Northwest Pipe Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Amounts below are in U.S. dollars. Unless stated otherwise, financial amounts are in millions.
Business context
The company manufactures water-infrastructure products through Engineered Steel Pressure Pipe (SPP) and Precast Infrastructure and Engineered Systems (Precast). It operates 13 manufacturing facilities across North America.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $99.1 | $109.3 | Down 9.4% |
| Gross profit | $16.6 | $14.8 | Up 12.1% |
| Gross margin | 16.7% | 13.5% | Up 3.2 percentage points |
| Operating income | $4.7 | $5.4 | Down 13.1% |
| Net income | $2.4 | $3.6 | Down 33.6% |
| Diluted earnings per share | $0.23 | $0.36 | Down $0.13 |
| Operating cash flow | $26.3 | $1.6 | Up $24.6 |
| Capital expenditures | $4.4 | $4.4 | Flat |
Interest expense rose to $1.4 million from $0.6 million. SG&A increased 26.7% to $11.9 million, or 11.9% of sales versus 8.5%, primarily due to higher incentive compensation, base compensation and benefits, professional fees, and administrative expenses.
Segments and material changes
- SPP: Sales fell 14.9% to $63.5 million, reflecting 4% fewer tons produced, primarily due to project timing, and an 11% decrease in selling price per ton as material costs declined. Gross profit increased to $7.8 million from $7.2 million; the prior-year period included a $2.0 million product-liability settlement reserve.
- Precast: Sales rose 2.7% to $35.6 million, primarily from higher selling prices. Gross profit rose 15.8% to $8.8 million, with margin increasing to 24.7% from 21.9%, primarily due to improved pricing.
- Consolidated gross margin improved, but lower sales, higher SG&A, and increased interest expense contributed to lower operating and net income.
Liquidity, debt and cash flow
At March 31, 2023, cash was $3.9 million and working capital was $170.5 million, down from $187.9 million at December 31, 2022. Current assets were $260.8 million and current liabilities $90.4 million. Operating cash flow benefited from an $18.0 million working-capital contribution, compared with a $7.2 million use in Q1 2022; the company cautions that working-capital timing varies with production, delivery, invoicing and collections.
Outstanding revolving borrowings were $62.6 million, down from $83.7 million at year-end; current debt was $10.8 million. The company reported approximately $61 million of additional borrowing capacity under its $125 million revolving facility, which matures June 30, 2024. Operating lease liabilities were $93.0 million and finance lease liabilities $3.3 million. The company was in compliance with its credit-agreement financial covenants at quarter-end and expects to remain compliant over the next 12 months.
Outlook, risks and unusual items
- Management expects 2023 capital expenditures of approximately $24–$28 million, including about $4 million for the new reinforced concrete pipe mill and related equipment.
- SPP backlog was $297 million at quarter-end. The company expects to recognize approximately 54% in 2023, 39% in 2024, and the remainder thereafter.
- Management described long-term U.S. water-infrastructure demand as strong and recent short-term SPP demand as improved. Steel prices increased significantly in Q1; the company expects higher steel costs to affect results in the second half of 2023, offset by higher average selling prices. Steel-price volatility, project timing, labor shortages, inflation, recession risks, and supply-chain issues could affect results.
- The ParkUSA ERP implementation has caused operational disruption and inefficiencies. A previously reported material weakness in internal control over financial reporting remained unremediated at March 31; disclosure controls were therefore deemed ineffective. Management anticipated remediation during 2023, subject to controls operating effectively and successful testing.
- The company cannot estimate its potential liability for the Portland Harbor Superfund Site cleanup, and recorded no additional adjustment. A related Yakama Nation case is stayed until January 2025; the company cannot currently determine the likelihood or amount of loss. It says insurance may reimburse some costs but cannot assure full coverage.
- Management stated that available cash, expected operating cash flows, and borrowing capacity should fund working capital, debt service, and capital expenditures for at least the next 12 months. No formal earnings or revenue guidance was provided.
Important facts for investors to verify
- Whether SPP production and project timing recover, and whether the $297 million backlog converts to revenue on the stated schedule.
- Whether higher steel costs in the second half are offset by selling prices as management expects.
- Whether ParkUSA ERP disruptions and the material weakness are remediated as planned, and whether any related reporting or operating issues emerge.
- Available revolver capacity, covenant compliance, and refinancing plans ahead of the June 2024 credit-facility maturity.
- Developments in the Portland Harbor environmental matters, including cost allocation, litigation, and insurance coverage.