0001001385 Northwest Pipe Co. false --12-31 Q3 2022 498 503 115,377 106,957 0.01 0.01 10,000,000 10,000,000 0 0 0 0 0.01 0.01 15,000,000 15,000,000 9,927,360 9,927,360 9,870,567 9,870,567 0 142 141 0 8 0 83 218 0 21 1.8 1.8 1.8 24.6 7.4 1.0 24.1 1 100 2.8 2.6 0.25 1 0 0 The number of PSAs disclosed in this table are at the target level of 100%. For the PSAs vested on March 31, 2022, the actual number of common shares that were issued was determined by multiplying the PSAs by a payout percentage based on the performance-based conditions achieved. The payout percentage was 141% for the 2020-2021 performance period and 93% for the 2021 performance period. 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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, 2022

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 November 1, 2022 was 9,927,360 shares.

 

 

 
Table of Contents
 

 

 

NORTHWEST PIPE COMPANY

FORM 10‑Q

TABLE OF CONTENTS

 

 

Page

PART I - FINANCIAL INFORMATION

  
   

Item 1. Financial Statements (Unaudited):

  
   

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021

2
   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021

3
   

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

4
   

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021

5
   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

7
   

Notes to Condensed Consolidated Financial Statements

8
   

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

21
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28
   

Item 4. Controls and Procedures

28
   

PART II - OTHER INFORMATION

  
   

Item 1. Legal Proceedings

29
   

Item 1A. Risk Factors

29
   

Item 6. Exhibits

29
   

Signatures

31

 

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Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net sales

 $122,984  $84,643  $350,837  $230,766 

Cost of sales

  97,866   72,280   286,853   200,090 

Gross profit

  25,118   12,363   63,984   30,676 

Selling, general, and administrative expense

  10,654   5,562   30,149   17,729 

Operating income

  14,464   6,801   33,835   12,947 

Other income

  11   171   56   260 

Interest expense

  (964

)

  (112

)

  (2,393

)

  (687

)

Income before income taxes

  13,511   6,860   31,498   12,520 

Income tax expense

  3,555   1,914   8,310   3,268 

Net income

 $9,956  $4,946  $23,188  $9,252 
                 

Net income per share:

                

Basic

 $1.00  $0.50  $2.34  $0.94 

Diluted

 $0.99  $0.50  $2.32  $0.93 
                 

Shares used in per share calculations:

                

Basic

  9,927   9,871   9,909   9,849 

Diluted

  10,010   9,921   9,988   9,918 

 

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

 

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NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net income

 $9,956  $4,946  $23,188  $9,252 
                 

Other comprehensive income (loss), net of tax:

                

Pension liability adjustment

  22   29   66   87 

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

  158   25   (245)  73 

Unrealized gain on interest rate swap designated as cash flow hedge

  428   -   661   - 

Other comprehensive income, net of tax

  608   54   482   160 

Comprehensive income

 $10,564  $5,000  $23,670  $9,412 

 

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

 

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NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar amounts in thousands, except per share amounts)

 

  

September 30, 2022

  

December 31, 2021

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $3,706  $2,997 

Trade and other receivables, less allowance for doubtful accounts of $498 and $503

  73,975   52,664 

Contract assets

  117,260   107,170 

Inventories

  71,578   59,651 

Prepaid expenses and other

  4,326   5,744 

Total current assets

  270,845   228,226 

Property and equipment, less accumulated depreciation and amortization of $115,377 and $106,957

  124,228   121,266 

Operating lease right-of-use assets

  94,166   98,507 

Goodwill

  55,504   53,684 

Intangible assets, net

  36,334   39,376 

Other assets

  5,400   6,620 

Total assets

 $586,477  $547,679 
         

Liabilities and Stockholders’ Equity

        

Current liabilities:

        
Current debt $3,525  $- 

Accounts payable

  40,444   32,267 

Accrued liabilities

  32,561   24,498 

Contract liabilities

  16,243   2,623 

Current portion of operating lease liabilities

  4,725   4,704 

Total current liabilities

  97,498   64,092 

Borrowings on line of credit

  71,817   86,761 

Operating lease liabilities

  90,231   93,725 

Deferred income taxes

  10,982   10,984 

Other long-term liabilities

  7,272   8,734 

Total liabilities

  277,800   264,296 
         

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, 9,927,360 and 9,870,567 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

  99   99 

Additional paid-in-capital

  126,686   125,062 

Retained earnings

  183,092   159,904 

Accumulated other comprehensive loss

  (1,200

)

  (1,682

)

Total stockholders’ equity

  308,677   283,383 

Total liabilities and stockholders’ equity

 $586,477  $547,679 

 

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

 

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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, 2022

  9,927,360  $99  $125,517  $173,136  $(1,808

)

 $296,944 

Net income

  -   -   -   9,956   -   9,956 

Other comprehensive income:

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   22   22 

Unrealized gain on foreign currency forward contracts designated as cash flow hedges, net of tax benefit of $142

  -   -   -   -   158   158 

Unrealized gain on interest rate swap designated as cash flow hedge, net of tax expense of $141

  -   -   -   -   428   428 

Share-based compensation expense

  -   -   1,169   -   -   1,169 

Balances, September 30, 2022

  9,927,360  $99  $126,686  $183,092  $(1,200

)

 $308,677 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, June 30, 2021

  9,870,567  $99  $123,686  $152,687  $(1,760

)

 $274,712 

Net income

  -   -   -   4,946   -   4,946 

Other comprehensive income:

                        

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 $8

  -   -   -   -   25   25 

Share-based compensation expense

  -   -   597   -   -   597 

Balances, September 30, 2021

  9,870,567  $99  $124,283  $157,633  $(1,706

)

 $280,309 

 

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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, 2021

  9,870,567  $99  $125,062  $159,904  $(1,682

)

 $283,383 

Net income

  -   -   -   23,188   -   23,188 

Other comprehensive income (loss):

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   66   66 

Unrealized loss on foreign currency forward contracts designated as cash flow hedges, net of tax benefit of $83

  -   -   -   -   (245)  (245)

Unrealized gain on interest rate swap designated as cash flow hedge, net of tax expense of $218

  -   -   -   -   661   661 

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

  56,793   -   (853)  -   -   (853)

Share-based compensation expense

  -   -   2,477   -   -   2,477 

Balances, September 30, 2022

  9,927,360  $99  $126,686  $183,092  $(1,200

)

 $308,677 

 

                  

Accumulated

     
          

Additional

      

Other

  

Total

 
  

Common Stock

  

Paid-In-

  

Retained

  

Comprehensive

  

Stockholders’

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Loss

  

Equity

 
                         

Balances, December 31, 2020

  9,805,437  $98  $123,013  $148,381  $(1,866

)

 $269,626 

Net income

  -   -   -   9,252   -   9,252 

Other comprehensive income:

                        

Pension liability adjustment, net of tax expense of $0

  -   -   -   -   87   87 

Unrealized gain on foreign currency forward contracts designated as cash flow hedges, net of tax expense of $21

  -   -   -   -   73   73 

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

  65,130   1   (1,167

)

  -   -   (1,166

)

Share-based compensation expense

  -   -   2,437   -   -   2,437 

Balances, September 30, 2021

  9,870,567  $99  $124,283  $157,633  $(1,706

)

 $280,309 

 

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

 

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NORTHWEST PIPE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  

Nine Months Ended September 30,

 
  

2022

  

2021

 

Cash flows from operating activities:

        

Net income

 $23,188  $9,252 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        

Depreciation and finance lease amortization

  9,321   8,358 

Amortization of intangible assets

  3,369   947 

Deferred income taxes

  (3)  (89

)

Share-based compensation expense

  2,477   2,437 

Other, net

  (305)  106 
Changes in operating assets and liabilities:        

Trade and other receivables

  (21,588)  3,181 

Contract assets, net

  3,531   (35,055

)

Inventories

  (11,927)  (13,813

)

Prepaid expenses and other assets

  8,789   6,383 

Accounts payable

  8,350   6,725 

Accrued and other liabilities

  315   (2,057

)

Net cash provided by (used in) operating activities

  25,517   (13,625

)

Cash flows from investing activities:

        

Purchases of property and equipment

  (11,792)  (8,126

)

Other investing activities

  (288)  304 

Net cash used in investing activities

  (12,080)  (7,822

)

Cash flows from financing activities:

        

Borrowings on line of credit

  121,103   4,720 

Repayments on line of credit

  (136,047)  (2,567

)

Borrowings on other debt  3,525   - 

Payments on other debt

  -   (13,762

)

Payments on finance lease obligations

  (409)  (297

)

Tax withholdings related to net share settlements of equity awards

  (853)  (1,166

)

Other financing activities

  (47)  (220

)

Net cash used in financing activities

  (12,728)  (13,292

)

Change in cash and cash equivalents

  709   (34,739

)

Cash and cash equivalents, beginning of period

  2,997   37,927 

Cash and cash equivalents, end of period

 $3,706  $3,188 
         

Noncash investing and financing activities:

        

Accrued property and equipment purchases

 $614  $756 

Accrued consideration in acquisition of business

 $1,820  $- 

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

 $26  $4,669 

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

 $894  $855 

 

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

 

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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 performance of the Company and makes decisions regarding the allocation of resources.

 

In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, the Company manufactures high-quality precast and reinforced concrete products; water, wastewater, and stormwater equipment; 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.

 

Effective in the fourth quarter of 2021, as a result of the acquisition of Park Environmental Equipment, LLC (“ParkUSA”), the Company revised its historical one segment position and identified the new operating segments, SPP and Precast, to align with changes made in its internal management structure and its reporting structure of financial information used to assess performance and allocate resources. See Note 15, “Segment Information” for detailed descriptions of these segments. As a result, certain amounts from the prior year financial statements have been reclassified in order to conform to the current year presentation.

 

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, 2021 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, 2021 (“2021 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 2021 Form 10‑K.

 

Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2022.

 

 

2.

Business Combination

 

On October 5, 2021, the Company completed the acquisition of 100% of Park Environmental Equipment, LLC (ParkUSA) for a purchase price of $90.2 million in cash which is included in the Precast segment for all periods following the acquisition date. ParkUSA is a precast concrete and steel fabrication-based company that develops and manufactures water, wastewater, and environmental solutions. Operations continue with ParkUSA’s previous management and workforce at its three Texas manufacturing facilities located in Houston, Dallas, and San Antonio.

 

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The following table summarizes the purchase consideration and fair value of the assets acquired and liabilities assumed as of October 5, 2021 (in thousands):

 

Assets

    

Cash and cash equivalents

 $278 

Trade and other receivables

  11,034 

Inventories

  12,773 

Prepaid expenses and other

  293 

Property and equipment

  8,076 

Operating lease right-of-use assets

  58,301 

Intangible assets

  31,000 

Deferred income taxes

  347 

Total assets acquired

  122,102 
     

Liabilities

    

Accounts payable

  2,029 

Accrued liabilities

  4,067 

Operating lease liabilities

  58,301 

Total liabilities assumed

  64,397 
     

Goodwill

  32,519 
     

Total purchase consideration

 $90,224 

 

The tangible and intangible assets acquired and liabilities assumed were recognized based on their estimated fair values on the acquisition date, with the excess purchase consideration recorded as goodwill. 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 and nine months ended September 30, 2022 which resulted in a $1.8 million increase in goodwill and purchase consideration related to the settlement of working capital. The measurement period for the ParkUSA acquisition was complete as of September 30, 2022.

 

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

  10.0  $19,800 

Trade names and trademarks

  10.0   9,600 

Patents

  21.0   1,300 

Backlog

  0.6   300 

Total intangible assets

  10.2  $31,000 

 

Goodwill arose from the acquisition of an assembled workforce, expansion of product offerings, and management’s industry know-how, and is deductible for tax purposes.

 

The Company incurred transaction costs associated with this acquisition of $0 and $0.1 million during the three and nine months ended September 30, 2022, respectively and $0.6 million and $0.8 million during the three and nine months ended September 30, 2021, respectively. These transaction costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

 

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Unaudited Pro Forma Disclosures

 

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

 

  Three Months Ended  Nine Months Ended 
  

September 30, 2021

  

September 30, 2021

 
         

Net sales

 $105,345  $283,005 

Net income

  2,477   12,247 

 

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 of ParkUSA 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 ParkUSA. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of ParkUSA 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 of ParkUSA had been outstanding since January 1 of the year prior to the acquisition. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

 

 

3.

Inventories

 

Inventories consist of the following (in thousands):

 

  

September 30, 2022

  

December 31, 2021

 
         

Raw materials

 $52,915  $44,697 

Work-in-process

  3,817   3,018 

Finished goods

  12,646   10,096 

Supplies

  2,200   1,840 

Total inventories

 $71,578  $59,651 

 

 

4.

Goodwill

 

The Company has recorded goodwill in connection with its business acquisitions within the Precast reportable segment. The changes in the carrying amount of goodwill for the nine months ended September 30, 2022 were as follows (in thousands):

 

Goodwill, December 31, 2021

 $53,684 

Measurement period adjustment (Note 2)

  1,820 

Goodwill, September 30, 2022

 $55,504 

 

 

5.

Current Debt

 

In August 2022, the Company entered into an Interim Funding Agreement (“IFA”) with Wells Fargo Equipment Finance, Inc. (“WFEF”) allowing for aggregate interim funding advances up to $13.5 million of equipment purchased for a new reinforced concrete pipe mill, to be converted into a term loan upon final delivery and acceptance of the financed equipment. The IFA bears interest at the Term Secured Overnight Finance Rate plus 1.75%, requires monthly payments of accrued interest, and grants a security interest in the equipment to WFEF. As of September 30, 2022, the outstanding balance was $3.5 million, which is classified as a current liability since there is not a firm commitment for long-term debt financing.

 

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6.

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, 2022

                

Financial assets:

                

Deferred compensation plan

 $3,410  $2,902  $508  $- 

Interest rate swaps

  879   -   879   - 

Foreign currency forward contracts

  1,123   -   1,123   - 

Total financial assets

 $5,412  $2,902  $2,510  $- 
                 

Financial liabilities:

                

Foreign currency forward contracts

 $(1,209

)

 $-  $(1,209

)

 $- 
                 

As of December 31, 2021

                

Financial assets:

                

Deferred compensation plan

 $4,321  $3,830  $491  $- 

Foreign currency forward contracts

  17   -   17   - 

Total financial assets

 $4,338  $3,830  $508  $- 
                 

Financial liabilities:

                

Foreign currency forward contracts

 $(661

)

 $-  $(661

)

 $- 

 

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 borrowings on the line of credit approximate fair value due to the short-term nature of these instruments.

 

 

7.

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.

 

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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, 2022, the total notional amount of the foreign currency forward contracts was $17.8 million (CAD$24.6 million) and $7.3 million (EUR$7.4 million), which included $0.7 million (CAD$1.0 million) of foreign currency forward contracts not designated as cash flow hedges. As of December 31, 2021, the total notional amount of the foreign currency forward contracts was $19.0 million (CAD$24.1 million), and all foreign currency forward contracts were designated as cash flow hedges. As of September 30, 2022, the Company’s foreign currency forward contracts mature at various dates through October 2023 and are subject to an enforceable master netting arrangement.

 

As of September 30, 2022, the interest rate swap, which effectively converts a portion of the Company’s variable-rate debt to fixed-rate debt, was designated as cash flow hedge. The Company receives floating interest payments monthly based on the Secured Overnight Financing Rate (“SOFR”) and pays a fixed rate of 1.941% to the counterparty. As of September 30, 2022, the total notional amount was $31.7 million, which amortizes ratably on a monthly basis to zero by the April 2024 maturity date.

 

On August 9, 2022, the Company entered into an interest rate swap transaction which will begin April 3, 2023 at a notional amount of $15.0 million, which will amortize ratably on a monthly basis to zero by the April 2028 maturity date. The Company will receive floating interest payments monthly based on the 30‑day Average SOFR and will pay a fixed rate of 2.96% to the counterparty.

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Foreign currency forward contracts:

                

Net sales

 $599  $145  $841  $44 

Property and equipment

  32   -   (95)  - 
                 

Interest rate swaps:

                

Interest expense

  4   -   (78)  - 

Total

 $635  $145  $668  $44 

 

As of September 30, 2022, unrealized pretax gains (losses) on outstanding cash flow hedges in Accumulated other comprehensive loss was $0.3 million, of which $0.4 million, $(1.1) million, and $0.6 million are expected to be reclassified to Net sales, Property and equipment, and Interest expense, respectively, within the next twelve months as a result of underlying hedged transactions also being recorded in these line items. See Note 13, “Accumulated Other Comprehensive Loss” for additional information regarding foreign currency forward contract gains and losses.

 

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8.

Stockholders’ Equity

 

At-the-Market Offering

 

On September 2, 2022, the Company entered into an Open Market Sale Agreement (the “At-the-Market Offering”) with Jefferies LLC (“Jefferies”), pursuant to which the Company may issue and sell shares of its common stock, par value $0.01 per share, having aggregate offering sales proceeds of up to $50,000,000 (the “Shares”) from time to time through Jefferies as its sales agent. The Company may sell the Shares in amounts and at times to be determined by the Company from time to time subject to the terms and conditions of the At-the-Market Offering, but it has no obligation to sell any of the Shares under the At-the-Market Offering. The Shares to be sold under the At-the-Market Offering, if any, will be offered and sold pursuant to the Company’s shelf registration statement on Form S‑3 (File No. 333‑249637) filed with the Securities and Exchange Commission, which became effective on November 3, 2020, and the prospectus supplement dated September 2, 2022 filed by the Company. The Company will pay Jefferies a cash commission of up to 3.0% of gross proceeds from the sale of the Shares pursuant to the At-the-Market Offering. The Company has also agreed to provide Jefferies with customary indemnification and contribution rights. No proceeds were raised under the At-the-Market Offering during the three and nine months ended September 30, 2022.

 

 

9.

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 has one inactive stock incentive plan, the 2007 Stock Incentive Plan, under which previously granted awards remain outstanding.

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Cost of sales

 $474  $202  $822  $685 

Selling, general, and administrative expense

  695   395   1,655   1,752 

Total

 $1,169  $597  $2,477  $2,437 

 

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 over a specified period of time. RSUs and PSAs are service-based awards that vest according to the terms of the grant. PSAs have performance-based payout conditions.

 

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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, 2021

  161,131  $30.26 

RSUs and PSAs granted

  116,622   30.68 

Unvested RSUs and PSAs canceled

  (8,248

)

  31.18 

RSUs and PSAs vested (2)

  (68,581

)

  29.29 

Unvested RSUs and PSAs as of September 30, 2022

  200,924   30.80 

 

(1)

The number of PSAs disclosed in this table are at the target level of 100%.

  

(2)

For the PSAs vested on March 31, 2022, 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 141% for the 2020-2021 performance period and 93% for the 2021 performance period.

 

The unvested balance of RSUs and PSAs as of September 30, 2022 includes approximately 149,000 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, 2022, unrecognized compensation expense related to the unvested portion of the Company’s RSUs and PSAs was $4.6 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, 2022 and 2021, stock awards of 11,380 shares and 12,606 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 $30.75 in 2022 and $30.94 in 2021.

 

 

10.

Commitments and Contingencies

 

Portland Harbor Superfund Site

 

In December 2000, a section of the lower Willamette River known as the Portland Harbor Superfund Site was included on the National Priorities List at the request of the United States Environmental Protection Agency (“EPA”). While the Company’s Portland, Oregon manufacturing facility does not border the Willamette River, an outfall from the facility’s stormwater system drains into a neighboring property’s privately owned stormwater system and slip. Also in December 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 February 2016, and the feasibility study in June 2016, which identified multiple remedial alternatives. In January 2017, the EPA issued its Record of Decision selecting the remedy for cleanup at the Portland Harbor Superfund Site, which it believes will cost approximately $1 billion 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 Condensed 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.

 

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

 

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

 

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

 

All Sites

 

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

 

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, 2022, the Company’s commitments include approximately $7.3 million relating to its investment in a new reinforced concrete pipe mill for which the Company has not yet received the equipment.

 

Guarantees

 

The Company has entered into certain letters of credit that total $1.1 million as of September 30, 2022. The letters of credit relate to workers’ compensation insurance.

 

 

11.

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.

 

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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.

 

Revisions in contract estimates resulted in an increase (decrease) in SPP net sales of $0.2 million and $(0.2) million for the three and nine months ended September 30, 2022, respectively, and approximately $0 and $2.1 million for the three and nine months ended September 30, 2021, respectively.

 

Precast revenue for water infrastructure concrete pipe and precast concrete products is recognized at the time control is transferred to customers, 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.

 

The Company does not recognize revenue on a contract until the contract has approval and commitment from both parties, the contract rights and payment terms can be identified, the contract has commercial substance, and its collectability is probable.

 

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,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Over time (Engineered Steel Pressure Pipe)

 $83,663  $69,439  $235,446  $188,244 

Point in time (Precast Infrastructure and Engineered Systems)

  39,321   15,204   115,391   42,522 

Net sales

 $122,984  $84,643  $350,837  $230,766 

 

Contract Assets and Liabilities

 

Contract assets primarily represent revenue earned over time but not yet billable based on the terms of the contracts. These amounts will be billed based on the terms of the contracts, which 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 Company recognized revenue that was included in the contract liabilities balance at the beginning of each period of $2.8 million and $2.6 million during the three and nine months ended September 30, 2022, respectively and $1.5 million and $6.2 million during the three and nine months ended September 30, 2021, respectively.

 

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, 2022, backlog was $295 million. The Company expects to recognize 25% of the remaining performance obligations in 2022, 52% in 2023, and the balance thereafter.

 

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12.

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 2018.

 

The Company recorded income tax expense at an estimated effective income tax rate of 26.3% and 26.4% for the three and nine months ended September 30, 2022, respectively and 27.9% and 26.1% for the three and nine months ended September 30, 2021, respectively. The Company’s estimated effective income tax rates for the three and nine months ended September 30, 2022 and 2021 were primarily impacted by non-deductible permanent differences.

 

 

13.

Accumulated Other Comprehensive Loss

 

The following table summarizes 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 on Interest Rate Swap Designated as Cash Flow Hedge

  

Total

 
                 

Balances, December 31, 2021

 $(1,487

)

 $(195

)

 $-  $(1,682

)

                 

Other comprehensive income (loss) before reclassifications

  61   (383)  602   280 

Amounts reclassified from Accumulated other comprehensive loss

  5   138   59   202 

Net current period other comprehensive income (loss)

  66   (245)  661   482 
                 

Balances, September 30, 2022

 $(1,421

)

 $(440

)

 $661  $(1,200

)

 

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

 

  

Amount reclassified from

 

Affected line item

  Accumulated Other Comprehensive Loss in the Condensed
  Three Months Ended  Nine Months Ended Consolidated
Details about Accumulated Other 

September 30,

  

September 30,

 Statements of
Comprehensive Loss Components 2022  

2021

  

2022

  

2021

 Operations
                  

Pension liability adjustment:

                 

Net periodic pension cost:

                 

Service cost

 $(2) $(4

)

 $(5) $(12

)

Cost of sales

   (2)  (4

)

  (5)  (12

)

Net of tax

                  

Unrealized gain (loss) on foreign currency forward contracts:

                 

Gain (loss) on cash flow hedges

  35   (15

)

  (56)  (71

)

Net sales

Loss on cash flow hedges

  -   -   (127)  - 

Property and equipment

Associated income tax benefit

  22   4   45   18 

Income tax expense

   57   (11

)

  (138)  (53

)

Net of tax

                  

Unrealized gain (loss) on interest rate swap:

                 

Gain (loss) on cash flow hedge

  4   -   (78)  - 

Interest expense

Associated income tax (expense) benefit

  (1)  -   19   - 

Income tax expense

   3   -   (59)  - 

Net of tax

                  

Total reclassifications for the period

 $58  $(15

)

 $(202) $(65

)

 

 

 

14.

Net Income per Share

 

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

 

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

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Net income

 $9,956  $4,946  $23,188  $9,252 
                 

Basic weighted-average common shares outstanding

  9,927   9,871   9,909   9,849 

Effect of potentially dilutive common shares (1)

  83   50   79   69 

Diluted weighted-average common shares outstanding

  10,010   9,921   9,988   9,918 
                 

Net income per common share:

                

Basic

 $1.00  $0.50  $2.34  $0.94 

Diluted

 $0.99  $0.50  $2.32  $0.93 

 

(1)

The weighted-average number of antidilutive shares not included in the computation of diluted net income per share was approximately 77,000 for the three months ended September 30, 2021. There were no antidilutive shares for the three and nine months ended September 30, 2022 and the nine months ended September 30, 2021.

 

 

15.

Segment Information

 

The operating segments reported below are based on the nature of the products sold and the manufacturing process used by the Company and are the segments of the Company for which separate financial information is available and for which operating results are regularly evaluated by the Company’s chief operating decision maker, its Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance. Management evaluates segment performance based on gross profit. The Company does not allocate selling, general, and administrative expenses, interest, other non-operating income or expense items, or taxes to segments.

 

The Company’s Engineered Steel Pressure Pipe segment (SPP) manufactures large-diameter, high-pressure steel pipeline systems for use in water infrastructure applications, which are primarily related to drinking water systems. These products are also used for hydroelectric power systems, wastewater systems, and other applications. In addition, SPP makes products for industrial plant piping systems and certain structural applications. SPP has manufacturing facilities located in Adelanto and Tracy, California; St. Louis, Missouri; Portland, Oregon; Saginaw, Texas; Parkersburg, West Virginia; and San Luis Río Colorado, Mexico.

 

The Company’s Precast Infrastructure and Engineered Systems segment (Precast) manufactures high-quality precast and reinforced concrete products, including manholes, box culverts, vaults, catch basins, oil water separators, pump lift stations, biofiltration, and other environmental and engineered solutions. Precast has manufacturing facilities located in Dallas, Houston, and San Antonio, Texas; and Orem, Salt Lake City, and St. George, Utah.

 

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The following table disaggregates revenue and gross profit based on the Company’s reportable segments (in thousands):

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net sales:

                

Engineered Steel Pressure Pipe

 $83,663  $69,439  $235,446  $188,244 

Precast Infrastructure and Engineered Systems

  39,321   15,204   115,391   42,522 

Total

 $122,984  $84,643  $350,837  $230,766 
                 

Gross profit:

                

Engineered Steel Pressure Pipe

 $14,196  $8,844  $32,490  $22,613 

Precast Infrastructure and Engineered Systems

  10,922   3,519   31,494   8,063 

Total

 $25,118  $12,363  $63,984  $30,676 

 

 

16.

Recent Accounting and Reporting Developments

 

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s Condensed Consolidated Financial Statements and disclosures in Notes to Condensed Consolidated Financial Statements, from those disclosed in the Company’s 2021 Form 10‑K.

 

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

 

Forward-Looking Statements

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10‑Q for the quarter ended September 30, 2022 (“2022 Q3 Form 10‑Q”) contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on current expectations, estimates, and projections about our business, management’s beliefs, and assumptions made by management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “forecasts,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements as a result of a variety of important factors. While it is impossible to identify all such factors, those that could cause actual results to differ materially from those estimated by us include:

 

 

•

changes in demand and market prices for our products;
 

•

product mix;
 

•

bidding activity and order cancelations;
 

•

timing of customer orders and deliveries;
 

•

production schedules;
 

•

price and availability of raw materials;
 

•

excess or shortage of production capacity;
 

•

international trade policy and regulations;
 

•

changes in tariffs and duties imposed on imports and exports and related impacts on us;
 

•

interest rate risk and changes in market interest rates, including the impact on our customers and related demand for our products;
 

•

our ability to identify and complete internal initiatives and/or acquisitions in order to grow our business;
 

•

our ability to effectively integrate Park Environmental Equipment, LLC (“ParkUSA”) and other acquisitions into our business and operations and achieve significant administrative and operational cost synergies and accretion to financial results;
  • effects of security breaches, computer viruses, and cybersecurity incidents;
 

•

impacts of U.S. tax reform legislation on our results of operations;
 

•

adequacy of our insurance coverage;
 

•

supply chain challenges;
 

•

labor shortages;
 

•

ongoing military conflicts in Ukraine and related consequences;
 

•

operating problems at our manufacturing operations including fires, explosions, inclement weather, and floods and other natural disasters;
 

•

impacts of pandemics, epidemics, or other public health emergencies, such as coronavirus disease 2019 (“COVID‑19”); and
 

•

other risks discussed in our Annual Report on Form 10‑K for the year ended December 31, 2021 (“2021 Form 10‑K”) and from time to time in our other Securities and Exchange Commission (“SEC”) filings and reports.

 

Such forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this 2022 Q3 Form 10‑Q. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.

 

Overview

 

Northwest Pipe Company is a leading manufacturer of water related infrastructure products. In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, we manufacture high-quality precast and reinforced concrete products; water, wastewater, and stormwater equipment; 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, we provide solution-based products for a wide range of markets under the ParkUSA, Geneva Pipe and Precast, Permalok®, and Northwest Pipe Company lines. Our diverse team is committed to quality and innovation while demonstrating our core values of accountability, commitment, and teamwork. We are headquartered in Vancouver, Washington, and have 13 manufacturing facilities across North America.

 

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Our water infrastructure products are sold generally to installation contractors, who include our products in their bids to federal, state, and municipal agencies, privately-owned water companies, or developers for specific projects. We believe our sales are substantially driven by spending on urban growth and new water infrastructure with a recent trend towards spending on water infrastructure replacement, repair, and upgrade. Within the total range of products, our steel pipe tends to fit the larger-diameter, higher-pressure pipeline applications, while our precast concrete products mainly serve stormwater and sanitary sewer systems.

 

In October 2021 we acquired Park Environmental Equipment, LLC (ParkUSA), a precast concrete and steel fabrication-based company in Texas that develops and manufactures water, wastewater, and environmental solutions. Effective in the fourth quarter of 2021, as a result of the acquisition of ParkUSA, we revised our historical one segment position and identified the new operating segments, Engineered Steel Pressure Pipe (“SPP”) and Precast Infrastructure and Engineered Systems (“Precast”), to align with changes made in our internal management structure and our reporting structure of financial information used to assess performance and allocate resources. For detailed descriptions of these segments, see Note 15, “Segment Information” of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2022 Q3 Form 10‑Q.

 

Our Current Economic Environment

 

Demand for our Precast products is generally influenced by general economic conditions such as housing starts, population growth, interest rates, and rates of inflation. According to the United States Census Bureau, privately-owned housing starts in September 2022 were at a seasonally adjusted annual rate of 1.4 million, compared to a seasonally adjusted annual rate of 1.6 million in June 2022, and the population of the United States is expected to increase by approximately 2 million people in 2022. Additionally, while recent and anticipated future increases in the federal funds rate by the Federal Reserve are expected to temper demand for housing, the immediate impacts have been muted by the demand for housing, stymied by recent labor and commodity shortages currently limiting the supply of new homes.

 

Our SPP projects are often planned for many years in advance, as we operate that business with a long-term time horizon for which the projects are sometimes part of 50‑year build-out plans. Long-term demand for water infrastructure projects in the United States appears strong. Even though recent demand for engineered steel pressure pipe has improved, a shift to a recessionary economy could strain governmental and water agency budgets and financing which could impact prospects for our business in the medium term. Additionally, we have experienced effects of the current labor shortage at certain manufacturing facilities, for which we are mitigating the impact through the use of overtime and third-party outsourcing as warranted. It is possible that a prolonged shortage of qualified, available workers could have an adverse effect on our business.

 

Purchased steel typically represents between 25% and 35% of cost of sales, and higher steel costs generally result in higher selling prices and revenue; however, volatile fluctuations in steel markets can affect our business. SPP contracts are generally quoted on a fixed-price basis, and volatile steel markets can result in selling prices that no longer correlate to the cost available at the time of steel purchase. Steel markets have remained volatile through the first three quarters of 2022, with prices dropping significantly in the third quarter. The reduced steel costs have begun and will continue to be realized in our financial results.

 

Russia’s invasion of Ukraine is considered to be largely responsible for increased fuel costs, increasing our delivery costs. While these costs are generally passed along to the customer, there can be no assurance that all of these increased costs will be recouped, which could be material until world economic forces stabilize. Freight costs represent approximately 5% of cost of sales of our SPP business, for which the risk is more significant due to the long lead times between when an SPP contract is entered and the product is shipped.

 

Implementation of Enterprise Resource Planning System at ParkUSA

 

In the third quarter of 2022, we implemented our enterprise resource planning system at the ParkUSA manufacturing facilities. Due primarily to an underinvestment in systems preceding our acquisition, and vastly broader product offerings, this implementation has caused, and may continue to cause, disruption and inefficiencies in ParkUSA’s operations.

 

Impact of the COVID‑19 Pandemic on Our Business

 

In March 2020, the World Health Organization declared COVID‑19 a pandemic. The impacts of the COVID‑19 pandemic, and the resurgence of new COVID‑19 virus variants, on global and domestic economic conditions, including the impacts of labor and raw material shortages, the long-term potential to reduce or delay funding of municipal projects, and the continued disruptions to and volatility in the financial markets remain uncertain. While the COVID‑19 pandemic has caused various direct and indirect financial impacts associated with project bidding, execution, and product deliveries over the past couple of years, we remain unable to predict the ultimate impact that the COVID‑19 pandemic may have on our business, future results of operations, financial position, or cash flows. We continue to monitor the impact of the COVID‑19 pandemic on all aspects of our business.

 

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Results of Operations

 

The following tables set forth, for the periods indicated, certain financial information regarding costs and expenses expressed in dollars (in thousands) and as a percentage of total net sales.

 

   

Three Months Ended September 30, 2022

    

Three Months Ended September 30, 2021

  
       $    

% of Net Sales

       $    

% of Net Sales

  
                                 

Net sales:

                                

Engineered Steel Pressure Pipe

   $ 83,663       68.0

%

   $ 69,439       82.0

%

Precast Infrastructure and Engineered Systems

     39,321       32.0       15,204       18.0  

Total net sales

     122,984       100.0       84,643       100.0  

Cost of sales:

                                

Engineered Steel Pressure Pipe

     69,467       56.5       60,595       71.6  

Precast Infrastructure and Engineered Systems

     28,399       23.1       11,685       13.8  

Total cost of sales

     97,866       79.6       72,280       85.4  

Gross profit:

                                

Engineered Steel Pressure Pipe

     14,196       11.5       8,844       10.4  

Precast Infrastructure and Engineered Systems

     10,922       8.9       3,519       4.2  

Total gross profit

     25,118       20.4       12,363       14.6  

Selling, general, and administrative expense

     10,654       8.6       5,562       6.6  

Operating income

     14,464       11.8       6,801       8.0  

Other income

     11       -       171       0.2  

Interest expense

     (964

)

     (0.8

)

     (112

)

     (0.1

)

Income before income taxes

     13,511       11.0       6,860       8.1  

Income tax expense

     3,555       2.9       1,914       2.3  

Net income

   $ 9,956       8.1

%

   $ 4,946       5.8

%

 

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Nine Months Ended September 30, 2022

    

Nine Months Ended September 30, 2021

  
       $    

% of Net Sales

        $    

% of Net Sales

  
                                 

Net sales:

                                

Engineered Steel Pressure Pipe

   $ 235,446       67.1

%

   $ 188,244       81.6

%

Precast Infrastructure and Engineered Systems

     115,391       32.9       42,522       18.4  

Total net sales

     350,837       100.0       230,766       100.0  

Cost of sales:

                                

Engineered Steel Pressure Pipe

     202,956       57.9       165,631       71.8  

Precast Infrastructure and Engineered Systems

     83,897       23.9       34,459       14.9  

Total cost of sales

     286,853       81.8       200,090       86.7  

Gross profit:

                                

Engineered Steel Pressure Pipe

     32,490       9.2       22,613       9.8  

Precast Infrastructure and Engineered Systems

     31,494       9.0       8,063       3.5  

Total gross profit

     63,984       18.2       30,676       13.3  

Selling, general, and administrative expense

     30,149       8.6       17,729       7.7  

Operating income

     33,835       9.6       12,947       5.6  

Other income

     56       -       260       0.1  

Interest expense

     (2,393

)

     (0.6

)

     (687

)

     (0.3

)

Income before income taxes

     31,498       9.0       12,520       5.4  

Income tax expense

     8,310       2.4       3,268       1.4  

Net income

   $ 23,188       6.6

%

   $ 9,252       4.0

%

 

Three and Nine Months Ended September 30, 2022 Compared to Three and Nine Months Ended September 30, 2021

 

Net sales. Net sales increased 45.3% to $123.0 million in the third quarter of 2022 compared to $84.6 million in the third quarter of 2021 and increased 52.0% to $350.8 million in the first nine months of 2022 compared to $230.8 million in the first nine months of 2021.

 

SPP net sales were $83.7 million in the third quarter of 2022 compared to $69.4 million in the third quarter of 2021 and $235.4 million in the first nine months of 2022 compared to $188.2 million in the first nine months of 2021. The 20.5% increase in the third quarter of 2022 compared to the third quarter of 2021 was driven by a 17% increase in tons produced resulting from changes in project timing and a 3% increase in selling price per ton due to changes in product mix. The 25.1% increase in the first nine months of 2022 compared to the first nine months of 2021 was driven by a 37% increase in selling price per ton due to increased materials costs and changes in product mix, partially offset by a 9% decrease in tons produced resulting from changes in project timing. Bidding activity, backlog, and production levels may vary significantly from period to period affecting sales volumes.

 

Precast net sales were $39.3 million in the third quarter of 2022 compared to $15.2 million in the third quarter of 2021 and $115.4 million in the first nine months of 2022 compared to $42.5 million in the first nine months of 2021. The 158.6% increase in the third quarter of 2022 compared to the third quarter of 2021 was primarily due to the ParkUSA operations acquired in October 2021, which contributed $20.5 million in net sales. In addition, the segment realized a 23.9% increase in net sales at the pre-existing precast operations due to a 49% increase in selling prices due to the high demand for our concrete products coupled with increased material costs, partially offset by a 17% decrease in volume shipped due to changes in product mix. The 171.4% increase in the first nine months of 2022 compared to the first nine months of 2021 was primarily due to the acquired ParkUSA operations, which contributed $64.4 million in net sales. In addition, the segment realized a 20.0% increase in net sales at the pre-existing precast operations due to a 46% increase in selling prices due to the high demand for our concrete products coupled with increased material costs, partially offset by an 18% decrease in volume shipped due to changes in product mix.

 

Gross profit. Gross profit increased 103.2% to $25.1 million (20.4% of net sales) in the third quarter of 2022 compared to $12.4 million (14.6% of net sales) in the third quarter of 2021 and increased 108.6% to $64.0 million (18.2% of net sales) in the first nine months of 2022 compared to $30.7 million (13.3% of net sales) in the first nine months of 2021.

 

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SPP gross profit increased 60.5% to $14.2 million (17.0% of SPP net sales) in the third quarter of 2022 compared to $8.8 million (12.7% of SPP net sales) in the third quarter of 2021 and increased 43.7% to $32.5 million (13.8% of SPP net sales) in the first nine months of 2022 compared to $22.6 million (12.0% of SPP net sales) in the first nine months of 2021. The increase in the third quarter of 2022 compared to the third quarter of 2021 was due to increased production volume and product pricing, while the increase in the first nine months of 2022 compared to the first nine months of 2021 was due entirely to improved product pricing. SPP gross profit in the first nine months of 2022 was reduced, in part, as a result of a $2.0 million product liability settlement reserve recorded in the first quarter.

 

Precast gross profit increased 210.4% to $10.9 million (27.8% of Precast net sales) in the third quarter of 2022 compared to $3.5 million (23.1% of Precast net sales) in the third quarter of 2021 and increased 290.6% to $31.5 million (27.3% of Precast net sales) in the first nine months of 2022 compared to $8.1 million (19.0% of Precast net sales) in the first nine months of 2021. The increase was due to contributions from the ParkUSA operations, as well as improved pricing at the pre-existing precast operations.

 

Selling, general, and administrative expense. Selling, general, and administrative expense increased 91.5% to $10.7 million (8.7% of net sales) in the third quarter of 2022 compared to $5.6 million (6.6% of net sales) in the third quarter of 2021 and increased 70.1% to $30.1 million (8.6% of net sales) in the first nine months of 2022 compared to $17.7 million (7.7% of net sales) in the first nine months of 2021. The increase in the third quarter of 2022 compared to the third quarter of 2021 was primarily due to the acquired ParkUSA operations, including $1.3 million in higher compensation-related expense and $0.8 million in higher amortization expense. We also incurred $3.1 million in higher compensation-related expense, $0.2 million in higher travel expense, and $0.5 million in lower professional fees compared to the third quarter of 2021. The increase in the first nine months of 2022 compared to the first nine months of 2021 was primarily due to the acquired ParkUSA operations, including $4.4 million in higher compensation-related expense and $2.4 million in higher amortization expense. We also incurred an additional $4.9 million in higher compensation-related expense and $0.5 million in higher travel expense compared to the first nine months of 2021.

 

Income taxes. Income tax expense was $3.6 million in the third quarter of 2022 (an effective income tax rate of 26.3%) compared to $1.9 million in the third quarter of 2021 (an effective income tax rate of 27.9%) and was $8.3 million in the first nine months of 2022 (an effective income tax rate of 26.4%) compared to $3.3 million in the first nine months of 2021 (an effective income tax rate of 26.1%). The estimated effective income tax rates for the third quarter of 2022 and 2021 and the first nine months of 2022 and 2021 were impacted by non-deductible permanent differences. The estimated effective income tax rate can change significantly depending on the relationship of permanent income tax differences and tax credits to estimated pre-tax income or loss and the changes in valuation allowances. Accordingly, the comparison of estimated effective income tax rates between periods is not meaningful in all situations.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Our principal sources of liquidity generally include operating cash flows and the Credit Agreement dated June 30, 2021 with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the lenders from time to time party thereto, including the initial sole lender, Wells Fargo (the “Lenders”), as amended by the Incremental Amendment dated October 22, 2021 and the Second Amendment to Credit Agreement dated April 29, 2022 (together, the “Amended Credit Agreement”). From time to time our long-term capital needs may be met through the issuance of long-term debt or additional equity. Our principal uses of liquidity generally include capital expenditures, working capital, organic growth initiatives, acquisitions, and debt service. Information regarding our cash flows for the nine months ended September 30, 2022 and 2021 are presented in our Condensed Consolidated Statements of Cash Flows contained in Part I – Item 1. “Financial Statements” of this 2022 Q3 Form 10‑Q, and are further discussed below. We are actively managing the business to maintain cash flow and believe we have liquidity to meet our anticipated funding requirements and other near-term obligations.

 

As of September 30, 2022, our working capital (current assets minus current liabilities) was $173.3 million compared to $164.1 million as of December 31, 2021. Cash and cash equivalents totaled $3.7 million and $3.0 million as of September 30, 2022 and December 31, 2021, respectively.

 

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Fluctuations in SPP working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. A portion of our revenues are recognized over time as the manufacturing process progresses; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary by project, and from period to period. As of September 30, 2022, Inventories and Accounts payable included $4.1 million of steel for which we expect to settle a quality claim with the supplier.

 

As of September 30, 2022, we had $71.8 million of outstanding revolving loan borrowings, $3.5 million of outstanding current debt, $95.0 million of operating lease liabilities, and $2.7 million of finance lease liabilities. As of December 31, 2021, we had $86.8 million of outstanding revolving loan borrowings, $98.4 million of operating lease liabilities, and $2.2 million of finance lease liabilities.

 

Net Cash Provided by (Used in) Operating Activities

 

Net cash provided by (used in) operating activities was $25.5 million in the first nine months of 2022 compared to $(13.6) million in the first nine months of 2021. Net income, adjusted for non-cash items, provided $38.0 million of operating cash flow in the first nine months of 2022 compared to $21.0 million of operating cash flow in the first nine months of 2021. The net change in working capital used was $12.5 million of operating cash flow in the first nine months of 2022 compared to $34.6 million of operating cash flow in the first nine months of 2021.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities was $12.1 million in the first nine months of 2022 compared to $7.8 million in the first nine months of 2021. Capital expenditures were $11.8 million in the first nine months of 2022 compared to $8.1 million in the first nine months of 2021, which was primarily for standard capital replacement. We currently expect capital expenditures in 2022 to be approximately $25 million to $26 million, which includes approximately $9 million of investment in our new reinforced concrete pipe mill and the remainder primarily for standard capital replacement.

 

Net Cash Used in Financing Activities

 

Net cash used in financing activities was $12.7 million in the first nine months of 2022 compared to $13.3 million in the first nine months of 2021. Net borrowings (repayments) on the line of credit were $(14.9) million in the first nine months of 2022 compared to $2.2 million in the first nine months of 2021. Net borrowings (repayments) on other debt were $3.5 million in the first nine months of 2022 compared to $(13.8) million in the first nine months of 2021.

 

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and additional borrowing capacity under the Amended Credit Agreement and other loans will be adequate to fund our working capital, debt service, and capital expenditure requirements for at least the next twelve months. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and finance and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may necessitate additional bank borrowings or other sources of funding. As previously discussed, we acquired ParkUSA in October 2021 which was funded primarily by borrowings on the line of credit.

 

On November 3, 2020, our shelf registration statement on Form S‑3 (Registration No. 333‑249637) covering the potential future sale of up to $150 million of our equity and/or debt securities or combinations thereof, was declared effective by the SEC. This shelf registration statement, which replaced the shelf registration statement on Form S‑3 that expired on September 15, 2020, provides another potential source of capital, in addition to other alternatives already in place. We cannot be certain that funding will be available on favorable terms or available at all. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. As of the date of this 2022 Q3 Form 10‑Q, we have not yet sold any securities under this registration statement, nor do we have an obligation to do so. Please refer to the factors discussed in Part I – Item 1A. “Risk Factors” in our 2021 Form 10‑K.

 

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On September 2, 2022, we entered into an Open Market Sale Agreement (the “At-the-Market Offering”) with Jefferies LLC (“Jefferies”), pursuant to which we may issue and sell shares of our common stock, par value $0.01 per share, having aggregate offering sales proceeds of up to $50,000,000 (the “Shares”) from time to time through Jefferies as our sales agent. We may sell the Shares in amounts and at times to be determined by us from time to time subject to the terms and conditions of the At-the-Market Offering, but we have no obligation to sell any of the Shares under the At-the-Market Offering. The Shares to be sold under the At-the-Market Offering, if any, will be offered and sold pursuant to our shelf registration statement on Form S‑3 discussed above, and the prospectus supplement dated September 2, 2022 filed by us. We will pay Jefferies a cash commission of up to 3.0% of gross proceeds from the sale of the Shares pursuant to the At-the-Market Offering. We have also agreed to provide Jefferies with customary indemnification and contribution rights. No proceeds were raised under the At-the-Market Offering during the three and nine months ended September 30, 2022.

 

Credit Agreement

 

The Amended Credit Agreement provides for a revolving loan, swingline loan, and letters of credit in the aggregate amount of up to $125 million (“Revolver Commitment”). The Amended Credit Agreement will expire, and all obligations outstanding will mature, on June 30, 2024. We may prepay outstanding amounts in our discretion without penalty at any time, subject to applicable notice requirements. As of September 30, 2022 under the Amended Credit Agreement, we had $71.8 million of outstanding revolving loan borrowings, $1.1 million of outstanding letters of credit, and additional borrowing capacity of $52 million. Based on our business plan and forecasts of operations, we expect to have sufficient credit available to support our operations for at least the next twelve months.

 

Revolving loans under the Amended Credit Agreement bear interest at rates related to, at our option and subject to the provisions of the Amended Credit Agreement, either: (i) Base Rate (as defined in the Amended Credit Agreement) plus the Applicable Margin; (ii) Adjusted Term Secured Overnight Financing Rate (“SOFR”) (as defined in the Amended Credit Agreement) plus the Applicable Margin; or (iii) Adjusted Daily Simple SOFR (as defined in the Amended Credit Agreement) plus the Applicable Margin. The “Applicable Margin” is 1.75% to 2.35%, depending on our Consolidated Senior Leverage Ratio (as defined in the Amended Credit Agreement) and the interest rate option chosen. Interest on outstanding revolving loans is payable monthly. Swingline loans under the Amended Credit Agreement bear interest at the Base Rate plus the Applicable Margin. The Amended Credit Agreement requires the payment of a commitment fee of between 0.30% and 0.40%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Amended Credit Agreement). Such fee is payable monthly in arrears. We are also obligated to pay additional fees customary for credit facilities of this size and type.

 

The letters of credit outstanding as of September 30, 2022 relate to workers’ compensation insurance. Based on the nature of these arrangements and our historical experience, we do not expect to make any material payments under these arrangements.

 

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 Lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, annual capital expenditures, certain investments, acquisitions, and dispositions, and other matters, all subject to certain exceptions. The Amended Credit Agreement requires us to regularly provide financial information to Wells Fargo and to maintain a consolidated senior leverage ratio no greater than 2.50 to 1.00 (subject to certain exceptions) and a minimum consolidated earnings before interest, taxes, depreciation, and amortization (as defined in the Amended Credit Agreement) of at least $31.5 million for the four consecutive fiscal quarters most recently ended. Pursuant to the Amended Credit Agreement, we have also agreed that we will not sell, assign, or otherwise dispose or encumber, any of our owned real property. The occurrence of an event of default could result in the acceleration of the obligations under the Amended Credit Agreement. We were in compliance with our financial covenants as of September 30, 2022. Based on our business plan and forecasts of operations, we believe we will remain in compliance with our financial covenants for the next twelve months.

 

Our obligations under the Amended Credit Agreement are secured by a senior security interest in substantially all of our and our subsidiaries’ assets.

 

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Recent Accounting Pronouncements

 

For a description of recent accounting pronouncements affecting our company, including the dates of adoption and estimated effects on financial position, results of operations, and cash flows, see Note 16, “Recent Accounting and Reporting Developments” of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2022 Q3 Form 10‑Q.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements included in Part I – Item 1. “Financial Statements” of this 2022 Q3 Form 10‑Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate all of our estimates, including those related to revenue recognition, business combinations, inventories, property and equipment, including depreciation and valuation, goodwill, intangible assets, including amortization, share-based compensation, allowance for doubtful accounts, income taxes, and litigation and other contingencies. Actual results may differ from these estimates under different assumptions or conditions.

 

There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2022 as compared to the critical accounting estimates disclosed in our 2021 Form 10‑K.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

For a discussion of our market risk associated with commodity prices and foreign currencies, see Part II – Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of our 2021 Form 10‑K.

 

Interest Rate Risk

 

Our debt bears interest at both fixed and variable rates. As of September 30, 2022 and December 31, 2021, we had $75.3 million and $86.8 million, respectively, of variable-rate debt outstanding. We have managed a portion of our variable-rate debt with an interest rate swap agreement to effectively convert a portion of our variable-rate debt to fixed-rate debt. The principal objective of this contract is to reduce the variability of the cash flows in interest payments associated with a portion of our variable-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. We have elected to apply the hedge accounting rules in accordance with authoritative guidance for this contract.

 

As of September 30, 2022, the total notional amount of the interest rate swap was $31.7 million, which will amortize ratably on a monthly basis to zero by the April 2024 maturity date. We receive floating interest payments monthly based on the SOFR and pay a fixed rate of 1.941% to the counterparty.

 

Assuming average interest rates and borrowings on variable-rate debt, a hypothetical 1.0%, or 100 basis points, change in interest rates would not have a material impact on our interest expense.

 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

In connection with the preparation of this Quarterly Report on Form 10‑Q for the quarter ended September 30, 2022, our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2022. As a result of the assessment, our CEO and CFO have concluded that, as of September 30, 2022, our disclosure controls and procedures were effective.

 

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As discussed in Note 2, “Business Combination” of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2022 Q3 Form 10‑Q, we completed the acquisition of 100% of Park Environmental Equipment, LLC (“ParkUSA”) on October 5, 2021. As part of our post-closing integration activities, we are engaged in the process of assessing the internal controls of ParkUSA. We have begun to integrate policies, processes, people, technology, and operations for the post-acquisition combined company, and we will continue to evaluate the impact of any related changes to internal control over financial reporting. As permitted for newly acquired businesses by interpretive guidance issued by the staff of the SEC, management has excluded the internal control over financial reporting of ParkUSA from the evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2022. We have reported the operating results of ParkUSA in our condensed consolidated statements of operations and cash flows from the acquisition date through September 30, 2022. As of September 30, 2022, total assets related to ParkUSA represented approximately 16.7% of our total assets, recorded on a preliminary basis as the measurement period for the business combination remained open as of September 30, 2022. Revenues from ParkUSA represented approximately 18.4% of our total consolidated revenues for the nine months ended September 30, 2022.

 

Changes in Internal Control over Financial Reporting

 

Except for changes in internal controls that we have made related to the integration of ParkUSA into the post-acquisition combined company, the most noteworthy of which are those controls impacted by the implementation of our enterprise resource planning system, there were no significant changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are party to a variety of legal actions arising out of the ordinary course of business. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material impact on our consolidated financial results. We are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines, penalties, and other costs in substantial amounts. See Note 10, “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2022 Q3 Form 10‑Q.

 

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this 2022 Q3 Form 10‑Q, the factors discussed in Part I – Item 1A. “Risk Factors” in our 2021 Form 10‑K and any subsequently filed quarterly reports on Form 10‑Q could materially affect our business, financial condition, or operating results. The risks described in our 2021 Form 10‑K and subsequent Form 10‑Q’s are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial, that may also materially adversely affect our business, financial condition, or operating results.

 

 

Item 6. Exhibits

 

(a) The exhibits filed as part of this 2022 Q3 Form 10‑Q are listed below:

 

Exhibit Number

  

Description
     

1.1

  

Open Market Sale AgreementSM, dated September 2, 2022 between Northwest Pipe Company and Jefferies LLC, incorporated by reference to the Company’s Current Report on Form 8‑K, as filed with the Securities and Exchange Commission on September 2, 2022
     

31.1

  

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     

31.2

  

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

29
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Exhibit Number

  

Description
     

32.1

  

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     

32.2

  

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
99.1   Interim Funding Agreement dated August 2, 2022 by and between Wells Fargo Equipment Finance, Inc. and Geneva Pipe and Precast Company
     

101.INS

  

Inline XBRL Instance Document
     

101.SCH

  

Inline XBRL Taxonomy Extension Schema Document
     

101.CAL

  

Inline XBRL Taxonomy Extension Calculation Document
     

101.DEF

  

Inline XBRL Taxonomy Definition Linkbase Document
     

101.LAB

  

Inline XBRL Taxonomy Extension Label Linkbase Document
     

101.PRE

  

Inline XBRL Taxonomy Extension Presentation Linkbase Document
     

104

  

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

SM “Open Market Sale Agreement” is a service mark of Jefferies LLC.

 

30
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SIGNATURES

 

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

 

Dated: November 9, 2022

 

 

 

NORTHWEST PIPE COMPANY
   
 

By: 

/s/ Scott Montross
     
   

Scott Montross
   

Director, President, and Chief Executive Officer
   

(principal executive officer)
     
 

By: 

/s/ Aaron Wilkins
     
   

Aaron Wilkins
   

Senior Vice President, Chief Financial Officer, and Corporate Secretary
   

(principal financial and accounting officer)

 

31

Exhibit 31.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Scott Montross, certify that:

 

 

1.

I have reviewed this Quarterly Report on Form 10‑Q of Northwest Pipe Company;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 9, 2022

By:

/s/ Scott Montross
   

Scott Montross
   

Director, President, and Chief Executive Officer
   

(principal executive officer)

 

 

Exhibit 31.2

 

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Aaron Wilkins, certify that:

 

 

1.

I have reviewed this Quarterly Report on Form 10‑Q of Northwest Pipe Company;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 9, 2022

By:

/s/ Aaron Wilkins
   

Aaron Wilkins
   

Senior Vice President, Chief Financial Officer, and

Corporate Secretary
   

(principal financial officer)

 

 

Exhibit 32.1

 

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Northwest Pipe Company (the “Company”) on Form 10‑Q for the period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott Montross, Director, President, and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Scott Montross

  

Scott Montross

  

Director, President, and Chief Executive Officer

  

November 9, 2022

  

 

 

Exhibit 32.2

 

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Northwest Pipe Company (the “Company”) on Form 10‑Q for the period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Aaron Wilkins, Senior Vice President, Chief Financial Officer, and Corporate Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ Aaron Wilkins

  

Aaron Wilkins

  

Senior Vice President, Chief Financial Officer, and Corporate Secretary

  

November 9, 2022

  

 

 

Exhibit 99.1

 

Interim Funding Agreement

Wells Fargo Equipment Finance, Inc. I 600 South 4th Street I MAC N9300-100 I Minneapolis, MN 55415
wellsfargo.jpg

This Agreement dated as of August 2, 2022 by and between Wells Fargo Equipment Finance, Inc. ("Creditor") and the undersigned lessee or purchaser or borrower from Creditor, as the case may be (the "Customer").

 

WHEREAS Creditor has agreed to finance certain equipment for the Customer by way of lease, installment sale contract or promissory note (the "Contract"), such equipment being described as follows (the "Equipment"):

 

See attached Schedule A.

 

After Customer signs this Agreement, Customer authorizes Creditor to insert any missing information or change any inaccurate information (such as the model year of the Equipment or its serial number or VIN) into this Equipment description.

 

WHEREAS the vendor or vendors of the Equipment require progress payments to be made.

 

NOW THEREFORE the parties hereby agree as follows:

 

 

1.

Creditor agrees to make progress payments to the vendor or vendors of the Equipment subject to the terms of this Agreement.
     
 

2.

The aggregate amount advanced by Creditor hereunder shall not exceed $13,500,000, and Creditor shall not advance any progress payment hereunder without the prior written authorization of the Customer.
     
 

3.

Creditor shall not advance any progress payment hereunder until it shall have first received the following: (a) the Contract duly signed by the Customer and all other related documentation that can be delivered prior to the Customer's acceptance of the Equipment, and (b) all advance payments and security deposits required by the Contract.
     
 

4.

The term "Cutoff Date" as used in this Agreement means the earliest to occur of the following dates: (a) November 30, 2022 (or such later date as Creditor may in its sole discretion designate by written notice to Customer); (b) the date there occurs an Event of Default as defined in the Contract (notwithstanding that the Equipment has not then been delivered and accepted); or (c) the date there occurs a material adverse change in the financial condition, business, or prospects of the Customer from that considered by Creditor in making its decision to finance the Equipment. Notwithstanding the foregoing, if the date set forth in clause (a) above is later than August 20, 2022 (the "Approval Expiration Date") the Cutoff Date shall be the Approval Expiration Date unless Creditor extends the Approval Expiration Date after reviewing Customer's updated financial, credit, business and other information as may be required by Creditor.
     
 

5.

If on the Cutoff Date the Equipment has not been delivered to and accepted by the Customer under the Contract as evidenced by a delivery and acceptance certificate executed by the Customer in form and substance satisfactory to Creditor, then upon demand at any time after the Cutoff Date the Customer shall pay Creditor the total amount advanced hereunder and remaining unpaid on the Cutoff Date together with accrued but unpaid interest thereon determined as provided below, and Creditor shall no longer be obligated to make advances hereunder. Upon such payment, Creditor shall transfer all of its right, title, and interest in the Equipment and in progress payments advanced hereunder to the Customer without recourse or any warranty whatsoever. In order to protect its ability to acquire use of the Equipment, the Customer may, if Creditor has not demanded payment within 10 business days after the specific date set forth in clause (a) of the definition of Cutoff Date, pay Creditor within such period the amount that would have been due had such a demand been made, but if no such payment is made within such period, the Customer shall have no right to acquire use of the Equipment under the Contract, and Creditor may, at its option, by written notice to the Customer, declare the Contract and all of Creditor's obligations thereunder terminated and acquire the Equipment for its own account or make any other arrangement with the vendor it can negotiate or demand payment from the Customer as provided above.

 

THIS AGREEMENT INCLUDES THE TERMS ON THE ATTACHED PAGE(S).

 
 

 

Creditor: Wells Fargo Equipment Finance, Inc.

  

Customer: Geneva Pipe and Precast Company
     

/s/ Kathleen Hatella

  

/s/ Aaron Wilkins

By

  

By
     

Kathleen Hatella

Authorized Signer

  

Aaron Wilkins, CFO

Title

  

Print Name and Title

 

 

6.

Whether or not the Equipment Is accepted by the Customer under the Contract, the Customer agrees to pay Creditor interest on the unpaid balance of the amount advanced hereunder from the date of the initial advance until the advances are fully paid at an annual rate (computed on the basis of a 360‑day year, actual days elapsed) as follows: the rate per annum determined by Creditor equal to (i) Term SOFR plus (ii) 1.75%. "Term SOFR" means the Term SOFR Reference Rate for a tenor comparable to one month on the day (such day, the "Term SOFR Determination Day") that is two (2) Business Days prior to the date of determination, as such rate is published by the Term SOFR Administrator; provided, however, that (x) if as of 5:00 p.m. (New York time) on any Term SOFR Determination Day, the Term SOFR Reference Rate for the applicable tenor has not been published by the Term SOFR Administrator and a Benchmark Replacement Date with respect to the Term SOFR Reference Rate has not occurred, then Term SOFR will be the Term SOFR Reference Rate for such tenor as published by the Term SOFR Administrator on the first preceding Business Day for which such Term SOFR Reference Rate for such tenor was published by the Term SOFR Administrator, so long as such first preceding Business Day is not more than three (3) Business Days prior to such Term SOFR Determination Day; and (y) if Term SOFR determined as provided above (including pursuant to clause (x) of this proviso) shall ever be less than 0% (the "Benchmark Floor"), then Term SOFR shall be deemed to be the Benchmark Floor. "SOFR" means a rate per annum equal to the secured overnight financing rate as administered by the SOFR Administrator. "SOFR Administrator" means the Federal Reserve Bank of New York (or a successor administrator of the secured overnight financing rate). "Term SOFR Administrator" means CME Group Benchmark Administration Limited (CBA) (or a successor administrator of the Term SOFR Reference Rate selected by Creditor in its reasonable discretion). "Term SOFR Reference Rate" means the forward-looking term rate based on SOFR. "Business Day" means any day except (i) a Saturday, (ii) a Sunday, or (iii) any day on which the Securities Industry and Financial Markets Association, or any successor thereto, recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in United States government securities. "Conforming Changes" means any technical, administrative or operational changes (including, without limitation, changes to the definition of "Business Day," the definition of "Interest Period" or any similar or analogous definition, the timing and frequency of determining rates and making payments of interest, prepayment provisions and other technical, administrative or operational matters) that Creditor decides may be appropriate to reflect the adoption and implementation of a Benchmark Replacement or to permit the use and administration of Term SOFR or a Benchmark Replacement by Creditor. The rate shall initially be determined on the first day of the month in which a progress payment is advanced hereunder and such initial rate shall remain in effect through the last day of the calendar month in which the advance is made. The interest rate in effect for each month thereafter during the term of this Agreement shall be the same percentage over Term SOFR, determined on the first day of each calendar month (each such monthly period, an "Interest Period"). In connection with the use or administration of Term SOFR, Creditor will have the right to make Conforming Changes from time to time and any amendments implementing such Conforming Changes will become effective without any further action or consent of Customer. Creditor will promptly notify Customer of the effectiveness of any Conforming Changes in connection with the use or administration of Term SOFR. Subject to paragraph 16 below, if Creditor determines (any determination of which shall be conclusive and binding on Customer) that either (i) Term SOFR for the applicable Interest Period cannot be determined pursuant to the definition thereof other than as a result of a Benchmark Transition Event (an "Inability Determination") or (ii) any law has made it unlawful, or that any governmental authority has asserted that it is unlawful, for Creditor to make or maintain an advance based on SOFR or Term SOFR, or to determine or charge interest rates based upon SOFR or Term SOFR (an "Illegality Determination"), then Creditor will so notify Customer. From the date of an Inability Determination or an Illegality Determination until Creditor revokes such Inability Determination or notifies Customer that the circumstances giving rise to such Illegality Determination no longer exist, as applicable, the Adjusted Prime Rate shall replace Term SOFR for any determination of interest hereunder for any affected Interest Period hereunder (with the margin that had been added to Term SOFR added to the Adjusted Prime Rate); provided, however, that no such determination of interest shall take effect during any applicable Interest Period as a result of an Inability Determination. Notwithstanding any of the foregoing to the contrary, if a Benchmark Replacement is subsequently determined in accordance with applicable Benchmark Replacement Provisions, that Benchmark Replacement, plus any applicable margin, will then supersede the foregoing with respect to the replaced Benchmark. "Adjusted Prime Rate" means, at any time, the amount equal to (a) the Prime Rate as of such time less (b) the amount (which may be a positive or negative number or zero and which amount shall remain the same from the date of an Inability Determination or an Illegality Determination until Creditor revokes such Inability Determination or notifies Customer that the circumstances giving rise to such Illegality Determination no longer exist, as applicable) equal to (i) the Prime Rate as of the date of the last available Term SOFR less (ii) the last available Term

 

 
 

 

    SOFR (if such Term SOFR is greater than the Prime Rate, so that (i) minus (ii) results in a negative number, then the negative number shall be added to (a) to arrive at the Adjusted Prime Rate); provided, however, that if Adjusted Prime Rate would be less than the Benchmark Floor, then Adjusted Prime Rate shall be deemed to be the Benchmark Floor. "Prime Rate" means at any time the rate of interest most recently announced within Wells Fargo Bank, National Association ("Bank") at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. If the rate of interest announced by Bank as its Prime Rate at any time is less than the Benchmark Floor, then for purposes of this Agreement the Prime Rate shall be deemed to be the Benchmark Floor.
     
  7. Interest shall be payable monthly beginning with the 20th day of the month following the month in which the first advance is made and on the same day of each month thereafter and also on the maturity date. The maturity date of this obligation is the earliest of (x) the date Creditor demands payment pursuant to paragraph 5, (y) the date the Equipment is accepted by the Customer under the Contract, or (z) the date the Customer prepays as permitted by paragraph 5.
     
  8. Some items of Equipment may be delivered by the vendor to the Customer without the Customer having accepted the items under the Contract. The Customer agrees to maintain insurance on each item of Equipment as required by the Contract from the date it is delivered to the Customer regardless of whether the Customer has accepted the item under the Contract.
     
  9. Although the Customer has agreed to reimburse Creditor as provided in paragraph 5 for amounts advanced by Creditor hereunder, such amounts do not constitute loans to the Customer, and Creditor as the party making the progress payments to the vendor or vendors reserves for its own benefit all rights to the Equipment and to the benefits of amounts advanced hereunder subject only to its obligations under the Contract and under this Agreement.
     
  10. Creditor makes no representation as to when the Equipment may be delivered by the vendor thereof.
     
 

11.

This Agreement may not be assigned by the Customer without the prior written consent of Creditor. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto.
     
 

12.

This Agreement shall be governed by the same substantive laws that govern the Contract.
     
 

13.

If Customer is not an individual, (i) the execution, delivery and performance of this Agreement has been duly authorized by all necessary action on the part of Customer and will not violate any provision of Customer's governing documents; (ii) the person signing on behalf of Customer is duly authorized; and (iii) this Agreement constitutes a legal, valid and binding obligation of Customer.
     
 

14.

Customer hereby grants to Creditor a security interest in any and all right, title or interest that Customer now has or may hereafter acquire in or to the Equipment to secure Customer's now existing and hereafter arising obligations and indebtedness to Creditor (except QFC Obligations) whether arising hereunder, under the Contract or under any other agreement or transaction at any time owing by Customer to Creditor. Upon the occurrence of any default in making payment hereunder or any event of default under any other agreement made by Customer in favor of Creditor, Creditor shall have all of the rights and remedies of a secured party under the Uniform Commercial Code. "QFC Obligations" means obligations arising under a securities contract, commodities contract, forward contract, repurchase agreement, swap agreement, or any similar agreement (as defined for purposes of Treasury Part 148 under 12 U.S.C. 5390(c)(8)(H) or FDIC Part 371 under 12 U.S.C. 1821(e)(8)(D)) that the FDIC determines by regulation, resolution, or order to be a qualified financial contract.
     
 

15.

Creditor may in its sole discretion, accept a photocopy, electronically transmitted facsimile, pdf or other reproduction of this Agreement and/or any document related hereto (a "Counterpart") as the binding and effective record of this Agreement and/or such other document, whether or not an ink signed copy hereof or thereof is also received by Creditor from Customer, provided, however, that if Creditor accepts a Counterpart as the binding and effective record of this Agreement or any other document, the Counterpart acknowledged by Creditor (either in ink or electronically) shall constitute the record hereof or thereof. Customer represents that the signature that appears on the Counterpart that is transmitted by Customer to Creditor in any manner described above is intended by Customer to authenticate the Counterpart notwithstanding that such signature is electronic, facsimile or a reproduction and Customer further agrees that a Counterpart of this Agreement or such other document received by Creditor, shall, when acknowledged by Creditor (either in ink or electronically), constitute an original document for the purposes of establishing the provisions hereof or thereof and shall be legally admissible under the best evidence rule and binding on and

 

 
 

 

   

enforceable against Customer. If Creditor accepts a Counterpart of a document as the binding and effective record thereof, only such Counterpart acknowledged by Creditor's ink or electronic signature may be marked "Original" and perfection of a security interest by possession or control may only be accomplished by possession or control of the Counterpart that bears Creditor's acknowledgement.

 

  16. Benchmark Replacement Provisions. Notwithstanding anything to the contrary contained herein:

 

 

(a) Benchmark Replacement. If a Benchmark Transition Event occurs, the applicable Benchmark Replacement will replace the then-current Benchmark for all purposes hereunder on the Benchmark Replacement Date without any further action or consent of Customer.
   
 

(b) Benchmark Replacement Conforming Changes. In connection with the use, administration, adoption or implementation of a Benchmark Replacement, Creditor will have the right to make Conforming Changes from time to time and any amendments implementing such Conforming Changes will become effective without any further action or consent of Customer.
   
 

(c) Notices: Standards for Decisions and Determinations. Creditor will promptly notify Customer of (i) the implementation of any Benchmark Replacement, and (ii) the effectiveness of any Conforming Changes in connection with the use, administration, adoption or implementation of a Benchmark Replacement. Any determination, decision or election that may be made by Creditor pursuant to these provisions, including any determination with respect to a tenor, rate or adjustment or of the occurrence or non-occurrence of an event, circumstance or date and any decision to take or refrain from taking any action or any selection, will be conclusive and binding absent manifest error and will be made in its sole discretion and without Customer consent.
   
 

(d) Certain Defined Terms. As used herein:
   
  "Benchmark" means, initially, the Term SOFR Reference Rate for a tenor comparable to one month; provided, however, that if a Benchmark Transition Event has occurred with respect to the Term SOFR Reference Rate for a tenor comparable to one month or the then-current Benchmark, then "Benchmark" means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has become effective pursuant to the provisions of this Agreement.
   
  "Benchmark Administrator" means, initially, the Term SOFR Administrator or any successor administrator of the then-current Benchmark or any insolvency or resolution official with authority over such administrator.
   
  "Benchmark Replacement" means the sum of: (x) the alternate rate of interest that has been selected by Creditor as the replacement for the then-current Benchmark and (y) the spread adjustment, or method for calculating or determining such spread adjustment, (which may be a positive or negative value or zero) that has been selected by Creditor, in each case giving due consideration to (i) any selection or recommendation by the Relevant Governmental Body at such time for a replacement rate, the mechanism for determining such a rate, the methodology or conventions applicable to such rate, or the spread adjustment, or method for calculating or determining such spread adjustment, for such rate or (ii) any evolving or then­ prevailing market convention for determining a rate of interest as a replacement to the then-current Benchmark, the methodology or conventions applicable to such rate, or the spread adjustment, or method for calculating or determining such spread adjustment, for such rate for U.S. dollar-denominated syndicated or bilateral credit facilities; provided, however, that if the Benchmark Replacement as determined as provided would be less than the Benchmark Floor, then the Benchmark Replacement shall be deemed to be the Benchmark Floor for the purposes hereof.
   
  "Benchmark Replacement Date" means the date specified by Creditor in a notice to Customer following a Benchmark Transition Event.
   
  "Benchmark Transition Event" means the occurrence of one or more of the following events with respect to the then-current Benchmark: a public statement or publication of information by or on behalf of the Benchmark Administrator or a regulatory supervisor for the Benchmark Administrator announcing that (a) the Benchmark Administrator has ceased or will cease to provide the Benchmark, permanently or indefinitely or (b) the Benchmark is not, or as of a specified future date will not be, representative.
   
  "Relevant Governmental Body" means the Board of Governors of the Federal Reserve System and/or the Federal Reserve Bank of New York, or a committee officially endorsed or convened by the Board of Governors of the Federal Reserve System and/or the Federal Reserve Bank of New York or any successor thereto.