Company Quick10K Filing
Northwest Pipe
Price24.99 EPS2
Shares10 P/E15
MCap245 P/FCF11
Net Debt-12 EBIT20
TEV233 TEV/EBIT12
TTM 2019-09-30, in MM, except price, ratios
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8-K 2020-08-04
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8-K 2018-01-15

NWPX 10Q Quarterly Report

EX-31.1 ex_194458.htm
EX-31.2 ex_194459.htm
EX-32.1 ex_194460.htm
EX-32.2 ex_194461.htm

Northwest Pipe Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
0.50.40.30.20.10.02012201420172020
Assets, Equity
0.20.10.10.0-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

nwpx20200630_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: June 30, 2020

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 July 28, 2020 was 9,800,810 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 six months ended June 30, 2020 and 2019

2

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019

5

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

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

22

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

 

 

Item 4. Controls and Procedures

29

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

29

 

 

Item 1A. Risk Factors

29

 

 

Item 6. Exhibits

30

 

 

Signatures

31

 

 

 

Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $69,971  $69,203  $138,894  $131,846 

Cost of sales

  57,013   60,985   116,357   117,057 

Gross profit

  12,958   8,218   22,537   14,789 

Selling, general, and administrative expense

  5,584   4,705   13,529   8,952 

Operating income

  7,374   3,513   9,008   5,837 

Other income

  1,059   25   658   184 

Interest income

  11   3   33   7 

Interest expense

  (262)  (120)  (481)  (251)

Income before income taxes

  8,182   3,421   9,218   5,777 

Income tax expense

  2,184   447   2,656   638 

Net income

 $5,998  $2,974  $6,562  $5,139 
                 

Net income per share:

                

Basic

 $0.61  $0.31  $0.67  $0.53 

Diluted

 $0.61  $0.31  $0.67  $0.53 
                 

Shares used in per share calculations:

                

Basic

  9,792   9,736   9,771   9,736 

Diluted

  9,808   9,753   9,832   9,745 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net income

 $5,998  $2,974  $6,562  $5,139 
                 

Other comprehensive income (loss), net of tax:

                

Pension liability adjustment

  24   27   49   53 

Unrealized loss on cash flow hedges

  (155)  -   (76)  (15)

Other comprehensive income (loss), net of tax

  (131)  27   (27)  38 

Comprehensive income

 $5,867  $3,001  $6,535  $5,177 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

  

June 30, 2020

  

December 31, 2019

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $19,206  $31,014 

Trade and other receivables, less allowance for doubtful accounts of $791 and $801

  39,204   38,026 

Contract assets

  74,902   91,186 

Inventories

  35,425   30,654 

Prepaid expenses and other

  3,809   4,159 

Total current assets

  172,546   195,039 

Property and equipment, less accumulated depreciation and amortization of $91,848 and $86,244

  108,789   99,631 

Operating lease right-of-use assets

  29,645   7,683 

Goodwill

  22,985   - 

Intangible assets, net

  11,424   1,231 

Other assets

  6,323   6,661 

Total assets

 $351,712  $310,245 
         

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Current portion of long-term debt

 $3,133  $- 

Accounts payable

  13,014   15,493 

Accrued liabilities

  11,876   12,150 

Contract liabilities

  4,731   12,281 

Current portion of operating lease liabilities

  2,340   1,642 

Total current liabilities

  35,094   41,566 

Long-term debt

  12,032   - 

Operating lease liabilities

  26,428   6,247 

Deferred income taxes

  12,202   4,265 

Other long-term liabilities

  10,448   10,009 

Total liabilities

  96,204   62,087 
         

Commitments and contingencies (Note 10)

          
         

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, 9,800,810 and 9,746,979 shares issued and outstanding

  98   97 

Additional paid-in-capital

  121,358   120,544 

Retained earnings

  135,893   129,331 

Accumulated other comprehensive loss

  (1,841)  (1,814)

Total stockholders’ equity

  255,508   248,158 

Total liabilities and stockholders’ equity

 $351,712  $310,245 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands)

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 

Balances, March 31, 2020

  9,787,995  $98  $120,902  $129,895  $(1,710) $249,185 

Net income

  -   -   -   5,998   -   5,998 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   24   24 

Unrealized loss on cash flow hedges, net of tax benefit of $52

  -   -   -   -   (155)  (155)

Issuance of common stock under stock compensation plans

  12,815   -   (517)  -   -   (517)

Share-based compensation expense

  -   -   973   -   -   973 

Balances, June 30, 2020

  9,800,810  $98  $121,358  $135,893  $(1,841) $255,508 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders'

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 

Balances, March 31, 2019

  9,735,055  $97  $118,857  $103,594  $(1,760) $220,788 

Net income

  -   -   -   2,974   -   2,974 

Other comprehensive income:

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   27   27 

Issuance of common stock under stock compensation plans

  9,772   -   -   -   -   - 

Share-based compensation expense

  -   -   653   -   -   653 

Balances, June 30, 2019

  9,744,827  $97  $119,510  $106,568  $(1,733) $224,442 

 

 

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, 2019

  9,746,979  $97  $120,544  $129,331  $(1,814) $248,158 

Net income

  -   -   -   6,562   -   6,562 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   49   49 

Unrealized loss on cash flow hedges, net of tax benefit of $29

  -   -   -   -   (76)  (76)

Issuance of common stock under stock compensation plans

  53,831   1   (619)  -   -   (618)

Share-based compensation expense

  -   -   1,433   -   -   1,433 

Balances, June 30, 2020

  9,800,810  $98  $121,358  $135,893  $(1,841) $255,508 

 

                  

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

  -   -   -   235   (235)  - 

Net income

  -   -   -   5,139   -   5,139 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   53   53 

Unrealized loss on cash flow hedges, net of tax benefit of $8

  -   -   -   -   (15)  (15)

Issuance of common stock under stock compensation plans

  9,772   -   -   -   -   - 

Share-based compensation expense

  -   -   675   -   -   675 

Balances, June 30, 2019

  9,744,827  $97  $119,510  $106,568  $(1,733) $224,442 

 

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

 

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Cash flows from operating activities:

        

Net income

 $6,562  $5,139 

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

        

Depreciation and finance lease amortization

  6,300   5,713 

Amortization of intangible assets

  972   216 

Deferred income taxes

  2,618   307 

Gain on insurance proceeds

  (1,018)  - 

Share-based compensation expense

  1,433   675 

Other, net

  128   115 

Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:

        

Trade and other receivables

  5,107   3,319 

Contract assets, net

  9,978   1,870 

Inventories

  902   5,863 

Prepaid expenses and other assets

  2,835   1,064 

Accounts payable

  (3,787)  (7,891)

Accrued and other liabilities

  (3,243)  909 

Net cash provided by operating activities

  28,787   17,299 

Cash flows from investing activities:

        

Acquisition of business, net of cash acquired

  (48,728)  - 

Purchases of property and equipment

  (6,494)  (2,645)

Proceeds from sale of property and equipment

  -   2 

Proceeds from insurance

  557   400 

Net cash used in investing activities

  (54,665)  (2,243)

Cash flows from financing activities:

        

Borrowings on line of credit

  41,377   34,034 

Repayments on line of credit

  (41,377)  (45,498)

Borrowings on long-term debt

  15,879   - 

Payments on long-term debt

  (529)  - 

Payments of debt issuance costs

  (454)  - 

Payments on finance lease obligations

  (208)  (215)

Tax withholdings related to net share settlements of restricted stock and performance share awards

  (618)  - 

Net cash provided by (used in) financing activities

  14,070   (11,679)

Change in cash and cash equivalents

  (11,808)  3,377 

Cash and cash equivalents, beginning of period

  31,014   6,677 

Cash and cash equivalents, end of period

 $19,206  $10,054 
         

Noncash investing and financing activities:

        

Accrued property and equipment purchases

 $633  $1,137 

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

 $1,837  $1,238 

 

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

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

1.

Organization and Basis of Presentation

 

Northwest Pipe Company (the “Company”) produces high-quality engineered steel water pipe, precast and reinforced concrete products, Permalok® steel casing pipe, bar-wrapped concrete cylinder pipe, as well as custom linings, coatings, joints, and one of the largest offerings of fittings and specialized components in North America. The Company provides solution-based products for a wide range of markets including water transmission and infrastructure, water and wastewater plant piping, structural stormwater and sewer systems, trenchless technology, and pipeline rehabilitation. 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 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. Certain amounts from the prior year financial statements have been reclassified in order to conform to the current year presentation.

 

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, 2019 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, 2019 (“2019 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. 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 2019 Form 10‑K.

 

Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2020, particularly in light of the coronavirus disease 2019 (“COVID-19”) pandemic and its effects on the domestic and global economies.

 

Impact of COVID-19

 

In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the economic impacts of the COVID-19 pandemic.

 

Consistent with national guidelines and with state and local orders to date, the Company currently continues to operate its manufacturing facilities in the United States as it produces critical water infrastructure products. The Company has taken proactive and precautionary steps to ensure the safety of its employees, customers, and suppliers, including frequent cleaning and disinfection of workspaces, property and equipment, instituting social distancing measures, and mandating remote working environments for certain employees.

 

In early April 2020, the Company was ordered to close its water infrastructure manufacturing facility in San Luis Río Colorado, Mexico (“SLRC”) as a result of mandates made by Mexican authorities that companies that do not carry out essential activities must suspend business operations in order to combat and eradicate the existence and transmission of COVID-19. The Company diverted orders on a case-by-case basis to its United States-based facilities during this closure. Since lifting previously imposed restrictions in early June 2020, the Mexican authorities have allowed weekly increases to our workforce.

 

8

 

While the COVID-19 pandemic has not had a material adverse effect on the Company's reported results for the first six months of 2020, the Company is unable to predict the ultimate impact that the COVID-19 pandemic may have on its business, future results of operations, financial position, or cash flows. The extent to which the Company's operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts on global and domestic economic conditions, including the long-term potential to reduce or delay funding of municipal projects, and the continued disruptions to and volatility in the financial markets remain unknown. The Company is closely monitoring the impact of the outbreak of COVID-19 on all aspects of its business.

 

Immaterial Correction of Error

 

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 facility. Management concluded that this out of period adjustment was not material to the consolidated financial results for the year ended December 31, 2019.

 

 

 

2.

Business Combination

 

On January 31, 2020, the Company completed the acquisition of 100% of Geneva Pipe Company, Inc. (“Geneva”) for a purchase price of $49.4 million in cash. Geneva is a concrete pipe and precast concrete products manufacturer based in Utah. This acquisition expanded the Company’s water infrastructure product capabilities by adding additional reinforced concrete pipe capacity and a full line of precast concrete products including storm drains and manholes, catch basins, vaults, and curb inlets as well as innovative lined products that extend the life of concrete pipe and manholes for sewer applications. Operations have continued with Geneva's previous management and workforce at the three Utah manufacturing facilities located in Salt Lake City, Orem, and St. George. Consistent with prior periods and considering the chief operating decision maker's evaluation of post-acquisition performance is based on total Company results, the Company continues to report as one segment.

 

The following table summarizes the purchase consideration and preliminary fair value of the assets acquired and liabilities assumed as of January 31, 2020 (in thousands):

 

Assets

    

Cash and cash equivalents

 $691 

Trade and other receivables

  7,089 

Inventories

  5,673 

Prepaid expenses and other

  356 

Property and equipment

  9,096 

Operating lease right-of-use assets

  21,684 

Intangible assets

  11,165 

Total assets acquired

  55,754 
     

Liabilities

    

Accounts payable

  1,395 

Accrued liabilities

  1,189 

Operating lease liabilities

  20,454 

Deferred income taxes

  5,343 

Other long-term liabilities

  939 

Total liabilities assumed

  29,320 
     

Goodwill

  22,985 
     

Total purchase consideration

 $49,419 

 

9

 

The purchase consideration for this business combination was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase consideration recorded as goodwill. The asset and liability fair value measurements primarily related to inventories, property and equipment, operating lease right-of-use assets and liabilities, identifiable intangible assets, goodwill, and deferred income taxes, are preliminary and subject to change as additional information is obtained. As a result of additional information obtained during the measurement period about facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments during the three months ended June 30, 2020 which resulted in a $0.1 million balance sheet reclassification between trade and other receivables and inventories. The purchase price allocation will be finalized as soon as practicable within the measurement period, but not later than one year following the acquisition date.

 

The following table summarizes the components of the intangible assets acquired and their estimated useful lives:

 

  

Estimated Useful Life

  

Fair Value

 
  

(In years)

  

(In thousands)

 

Customer relationships

 11.0   $8,031 

Trade names

 10.0    2,093 

Backlog

 0.9    1,041 

Total intangible assets

 9.9   $11,165 

 

Goodwill arose from the acquisition of an assembled workforce, expansion of product offerings, and management’s industry know-how. The Company does not expect the goodwill to be deductible for tax purposes.

 

The Company incurred transaction costs associated with this acquisition of $0.1 million and $2.6 million during the three and six months ended June 30, 2020, respectively. These transaction costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

 

Geneva operations contributed net sales of $20.4 million to the Company’s continuing operations for the period from January 31, 2020 to June 30, 2020. It is impracticable to determine the effect on net income as a substantial portion of Geneva has been integrated into the Company’s ongoing operations.

 

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

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net sales

 $69,971  $81,004  $142,483  $153,424 

Net income

  6,331   3,905   8,755   5,871 

 

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 Geneva. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Geneva to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied on January 1 of the year prior to the acquisition. Adjustments also include an increase of interest expense as if the Company’s debt obtained in connection with the acquisition had been outstanding since January 1 of the year prior to the acquisition. The unaudited pro forma financial information includes non-recurring adjustments to remove transaction costs directly attributable to the acquisition. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

 

10

 

 

3.

Inventories

 

Inventories consist of the following (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 
         

Raw materials

 $26,252  $26,772 

Work-in-process

  2,058   1,579 

Finished goods

  5,527   683 

Supplies

  1,588   1,620 

Total inventories

 $35,425  $30,654 

 

 

 

4.

Goodwill and Intangible Assets

 

Goodwill

 

Goodwill represents the excess of purchase price over the assigned fair values of the assets and liabilities assumed in conjunction with an acquisition. The changes in the carrying amount of goodwill for the six months ended June 30, 2020 were as follows (in thousands):

 

Goodwill, December 31, 2019

 $- 

Acquisition of Geneva (Note 2)

  22,985 

Goodwill, June 30, 2020

 $22,985 

 

Goodwill is reviewed for impairment annually at December 31. In testing goodwill for impairment, the Company has the option to perform a qualitative assessment to determine whether the existence of events or circumstances indicate that it is more-likely-than-not (more than 50%) that the fair value of a reporting unit is less than its carrying amount. When performing a qualitative assessment, the Company evaluates factors such as industry and market conditions, cost factors, overall financial performance, and other relevant entity specific events and changes. If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, or if the Company chooses not to perform the qualitative assessment, then a quantitative assessment is performed to determine the reporting unit’s fair value. If the reporting unit’s carrying value exceeds its fair value, then an impairment loss is recognized for the amount of the excess of the carrying amount over the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require interim impairment testing. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on the Company as well as the current market capitalization and forecasts. The Company determined that a triggering event has not occurred which would require an interim impairment test to be performed.

 

11

 

Intangible Assets

 

Intangible assets consist of the following (in thousands):

 

  

Gross Carrying

  

Accumulated

  

Intangible

 
  

Amount

  

Amortization

  

Assets, Net

 

As of June 30, 2020

            

Customer relationships

 $9,409  $(1,200) $8,209 

Trade names and trademarks

  3,225   (578)  2,647 

Backlog

  1,041   (473)  568 

Total

 $13,675  $(2,251) $11,424 
             

As of December 31, 2019

            

Customer relationships

 $1,378  $(827) $551 

Trade names and trademarks

  1,132   (452)  680 

Total

 $2,510  $(1,279) $1,231 

 

During the six months ended June 30, 2020, intangible assets increased due to the acquisition of Geneva. See Note 2, "Business Combination" for additional information related to this transaction.

 

Intangible assets are amortized using the straight-line method over estimated useful lives ranging from eleven months to 15 years. The estimated amortization expense for each of the next five years and thereafter is as follows (in thousands):

 

Year ending December 31,

    

Remainder of 2020

 $1,143 

2021

  1,153 

2022

  1,153 

2023

  1,153 

2024

  1,015 

Thereafter

  5,807 

Total amortization expense

 $11,424 

 

 

 

5.

Line of Credit and Long-Term Debt

 

The Company’s Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) dated October 25, 2018 (“Credit Agreement”), as amended on January 31, 2020 by the Consent and Amendment No. 1 to Credit Agreement with Wells Fargo (collectively the “Amended Credit Agreement”) provides for a term loan, as well as letters of credit and revolving loans in the aggregate amount of up to $74 million, subject to a borrowing base (“Revolver Commitment”). 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. The Amended Credit Agreement will expire on October 25, 2024.

 

The Amended 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 Amended Credit Agreement also requires the Company to regularly provide financial information to Wells Fargo and to maintain a Senior Leverage Ratio (as defined in the Amended Credit Agreement) not greater than 3.00 and a Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) of at least 1.10 to 1.00. The Company was in compliance with its financial covenants as of June 30, 2020.

 

The Company's obligations under the Amended Credit Agreement are secured by a security interest in certain real property owned by the Company and its subsidiaries and substantially all of Company’s and its subsidiaries’ other assets.

 

12

 

Line of Credit

 

As of June 30, 2020, the Company had no outstanding revolving loan borrowings under the Amended Credit Agreement and additional revolving loan borrowing capacity of $55.1 million. As of December 31, 2019, the Company had no outstanding borrowings under the Credit Agreement. Revolving loan borrowings under the Amended Credit Agreement bear interest at rates related to the daily three month London Interbank Offered Rate (“LIBOR”) plus 1.5% to 2.0%. As of June 30, 2020 and December 31, 2019, the weighted-average interest rate for outstanding revolving loan borrowings was 2.11% and 3.43% respectively. The Amended Credit Agreement provides a mechanism for determining an alternative benchmark rate to the LIBOR. The Amended 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 Amended Credit Agreement) during any month. Such fee is payable monthly in arrears.

 

Long-Term Debt

 

Pursuant to the Amended Credit Agreement, on March 31, 2020, the Company entered into a term loan for $15.9 million with Wells Fargo that matures on October 25, 2024 and bears interest at the daily three month LIBOR plus 2.0% to 2.5%. The term loan requires monthly principal payments of $0.3 million plus accrued interest. As of June 30, 2020, the outstanding balance of the term loan was $15.4 million. The Company is obligated to prepay the term loan to the extent that the outstanding principal balance at any time exceeds 60% of the fair market value of specified real property securing the loan. The Company is also obligated to prepay the term loan in an amount equal to 20% of Excess Cash Flow (as defined in the Amended Credit Agreement). Subject to certain limitations, the Company may also voluntarily prepay all or a portion of the loan balance upon ten business days’ written notice.

 

Future principal payments of long-term debt are as follows (in thousands):

 

Year ending December 31,

    

Remainder of 2020

 $1,588 

2021

  3,176 

2022

  3,176 

2023

  3,176 

2024

  4,234 

Total future principal payments

  15,350 

Less: Unamortized debt issuance costs

  (185)

Less: Current portion of long-term debt

  (3,133)

Long-term debt

 $12,032 

 

 

 

6.

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.

 

13

 

The following table summarizes the Company’s leases recorded on the Condensed Consolidated Balance Sheets (in thousands):

 

  

June 30, 2020

  

December 31, 2019

 

Right-of-use assets:

        

Finance leases, net, included in Property and equipment (1)

 $992  $1,203 

Operating leases

  29,645   7,683 

Total right-of-use assets

 $30,637  $8,886 
         

Lease liabilities:

        

Finance leases

 $1,434  $1,641 

Operating leases

  28,768   7,889 

Total lease liabilities

 $30,202  $9,530 

 

 

(1)

Finance lease right-of-use assets are presented net of accumulated amortization of $1.1 million and $0.9 million as of June 30, 2020 and December 31, 2019, respectively.

 

Lease cost consists of the following (in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 

Finance lease cost:

                

Amortization of right-of-use assets

 $106  $110  $211  $219 

Interest on lease liabilities

  20   14   42   29 

Operating lease cost

  947   480   1,752   905 

Short-term lease cost

  217   313   407   575 

Variable lease cost

  40   35   82   75 

Total lease cost

 $1,330  $952  $2,494  $1,803 

 

The future maturities of lease liabilities as of June 30, 2020 are as follows (in thousands):

 

  

Finance Leases

  

Operating Leases

 
         

Remainder of 2020

 $271  $1,987 

2021

  382   3,050 

2022

  361   2,695 

2023

  157   2,432 

2024

  471   2,287 

Thereafter

  -   27,098 

Total lease payments

  1,642   39,549 

Amount representing interest

  (208)  (10,781)

Present value of lease liabilities

  1,434   28,768 

Current portion of lease liabilities (1)

  (380)  (2,340)

Long-term lease liabilities (2)

 $1,054  $26,428 

 

 

(1)

Current portion of finance lease liabilities are included in Accrued liabilities.

 

 

 

 

(2)

Long-term finance lease liabilities are included in Other long-term liabilities.

 

14

 

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

 

  

June 30, 2020

  

December 31, 2019

 

Weighted-average remaining lease term (years)

        

Finance leases

  3.43   3.79 

Operating leases

  17.61   8.31 

Weighted-average discount rate

        

Finance leases

  5.45

%

  5.40

%

Operating leases

  3.53

%

  4.50

%

 

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

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

        

Operating cash flows from finance leases

 $(42) $(29)

Operating cash flows from operating leases

  (1,677)  (887)

Financing cash flows from finance leases

  (208)  (215)

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

  1,837   1,238 

 

 

 

7.

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 June 30, 2020

                

Financial assets:

                

Deferred compensation plan

 $4,655  $4,018  $637  $- 

Foreign currency forward contracts

  76   -   76   - 

Total financial assets

 $4,731  $4,018  $713  $- 
                 

Financial liabilities:

                

Foreign currency forward contracts

 $(261) $-  $(261) $- 
                 

As of December 31, 2019

                

Financial assets:

                

Deferred compensation plan

 $5,150  $4,268  $882  $- 
                 

Financial liabilities:

                

Foreign currency forward contracts

 $(138) $-  $(138) $- 

 

15

 

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 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. The Company is obligated to repay the carrying value of the Company’s long-term debt. The fair value of the Company’s long-term debt is calculated using interest rates for the Company’s existing debt arrangements which are classified as Level 2 inputs within the fair value hierarchy. As of June 30, 2020, the fair value of the Company’s long-term debt approximates the carrying value as the borrowings bear interest based on current market rates.

 

 

 

8.

Derivative Instruments and Hedging Activities

 

For each foreign currency forward contract 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 foreign currency forward contracts to specific firm commitments or forecasted transactions and designating the foreign currency forward contracts as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the foreign currency forward contracts 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 loss on cash flow hedges on the Condensed Consolidated Statements of Comprehensive Income. If it is determined that a foreign currency forward contract 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 foreign currency forward contract prospectively.

 

As of June 30, 2020 and December 31, 2019, the total notional amount of the foreign currency forward contracts designated as cash flow hedges was $15.0 million (CAD$20.4 million) and $6.1 million (CAD$7.9 million), respectively. All of the Company’s foreign currency forward contracts are subject to an enforceable master netting arrangement.

 

All of the Company’s foreign currency forward contracts have maturities less than twelve months as of June 30, 2020, except three contracts with notional amounts totaling $10.9 million (CAD$14.9 million) and remaining maturities between 18 and 23 months.

 

As of June 30, 2020 and December 31, 2019, all foreign currency forward contracts were designated as cash flow hedges. For the three and six months ended June 30, 2020, gains (losses) recognized in Net sales from foreign currency forward contracts not designated as hedging instruments were $(0.1) million and $0.2 million, respectively. For the three and six months ended June 30, 2019, losses recognized in Net sales from foreign currency forward contracts not designated as hedging instruments were $(0.1) million. As of June 30, 2020, unrealized pretax losses on outstanding foreign currency forward contracts in Accumulated other comprehensive loss was $(0.2) million. Substantially all of the outstanding foreign currency forward contract balances in Accumulated other comprehensive loss are expected to be reclassified to Net sales within the next twelve months as a result of underlying hedged transactions also being recorded in Net sales.

 

 

 

9.

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”).

 

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 June 30,

  

Six Months Ended June 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Cost of sales

 $179  $118  $321  $124 

Selling, general, and administrative expense

  794   535   1,112