nwpx20210930

nwpx20210930_10q.htm

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, 2021

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

For the transition period from _______to _______

Commission File Number: 0-27140

NORTHWEST PIPE COMPANY

(Exact name of registrant as specified in its charter)

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

201 NE Park Plaza Drive, Suite 100

Vancouver, Washington 98684

(Address of principal executive offices and Zip Code)

360‑397‑6250

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

The number of shares outstanding of the registrant’s common stock as of October 28, 2021 was 9,870,567 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, 2021 and 2020	2

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	3

Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020	4

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	5

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	7

Notes to Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25

Item 4. Controls and Procedures	26

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	26

Item 1A. Risk Factors	26

Item 6. Exhibits	27

Signatures	28

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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,
	2021			2020			2021			2020

Net sales	$	84,643		$	77,632		$	230,766		$	216,526
Cost of sales		72,280			62,013			200,090			178,370
Gross profit		12,363			15,619			30,676			38,156
Selling, general, and administrative expense		5,562			5,656			17,729			19,185
Operating income		6,801			9,963			12,947			18,971
Other income		171			157			260			815
Interest income		-			16			-			49
Interest expense		(112	)		(238	)		(687	)		(719	)
Income before income taxes		6,860			9,898			12,520			19,116
Income tax expense		1,914			2,631			3,268			5,287
Net income	$	4,946		$	7,267		$	9,252		$	13,829

Net income per share:
Basic	$	0.50		$	0.74		$	0.94		$	1.41
Diluted	$	0.50		$	0.73		$	0.93		$	1.40

Shares used in per share calculations:
Basic		9,871			9,802			9,849			9,782
Diluted		9,921			9,861			9,918			9,851

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,
	2021		2020		2021		2020

Net income	$	4,946	$	7,267	$	9,252	$	13,829

Other comprehensive income (loss), net of tax:
Pension liability adjustment		29		25		87		74
Unrealized gain (loss) on cash flow hedges		25		19		73		(57	)
Other comprehensive income, net of tax		54		44		160		17
Comprehensive income	$	5,000	$	7,311	$	9,412	$	13,846

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, 2021			December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	3,188		$	37,927
Trade and other receivables, less allowance for doubtful accounts of $534 and $767		38,885			42,680
Contract assets		111,239			76,985
Inventories		43,042			29,177
Prepaid expenses and other		1,915			5,194
Total current assets		198,269			191,963
Property and equipment, less accumulated depreciation and amortization of $104,152 and $96,684		111,157			110,184
Operating lease right-of-use assets		32,769			30,813
Goodwill		22,985			22,985
Intangible assets, net		9,571			10,518
Other assets		6,216			6,552
Total assets	$	380,967		$	373,015

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	-		$	7,701
Accounts payable		20,148			12,993
Accrued liabilities		17,406			16,814
Contract liabilities		5,388			6,189
Current portion of operating lease liabilities		2,401			2,204
Total current liabilities		45,343			45,901
Borrowings on line of credit		2,153			-
Long-term debt		-			5,888
Operating lease liabilities		30,004			27,911
Deferred income taxes		12,391			12,481
Other long-term liabilities		10,767			11,208
Total liabilities		100,658			103,389

Commitments and contingencies (Note 8)

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, 9,870,567 and 9,805,437 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively		99			98
Additional paid-in-capital		124,283			123,013
Retained earnings		157,633			148,381
Accumulated other comprehensive loss		(1,706	)		(1,866	)
Total stockholders’ equity		280,309			269,626
Total liabilities and stockholders’ equity	$	380,967		$	373,015

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, 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 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

									Accumulated
					*Additional*				*Other*			*Total*
	*Common Stock*				*Paid-In-*		*Retained*		*Comprehensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Earnings*		*Loss*			*Equity*
Balances, June 30, 2020		9,800,810	$	98	$	121,358	$	135,893	$	(1,841	)	$	255,508
Net income		-		-		-		7,267		-			7,267
Other comprehensive income:
Pension liability adjustment, net of tax expense of $0		-		-		-		-		25			25
Unrealized gain on cash flow hedges, net of tax expense of $6		-		-		-		-		19			19
Issuance of common stock under stock compensation plans		4,627		-		-		-		-			-
Share-based compensation expense		-		-		873		-		-			873
Balances, September 30, 2020		9,805,437	$	98	$	122,231	$	143,160	$	(1,797	)	$	263,692

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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, 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 cash flow hedges, net of tax expense of $21		-		-		-			-		73			73
Issuance of common stock under stock compensation plans		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

										Accumulated
					*Additional*					*Other*			*Total*
	*Common Stock*				*Paid-In-*			*Retained*		*Comprehensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*			*Earnings*		*Loss*			*Equity*

Balances, December 31, 2019		9,746,979	$	97	$	120,544		$	129,331	$	(1,814	)	$	248,158
Net income		-		-		-			13,829		-			13,829
Other comprehensive income (loss):
Pension liability adjustment, net of tax expense of $0		-		-		-			-		74			74
Unrealized loss on cash flow hedges, net of tax benefit of $23		-		-		-			-		(57	)		(57	)
Issuance of common stock under stock compensation plans		58,458		1		(619	)		-		-			(618	)
Share-based compensation expense		-		-		2,306			-		-			2,306
Balances, September 30, 2020		9,805,437	$	98	$	122,231		$	143,160	$	(1,797	)	$	263,692

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,
	2021			2020
Cash flows from operating activities:
Net income	$	9,252		$	13,829
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and finance lease amortization		8,358			9,332
Amortization of intangible assets		947			1,607
Deferred income taxes		(89	)		5,025
Gain on insurance proceeds		-			(1,147	)
Share-based compensation expense		2,437			2,306
Other, net		106			869
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade and other receivables		3,181			(354	)
Contract assets, net		(35,055	)		8,298
Inventories		(13,813	)		4,382
Prepaid expenses and other assets		6,383			3,787
Accounts payable		6,725			(3,343	)
Accrued and other liabilities		(2,057	)		(1,201	)
Net cash provided by (used in) operating activities		(13,625	)		43,390
Cash flows from investing activities:
Acquisition of business, net of cash acquired		-			(48,728	)
Purchases of property and equipment		(8,126	)		(9,787	)
Purchases of intangible assets		-			(327	)
Proceeds from insurance		-			1,637
Other investing activities		304			-
Net cash used in investing activities		(7,822	)		(57,205	)
Cash flows from financing activities:
Borrowings on line of credit		4,720			41,377
Repayments on line of credit		(2,567	)		(41,377	)
Borrowings on long-term debt		-			15,879
Payments on long-term debt		(13,762	)		(1,323	)
Payments of debt issuance costs		(220	)		(461	)
Payments on finance lease obligations		(297	)		(313	)
Tax withholdings related to net share settlements of restricted stock and performance share awards		(1,166	)		(618	)
Net cash provided by (used in) financing activities		(13,292	)		13,164
Change in cash and cash equivalents		(34,739	)		(651	)
Cash and cash equivalents, beginning of period		37,927			31,014
Cash and cash equivalents, end of period	$	3,188		$	30,363

Noncash investing and financing activities:
Accrued property and equipment purchases	$	756		$	876
Right-of-use assets obtained in exchange for operating lease liabilities	$	4,669		$	4,471
Right-of-use assets obtained in exchange for finance lease liabilities	$	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 (the “Company”) is a leading manufacturer for water related infrastructure products. In addition to being the largest manufacturer of engineered steel water pipeline systems in North America, the Company produces high-quality precast and reinforced concrete products, Permalok® steel casing pipe, bar-wrapped concrete cylinder pipe, as well as linings, coatings, joints, and one of the largest offerings of fittings and specialized components. The Company provides solution-based products for a wide range of markets including water transmission and infrastructure, water and wastewater plant piping, structural stormwater and sewer systems, trenchless technology, and pipeline rehabilitation. The Company’s chief operating decision maker, its Chief Executive Officer, evaluates performance of the Company and makes decisions regarding allocation of resources based on total Company results. Therefore, the Company has determined that it operates in one segment, Water Infrastructure.

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

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, 2020 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, 2020 (“2020 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 2020 Form 10‑K.

Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2021, particularly in light of the coronavirus disease 2019 pandemic and its effects on the domestic and global economies.

2.	Business Combination

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

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

Assets
Cash and cash equivalents	$	691
Trade and other receivables		7,089
Inventories		5,673
Prepaid expenses and other		356
Property and equipment		9,096
Operating lease right-of-use assets		21,684
Intangible assets		11,165
Total assets acquired		55,754

Liabilities
Accounts payable		1,395
Accrued liabilities		1,189
Operating lease liabilities		20,454
Deferred income taxes		5,343
Other long-term liabilities		939
Total liabilities assumed		29,320

Goodwill		22,985

Total purchase consideration	$	49,419

The purchase consideration for this business combination was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated purchase consideration recorded as goodwill. As a result of additional information obtained during the measurement period about facts and circumstances that existed as of the acquisition date, the Company recorded measurement period adjustments during the three months ended June 30, 2020 which resulted in a $0.1 million balance sheet reclassification between trade and other receivables and inventories.

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

	Estimated Useful Life		Fair Value
	(In years)		(In thousands)

Customer relationships		11.0	$	8,031
Trade names		10.0		2,093
Backlog		0.9		1,041
Total intangible assets		9.9	$	11,165

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

The Company incurred transaction costs associated with this acquisition of approximately $0 and $2.6 million during the three and nine months ended September 30, 2020, respectively. These transaction costs are included in Selling, general, and administrative expense in the Condensed Consolidated Statements of Operations.

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

	Three Months Ended		Nine Months Ended
	September 30, 2020		September 30, 2020

Net sales	$	77,632	$	220,115
Net income		7,589		16,344

This unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisition had occurred on January 1 of the year prior to the acquisition. Moreover, this information is not indicative of what the Company’s future operating results will be. The information prior to the acquisition is included based on prior accounting records maintained by Geneva. The pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Geneva to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property and equipment and intangible assets had been applied on January 1 of the year prior to the acquisition. Adjustments also include an increase of interest expense as if the Company’s debt obtained in connection with the acquisition had been outstanding since January 1 of the year prior to the acquisition. The unaudited pro forma financial information includes non-recurring adjustments to remove transaction costs directly attributable to the acquisition. The provision for income taxes has also been adjusted for all periods, based upon the foregoing adjustments to historical results.

3.	Inventories

Inventories consist of the following (in thousands):

	September 30, 2021		December 31, 2020

Raw materials	$	35,245	$	20,631
Work-in-process		932		1,416
Finished goods		5,018		5,489
Supplies		1,847		1,641
Total inventories	$	43,042	$	29,177

4.	Credit Agreement

On June 30, 2021, the Company entered into a Credit Agreement (the “Credit Agreement”) 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”) that provides for a revolving loan, swingline loan, and letters of credit in the aggregate amount of up to $100 million, with an option for the Company to increase that amount by $25 million, subject to the provisions of the Credit Agreement. The Credit Agreement will expire, and all obligations outstanding will mature, on June 30, 2024. The Company may prepay outstanding amounts in its discretion without penalty at any time, subject to applicable notice requirements. In conjunction with entering into the Credit Agreement, also effective June 30, 2021, the Company terminated the Credit Agreement with Wells Fargo dated October 25, 2018, as amended on January 31, 2020 by the Consent and Amendment No. 1 to Credit Agreement with Wells Fargo (together, the “Former Credit Agreement”), and all outstanding debt under the Former Credit Agreement, including long-term debt, was repaid.

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The Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants, events of default, and indemnification provisions in favor of the 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 Credit Agreement requires the Company 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), a consolidated fixed charge coverage ratio no less than 1.25 to 1.00, and a minimum consolidated earnings before interest, taxes, depreciation, and amortization of at least $25 million for the four consecutive fiscal quarters most recently ended. Pursuant to the Credit Agreement, the Company has also agreed that it will not sell, assign, or otherwise dispose or encumber, any of its owned real property. The occurrence of an event of default could result in the acceleration of the obligations under the Credit Agreement. The Company was in compliance with its financial covenants as of September 30, 2021.

The Company's obligations under the Credit Agreement are secured by a senior security interest in substantially all of the Company’s and its subsidiaries’ assets.

Line of Credit (Revolving and Swingline Loans)

As of September 30, 2021 under the Credit Agreement, the Company had $2.2 million of outstanding revolving loan borrowings, $1.6 million of outstanding letters of credit, and additional borrowing capacity of approximately $96 million. As of December 31, 2020 under the Former Credit Agreement, the Company had no outstanding revolving loan borrowings and $1.6 million of outstanding letters of credit. Revolving loans under the Credit Agreement bear interest at rates related to, at the Company’s option and subject to the provisions of the Credit Agreement including certain London Interbank Offered Rate (“LIBOR”) transition provisions, either: (i) Base Rate (as defined in the Credit Agreement) plus the Applicable Margin; (ii) LIBOR plus the Applicable Margin; or (iii) the daily one month LIBOR plus the Applicable Margin. The “Applicable Margin” is 1.75% to 2.25%, depending on the Company’s Senior Leverage Ratio (as defined in the Credit Agreement). Interest on outstanding revolving loans is payable quarterly. Swingline loans under the Credit Agreement bear interest at the Base Rate plus the Applicable Margin. As of September 30, 2021 and December 31, 2020, the weighted-average interest rate for outstanding borrowings was 1.84% and 1.73%, respectively. The 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 Credit Agreement). Such fee is payable quarterly in arrears. The Company is also obligated to pay additional fees customary for credit facilities of this size and type.

5.	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.

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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, 2021
Financial assets:
Deferred compensation plan	$	4,427		$	3,733	$	694		$	-
Foreign currency forward contracts		37			-		37			-
Total financial assets	$	4,464		$	3,733	$	731		$	-

Financial liabilities:
Foreign currency forward contracts	$	(508	)	$	-	$	(508	)	$	-

As of December 31, 2020
Financial assets:
Deferred compensation plan	$	4,717		$	3,884	$	833		$	-

Financial liabilities:
Foreign currency forward contracts	$	(1,150	)	$	-	$	(1,150	)	$	-

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

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

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

6.	Derivative Instruments and Hedging Activities

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

As of September 30, 2021 and December 31, 2020, the total notional amount of the foreign currency forward contracts designated as cash flow hedges was $7.5 million (CAD$9.5 million) and $15.3 million (CAD$19.5 million), respectively. As of September 30, 2021, the Company’s foreign currency forward contracts mature at various dates through September 2022 and are subject to an enforceable master netting arrangement.

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As of September 30, 2021 and December 31, 2020, all foreign currency forward contracts were designated as cash flow hedges. Gains (losses) recognized in Net sales from foreign currency forward contracts not designated as hedging instruments were $0.1 million and approximately $0 for the three and nine months ended September 30, 2021, respectively, and $(0.2) million and approximately $0 for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, unrealized pretax losses on outstanding foreign currency forward contracts in Accumulated other comprehensive loss was approximately $0. Typically, outstanding foreign currency forward contract balances in Accumulated other comprehensive loss are expected to be reclassified to Net sales within the next twelve months as a result of underlying hedged transactions also being recorded in Net sales.

7.	Share-based Compensation

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

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,
	2021		2020		2021		2020

Cost of sales	$	202	$	255	$	685	$	576
Selling, general, and administrative expense		395		618

SEC Form 10-Q filed by Northwest Pipe Company