Northwest Pipe Company (NWPX) Risk Analysis

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") requires our management to assess the effectiveness of the internal control over financial reporting for the companies we acquire. In order to comply with the Sarbanes-Oxley Act, we will need to implement or enhance internal control over financial reporting at any company we acquire and evaluate the internal controls. We do not conduct a formal evaluation of companies' internal control over financial reporting prior to an acquisition. We may experience difficulties in implementing effective internal controls as part of our integration of acquisitions from private companies, as they may have limited experience complying with the Sarbanes-Oxley Act. We may be required to hire or engage additional resources and incur substantial costs to implement the necessary new internal controls should we acquire any companies. Any failure to implement required internal controls, or difficulties encountered in their implementation, could harm our operating results or increase the risk of material weaknesses in internal controls, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.

Our net sales and operating results may fluctuate significantly from quarter to quarter due to a number of factors, including: - the commencement, completion, or termination of contracts during any particular quarter;- unplanned down time due to project delays or mechanical failure;- underutilized capacity or factory productivity;- adverse weather conditions;- fluctuations in the cost of steel and other raw materials; and - competitive pressures. Results of operations in any period are not indicative of results for any future period, and comparisons between any two periods may not be meaningful.

Our manufacturing operations are subject to typical hazards and risks relating to the manufacture of similar products such as: - explosions, fires, inclement weather, and natural disasters;- mechanical failure;- unscheduled downtime;- labor difficulties;- loss of process control and quality;- disruptions to supply;- raw materials quality defects;- service provider delays or failures;- transportation delays or failures;- an inability to obtain or maintain required licenses or permits; and - environmental hazards such as chemical spills, discharges, or releases of toxic or hazardous substances or gases into the environment or workplace. The occurrence of any of these operating problems at our facilities may have a material adverse effect on the productivity and profitability of a particular manufacturing facility or on our operations as a whole, during and after the period of these operating difficulties. For example, as discussed in Note 14 of the Notes to Consolidated Financial Statements in Part II - Item 8. "Financial Statements and Supplementary Data" of this 2020 Form 10-K, on April 21, 2019, there was an accidental fire at our Saginaw, Texas facility which resulted in damage to the coatings building. There were no injuries, but the ability to coat at this facility was impaired while we repaired the damage. The operating problems listed above may also cause personal injury and loss of life, severe damage to or destruction of property and equipment, and environmental damage. In addition, individuals could seek damages for alleged personal injury or property damage. Furthermore, we could be subject to present and future claims with respect to workplace injury, exposure to hazardous materials, workers' compensation, and other matters. Although we maintain property and casualty insurance of the types and in the amounts that we believe are customary for our industries, we cannot assure you that our insurance coverage will be adequate for liability that may be ultimately incurred or that such coverage will continue to be available to us on commercially reasonable terms. Any claims that result in liability exceeding our insurance coverage could have an adverse effect on our business, financial position, results of operations, or cash flows.

Revenue for water infrastructure steel pipe products is recognized over time as the manufacturing process progresses, and is measured by the costs incurred to date relative to the estimated total direct costs to fulfill each contract (cost-to-cost method). Estimated total costs of each contract are reviewed on a monthly basis by project management and operations personnel for all active projects. All cost revisions that result in a material change in gross profit are reviewed by senior management personnel. Significant judgment is required in estimating total costs and measuring the progress of project completion, as well as whether a loss is expected to be incurred on the contract. 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. Due to the variability of events affecting our estimates which have a material impact on our contract accounting, actual results could differ from those estimates, which could adversely affect our financial position, results of operations, or cash flows.

We have financed our operations through cash flows from operations, available borrowings, and other financing arrangements. As of December 31, 2020, we had $13.8 million of outstanding long-term debt, no outstanding revolving loan borrowings, $1.7 million of finance lease liabilities, and $30.1 million of operating lease liabilities. We could incur additional revolving loan borrowings under the Amended Credit Agreement in the future to finance increases in working capital, finance mergers, acquisitions and capital expenditures, fund negative operating cash flows, or for other corporate purposes. These borrowings could become significant in the future. Our current and future debt and debt service obligations could: - limit our ability to obtain additional financing for working capital or other purposes in the future;- reduce the amount of funds available to finance our operations, capital expenditures, and other activities;- increase our vulnerability to economic downturns, illiquid capital markets, and adverse industry conditions;- limit our flexibility in responding to changing business and economic conditions, including increased competition;- place us at a disadvantage when compared to our competitors that have less debt; and - with respect to our borrowings that bear interest at variable rates, cause us to be vulnerable to increases in interest rates. Our ability to make scheduled payments on our current and future debt will depend on our future operating performance and cash flows, which are subject to prevailing economic conditions, prevailing interest rate levels, and other financial, competitive, and business factors, many of which are beyond our control. Our inability to make scheduled payments on our debt or any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operations, or cash flows. In addition, under the Amended Credit Agreement, our variable rate indebtedness uses daily three month London Interbank Offered Rate ("LIBOR") as a benchmark for establishing the rate. The United Kingdom's Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop publishing daily three month LIBOR rates on June 30, 2023. In the United States, the Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate ("SOFR") as an alternative to LIBOR. The Amended Credit Agreement provides a mechanism for determining an alternative benchmark rate to LIBOR, which may include SOFR. It is not presently known whether SOFR or any other alternative reference rates that have been proposed will attain market acceptance as replacements of LIBOR. As such, the transition to alternatives to LIBOR could be modestly disruptive to the credit markets. While we do not believe that the impact would be material to us, the consequences of these developments with respect to LIBOR cannot be entirely predicted and span multiple future periods, and could result in an increase in the cost of our variable rate debt which could have a material adverse effect on our financial position and results of operations.