10-Q 1 nwpx20240930_10q.htm FORM 10-Q nwpx20240930_10q.htm
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒

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

 

For the quarterly period ended: September 30, 2024

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)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

NWPX

Nasdaq Global Select Market

 

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

 

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

 

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

 

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

  

Emerging growth company

☐

 

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

 

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

 

The number of shares outstanding of the registrant’s common stock as of October 22, 2024 was 9,918,711 shares.

 

 
Table of Contents
 

NORTHWEST PIPE COMPANY

FORM 10‑Q

TABLE OF CONTENTS

 

 

Page

PARTI- FINANCIAL INFORMATION

  
   

Item1. Financial Statements (Unaudited):

  
   

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023

 2
   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2024 and 2023

 3
   

Condensed Consolidated Balance Sheets as of September 30, 2024 and December31, 2023

 4
   

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2024 and 2023

 5
   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023

7
   

Notes to Condensed Consolidated Financial Statements

 8
   

Item2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 21
   

Item3. Quantitative and Qualitative Disclosures About Market Risk

 27
   

Item4. Controls and Procedures

 28
   

PARTII- OTHER INFORMATION

  
   

Item1. Legal Proceedings

 28
   

Item1A. Risk Factors

 28
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
   

Item5. Other Information

 29
   

Item6. Exhibits

 30
   

Signatures

 31
 

 

1
Table of Contents

 

PartI– FINANCIAL INFORMATION

 

Item1. 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,

  
   

2024

    

2023

    

2024

    

2023

  
                                 

Net sales

   $ 130,201     $ 118,722     $ 372,921     $ 334,191  

Cost of sales

     103,182       99,428       299,954       275,839  

Gross profit

     27,019       19,294       72,967       58,352  

Selling, general, and administrative expense

     11,581       10,237       35,220       33,119  

Operating income

     15,438       9,057       37,747       25,233  

Other expense

     (66 )     (61 )     (287 )     (224 )

Interest expense

     (1,452 )     (1,162 )     (4,749 )     (3,722 )

Income before income taxes

     13,920       7,834       32,711       21,287  

Income tax expense

     3,667       2,016       8,601       5,659  

Net income

   $ 10,253     $ 5,818     $ 24,110     $ 15,628  
                                 

Net income per share:

                                

Basic

   $ 1.03     $ 0.58     $ 2.43     $ 1.57  

Diluted

   $ 1.02     $ 0.58     $ 2.40     $ 1.55  
                                 

Shares used in per share calculations:

                                

Basic

     9,919       10,014       9,915       9,985  

Diluted

     10,055       10,107       10,040       10,088  

 

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

 

2
Table of Contents
 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2024

    

2023

    

2024

    

2023

  
                                 

Net income

   $ 10,253     $ 5,818     $ 24,110     $ 15,628  
                                 

Other comprehensive loss, net of tax:

                                

Pension liability adjustment

     23       29       67       88  

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

     -       3       13       (98 )

Unrealized loss on interest rate swaps designated as cash flow hedges

     (261 )     (59 )     (276 )     (152 )

Other comprehensive loss, net of tax

     (238 )     (27 )     (196 )     (162 )
                                 

Comprehensive income

   $ 10,015     $ 5,791     $ 23,914     $ 15,466  

 

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

 

3
Table of Contents
 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

  

September 30, 2024

  

December 31, 2023

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $5,723  $4,068 

Trade and other receivables, net of allowance of $215 and $121

  79,507   47,645 

Contract assets

  120,983   120,516 

Inventories

  84,977   91,229 

Prepaid expenses and other

  2,530   9,026 

Total current assets

  293,720   272,484 

Property and equipment, less accumulated depreciation and amortization of $137,029 and $126,359

  149,262   143,955 

Operating lease right-of-use assets

  84,161   88,155 

Goodwill

  55,504   55,504 

Intangible assets, net

  28,050   31,074 

Other assets

  6,493   6,709 

Total assets

 $617,190  $597,881 
         

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Current debt

 $10,756  $10,756 

Accounts payable

  20,356   31,142 

Accrued liabilities

  26,659   27,913 

Contract liabilities

  28,897   21,450 

Current portion of operating lease liabilities

  5,181   4,933 

Total current liabilities

  91,849   96,194 

Borrowings on line of credit

  60,704   54,485 

Operating lease liabilities

  81,748   85,283 

Deferred income taxes

  10,856   10,942 

Other long-term liabilities

  9,673   10,617 

Total liabilities

  254,830   257,521 
         

Commitments and contingencies (Note 7)

          
         

Stockholders’ equity:

        

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding

  -   - 

Common stock, $.01 par value, 15,000,000 shares authorized, 9,918,711 and 9,985,580 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively

  99   100 

Additional paid-in-capital

  127,182   129,095 

Retained earnings

  236,235   212,125 

Accumulated other comprehensive loss

  (1,156)  (960)

Total stockholders’ equity

  362,360   340,360 

Total liabilities and stockholders’ equity

 $617,190  $597,881 

 

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

 

4
Table of Contents
 

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, 2024

  9,918,711  $99  $126,020  $225,982  $(918) $351,183 

Net income

  -   -   -   10,253   -   10,253 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   23   23 

Unrealized loss on interest rate swaps designated as cash flow hedges, net of tax benefit of $84

  -   -   -   -   (261)  (261)

Share-based compensation expense

  -   -   1,162   -   -   1,162 

Balances, September 30, 2024

  9,918,711  $99  $127,182  $236,235  $(1,156) $362,360 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, June 30, 2023

  10,014,196  $100  $128,562  $200,863  $(924) $328,601 

Net income

  -   -   -   5,818   -   5,818 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   29   29 

Unrealized gain on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $1

  -   -   -   -   3   3 

Unrealized loss on interest rate swaps designated as cash flow hedges, net of tax benefit of $19

  -   -   -   -   (59)  (59)

Share-based compensation expense

  -   -   746   -   -   746 

Balances, September 30, 2023

  10,014,196  $100  $129,308  $206,681  $(951) $335,138 

 

5
Table of Contents

 

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, 2023

  9,985,580  $100  $129,095  $212,125  $(960) $340,360 

Net income

  -   -   -   24,110   -   24,110 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   67   67 

Unrealized gain on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $12

  -   -   -   -   13   13 

Unrealized loss on interest rate swaps designated as cash flow hedges, net of tax benefit of $89

  -   -   -   -   (276)  (276)

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

  78,021   -   (1,449)  -   -   (1,449)

Repurchase of common stock

  (144,890)  (1)  (4,300)  -   -   (4,301)

Share-based compensation expense

  -   -   3,836   -   -   3,836 

Balances, September 30, 2024

  9,918,711  $99  $127,182  $236,235  $(1,156) $362,360 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, December 31, 2022

  9,927,360  $99  $127,911  $191,053  $(789) $318,274 

Net income

  -   -   -   15,628   -   15,628 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   88   88 

Unrealized loss on foreign currency forward contracts designated as cash flow hedges, net of tax benefit of $34

  -   -   -   -   (98)  (98)

Unrealized loss on interest rate swaps designated as cash flow hedge, net of tax benefit of $53

  -   -   -   -   (152)  (152)

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

  86,836   1   (1,653)  -   -   (1,652)

Share-based compensation expense

  -   -   3,050   -   -   3,050 

Balances, September 30, 2023

  10,014,196  $100  $129,308  $206,681  $(951) $335,138 

 

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

 

6
Table of Contents
 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

  
   

2024

    

2023

  

Cash flows from operating activities:

                

Net income

   $ 24,110     $ 15,628  

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

                

Depreciation and finance lease amortization

     11,255       8,644  

Amortization of intangible assets

     3,024       3,147  

Deferred income taxes

     (70 )     226  

Share-based compensation expense

     3,836       3,050  

Other, net

     539       1,298  

Changes in operating assets and liabilities:

                

Trade and other receivables

     (32,267 )     4,401  

Contract assets, net

     6,980       16,165  

Inventories

     6,252       (12,064 )

Prepaid expenses and other assets

     10,832       7,417  

Accounts payable

     (10,517 )     4,974  

Accrued and other liabilities

     (5,046 )     (8,477 )

Net cash provided by operating activities

     18,928       44,409  
                 

Cash flows from investing activities:

                

Purchases of property and equipment

     (16,609 )     (13,244 )

Payment of working capital adjustment in acquisition of business

     -       (2,731 )

Other investing activities

     62       63  

Net cash used in investing activities

     (16,547 )     (15,912 )
                 

Cash flows from financing activities:

                

Borrowings on line of credit

     142,883       113,047  

Repayments on line of credit

     (136,664 )     (138,667 )

Payments on finance lease liabilities

     (1,067 )     (548 )

Tax withholdings related to net share settlements of equity awards

     (1,449 )     (1,652 )

Repurchase of common stock

     (4,429 )     -  

Other financing activities

     -       (300 )

Net cash used in financing activities

     (726 )     (28,120 )

Change in cash and cash equivalents

     1,655       377  

Cash and cash equivalents, beginning of period

     4,068       3,681  

Cash and cash equivalents, end of period

   $ 5,723     $ 4,058  
                 

Noncash investing and financing activities:

                

Accrued property and equipment purchases

   $ 514     $ 528  

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

     269       3,243  

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

     481       952  

 

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

 

7
Table of Contents

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Organization and Basis of Presentation

 

Northwest Pipe Company (collectively with its subsidiaries, the “Company”) is a leading manufacturer of water-related infrastructure products, and operates in two segments, Engineered Steel Pressure Pipe (“SPP”) and Precast Infrastructure and Engineered Systems (“Precast”). This segment presentation is consistent with how the Company’s chief operating decision maker, its Chief Executive Officer, evaluates the performance of the Company and makes decisions regarding the allocation of resources. See Note 12, “Segment Information” for detailed descriptions of these segments.

 

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

 

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

 

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The financial information as of December 31, 2023 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, 2023 (“2023 Form 10‑K”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission and the accounting standards for interim financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements include all adjustments necessary (which are of a normal and recurring nature) for the fair statement of the results of the interim periods presented. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in the Company’s 2023 Form 10‑K.

 

Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2024.

 
 

2.

Inventories

 

Inventories consist of the following (in thousands):

 

   

September 30, 2024

    

December 31, 2023

  
                 

Raw materials

   $ 61,552     $ 68,110  

Work-in-process

     8,293       8,912  

Finished goods

     12,660       11,911  

Supplies

     2,472       2,296  

Total inventories

   $ 84,977     $ 91,229  

 

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3.

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.

 

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

 

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

 

   

Total

    

Level 1

    

Level 2

    

Level 3

  

As of September 30, 2024

                                

Financial assets:

                                

Deferred compensation plan

   $ 3,794     $ 3,307     $ 487     $ -  

Interest rate swaps

     124       -       124       -  

Total financial assets

   $ 3,918     $ 3,307     $ 611     $ -  
                                 

Financial liabilities:

                                

Foreign currency forward contracts

   $ (6 )   $ -     $ (6 )   $ -  

Interest rate swaps

     (163 )     -       (163 )     -  

Total financial liabilities

   $ (169 )   $ -     $ (169 )   $ -  
                                 

As of December 31, 2023

                                

Financial assets:

                                

Deferred compensation plan

   $ 3,912     $ 3,391     $ 521     $ -  

Foreign currency forward contracts

     42       -       42       -  

Interest rate swaps

     326       -       326       -  

Total financial assets

   $ 4,280     $ 3,391     $ 889     $ -  
                                 

Financial liabilities:

                                

Foreign currency forward contracts

   $ (115 )   $ -     $ (115 )   $ -  

 

The deferred compensation plan assets consist of cash and several publicly traded stock and bond mutual funds, valued using quoted market prices in active markets, classified as Level 1 within the fair value hierarchy, as well as guaranteed investment contracts, valued at principal plus interest credited at contract rates, classified as Level 2 within the fair value hierarchy. Deferred compensation plan assets are included within Other assets in the Condensed Consolidated Balance Sheets.

 

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

 

The net carrying amounts of cash and cash equivalents, trade and other receivables, accounts payable, accrued liabilities, and current debt approximate fair value due to the short-term nature of these instruments. The net carrying amount of the borrowings on the line of credit approximates fair value due to its variable interest rate based on market.

 

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4.

Derivative Instruments and Hedging Activities

 

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

 

For each derivative entered into in which the Company seeks to obtain cash flow hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific firm commitments or forecasted transactions and designating the derivatives as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective portion of these hedged items is reflected in Unrealized gain (loss) on cash flow hedges on the Condensed Consolidated Statements of Comprehensive Income. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company is required to discontinue hedge accounting with respect to that derivative prospectively.

 

As of September 30, 2024, the total notional amount of the foreign currency forward contracts was $2.2 million (CAD$3.0 million) and $1.2 million (EUR€1.1 million), which included $1.5 million (CAD$2.1 million) and $1.2 million (EUR€1.1 million) of foreign currency forward contracts not designated as cash flow hedges. As of December 31, 2023, the total notional amount of the foreign currency forward contracts was $5.1 million (CAD$6.7 million) and $1.2 million (EUR€1.1 million), which included $4.9 million (CAD$6.4 million) and $1.2 million (EUR€1.1 million) of foreign currency forward contracts not designated as cash flow hedges. As of September 30, 2024, the Company’s foreign currency forward contracts mature at various dates through April 2025 and are subject to an enforceable master netting arrangement.

 

The Company has entered into interest rate swaps which effectively convert a portion of its variable-rate debt to fixed-rate debt and are designated as cash flow hedges. For the first cash flow hedge, the Company received floating interest payments monthly based on Secured Overnight Finance Rate (“SOFR”) and paid a fixed rate of 1.941% to the counterparty on the total notional amount of $6.7 million as of December 31, 2023, which amortized ratably on a monthly basis to zero by the April 2024 maturity date. For the second cash flow hedge, beginning April 3, 2023, the Company receives floating interest payments monthly based on the SOFR Average 30 day and pays a fixed rate of 2.96% to the counterparty on the total notional amount of $10.8 million and $13.0 million as of September 30, 2024 and December 31, 2023, respectively, which amortizes ratably on a monthly basis to zero by the April 2028 maturity date. For the third cash flow hedge, beginning June 30, 2024, the Company receives floating interest payments monthly based on SOFR and pays a fixed rate of 5.10% to the counterparty on the total notional amount of $28.0 million as of September 30, 2024, which amortizes ratably on a monthly basis to $20 million through December 2024, and matures in June 2025.

 

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

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2024

    

2023

    

2024

    

2023

  

Foreign currency forward contracts:

                                

Net sales

   $ (21 )   $ 77     $ 90     $ (601 )

Property and equipment

     41       (22 )     41       (109 )
                                 

Interest rate swaps:

                                

Interest expense

     88       201       285       553  

Total

   $ 108     $ 256     $ 416     $ (157 )

 

As of September 30, 2024, unrealized pretax losses on outstanding cash flow hedges in Accumulated other comprehensive loss was approximately $0. See Note 10, “Accumulated Other Comprehensive Loss” for additional quantitative information regarding foreign currency forward contract and interest rate swap gains and losses.

 

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5.

Stockholders’ Equity

 

Share Repurchase Program

 

On November 2, 2023, the Company announced its authorization of a share repurchase program of up to $30 million of its outstanding common stock. The program does not commit to any particular timing or quantity of purchases, and the program may be suspended or discontinued at any time. Under the program, shares may be purchased in open market, including through plans adopted pursuant to Rule 10b5‑1 of the Securities Exchange Act of 1934, as amended, or in privately negotiated transactions administered by its broker, D.A. Davidson Companies. At this time, the Company has elected to limit its share repurchase transactions to only those under the Rule 10b5‑1 trading plan it executed in November 2023, which designates up to $10 million for daily share repurchases with volumes that fluctuate with changes in the trading price of its common stock.

 

During the nine months ended September 30, 2024, the Company repurchased approximately 145,000 shares of the Company’s common stock for an aggregate amount of $4.3 million. There were no share repurchases during the three months ended September 30, 2024 nor in the three and nine months ended September 30, 2023. All shares reacquired in connection with the Company’s share repurchase program are retired and treated as authorized and unissued shares. As of September 30, 2024, $24.9 million of the share repurchase authorization remained available for repurchases under this program.

 
 

6.

Share-based Compensation

 

The Company has one active stock incentive plan for employees and directors, the 2022 Stock Incentive Plan, which provides for awards of stock options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted shares of common stock, restricted stock units (“RSUs”), and performance share awards (“PSAs”). In addition, the Company had one inactive stock incentive plan, the 2007 Stock Incentive Plan, under which previously granted awards vested on April 1, 2024.

 

The Company recognizes the compensation cost of employee and director services received in exchange for awards of equity instruments based on the grant date estimated fair value of the awards. The Company estimates the fair value of RSUs and PSAs using the value of the Company’s stock on the date of grant. Share-based compensation cost is recognized over the period during which the employee or director is required to provide service in exchange for the award and, as forfeitures occur, the associated compensation cost recognized to date is reversed. For awards with performance-based payout conditions, the Company recognizes compensation cost based on the probability of achieving the performance conditions, with changes in expectations recognized as an adjustment to earnings in the period of change. Any recognized compensation cost is reversed if the conditions are ultimately not met.

 

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

 

   

Three Months Ended September 30,

    

Nine Months Ended September 30,

  
   

2024

    

2023

    

2024

    

2023

  
                                 

Cost of sales

   $ 387     $ 275     $ 1,102     $ 816  

Selling, general, and administrative expense

     775       471       2,734       2,234  

Total

   $ 1,162     $ 746     $ 3,836     $ 3,050  

 

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Restricted Stock Units and Performance Share Awards

 

The Company’s stock incentive plan provides for equity instruments, such as RSUs and PSAs, which grant the right to receive a specified number of shares at specified times. RSUs and PSAs are service-based awards that vest according to the terms of the grant. PSAs have performance-based payout conditions.

 

The following table summarizes the Company’s RSU and PSA activity:

 

   

Number of RSUs and PSAs (1)

    

Weighted-Average Grant Date Fair Value

  
                 

Unvested RSUs and PSAs as of December 31, 2023

     226,391     $ 29.66  

RSUs and PSAs granted

     120,143       34.68  

Unvested RSUs and PSAs canceled

     (3,197 )     29.15  

RSUs and PSAs vested (2)

     (103,266 )     30.35  

Unvested RSUs and PSAs as of September 30, 2024

     240,071       31.89  

 

(1)

The number of PSAs disclosed in this table are at the target level of 100%.
   
(2) For the PSAs vested on April 1, 2024, the actual number of common shares that were issued was determined by multiplying the PSAs at the target level of 100%, as disclosed in this table, by a payout percentage based on the performance-based conditions achieved. The payout percentage was 123% for the 2021-2023 performance period, 110% for the 2022-2023 performance period, and 90% for the 2023 performance period.

 

The unvested balance of RSUs and PSAs as of September 30, 2024 includes approximately 180,000 PSAs at the target level of 100%. The vesting of these awards is subject to the achievement of specified performance-based conditions, and the actual number of common shares that will ultimately be issued will be determined by multiplying this number of PSAs by a payout percentage ranging from 0% to 200%.

 

Based on the estimated level of achievement of the performance targets associated with the PSAs as of September 30, 2024, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $4.9 million, which is expected to be recognized over a weighted-average period of 1.6 years.

 

Stock Awards

 

For the nine months ended September 30, 2024 and 2023, stock awards of 14,424 shares and 15,904 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 $33.27 in 2024 and $29.51 in 2023.

 

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7.

Commitments and Contingencies

 

Portland Harbor Superfund Site

 

In 2000, a section of the lower Willamette River known as the Portland Harbor Superfund Site was included on the National Priorities List at the request of the United States Environmental Protection Agency (“EPA”). While the Company’s Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facility’s stormwater system drains into a neighboring property’s privately owned stormwater system and slip. Also in 2000, the Company was notified by the EPA and the Oregon Department of Environmental Quality (“ODEQ”) of potential liability under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). A remedial investigation and feasibility study of the Portland Harbor Superfund Site was directed by a group of 14 potentially responsible parties known as the Lower Willamette Group under agreement with the EPA. The EPA finalized the remedial investigation report in 2016, and the feasibility study in 2016, which identified multiple remedial alternatives. In 2017, the EPA issued its Record of Decision selecting the remedy for cleanup at the Portland Harbor Superfund Site, which it believes will cost approximately $1 billion at net present value and 13 years to complete. The EPA has not yet determined who is responsible for the costs of cleanup or how the cleanup costs will be allocated among the more than 150 potentially responsible parties. Because of the large number of potentially responsible parties and the variability in the range of remediation alternatives, the Company is unable to estimate an amount or an amount within a range of costs for its obligation with respect to the Portland Harbor Superfund Site matters, and no further adjustment to the Consolidated Financial Statements has been recorded as of the date of this filing.

 

The ODEQ is separately providing oversight of voluntary investigations and source control activities by the Company involving the Company’s site, which are focused on controlling any current “uplands” releases of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because the extent of contamination and the Company’s responsibility for the contamination have not yet been determined.

 

Concurrent with the activities of the EPA and the ODEQ, the Portland Harbor Natural Resources Trustee Council (“Trustees”) sent some or all of the same parties, including the Company, a notice of intent to perform a Natural Resource Damage Assessment (“NRDA”) for the Portland Harbor Superfund Site to determine the nature and extent of natural resource damages under CERCLA Section 107. The Trustees for the Portland Harbor Superfund Site consist of representatives from several Northwest Indian Tribes, three federal agencies, and one state agency. The Trustees act independently of the EPA and the ODEQ. The Trustees have encouraged potentially responsible parties to voluntarily participate in the funding of their injury assessments and several of those parties have agreed to do so. In 2014, the Company agreed to participate in the injury assessment process, which included funding $0.4 million of the assessment. The Company has not assumed any additional payment obligations or liabilities with the participation with the NRDA, nor does the Company expect to incur significant future costs in the resolution of the NRDA.

 

In 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 case has been stayed until 2025, and the Company does not have sufficient information at this time to determine the likelihood of a loss in this matter or the amount of damages that could be allocated to the Company.

 

The Company has insurance policies for defense costs, as well as indemnification policies it believes will provide reimbursement for the remediation assessed. However, the Company can provide no assurance that those policies will cover all of the costs which the Company may incur.

 

All Sites

 

The Company operates its facilities under numerous governmental permits and licenses relating to air emissions, stormwater runoff, and other environmental matters. The Company’s operations are also governed by many other laws and regulations, including those relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder which, among other requirements, establish noise and dust standards. The Company believes it is in material compliance with its permits and licenses and these laws and regulations, and the Company does not believe that future compliance with such laws and regulations will have a material adverse effect on its financial position, results of operations, or cash flows.

 

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Other Contingencies and Legal Proceedings

 

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

 

Commitments

 

As of September 30, 2024, the Company’s commitments include approximately $1.2 million remaining relating to its investment in the primary component of the new reinforced concrete pipe mill which remained unpaid at September 30, 2024 and approximately $0.9 million remaining relating to the final obligations associated with the construction of the building for the new mill at the Company’s facility in Salt Lake City, Utah.

 

Guarantees

 

The Company has entered into certain letters of credit that total $1.6 million as of September 30, 2024. The letters of credit relate to workers’ compensation insurance and a public improvement project.

 
 

8.

Revenue

 

The Company manufactures water infrastructure steel pipe products, which are generally made to custom specifications for installation contractors serving projects funded by public water agencies, as well as precast and reinforced concrete products. Generally, each of the Company’s contracts with its customers contains a single performance obligation, as the promise to transfer products is not separately identifiable from other promises in the contract and, therefore, is not distinct. The Company generally 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.

 

SPP revenue for water infrastructure steel pipe products is recognized over time as the manufacturing process progresses because of the Company’s right to payment for work performed to date plus a reasonable profit on cancellations for unique products that have no alternative use to the Company. Revenue is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract (cost-to-cost method). Contract costs include all material, labor, and other direct costs incurred in satisfying the performance obligations. The cost of steel material is recognized as a contract cost when the steel is introduced into the manufacturing process. Changes in job performance, job conditions, and estimated profitability, including those arising from contract change orders, contract penalty provisions, foreign currency exchange rate movements, changes in raw materials costs, and final contract settlements may result in revisions to estimates of revenue, costs, and income, and are recognized in the period in which the revisions are determined. Provisions for losses on uncompleted contracts, included in Accrued liabilities, are estimated by comparing total estimated contract revenue to the total estimated contract costs and a loss is recognized during the period in which it becomes probable and can be reasonably estimated.

 

Net revisions in contract estimates resulted in an increase (decrease) in SPP net sales of $0.8 million and $3.1 million for the three and nine months ended September 30, 2024, respectively and ($0.8) million for the three and nine months ended September 30, 2023.

 

Precast revenue for water infrastructure concrete pipe and precast concrete products is recognized at the time control is transferred to customers which is generally at the time of shipment, in an amount that reflects the consideration the Company expects to be entitled to in exchange for the products. All variable consideration that may affect the total transaction price, including contractual discounts, returns, and credits, is included in net sales. Estimates for variable consideration are based on historical experience, anticipated performance, and management’s judgment. The Company’s contracts do not contain significant financing.

 

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Disaggregation of Revenue

 

The following table disaggregates revenue by recognition over time or at a point in time, as the Company believes it best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2024

  

2023

  

2024

  

2023

 
                 

Over time

 $85,924  $80,493  $255,454  $221,294 

Point in time

  44,277   38,229   117,467   112,897 

Net sales

 $130,201  $118,722  $372,921  $334,191 

 

Contract Assets and Contract Liabilities

 

Contract assets primarily represent revenue earned over time but not yet billable based on the terms of the contracts. These amounts will be billed based on the terms of the contracts, which can include certain milestones, partial shipments, or completion of the contracts. Payment terms of amounts billed vary based on the customer, but are typically due within 30 days of invoicing. Contract liabilities represent advance billings on contracts, typically for steel.

 

The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and billings.

 

The following is a summary of the changes in contract assets (in thousands):

 

  Nine Months Ended September 30, 
  

2024

  

2023

 
         

Balance, beginning of period

 $120,516  $121,778 

Revenue recognized in advance of billings

  220,632   192,558 

Billings

  (220,060)  (207,436)

Other

  (105)  (1,480)

Balance, end of period

 $120,983  $105,420 

 

The following is a summary of the changes in contract liabilities (in thousands):

 

  Nine Months Ended September 30, 
  

2024

  

2023

 
         

Balance, beginning of period

 $21,450  $17,456 

Billings

  42,333   28,544 

Revenue recognized

  (34,822)  (28,736)

Other

  (64)  - 

Balance, end of period

 $28,897  $17,264 

 

Backlog

 

Backlog represents the balance of remaining performance obligations under signed contracts for SPP water infrastructure steel pipe products for which revenue is recognized over time. As of September 30, 2024, backlog was $231 million. The Company expects to recognize approximately 33% of the remaining performance obligations in 2024, 51% in 2025, and the balance thereafter.

 

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9.

Income Taxes

 

The Company files income tax returns in the United States Federal jurisdiction, in a limited number of foreign jurisdictions, and in many state jurisdictions. With few exceptions, the Company is no longer subject to United States Federal, state, or foreign income tax examinations for years before 2020.

 

The Company recorded income tax expense at an estimated effective income tax rate of 26.3% and 26.3% for the three and nine months ended September 30, 2024, respectively and 25.7% and 26.6% for the three and nine months ended September 30, 2023, respectively. The Company’s estimated effective income tax rates for the three and nine months ended September 30, 2024 and 2023 were primarily impacted by non-deductible permanent differences.

 
 

10.

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 Loss on Foreign Currency Forward Contracts Designated as Cash Flow Hedges

    

Unrealized Gain (Loss) on Interest Rate Swaps Designated as Cash Flow Hedges

    

Total

  
                                 

Balances, December 31, 2023

   $ (1,193 )   $ (13 )   $ 246     $ (960 )
                                 

Other comprehensive income (loss) before reclassifications

     57       11       (60 )     8  

Amounts reclassified from Accumulated other comprehensive loss

     10       2       (216 )     (204 )

Net current period other comprehensive income (loss)

     67       13       (276 )     (196 )
                                 

Balances, September 30, 2024

   $ (1,126 )   $ -     $ (30 )   $ (1,156 )
                                 
    Pension Liability Adjustment     Unrealized Gain (Loss) on Foreign Currency Forward Contracts Designated as Cash Flow Hedges     Unrealized Gain on Interest Rate Swaps Designated as Cash Flow Hedges     Total  
                                 

Balances, December 31, 2022

   $ (1,532 )   $ 94     $ 649     $ (789 )
                                 

Other comprehensive income (loss) before reclassifications

     78       (115 )     266       229  

Amounts reclassified from Accumulated other comprehensive loss

     10       17       (418 )     (391 )

Net current period other comprehensive income (loss)

     88       (98 )