Northwest Pipe Company (Nasdaq: NWPX) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing identifies the registrant as Northwest Pipe Company. The company manufactures water-related infrastructure products through its Engineered Steel Pressure Pipe (SPP) and Precast Infrastructure and Engineered Systems (Precast) segments. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $116.4 | $118.5 | $215.5 | $227.9 |
| Gross profit / margin | $22.5 / 19.3% | $24.1 / 20.3% | $39.1 / 18.1% | $38.9 / 17.1% |
| Operating income / margin | $11.5 / 9.9% | $14.0 / 11.8% | $16.2 / 7.5% | $19.4 / 8.5% |
| Net income | $7.4 | $9.7 | $9.8 | $13.2 |
| Diluted EPS | $0.74 | $0.97 | $0.97 | $1.33 |
- Q2 sales declined 1.8% year over year; first-half sales declined 5.4%. Q2 net income fell about 23%; first-half net income fell about 26%.
- SPP Q2 sales were essentially flat at $77.3 million; higher selling price per ton from product mix was largely offset by lower production volumes tied to project timing. First-half SPP sales fell 7.2%, reflecting lower volume and selling price.
- Precast sales declined 5.6% in Q2 and 1.8% in the first half. Lower shipment volumes were partly offset by higher selling prices. Precast gross profit fell 23.6% in Q2 and 9.1% in the first half, primarily due to higher production costs. SPP gross profit improved, primarily from product mix and, for the first half, comparison with a prior-year product liability settlement reserve.
- SG&A increased 8.8% in Q2 and 17.4% in the first half, driven mainly by compensation and benefits, administrative expense, professional fees including ERP work, and other costs.
Cash flow, liquidity, and debt
- First-half operating cash flow was $27.5 million, versus $10.2 million in 2022. Working-capital changes provided $5.9 million, compared with using $13.0 million in the prior-year period.
- First-half investing cash outflow was $11.1 million, including $8.4 million of capital expenditures and a $2.7 million ParkUSA working-capital adjustment payment. Financing cash outflow was $15.9 million, including $13.6 million of net revolver repayments.
- Cash was $4.2 million at June 30, 2023. Working capital was $184.3 million, compared with $187.9 million at December 31, 2022. Current assets were $279.4 million and current liabilities $95.1 million.
- Revolver borrowings were $70.1 million, down from $83.7 million at year-end; the company reported approximately $54 million of additional borrowing capacity and $1.1 million of letters of credit. Current equipment-funding debt was $10.8 million. Operating and finance lease liabilities were $92.7 million and $4.8 million, respectively.
- The revolver commitment is $125 million, with a conditional option to increase it by $50 million, and matures June 29, 2028. The weighted-average rate on revolver borrowings was 7.16%, up from 6.07% at December 31, 2022. The company reported compliance with financial covenants at quarter-end and expects to remain compliant over the next 12 months.
- Management said existing cash, expected operating cash flow, and available borrowing capacity should fund working capital, debt service, and capital needs for the foreseeable future.
Outlook, risks, and contingencies
- SPP backlog was $292 million at June 30. The company expects to recognize about 46% in 2023, 46% 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.
- Expected 2023 capital expenditures are $24–$28 million, including about $4 million for a new reinforced concrete pipe mill and related equipment. The filing provides no specific revenue or earnings guidance.
- Steel markets remained volatile, with prices rising significantly in the first half. Management expects higher steel costs to affect second-half results, offset by higher average selling prices. Fixed-price SPP contracts create exposure if steel prices move before materials are purchased. Labor shortages, inflation, potential recession, interest rates, supply-chain issues, project timing, and housing-market conditions are also cited risks.
- The ParkUSA ERP implementation has caused, and may continue to cause, operational disruption and inefficiencies. The company reported a material weakness in internal control over financial reporting related to ERP conversion oversight, data completeness and testing, and controls over ParkUSA sales and cost-of-sales transactions. Remediation is ongoing; management anticipated completion during 2023. Disclosure controls were considered ineffective as of June 30.
- The company cannot estimate its potential obligation for the Portland Harbor Superfund cleanup, for which the EPA estimated total cleanup costs of about $1 billion and has not allocated responsibility among more than 150 potentially responsible parties. No further adjustment was recorded. A related Yakama Nation case is stayed until January 2025; the company cannot determine the likelihood or amount of loss. Insurance may not cover all costs.
- Other items include approximately $1.2 million remaining on commitments for new mill equipment. Management stated routine legal proceedings are not expected to have a material adverse effect.
Important facts for investors to verify
- Whether higher steel costs are passed through as anticipated and how they affect second-half margins.
- SPP project timing and conversion of the $292 million backlog into shipments, revenue, and cash collections.
- Precast demand, shipment volumes, and production-cost trends.
- Progress and testing of ParkUSA internal-control remediation, including whether the material weakness is resolved.
- Revolver utilization, borrowing costs, covenant headroom, and financing arrangements for the equipment loan.
- Developments in Portland Harbor environmental matters, allocation of cleanup costs, and insurance coverage.