Northwest Pipe Company — Q3 2018 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2018; filed November 9, 2018. Northwest Pipe manufactures engineered steel and concrete pipe and related products for water infrastructure. It reports one segment, Water Transmission. The results include Ameron from its July 27, 2018 acquisition date.
Financial performance and liquidity
- Q3 revenue: $52.5 million, up 35.2% year over year. Nine-month revenue: $114.6 million, up 18.0%.
- Gross profit: Q3 $5.2 million (9.9% margin), versus $2.0 million (5.1%); nine months $5.3 million (4.6%), versus $4.0 million (4.1%).
- Operating result: Q3 income of $2.5 million, versus a $1.4 million loss. Nine-month operating loss was $5.7 million, versus $7.7 million.
- Net income: Q3 $27.8 million, or $2.86 per diluted share; nine months $20.2 million, or $2.07 per diluted share. Both periods included a $21.9 million bargain purchase gain from Ameron; the gain was noncash and materially affects comparisons.
- Cash flow: Nine-month operating cash use was $7.2 million, investing cash use $33.6 million, and financing cash use $1.3 million. Cash fell to $1.5 million from $43.6 million at year-end, primarily reflecting the Ameron acquisition.
- Balance sheet at September 30: Current assets $139.7 million; current liabilities $26.6 million; working capital $113.1 million. Total liabilities were $38.6 million and equity $218.6 million. Line-of-credit borrowings were $0.2 million; capital lease obligations totaled $1.4 million.
Material changes versus prior comparable periods
- Ameron contributed $11.1 million of Q3 sales and reported a $0.7 million operating loss, including $1.9 million of acquisition-related costs. The acquisition added products and facilities and expanded the company’s market footprint.
- Excluding Ameron, Q3 sales rose $2.6 million as selling price per ton increased 35%, partly offset by a 21% decline in tons produced. For the first nine months, excluding Ameron, sales increased $6.3 million, driven by a 6% increase in tons produced.
- Q3 gross margin improved with better pricing and the addition of Ameron; the nine-month improvement was limited by product mix and lower fixed-cost absorption.
- SG&A increased to $5.3 million in Q3, principally due to acquisition costs. The company also recorded a $2.8 million gain on the sale of Houston property and $1.2 million of restructuring expense in the first nine months.
- Topic 606 adoption reduced opening retained earnings by $0.9 million. Its reported nine-month effect was to increase net income by $0.9 million; prior-year periods were not restated.
Outlook, risks, and unusual items
- Backlog was approximately $100.2 million at quarter-end. Management expected to recognize about 48% in 2018, 41% in 2019, and the remainder thereafter.
- Management expected approximately $5.0 million of 2018 capital expenditures and stated that cash, operating cash flow, and available revolving credit should fund requirements for at least 12 months. No earnings guidance was provided.
- The October 25, 2018 Wells Fargo credit agreement provides a revolving commitment of up to $60 million, with potential increase to $100 million, subject to borrowing-base limits. As of October 25, borrowings were $6.0 million with $32.5 million of additional borrowing capacity. The facility matures in 2023 and is secured by substantially all company and subsidiary assets.
- Management cited constrained public-agency budgets, competitive capacity, steel price and availability volatility, and tariffs as business risks. U.S. tariffs on imported steel and Canada’s surtax may raise costs or affect supply and pricing, including on imports from Mexico.
- The company cannot estimate its potential liability for Portland Harbor Superfund remediation and recorded no additional adjustment. Related claims and natural-resource damage assessments remain uncertain; insurance may not cover all costs.
- Ameron’s purchase-price allocation was preliminary, and its measurement period remained open. Management also noted integration and synergy execution risks. Disclosure controls were deemed effective, but Ameron’s internal controls were excluded from the quarter-end assessment while integration work continued.
Important facts for investors to verify
- How much of reported earnings reflects recurring operations versus the $21.9 million bargain purchase gain, property-sale gain, and accounting or tax effects.
- Whether Ameron integration delivers expected operational benefits and how its purchase-price allocation changes when finalized.
- Conversion of backlog into shipments and cash collections, given the company’s high contract assets and negative operating cash flow.
- Exposure to steel tariffs, material availability, contract pricing, and project mix—and the effect on margins.
- Potential Portland Harbor environmental and legal exposure, for which the company says it cannot currently estimate a loss.