business. Fluctuating steel costs will also be a factor, as the ability to adjust our selling prices as steel costs fluctuate depends on market conditions. Purchased steel represents a substantial portion of our cost of sales, and changes in our selling prices often correlate directly to changes in steel costs.

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 September 30, 2019						Three Months Ended September 30, 2018
	$			% of Net Sales			$			% of Net Sales
Net sales	$	75,226			100.0	%	$	52,455			100.0	%
Cost of sales		59,751			79.4			47,252			90.1
Gross profit		15,475			20.6			5,203			9.9
Selling, general, and administrative expense		4,900			6.5			5,332			10.1
Gain on sale of facilities		-			-			(2,760	)		(5.3	)
Restructuring expense		-			-			134			0.3
Operating income		10,575			14.1			2,497			4.8
Bargain purchase gain		-			-			21,880			41.6
Other income		2,792			3.7			59			0.1
Interest income		23			-			38			0.1
Interest expense		(114	)		(0.2	)		(129	)		(0.2	)
Income before income taxes		13,276			17.6			24,345			46.4
Income tax expense (benefit)		2,529			3.3			(3,456	)		(6.6	)
Net income	$	10,747			14.3	%	$	27,801			53.0	%

	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	$			% of Net Sales			$			% of Net Sales
Net sales	$	207,072			100.0	%	$	114,605			100.0	%
Cost of sales		176,808			85.4			109,292			95.4
Gross profit		30,264			14.6			5,313			4.6
Selling, general, and administrative expense		13,852			6.7			12,523			10.8
Gain on sale of facilities		-			-			(2,760	)		(2.4	)
Restructuring expense		-			-			1,222			1.1
Operating income (loss)		16,412			7.9			(5,672	)		(4.9	)
Bargain purchase gain		-			-			21,880			19.0
Other income		2,976			1.5			249			0.2
Interest income		30			-			256			0.2
Interest expense		(365	)		(0.2	)		(385	)		(0.3	)
Income before income taxes		19,053			9.2			16,328			14.2
Income tax expense (benefit)		3,167			1.5			(3,836	)		(3.4	)
Net income	$	15,886			7.7	%	$	20,164			17.6	%

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We have one operating segment, Water Infrastructure, which produces engineered pipeline systems including steel pipe, reinforced concrete pipe, and protective linings. These pipeline systems are primarily used in water infrastructure including drinking water, hydroelectric power systems, wastewater systems, industrial plant piping systems, certain structural applications, and other applications. See Note 2 of the Notes to Condensed Consolidated Financial Statements in Part I – Item I. “Financial Statements” of this 2019 Q3 Form 10-Q for information on our acquisition of Ameron in July 2018.

Three and Nine Months Ended September 30, 2019 Compared to Three and Nine Months Ended September 30, 2018

Net sales. Net sales increased 43.4% to $75.2 million for the third quarter of 2019 compared to $52.5 million for the third quarter of 2018 primarily due to a 73% increase in tons produced, partially offset by a 17% decrease in selling price per ton. The increase in tons produced was due to increased demand. The decrease in selling price per ton was due to a change in product mix. Net sales increased 80.7% to $207.1 million for the first nine months of 2019 compared to $114.6 million for the first nine months of 2018 primarily due to a 97% increase in tons produced, partially offset by an 8% decrease in selling price per ton. The increase in tons produced was due to increased demand coupled with the acquired Ameron operations, which contributed $40.7 million and $11.1 million in net sales during the first nine months of 2019 and 2018, respectively. The decrease in selling price per ton was due to a change in product mix. Bidding activity, backlog, and production levels may vary significantly from period to period affecting sales volumes.

Gross profit. Gross profit increased to $15.5 million (20.6% of Net sales) for the third quarter of 2019 compared to $5.2 million (9.9% of Net sales) for the third quarter of 2018 and increased to $30.3 million (14.6% of Net sales) for the first nine months of 2019 compared to $5.3 million (4.6% of Net sales) for the first nine months of 2018. The increase in gross profit was primarily due to increased production volume coupled with the addition of the Ameron operations. This was partially offset by $0.7 million and $3.9 million in incremental production costs in the third quarter and first nine months of 2019, respectively, resulting from the fire at our Saginaw facility, which were partially offset by $1.0 million of business interruption insurance proceeds received in the third quarter of 2019. Any insurance recoveries associated with these costs will be recorded as they are received in future quarters as we work with our insurer to settle the claim.

Selling, general, and administrative expense. Selling, general, and administrative expense decreased 8.1% to $4.9 million (6.5% of total Net sales) for the third quarter of 2019 compared to $5.3 million (10.1% of total Net sales) for the third quarter of 2018 and increased 10.6% to $13.9 million (6.7% of total Net sales) for the first nine months of 2019 compared to $12.5 million (10.8% of total Net sales) for the first nine months of 2018. The decrease in selling, general, and administrative expense for the third quarter of 2019 compared to the third quarter of 2018 was primarily due to $1.3 million in lower professional and other fees related to the Ameron acquisition offset by $1.0 million in higher incentive compensation-related expense. The increase in selling, general, and administrative expense for the first nine months of 2019 compared to the first nine months of 2018 was primarily due to $2.8 million in higher incentive compensation-related expense offset by $1.4 million in lower professional and other fees related to the Ameron acquisition.

Gain on sale of facilities. In August 2018, we sold property in Houston, Texas for net proceeds of $5.8 million, resulting in a gain of $2.8 million.

Restructuring expense. In March 2018, we announced our plan to close our leased Permalok^® manufacturing facility in Salt Lake City, Utah and move the production to our Permalok^® production facility in St. Louis, Missouri, which was completed during the second quarter of 2018. Also in March 2018, we announced our plan to close our manufacturing facility in Monterrey, Mexico. Production ceased early in the second quarter of 2018, and the facility was sold in December 2018. We incurred restructuring expense of $0.1 million in the third quarter of 2018 and $1.2 million in the first nine months of 2018, which includes employee severance and termination related restructuring expense of approximately $0 and $0.6 million, respectively, and expense related to demobilization activities of $0.1 million and $0.6 million, respectively.

Bargain purchase gain. We acquired 100% of Ameron in July 2018. The excess of the aggregate net fair value of assets acquired and liabilities assumed over the fair value of consideration transferred as the purchase price has been recorded as a bargain purchase gain. When it became apparent there was a potential for a bargain purchase gain, management reviewed the Ameron assets acquired and liabilities assumed as well as the assumptions utilized in estimating their fair values. Upon completion of this reassessment, we concluded that recording a bargain purchase gain with respect to Ameron was appropriate and required under accounting principles generally accepted in the United States of America. We believe the seller was motivated to complete the transaction as part of an overall repositioning of its business.

Other income. In August 2019, we received $2.3 million of proceeds related to a legal settlement involving certain pipe produced at our former Houston, Texas and Bossier City, Louisiana facilities. In addition, during the third quarter of 2019, we recognized a gain of $0.4 million upon receipt of insurance proceeds for property damage resulting from the fire at our Saginaw facility.

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Income taxes. Income tax expense was $2.5 million in the third quarter of 2019 (an effective income tax rate of 19.0%) compared to an income tax benefit of $3.5 million in the third quarter of 2018 (an effective income tax rate of 14.2%). Income tax expense was $3.2 million in the first nine months of 2019 (an effective income tax rate of 16.6%) compared to an income tax benefit of $3.8 million in the first nine months of 2018 (an effective income tax rate of 23.5%). The effective income tax rate for the third quarter and first nine months of 2019 was impacted by the final Section 965 regulations issued in June 2019 related to certain foreign tax credit aspects of the transition tax, as well as the estimated changes in our valuation allowance. The effective income tax rate for the third quarter and first nine months of 2018 was impacted by the nontaxable $21.9 million bargain purchase gain recorded in connection with the acquisition of Ameron, as well as the estimated changes in our valuation allowance and the tax windfall from share-based compensation. The effective income tax rate can change significantly depending on the relationship of permanent income tax deductions and tax credits to estimated pre-tax income or loss and the changes in valuation allowances. Accordingly, the comparison of effective income tax rates between periods is not meaningful in all situations.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal sources of liquidity generally include operating cash flows and the Credit Agreement with Wells Fargo Bank, N.A. dated October 25, 2018 (the “Credit Agreement”). From time to time our long-term capital needs may be met through the issuance of long-term debt or additional equity. Our principal uses of liquidity generally include capital expenditures, working capital, and debt service. Information regarding our cash flows for the nine months ended September 30, 2019 and 2018 are presented in our Condensed Consolidated Statements of Cash Flows contained in Part I – Item 1. “Financial Statements” of this 2019 Q3 Form 10‑Q, and are further discussed below.

As of September 30, 2019, our working capital (current assets minus current liabilities) was $139.0 million compared to $128.0 million as of December 31, 2018. Cash and cash equivalents totaled $11.7 million and $6.7 million as of September 30, 2019 and December 31, 2018, respectively.

Fluctuations in our working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. Our revenues are recognized over time as the manufacturing process progresses; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary by project, and from period to period.

There were no borrowings under the Credit Agreement as of September 30, 2019. Borrowings under the Credit Agreement were $11.5 million as of December 31, 2018.

Net cash provided by operating activities in the first nine months of 2019 was $21.4 million. Cash provided by operating activities was primarily the result of our net income adjusted for noncash charges and the fluctuations in working capital accounts that included decreases in inventories and prepaid expenses and other and an increase in accrued and other liabilities offset by increases in trade and other receivables and contract assets, net and a decrease in accounts payable.

Net cash used in investing activities in the first nine months of 2019 was $4.5 million, primarily due to $5.9 million of capital expenditures, which was primarily standard capital replacement and replacement of fire damaged property and equipment at our Saginaw facility, offset by $1.4 million of insurance proceeds. Any insurance recoveries associated with these costs will be recorded as they are received in future quarters as we work with our insurer to settle the claim. Total capital expenditures in 2019 are expected to be $11.1 million for standard capital replacement and replacement of fire damaged property and equipment at our Saginaw facility.

Net cash used in financing activities in the first nine months of 2019 was $11.8 million, primarily due to net repayments on the line of credit of $11.5 million.

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and amounts available under the Credit Agreement will be adequate to fund our working capital and capital expenditure requirements for at least the next twelve months. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and finance and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may use a portion of our working capital or necessitate additional bank borrowings or other sources of funding.

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On September 15, 2017, our registration statement on Form S-3 (Registration No. 333-216802) covering the potential future sale of up to $120 million of our equity and/or debt securities or combinations thereof, was declared effective by the Securities and Exchange Commission. This registration statement provides another potential source of capital, in addition to other alternatives already in place. We cannot be certain that funding will be available on favorable terms or available at all. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. As of the date of this 2019 Q3 Form 10‑Q, we have not yet sold any securities under this registration statement, nor do we have an obligation to do so. Please refer to the factors discussed in Part I – Item 1A. “Risk Factors” in our 2018 Form 10‑K.

Borrowings on Line of Credit

As of September 30, 2019, we had no outstanding borrowings and $1.6 million of outstanding letters of credit under the Credit Agreement. The Credit Agreement expires on October 25, 2023 and provides for revolving loans and letters of credit in the aggregate amount of up to $60 million, subject to a borrowing base (the “Revolver Commitment”). We have the ability to increase the Revolver Commitment to $100 million, subject to the provisions of the Credit Agreement.

The borrowing base is calculated by applying various advance rates to eligible accounts receivable, contract assets, inventories, and equipment, subject to various exclusions, adjustments, and sublimits. As of September 30, 2019, we had additional borrowing capacity of $45.1 million, net of outstanding letters of credit and the amount required to avoid a covenant trigger event. Based on our business plan and forecasts of operations, we expect to have sufficient credit availability to support our operations for at least the next twelve months.

Borrowings under the Credit Agreement bear interest at rates related to the daily three month London Interbank Offered Rate plus 1.5% to 2.0%. The Credit Agreement requires the payment of an unused line fee of between 0.25% and 0.375%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Credit Agreement) during any month. Such fee is payable monthly in arrears.

The Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants, events of default, and indemnification provisions in favor of the lender. The negative covenants include restrictions regarding the incurrence of liens and indebtedness and certain acquisitions and dispositions of assets and other matters, all subject to certain exceptions. The Credit Agreement also requires us to regularly provide financial information to Wells Fargo and to maintain a specified fixed charge coverage ratio upon certain triggers.

In connection with the execution and delivery of the Credit Agreement, we and certain of our subsidiaries also entered into a Guaranty and Security Agreement with Wells Fargo (the “Guaranty and Security Agreement”). Pursuant to the Guaranty and Security Agreement, our obligations under the Credit Agreement are secured by a security interest in substantially all of our and our subsidiaries’ assets.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position, results of operations, or cash flows.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements affecting our company, including the dates of adoption and estimated effects on financial position, results of operations, and cash flows, see Note 14 of the Notes to Condensed Consolidated Financial Statements in Part I – Item I. “Financial Statements” of this 2019 Q3 Form 10‑Q.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements included in Part I – Item 1. “Financial Statements” of this 2019 Q3 Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate all of our estimates, including those related to revenue recognition, business combinations, inventories, property and equipment, including depreciation and valuation, share-based compensation, income taxes, allowance for doubtful accounts, and litigation and other contingencies. Actual results may differ from these estimates under different assumptions or conditions.

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There have been no significant changes in our critical accounting policies and estimates during the nine months ended September 30, 2019 as compared to the critical accounting policies and estimates disclosed in our 2018 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For a discussion of our market risk associated with foreign currencies and interest rates, see Part II – Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of our 2018 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to provide reasonable assurance that information required to be disclosed in reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2019. As a result of the assessment, our CEO and CFO have concluded that, as of September 30, 2019, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

We are party to a variety of legal actions arising out of the normal course of business. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material impact on our consolidated financial results. We are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties, and other costs in substantial amounts. See Note 9 of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2019 Q3 Form 10-Q.

Item 1A. Risk Factors

In addition to the other information set forth in this 2019 Q3 Form 10-Q, the factors discussed in Part I – Item 1A. “Risk Factors” in our 2018 Form 10-K could materially affect our business, financial condition, or operating results. The risks described in our 2018 Form 10-K are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, that may also materially adversely affect our business, financial condition, or operating results.

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Item 6. Exhibits

(a) The exhibits filed as part of this 2019 Q3 Form 10-Q are listed below:

Exhibit Number	Description
31.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Document
101.DEF	XBRL Taxonomy Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: October 31, 2019

NORTHWEST PIPE COMPANY
By:	/s/ Scott Montross
	Scott Montross
	Director, President, and Chief Executive Officer
	(principal executive officer)
By:	/s/ Robin Gantt
	Robin Gantt
	Senior Vice President and Chief Financial Officer
	(principal financial and accounting officer)

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