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Note 2 - Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2018
Notes to Financial Statements |
Significant Accounting Policies [Text Block] |
2 . | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, the Company evaluates all of its estimates, including those related to allowance for doubtful accounts, inventories, long-lived assets (including depreciation and amortization), revenue recognition, share-based compensation, income taxes, and litigation and other contingencies. Actual results may differ from these estimates under different assumptions or conditions. Basis of Consolidation and Presentation The Consolidated Financial Statements include the accounts of Northwest Pipe Company and its subsidiaries over which the Company exercises control as of the financial statement date. Intercompany accounts and transactions have been eliminated. Business Combinations Business combinations are accounted for under the acquisition method which requires identifiable assets acquired and liabilities assumed in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. The amount by which the net fair value of assets acquired and liabilities assumed exceeds the fair value of consideration transferred as the purchase price is recorded as a bargain purchase gain. Acquisition-related costs are expensed as incurred. These estimates are inherently uncertain and unpredictable. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill or bargain purchase gain. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s Consolidated Statements of Operations. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term, highly-liquid investments with maturities of three months or less when purchased. At times, the Company will have outstanding checks in excess of related bank balances (a “book overdraft”). If this occurs, the amount of the book overdraft will be reclassified to accounts payable, and changes in the book overdraft will be reflected as a component of operating activities in the Consolidated Statement of Cash Flows. The Company had no book overdraft as of December 31, 2018 and 2017. Receivables and Allowance for Doubtful Accounts Trade receivables are reported on the Consolidated Balance Sheet net of doubtful accounts. The Company maintains allowances for estimated losses resulting from the inability of its customers to make required payments or from contract disputes. The amounts of such allowances are based on historical experience and management’s judgment. The Company will write down or write off a receivable account once the account is deemed uncollectible. If the customers’ financial conditions were to deteriorate resulting in their inability to make payments, or if contract disputes were to escalate, additional allowances may need to be recorded which would result in additional expenses being recorded for the period in which such determination was made. Contract Assets and Liabilities Contract assets primarily represent revenue earned over time but not yet billable based on the terms of the contracts and were historically presented as costs and estimated earnings in excess of billings on uncompleted contracts. These amounts will be billed based on the terms of the contracts, which include achievement of milestones, partial shipments, or completion of the contracts. Payments terms of amounts billed vary based on the customer, but are typically due within 30 days of invoicing. Contract liabilities represent amounts billed based on the terms of the contracts in advance of costs incurred and revenue earned. These amounts were historically presented as billings in excess of costs and estimated earnings on uncompleted contracts. Inventories Inventories are stated at the lower of cost and net realizable value. The cost of raw material inventories of steel is either on a specific identification basis or on an average cost basis. The cost of all other raw material inventories, as well as work-in-process and supplies, is on an average cost basis. The cost of finished goods uses the first -in, first -out method of accounting. Property and Equipment Property and equipment are recorded at cost. Maintenance and repairs are expensed as incurred, and costs of new equipment and buildings, as well as costs of expansions or refurbishment of existing equipment and buildings, including interest where applicable, are capitalized. Depreciation and amortization are determined by the units of production method for most equipment and by the straight-line method for the remaining assets based on the estimated useful lives of the related assets. Estimated useful lives by major classes of property and equipment are as follows: Land improvements ( 15 – 30 years); Buildings ( 20 – 40 years); and Machinery and equipment ( 3 – 30 years). Depreciation expense calculated under the units of production method may be less than, equal to, or greater than depreciation expense calculated under the straight-line method due to variances in production levels. Upon disposal, costs and related accumulated depreciation of the assets are removed from the accounts and resulting gains or losses are reflected in operating expenses. The Company leases certain equipment under long-term capital leases, which are being amortized on a straight-line basis over the shorter of its useful life or the lease term. The Company assesses impairment of property and equipment whenever changes in circumstances indicate that the carrying values of the asset or asset group(s) may not be recoverable. The asset group is the lowest level at which identifiable cash flows are largely independent of the cash flows of other groups of assets or liabilities. The recoverable value of a long-lived asset group is determined by estimating future undiscounted cash flows using assumptions about the expected future operating performance of the Company. Intangible Assets Intangible assets consist primarily of customer relationships and trade names and trademarks recorded as the result of acquisition activity. Intangible assets are amortized using the straight-line method over estimated useful lives ranging from eleven months to 15 years. See Note 7, “Intangible Assets” for further discussion of the Company’s intangible asset balances. Workers Compensation The Company is self-insured, or maintains high deductible policies, for losses and liabilities associated with workers compensation claims. Losses are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using historical experience and certain actuarial assumptions followed in the insurance industry. As of December 31, 2018 and 2017, workers compensation reserves recorded were $2.7 million and $3.7 million, respectively, of which $0.5 million and $0.4 million, respectively, were included in Accrued liabilities and $2.2 million and $3.3 million, respectively, were included in Other long-term liabilities. Accrued Liabilities Accrued liabilities consist of the following (in thousands):
|  | December 31, |
|  | 2018 |  |  | 2017 |
Accrued liabilities: |  |  |  |  |  |  |  |
Accrued vacation payable |  | $ | 2,211 |  |  | $ | 1,886 |
Accrued sales tax |  |  | 1,753 |  |  |  | 550 |
Accrued property taxes |  |  | 600 |  |  |  | 898 |
Workers compensation reserves |  |  | 452 |  |  |  | 422 |
Provision for losses on uncompleted contracts |  |  | 85 |  |  |  | 911 |
Other |  |  | 2,446 |  |  |  | 1,896 |
Total accrued liabilities |  | $ | 7,547 |  |  | $ | 6,563 |
Derivative Instruments The Company conducts business in various foreign countries and, from time to time, settles transactions in foreign currencies. The Company has established a program that utilizes foreign currency forward contracts to offset the risk associated with the effects of certain foreign currency exposures, typically arising from sales contracts denominated in Canadian currency. Foreign currency forward contracts are consistent with the Company’s strategy for financial risk management. The Company utilizes cash flow hedge accounting treatment for qualifying foreign currency forward contracts. Instruments that do not qualify for cash flow hedge accounting treatment are remeasured at fair value on each balance sheet date and resulting gains and losses are recognized in earnings. Pension Benefits The Company has two defined benefit pension plans that have been frozen since 2001. The Company funds these plans to cover current plan costs plus amortization of the unfunded plan liabilities. To record these obligations, management uses estimates relating to investment returns, mortality, and discount rates. Foreign Currency Transactions The functional currency of the Company, including its Mexican operations, is the United States dollar. Monetary assets and liabilities are remeasured at current exchange rates and non-monetary assets and liabilities are remeasured at historical exchange rates. Revenue and expenses related to monetary assets and liabilities are remeasured at average exchange rates and at historical exchange rates for the related revenue and expenses of non-monetary assets and liabilities. Transaction gains (losses) from foreign currency forward contracts designated as cash flow hedges are included in Accumulated other comprehensive loss as a separate component of Stockholders’ equity. For the years ended December 31, 2018, 2017, and 2016, net foreign currency transaction gains (losses) of $( 0.4 ) million, $( 0.2 ) million, and $0.1 million, respectively, were recognized in earnings. Revenue Recognition 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. 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. For a majority of contracts, revenue 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). For a small number of contracts, revenue is recognized when all four of the following criteria have been satisfied: persuasive evidence of an arrangement exists, the price is fixed or determinable, delivery has occurred, and collectability is reasonably assured. 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. 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. See Note 16, “Revenue” for further discussion of the Company’s revenue. Share-based Compensation 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. 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 Company estimates the fair value of restricted stock units (“RSUs”) and performance share awards (“PSAs”) using the value of the Company’s stock on the date of grant, with the exception of market-based PSAs, for which a Monte Carlo simulation model is used. The Monte Carlo simulation model requires the use of subjective and complex assumptions including the price volatility of the underlying stock. The expected stock price volatility assumption is determined using the historical volatility of the Company’s and a comparator group of companies’ stock over the most recent historical period equivalent to the expected life. The Monte Carlo simulation model calculates many potential outcomes for an award and estimates fair value based on the most likely outcome. See Note 13, “Share-based Compensation” for further discussion of the Company’s share-based compensation. Income Taxes Income taxes are recorded using an asset and liability approach that requires the recognition of deferred income tax assets and liabilities for the expected future income tax consequences of events that have been recognized in the Company’s financial statements or income tax returns. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. The determination of the provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. The provision for income taxes primarily reflects a combination of income earned and taxed in the various United States federal and state and, to a lesser extent, foreign jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for unrecognized income tax benefits or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective income tax rate. The Company records income tax reserves for federal, state, local, and international exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about tax issues, potential outcomes and timing, and is a subjective estimate. The Company assesses income tax positions and records income tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. For those income tax positions where it is more-likely-than- not that an income tax benefit will be sustained, the largest amount of income tax benefit with a greater than 50% likelihood of being realized upon settlement with a tax authority that has full knowledge of all relevant information has been recorded. For those income tax positions where it is not more-likely-than- not that an income tax benefit will be sustained, no income tax benefit has been recognized in the Consolidated Financial Statements. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss includes unrealized gains and losses on derivative instruments related to the effective portion of cash flow hedges and changes in the funded status of the defined benefit pension plans, both net of the related income tax effect. See Note 18, “Accumulated Other Comprehensive Loss” for further discussion of the Company’s accumulated other comprehensive loss. Net Income ( Loss ) per Share Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) 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 performance share awards 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 from continuing operations, all potential shares of common stock are excluded from the computation of diluted net loss per share as the impact would be antidilutive. Net income (loss) per basic and diluted weighted-average common share outstanding was calculated as follows (in thousands, except per share amounts):
|  | Year Ended December 31, |
|  | 2018 |  |  | 2017 |  |  | 2016 |
Income (loss) from continuing operations |  | $ | 20,312 |  |  | $ | (8,392 | ) |  | $ | (6,741 | )
Loss on discontinued operations |  |  | - |  |  |  | (1,771 | ) |  |  | (2,522 | )
Net income (loss) |  | $ | 20,312 |  |  | $ | (10,163 | ) |  | $ | (9,263 | )
Basic weighted-average common shares outstanding |  |  | 9,726 |  |  |  | 9,613 |  |  |  | 9,588 |
Effect of potentially dilutive common shares (1) |  |  | 7 |  |  |  | - |  |  |  | - |
Diluted weighted-average common shares outstanding |  |  | 9,733 |  |  |  | 9,613 |  |  |  | 9,588 |
Income (loss) per basic common share: |  |  |  |  |  |  |  |  |  |  |  |
Continuing operations |  | $ | 2.09 |  |  | $ | (0.88 | ) |  | $ | (0.71 | )
Discontinued operations |  |  | - |  |  |  | (0.18 | ) |  |  | (0.26 | )
Net income (loss) per share |  | $ | 2.09 |  |  | $ | (1.06 | ) |  | $ | (0.97 | )
Income (loss) per diluted common share: |  |  |  |  |  |  |  |  |  |  |  |
Continuing operations |  | $ | 2.09 |  |  | $ | (0.88 | ) |  | $ | (0.71 | )
Discontinued operations |  |  | - |  |  |  | (0.18 | ) |  |  | (0.26 | )
Net income (loss) per share assuming dilution |  | $ | 2.09 |  |  | $ | (1.06 | ) |  | $ | (0.97 | )
| ( 1 ) | The weighted-average number of antidilutive shares not included in the computation of diluted net income per share was approximately 63,000, for the year ended December 31, 2018, including approximately 39,000 of performance-based share awards, at the target level of 100%, that were not included because the performance conditions had not been met as of December 31, 2018. The weighted-average number of antidilutive shares not included in the computation of diluted net loss per share was approximately 196,000 and 198,000 for the years ended December 31, 2017 and 2016, respectively.
Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables, foreign currency forward contracts, and deferred compensation plan assets. Trade receivables generally represent a large number of customers, including municipalities, manufacturers, distributors, and contractors, dispersed across a wide geographic base. As of December 31, 2018, one customer had a balance in excess of 10% of total accounts receivable. As of December 31, 2017, two customers had a balance in excess of 10% of total accounts receivable. Foreign currency forward contracts are with a high quality financial institution. The Company’s deferred compensation plan assets, included in Other assets, are invested in a diversified portfolio of stock and bond mutual funds. Recent Accounting and Reporting Developments Accounting Changes In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014 - 09, “Revenue from Contracts with Customers (Topic 606 )” (“ASU 2014 - 09” ) which replaces most existing revenue recognition guidance in accordance with U.S. GAAP. The core principle of ASU 2014 - 09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014 - 09 requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. During 2016 and 2017, the FASB issued several ASUs that clarify the implementation guidance for ASU 2014 - 09 but do not change the core principle of the guidance. The Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers,” (“Topic 606” ) on January 1, 2018 using the modified retrospective method applied to those contracts that were not completed as of that date. The Company recorded the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Under the modified retrospective method, periods prior to the adoption date were not adjusted and continue to be reported in accordance with accounting standards in effect for those periods. The cumulative effect of adopting Topic 606 was a decrease to Retained earnings due to a change in the timing of revenue recognition on certain costs under the new revenue standard, as well as, to a lesser extent, a change in the costs included in the provisions for losses on uncompleted contracts. Additionally, Costs and estimated earnings in excess of billings on uncompleted contracts and certain amounts of Trade and other receivables, net were reclassified to establish the opening balance of Contract assets and Billings in excess of costs and estimated earnings on uncompleted contracts were reclassified to establish the opening balance of Contract liabilities. The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet as of January 1, 2018 for the adoption of Topic 606 was as follows (in thousands):
|  | December 31, 2017 |  |  | Effects of Adoption of Topic 606 |  |  | January 1, 2018 |
Consolidated Balance Sheet |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Trade and other receivables, net |  | $ | 28,990 |  |  | $ | (420 | ) |  | $ | 28,570 |
Costs and estimated earnings in excess of billings on uncompleted contracts |  |  | 44,502 |  |  |  | (44,502 | ) |  |  | - |
Contract assets |  |  | - |  |  |  | 42,945 |  |  |  | 42,945 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Accrued liabilities |  | $ | 6,563 |  |  | $ | (783 | ) |  | $ | 5,780 |
Billings in excess of costs and estimated earnings on uncompleted contracts |  |  | 2,599 |  |  |  | (2,599 | ) |  |  | - |
Contract liabilities |  |  | - |  |  |  | 2,537 |  |  |  | 2,537 |
Deferred income taxes |  |  | 941 |  |  |  | (257 | ) |  |  | 684 |
Stockholders' equity: |  |  |  |  |  |  |  |  |  |  |  |
Retained earnings |  | $ | 81,757 |  |  | $ | (875 | ) |  | $ | 80,882 |
The impact of Topic 606 on the Company’s Consolidated Statement of Operations and on the Consolidated Balance Sheet was as follows (in thousands):
|  | Year Ended December 31, 2018 |
|  | As Reported |  |  | Adjustments |  |  | Balance Without Adjustment for Adoption of Topic 606 |
Consolidated Statement of Operations |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  | $ | 172,149 |  |  | $ | 766 |  |  | $ | 172,915 |
Cost of sales |  |  | 160,053 |  |  |  | 532 |  |  |  | 160,585 |
Operating loss |  |  | (2,971 | ) |  |  | 234 |  |  |  | (2,737 | )
Income tax benefit |  |  | (3,252 | ) |  |  | 1 |  |  |  | (3,251 | )
Net income |  |  | 20,312 |  |  |  | 233 |  |  |  | 20,545 |
|  | December 31, 2018 |
|  | As Reported |  |  | Adjustments |  |  | Balance Without Adjustment for Adoption of Topic 606 |
Consolidated Balance Sheet |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Trade and other receivables, net |  | $ | 34,394 |  |  | $ | 834 |  |  | $ | 35,228 |
Costs and estimated earnings in excess of billings on uncompleted contracts |  |  | - |  |  |  | 76,033 |  |  |  | 76,033 |
Contract assets |  |  | 74,271 |  |  |  | (74,271 | ) |  |  | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Accrued liabilities |  | $ | 7,547 |  |  | $ | 1,315 |  |  | $ | 8,862 |
Billings in excess of costs and estimated earnings on uncompleted contracts |  |  | - |  |  |  | 3,660 |  |  |  | 3,660 |
Contract liabilities |  |  | 3,745 |  |  |  | (3,745 | ) |  |  | - |
Deferred income taxes |  |  | 68 |  |  |  | 258 |  |  |  | 326 |
Stockholders' equity: |  |  |  |  |  |  |  |  |  |  |  |
Retained earnings |  | $ | 101,194 |  |  | $ | 1,108 |  |  | $ | 102,302 |
In January 2016, the FASB issued Accounting Standards Update No. 2016 - 01, “Financial Instruments—Overall (Subtopic 825 - 10 ): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016 - 01” ). ASU 2016 - 01 makes changes to the accounting for equity investments and financial liabilities accounted for under the fair value option, and changes presentation and disclosure requirements for financial instruments. In February 2018, the FASB issued Accounting Standards Update No. 2018 - 03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825 - 10 ): Recognition and Measurement of Financial Assets and Financial Liabilities,” which clarifies certain aspects of the guidance issued in ASU 2016 - 01. The Company adopted this guidance on January 1, 2018 and the impact was not material to the Company’s financial position, results of operations, or cash flows. In August 2016, the FASB issued Accounting Standards Update No. 2016 - 15, “Statement of Cash Flows (Topic 230 ): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016 - 15” ). ASU 2016 - 15 clarifies whether eight specifically identified cash flow issues, which previous U.S. GAAP did not address, should be categorized as operating, investing, or financing activities in the statement of cash flows. The Company adopted this guidance on January 1, 2018 and the impact was not material to the Company’s financial position, results of operations, or cash flows. In March 2017, the FASB issued Accounting Standards Update No. 2017 - 07, “Compensation—Retirement Benefits (Topic 715 ): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017 - 07” ). ASU 2017 - 07 requires that the service cost component of net benefit cost be presented in the same income statement line as other employee compensation costs, while the other components of net benefit cost are to be presented outside income from operations. The Company adopted this guidance on a retrospective basis on January 1, 2018. The non-service cost components of approximately $0 and $0.4 million for the years ended December 31, 2017 and 2016, respectively, were reclassified from Cost of sales to Other income (expense), resulting in a change to Gross profit and Operating loss. There was no impact to Loss from continuing operations or Net loss, so therefore no impact to Net loss per share. Recent Accounting Standards In February 2016, the FASB issued Accounting Standards Update No. 2016 - 02, “Leases (Topic 842 )” (“ASU 2016 - 02” ). ASU 2016 - 02 makes changes to U.S. GAAP, requiring the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases. For operating leases, the lease asset and lease liability will be initially measured at the present value of the lease payments in the balance sheet. The cost of the lease is then allocated over the lease term generally on a straight-line basis. All cash payments will be classified within operating activities in the statement of cash flows. For financing leases, the lease asset and lease liability will be initially measured at the present value of the lease payments in the balance sheet. Interest on the lease liability will be recognized separately from amortization of the lease asset in the statement of comprehensive income. In the statement of cash flows, repayments of the principal portion of the lease liability will be classified within financing activities, and payments of interest on the lease liability and variable payments will be classified within operating activities. For leases with terms of twelve months or less, a lessee is permitted to make an accounting policy election by asset class not to recognize lease assets and lease liabilities. Lease expense for such leases will be generally recognized straight-line basis over the lease term. The accounting applied by a lessor is largely unchanged from previous U.S. GAAP. ASU 2016 - 02 provides for a transitional adoption, with lessees and lessors required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. During 2018 and 2019, the FASB issued additional ASUs that clarify the implementation guidance for ASU 2016 - 02 but do not change the core principle of the guidance. The Company will adopt ASC Topic 842, “Leases,” on January 1, 2019 using the modified retrospective transition method and initially apply the transition provisions at January 1, 2019, which allows it to continue to apply legacy guidance for periods prior to 2019. The Company will elect the package of transition practical expedients, which, among other things, allows it to keep the historical lease classifications and not have to reassess the lease classification for any existing leases as of the date of adoption. The Company will also make an accounting policy election to apply the short-term lease exception, which allows it to keep leases with an initial term of twelve months or less off the balance sheet. While the Company is continuing to assess all potential impacts of the standard, it expects to recognize right-of-use assets and lease liabilities for operating leases of approximately $8.0 million as of January 1, 2019. The Company does not expect a material impact to its results of operations or cash flows from adoption of Topic 842. In August 2017, the FASB issued Accounting Standards Update No. 2017 - 12, “Derivatives and Hedging (Topic 815 ): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017 - 12” ), which better aligns risk management activities and financial reporting for hedging relationships, simplifies hedge accounting requirements, and improves disclosures of hedging arrangements. ASU 2017 - 12 is effective for the Company beginning January 1, 2019. The Company does not expect a material impact to its financial position, results of operations, or cash flows from adoption of this guidance. In February 2018, the FASB issued Accounting Standards Update No. 2018 - 02, “Income Statement—Reporting Comprehensive Income (Topic 220 ): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018 - 02” ), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”) and requires certain disclosures about stranded tax effects. ASU 2018 - 02 is effective for the Company beginning January 1, 2019. The Company is currently assessing the impact of ASU 2018 - 02 on its Consolidated Financial Statements, but does not expect a material impact to its financial position, results of operations, or cash flows from adoption of this guidance. In July 2018, the FASB issued Accounting Standards Update No. 2018 - 09, “Codification Improvements” (“ASU 2018 - 09” ), which clarifies, corrects errors in or makes minor improvements to the ASC. ASU 2018 - 09 is effective for the Company beginning January 1, 2019. The Company does not expect a material impact to its financial position, results of operations, or cash flows from adoption of this guidance. In August 2018, the FASB issued Accounting Standards Update No. 2018 - 13, “Fair Value Measurement (Topic 820 ): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018 - 13” ), which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018 - 13 is effective for the Company beginning January 1, 2020, with early adoption permitted for the removed and modified disclosures and delayed adoption until the effective date permitted for the additional disclosures. Upon adoption, the removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not expect a material impact to its financial position, results of operations, or cash flows from adoption of this guidance. In August 2018, the FASB issued Accounting Standards Update No. 2018 - 14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715 - 20 ): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018 - 14” ), which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The eliminated disclosures include the amounts in accumulated other comprehensive income expected to be recognized in net periodic benefit costs over the next fiscal year and the amount and timing of plan assets expected to be returned to the employer. The new disclosures include an explanation of significant gains and losses related to changes in benefit obligations. ASU 2018 - 14 is effective for the Company beginning January 1, 2021, with early adoption permitted, and will be adopted on a retrospective basis. The Company does not expect a material impact to its financial position, results of operations, or cash flows from adoption of this guidance.

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