Northwest Pipe Company (NWPX) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Northwest Pipe manufactures steel water pipeline systems and concrete infrastructure products for water transmission, water and wastewater, stormwater, sewer, and related markets. It reports one operating segment, Water Infrastructure. The Geneva Pipe and Precast acquisition closed in January 2020 and contributed to the year-over-year sales comparison.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $73.8 | $70.0 | $146.1 | $138.9 |
| Gross profit / margin | $9.5 / 12.9% | $13.0 / 18.5% | $18.3 / 12.5% | $22.5 / 16.2% |
| Operating income | $3.2 | $7.4 | $6.1 | $9.0 |
| Net income | $2.1 | $6.0 | $4.3 | $6.6 |
| Diluted EPS | $0.21 | $0.61 | $0.43 | $0.67 |
- Sales increased 5.5% in Q2 and 5.2% for the first half. Geneva contributed $15.0 million of Q2 2021 sales versus $12.4 million in Q2 2020, and $27.3 million for the first half versus $20.4 million.
- Gross profit and margins fell in both comparisons. Management attributed the decline primarily to product mix and pricing pressure at steel pipe facilities, partly offset by higher precast concrete gross profit. Steel pipe sales were relatively consistent year over year.
- Q2 SG&A rose 13.5% to $6.3 million, mainly due to compensation and other costs. First-half SG&A fell 10.1% to $12.2 million, primarily because 2020 included $2.6 million of Geneva acquisition transaction costs.
- Interest expense was $0.35 million in Q2 and $0.58 million for the first half, versus $0.26 million and $0.48 million, respectively, in 2020.
Cash flow, liquidity and debt
- First-half operating cash flow was $5.1 million, down from $28.8 million. The company cited $7.8 million of cash use from working-capital changes, compared with $11.8 million of working-capital cash generation in the prior-year period; contract assets increased $17.0 million.
- First-half investing cash use was $4.7 million, including $4.8 million of capital expenditures; 2020 investing cash use included $48.7 million for Geneva. Financing cash use was $15.1 million, including $13.8 million of long-term debt repayments.
- Cash was $23.2 million at June 30, 2021, down from $37.9 million at year-end 2020. Working capital was $146.0 million, versus $146.1 million at year-end.
- The company repaid all outstanding long-term debt when it entered a new revolving credit agreement on June 30. It had no revolving or swingline borrowings, $1.6 million of letters of credit, and approximately $98 million of available borrowing capacity under the $100 million facility, which may be increased by $25 million subject to conditions. The facility matures June 30, 2024 and is secured by substantially all company and subsidiary assets. Operating lease liabilities were $33.0 million and finance lease liabilities were $1.9 million.
- From September 30, 2021, the credit agreement requires a senior leverage ratio no greater than 2.50:1, fixed-charge coverage ratio of at least 1.25:1, and trailing-four-quarter EBITDA of at least $25 million, subject to agreement terms. Management expects covenant compliance and says available cash, operating cash flow, and credit availability should fund needs for at least 12 months.
Outlook, risks and contingencies
- Management expects 2021 capital expenditures of approximately $12–14 million, primarily for replacement of existing assets. Steel-pipe backlog was approximately $195 million at June 30; the company expects to recognize about 56% in 2021, 33% in 2022, and the remainder thereafter.
- Management describes long-term U.S. water-infrastructure demand as strong, but warns that constrained government and water-agency budgets and financing, increased competition and capacity, and project timing could weigh on near-term results.
- Steel costs introduced into production rose 20% in the first half versus the prior-year period. The company expects continued procurement challenges, higher costs, and extended lead times; its ability to adjust selling prices depends on market conditions.
- COVID-19 had no direct material adverse effect on reported first-half 2021 results, but its future effects remain uncertain, including possible impacts on labor, materials, municipal funding, and operations.
- For the Portland Harbor Superfund Site, the EPA estimated cleanup costs of about $1 billion and a 13-year process, but has not allocated responsibility among more than 150 potentially responsible parties. The company cannot estimate its potential obligation and recorded no further adjustment. A separate Yakama Nation claim seeks recovery of assessment costs and natural-resource damages; the company says it lacks sufficient information to assess the likelihood or amount of loss. Insurance may not cover all costs.
- The filing reports business-interruption insurance recovery of $1.8 million for Q2 2020 and $1.4 million for the first half of 2020, figures that appear inconsistent because the reported quarterly amount exceeds the reported six-month amount.
Important facts for investors to verify
- Whether pricing and product mix can recover gross margins amid elevated steel costs and procurement delays.
- Conversion of the $195 million backlog into shipments, billings, and cash collections, particularly given the increase in contract assets and lower operating cash flow.
- Capacity to meet the new credit agreement’s EBITDA and leverage/coverage tests when they begin applying.
- The eventual allocation and insurability of any Portland Harbor cleanup or Yakama Nation-related costs.
- The disclosed 2020 business-interruption recovery amounts and their apparent quarterly-versus-half-year inconsistency.