Northwest Pipe Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company manufactures steel pipe, precast and reinforced concrete products, and other water-infrastructure products. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $84.6 | $77.6 | $230.8 | $216.5 |
| Gross profit / margin | $12.4 / 14.6% | $15.6 / 20.1% | $30.7 / 13.3% | $38.2 / 17.6% |
| Operating income | $6.8 | $10.0 | $12.9 | $19.0 |
| Net income | $4.9 | $7.3 | $9.3 | $13.8 |
| Diluted EPS | $0.50 | $0.73 | $0.93 | $1.40 |
- Sales rose 9.0% in Q3 and 6.6% year to date. Higher precast concrete sales and pricing, and higher steel-pipe selling prices, drove the increase; steel-pipe volumes were lower amid project timing changes.
- Gross profit declined 20.8% in Q3 and 19.6% for the first nine months. Lower margins reflected steel-pipe product mix and project-pricing pressure, partly offset by higher precast profit. Nine-month 2020 gross profit included a $1.4 million insurance recovery and $0.3 million of acquisition-related inventory charges.
- SG&A declined 1.7% in Q3 and 7.6% year to date, including lower compensation and, for the nine-month comparison, lower acquisition-related expenses.
Cash flow, liquidity and debt
- Operating cash flow was negative $13.6 million for the first nine months, versus positive $43.4 million in 2020. Working-capital changes used $34.6 million, principally reflecting increases in contract assets and inventory.
- Investing cash outflow was $7.8 million, including $8.1 million of capital expenditures. Financing cash outflow was $13.3 million, including $13.8 million of long-term-debt repayments.
- Cash fell to $3.2 million from $37.9 million at December 31, 2020; working capital was $152.9 million. The company reported $2.2 million of revolving borrowings and approximately $96 million of remaining availability under its $100 million facility as of September 30.
- There was no long-term debt balance at September 30. Operating lease liabilities were $32.4 million; finance lease liabilities were $2.3 million. The company said available cash, operating cash flows and credit availability should fund needs for at least 12 months.
- Capital expenditures were expected to be approximately $11–$12 million for 2021. This is the filing’s stated spending expectation, not earnings guidance.
Outlook, material events and risks
- Steel costs introduced into production increased 49% in the first nine months versus 2020. Management described continuing procurement challenges, extended lead times and higher costs; the ability to pass costs through depends on market conditions.
- Steel-pipe backlog was approximately $191 million at September 30. The company expected to recognize about 33% in 2021, 53% in 2022 and the remainder thereafter.
- Management characterized long-term U.S. water-infrastructure demand as strong, but noted near-term risks from constrained public-agency budgets and financing, increased competitive capacity, changing project timing, raw-material availability and pricing, and COVID-19-related disruption. The pandemic had not materially adversely affected reported results in the first nine months, but its future effects were uncertain.
- On October 5, 2021, the company acquired ParkUSA for approximately $87.4 million, net of cash acquired, subject to a working-capital adjustment. The acquisition occurred after the reporting period and is not included in the period’s results. On October 22, the credit facility was increased to $125 million; borrowings were $87.2 million and availability approximately $36 million at that date. The amended facility raises the minimum EBITDA covenant to $31.5 million beginning in Q4 2021 and removes the fixed-charge-coverage covenant.
- The company cannot estimate its potential share of Portland Harbor Superfund cleanup costs and recorded no additional liability. A separate Yakama Nation natural-resource-damages lawsuit remains unresolved; the company said it lacks sufficient information to determine the likelihood or amount of loss. Insurance coverage may not cover all costs.
Investor facts to verify
- Whether steel-cost inflation and procurement delays can be passed through to customers without further margin deterioration.
- Whether the $191 million backlog converts to revenue on the expected schedule, given project timing and customer delivery patterns.
- Post-acquisition ParkUSA performance, integration costs, and debt levels following the $87.4 million purchase and October facility draw.
- Working-capital requirements and cash generation, particularly given negative operating cash flow and the growth in contract assets and inventory.
- Compliance with amended credit covenants and the potential financial exposure from Portland Harbor and related legal matters.