Northwest Pipe Company (Nasdaq: NWPX) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company manufactures engineered steel and reinforced-concrete pipeline systems and protective linings for water infrastructure. It reports as one segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $75.2m | $52.5m | $207.1m | $114.6m |
| Gross profit / margin | $15.5m / 20.6% | $5.2m / 9.9% | $30.3m / 14.6% | $5.3m / 4.6% |
| Operating income (loss) | $10.6m | $2.5m | $16.4m | $(5.7)m |
| Net income | $10.7m | $27.8m | $15.9m | $20.2m |
| Diluted EPS | $1.10 | $2.86 | $1.63 | $2.07 |
- Sales increased 43% in Q3 and 81% year to date. Management attributed growth principally to higher production volumes; Ameron, acquired in July 2018, contributed $40.7m of 2019 year-to-date sales versus $11.1m in the comparable 2018 period. Selling price per ton fell 17% in Q3 and 8% year to date, primarily because of product mix.
- Gross margin improved substantially with higher volumes and Ameron operations. The 2019 year-to-date result included $3.9m of incremental production costs from the Saginaw fire, partly offset by $1.0m of business-interruption insurance proceeds.
- Net income comparisons are affected by the $21.9m Ameron bargain-purchase gain recorded in 2018. The 2018 periods also included a $2.8m facility-sale gain; 2019 included no such gains. 2019 other income included a $2.3m legal settlement and a $0.4m gain on Saginaw property-damage insurance.
- Year-to-date operating cash flow was $21.4m, versus cash used of $7.2m in 2018. Investing activities used $4.5m, including $5.9m of capital expenditures; financing activities used $11.8m, mainly net credit-line repayments of $11.5m. Cash ended at $11.7m, up from $6.7m at year-end 2018.
Financial position and liquidity
- At September 30, 2019, working capital was $139.0m, compared with $128.0m at December 31, 2018. Current assets were $169.6m and current liabilities $30.7m. Contract assets were $90.8m, up from $74.3m at year-end.
- No credit-line borrowings were outstanding; $1.6m of letters of credit were outstanding. The $60m revolving facility had $45.1m of additional borrowing capacity, net of letters of credit and the amount needed to avoid a covenant trigger. The facility expires October 2023 and is secured by substantially all company and subsidiary assets.
- Other long-term liabilities were $18.9m, including operating-lease liabilities of $6.6m and finance-lease liabilities of $0.6m, net of current portions. Management said cash, operating cash flows, and available credit were expected to fund working capital and capital spending for at least 12 months.
Outlook, risks, and unusual items
- Backlog was approximately $211.3m at September 30. The company expected to recognize about 35% in the remainder of 2019, 47% in 2020, and the balance thereafter. Expected 2019 capital expenditures were $11.1m. No broader earnings or sales guidance was provided.
- Management described long-term U.S. water-infrastructure demand as strong, while warning that constrained public-agency budgets and increased competitive capacity could weigh on near-term business. Steel prices and the ability to pass cost changes through to selling prices remain important factors. Orders, bidding, product mix, and production can vary significantly.
- A fire at the Saginaw, Texas facility on April 21 impaired coating operations; the facility resumed operations in October. The company wrote off $0.9m of property and equipment and $0.1m of inventory, and reported $3.9m of incremental production costs year to date. Further insurance recoveries, if any, were to be recorded when received.
- Potential environmental liability at the Portland Harbor Superfund Site remains unquantifiable: the EPA estimated cleanup at approximately $1bn over 13 years, but allocation among more than 150 potentially responsible parties had not been determined. No additional accrual was recorded. A Yakama Nation natural-resource-damages complaint is also pending; the company said it lacked information to assess likelihood or potential damages. Insurance coverage may not cover all costs.
- The filing disclosed a $1.2m timing error in revenue recognition at a recently acquired facility, which management concluded was not material to 2018 or projected 2019 results. Revenue depends on cost-to-cost estimates; revisions reduced year-to-date 2019 revenue by $1.1m.
Important facts for investors to verify
- Whether Saginaw insurance claims are settled and additional recoveries offset the remaining fire-related costs.
- Backlog conversion, contract-asset billing and collection, and the accuracy of estimated costs and revenue on long-term contracts.
- Developments in Portland Harbor remediation, cost allocation, and the Yakama Nation litigation, including the adequacy of insurance.
- Whether margins and cash generation are sustained as product mix, steel costs, competition, and public-agency budgets change.
- Credit-facility availability and covenant compliance, particularly given the borrowing-base structure and security over company assets.