Northwest Pipe Company — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; comparisons are with the corresponding 2011 periods. Unless noted, dollar amounts are in millions. The filing identifies the registrant as Northwest Pipe Company.
Business context and results
The company manufactures large-diameter steel water pipeline systems and smaller-diameter welded steel pipe through its Water Transmission and Tubular Products segments. For the first nine months, those segments represented 46.6% and 53.4% of sales, respectively. Production at the leased Pleasant Grove facility was being shut down and equipment transferred to other sites.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $115.1 | $139.3 | $388.3 | $394.5 |
| Gross profit (margin) | $11.6 (10.1%) | $16.5 (11.9%) | $41.7 (10.7%) | $48.0 (12.2%) |
| Operating income | $4.0 | $10.0 | $20.2 | $28.6 |
| Net income | $3.4 | $3.3 | $11.7 | $11.2 |
| Diluted EPS | $0.36 | $0.35 | $1.24 | $1.20 |
| Operating cash flow | — | $22.2 | $9.5 |
Financial position and cash flow
- At September 30, cash was only $0.028 million. Working capital was $177.3 million, versus $170.6 million at December 31, 2011; current assets were $271.2 million and current liabilities $93.9 million.
- Operating cash flow of $22.2 million was offset by $11.2 million of investing outflows and $11.1 million of financing outflows. Capital expenditures were $11.3 million for the nine months.
- Debt included $58.3 million outstanding under the credit agreement and $13.5 million of term notes; capital lease obligations totaled $13.3 million. Revolver availability, net of letters of credit, was $53.5 million at quarter-end.
- The company reported compliance with its financial covenants: leverage ratio 2.11:1.0 against a 3.5:1.0 maximum; tangible net worth $233.6 million against a $200 million minimum; and fixed-charge coverage 1.64:1.0 against a 1.25:1.0 minimum.
Material changes and management commentary
- Q3 sales fell 17.4%; gross profit fell 29.8% and operating income fell to $4.0 million from $10.0 million. Nine-month sales declined 1.6%, while gross profit and operating income declined 13.1% and 29.4%, respectively. Nine-month net income rose 4.8%.
- Water Transmission sales fell 17.5% in Q3 and 13.8% year to date, reflecting weaker municipal demand, lower production volumes and lower selling prices. Q3 Tubular Products sales declined 17.2% as tons sold fell 18%; however, nine-month sales rose 12.4% on higher volume and average selling prices.
- Management attributed weaker margins mainly to lower volume and fixed-cost absorption, plus product and inventory cost mix. SG&A increased, including higher share-based compensation and professional fees.
- Q3 and nine-month net income benefited from a $1.8 million research and development tax-credit study adjustment. Interest expense decreased versus 2011, reflecting lower average borrowings and rates.
Outlook, risks, contingencies and unusual items
- Management expected municipal budget constraints to continue weighing on Water Transmission, partly offset by infrastructure needs in Colorado and Texas and the Lake Texoma project. It expected Water Transmission production to rise from Q3 levels in the near term.
- Management expected energy-pipe sales volume to decline in the near term and described drilling activity as likely to remain relatively steady through the rest of 2012 and the first half of 2013. Risks include imports, low natural-gas prices, steel-price uncertainty, demand, order timing and project mix.
- Planned 2012 capital expenditures were approximately $18–$22 million, including Saginaw capacity expansion and an additional Atchison accumulator. Management stated available cash, operating cash flows and credit availability should fund foreseeable needs.
- On October 24, 2012, after quarter-end, the company amended its credit agreement to provide up to $165 million through October 24, 2017, at lower stated interest-rate spreads and with fewer financial covenants. The term-note agreement was also amended to align certain covenants.
- A proposed $12.5 million securities class-action settlement and $0.75 million derivative-action settlement were subject to court approval. The company said insurers would fund all but $0.2 million of the class settlement, and would fund the derivative settlement; related amounts were accrued and insurance recoveries recorded as receivables.
- The SEC investigation concerning matters that led to the 2010 restatement remained unresolved; no related charge was accrued because the outcome could not be predicted. Portland Harbor and facility environmental matters also remained uncertain; the company reported about $2.0 million of 2012 remediation work and no further liability adjustment.
- Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2012 because material weaknesses remained, including in percentage-of-completion revenue, inventory, property and equipment, and complex transactions. Remediation testing was underway, with completion targeted by year-end 2012.
Most important facts for investors to verify
- Whether Water Transmission project awards and Lake Texoma work translate into higher production, sales and cash collections.
- Whether Tubular Products energy demand, import competition, steel costs and inventory-cost mix improve or further pressure margins.
- Progress and court approval of the proposed litigation settlements, and the extent of insurance recoveries.
- Developments in the SEC investigation and Portland Harbor/environmental matters, including any newly estimable exposure.
- Completion and independent effectiveness testing of internal-control remediation, and continued compliance with credit covenants and liquidity requirements.
- Whether the amended credit terms, planned capital spending and working-capital needs support the company’s stated liquidity outlook.