Northwest Pipe Company — Q2 2016 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2016. Northwest Pipe manufactures welded steel pipe through its Water Transmission and Tubular Products groups. Water Transmission represented 91% of first-half sales. Amounts below are in millions, except per-share data.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $42.1 | $53.8 | $76.0 | $138.7 |
| Gross profit (loss) | $(2.2) | $(2.6) | $(7.6) | $1.3 |
| Gross margin | (5.1)% | (4.8)% | (10.0)% | 0.9% |
| Operating loss | $(6.3) | $(13.3) | $(16.3) | $(16.4) |
| Net loss | $(6.2) | $(12.1) | $(15.8) | $(14.2) |
| Loss per share, diluted | $(0.65) | $(1.26) | $(1.65) | $(1.48) |
| Cash from operating activities | — | $1.5 | $41.8 |
- At June 30, cash was $9.1, working capital $86.9, and total assets $240.8. Working capital was down from $93.7 at December 31, 2015.
- No revolving-credit borrowings were outstanding; capital lease obligations totaled $1.1. The $60 revolving facility expires October 2018. After a borrowing-base availability limit applied because the company did not meet its fixed-charge coverage ratio, available capacity was $13.1, net of $2.0 in letters of credit.
- First-half capital expenditures were $1.3. The company forecast approximately $2.7 for full-year 2016 and said existing cash, expected operating cash flows, and credit availability should fund foreseeable needs.
Changes versus prior comparable periods
- Second-quarter sales fell 21.9%; first-half sales fell 45.2%. First-half gross profit swung from $1.3 profit to a $7.6 loss, and net loss increased by $1.6. Second-quarter net loss improved, partly because the 2015 quarter included a $5.3 goodwill impairment.
- Water Transmission Q2 sales rose 3.5%, but first-half sales fell 27.0%. Lower selling prices—attributed to product mix, competition, and lower steel costs—more than offset increased production volume; segment gross profit turned negative in both comparisons.
- Tubular Products sales fell 85.2% in Q2 and 84.4% for the first half. The Atchison facility had produced no pipe since January 2016; depressed energy markets and lower volume and prices weighed on results. The segment’s gross loss narrowed year over year, helped by prior-period inventory write-downs and severance charges.
- First-half operating cash flow fell to $1.5 from $41.8, mainly reflecting lower cash generation from working-capital movements, including receivables and inventory. Cash declined $1.2 from year-end.
Outlook, management commentary, and risks
- Management described long-term U.S. water-infrastructure demand as strong, but expected near-term pressure from strained public budgets and expanded competitor capacity. Selling prices may not adjust in step with steel-cost changes.
- Management expected weak Tubular Products demand through the rest of 2016, citing historically low oil prices, imports, and domestic capacity expansion. It was exploring a sale of the remaining Tubular Products business and had idled Atchison pending improved markets or a sale.
- The company announced plans to close its Denver facility; production was scheduled to conclude in Q4 2016, with final shipments planned into Q1 2017. The Denver operation generated a $2.7 pretax loss in the first half of 2016. Its $6.6 disposal group was classified as held for sale, with no impairment recorded.
- Garney Construction accounted for 24.4% of Q2 sales and 27.9% of first-half sales, creating customer concentration to monitor.
- For the Portland Harbor Superfund matter, the EPA proposed a remedy estimated to cost $745 million for the site, but responsibility and allocation among more than 100 potentially responsible parties were undetermined. The company said it could not estimate its share and recorded no additional amount; insurance may not cover all costs.
- For Houston groundwater remediation, estimated future costs were $0.2–$1.6, with a $0.2 accrual. Completion was expected between Q3 2017 and Q2 2019.
- Income-tax benefits were limited by valuation allowances on current-period net operating losses. The filing also identifies market, bidding, project timing, raw-material, import, and production-capacity risks. Management reported disclosure controls were effective and no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Water Transmission margins recover despite continued competition, lower selling prices, and project-mix volatility.
- Progress and terms, if any, for a sale of Tubular Products, and the financial effects of the Atchison idling and Denver closure.
- Whether operating cash flow improves and credit availability remains sufficient, particularly while the fixed-charge coverage test is unmet.
- Developments in Portland Harbor cleanup planning, allocation of liability, and the extent of applicable insurance coverage; also track Houston remediation costs against the accrued amount.
- Customer concentration and delivery timing, including the contribution of Garney Construction to revenue.