NWPX Infrastructure, Inc. (Northwest Pipe Company) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are in millions of dollars unless otherwise noted. The company manufactures welded steel pipe, with Water Transmission and Tubular Products reportable segments.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $33.9 | $84.9 |
| Gross profit (loss) | $(5.4) | $3.9 |
| Gross margin | (16.0%) | 4.6% |
| Operating loss | $(10.0) | $(3.1) |
| Net loss | $(9.6) | $(2.1) |
| Loss per diluted share | $(1.00) | $(0.22) |
| Operating cash flow | $1.2 | $24.6 |
| Capital expenditures | $0.7 | $3.7 |
- Segments: Water Transmission sales were $29.4 million, down 47.8%, with a $5.8 million gross loss versus $7.5 million gross profit a year earlier. Tubular Products sales were $4.6 million, down 84.0%, but gross profit improved to $0.3 million from a $3.6 million loss.
- Margins and costs: Water Transmission’s gross margin fell to (19.6%) from 13.4%, reflecting competitive bidding, lower selling prices and project mix. Tubular Products’ 6.8% gross margin benefited from realized prices above those assumed in a 2015 inventory write-down.
- Balance sheet and liquidity: Cash was $9.4 million at March 31, versus $10.3 million at year-end. Working capital was $83.7 million, down from $93.7 million. Total assets were $249.2 million and stockholders’ equity was $207.2 million.
- Debt and availability: No line-of-credit borrowings were outstanding; capital lease obligations totaled $1.0 million. The $60 million revolving facility had $19.6 million of additional borrowing capacity, net of $2.0 million in letters of credit, after a borrowing-base availability limit applied because the fixed-charge coverage ratio was not met.
Material changes and management commentary
- Sales fell 60.0% year over year. Water Transmission selling price per ton declined 52%, partly offset by 10% more tons produced; management attributed lower prices largely to steel costs falling 39% per ton and competitive conditions.
- Tubular Products tons sold fell 73% and selling price per ton fell 42%. Energy pipe volume declined 77%, amid weak oil-and-gas demand and imported-pipe pressure. The Atchison facility was idled in January 2016; the company continued selling previously manufactured inventory and was exploring a sale of the remaining Energy Tubular Products business.
- SG&A declined 34.1% to $4.6 million, primarily due to reduced wages and benefits, professional fees, and travel expense. Interest expense declined to $0.1 million from $0.4 million, mainly due to lower average borrowings and lease balances.
- Management expected approximately $3.0 million of capital expenditures for 2016 and stated that cash, expected operating cash flow and available credit should be sufficient for foreseeable working-capital and capital needs. No specific earnings or revenue guidance was provided. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- Management described long-term water-infrastructure demand as strong, but expected near-term budget constraints and competitor capacity to weigh on Water Transmission. Weak energy demand, imports, domestic capacity expansion, steel-price fluctuations, order timing and project mix were identified as business risks.
Contingencies and unusual items
- Portland Harbor Superfund: The company could be responsible for a share of cleanup costs, but could not estimate its obligation; no additional accrual was recorded. Potential site-remedy estimates ranged from $790 million to $2.5 billion for the entire site, with allocation among more than 100 potentially responsible parties. Insurance coverage may not cover all costs.
- Houston environmental matter: Estimated future remediation costs were $0.2 million to $2.2 million; the company accrued $0.3 million. Completion was estimated between Q2 2017 and Q1 2019. Reimbursement by the purchaser of the former OCTG business depends on specified circumstances.
- The company paid $1.2 million of contingent consideration in January 2016 related to Permalok revenue earned in 2015. Derivative contracts hedge foreign-currency exposure; substantially all accumulated hedge losses were expected to be reclassified to sales within 12 months.
- The Q1 2016 tax benefit was $0.5 million, at a 5.3% effective rate, versus a $1.3 million benefit and 37.7% rate in Q1 2015. Management attributed the lower 2016 rate primarily to a valuation allowance on current-period net operating losses.
Important facts for investors to verify
- Whether Water Transmission project awards, pricing, production and gross margins improve after the sharp Q1 deterioration.
- Progress on a potential Tubular Products business sale, the idled Atchison facility and remaining inventory sales.
- Actual borrowing-base availability and covenant-related restrictions, given the fixed-charge coverage ratio was not met.
- Updates to Portland Harbor liability, allocation, insurance recovery and the Houston remediation estimate and reimbursement conditions.
- Whether operating cash generation and working-capital trends support management’s liquidity assessment and 2016 capital-spending expectation.