Northwest Pipe Company — Q2 2015 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2015. Northwest Pipe manufactures welded steel pipe through its Water Transmission and Tubular Products groups. The former OCTG business was sold in March 2014 and is reported as discontinued operations; comparisons below are continuing operations unless noted. Amounts are in millions of dollars except per-share data.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $53.8 | $102.0 | $138.7 | $184.6 |
| Gross profit (loss) | $(2.6) | $11.3 | $1.3 | $15.6 |
| Gross margin | (4.8)% | 11.1% | 0.9% | 8.5% |
| Operating income (loss) | $(13.3) | $5.4 | $(16.4) | $4.3 |
| Net income (loss) | $(12.1) | $3.2 | $(14.2) | $(8.9) |
| Diluted earnings (loss) per share | $(1.26) | $0.33 | $(1.48) | $(0.93) |
- Segments: Q2 Water Transmission sales fell 38% to $38.4 million; segment gross margin declined to 3.3% from 18.5%. Tubular Products sales fell 61% to $15.4 million, and the segment recorded a $3.8 million gross loss. For the first half, Water Transmission sales were $94.7 million and Tubular Products sales were $44.0 million.
- Cash flow: First-half operating cash flow was $41.8 million, principally reflecting lower receivables and inventory. Investing cash use was $0.6 million, including $6.0 million of capital expenditures and $4.3 million released from escrow related to the OCTG sale. Financing cash use was $41.0 million, including $38.5 million of net revolver repayments. Cash ended the period at $0.7 million.
- Liquidity and debt: Working capital was $123.3 million, down from $165.7 million at December 31, 2014. Revolver borrowings were $7.1 million under a $165 million credit agreement; reported borrowing availability, net of letters of credit and subject to covenant compliance, was $48.2 million. Capital lease obligations were $0.3 million. The company was compliant with covenants at June 30, but anticipated possible noncompliance in later 2015 quarters and was discussing waivers or amendments with lenders.
- Balance sheet: Total assets were $294.7 million, down from $351.9 million at year-end; stockholders’ equity was $232.0 million. Goodwill fell from $5.3 million to zero following impairment.
Material changes, outlook, and risks
- Continuing-operations sales fell 47% year over year in Q2 and 25% for the first half. Water Transmission volumes declined amid reduced demand, project timing, competitive bids, and municipal budget pressure. Tubular Products suffered from the crude-oil downturn, weaker line-pipe demand, import competition, and lower selling prices. Steel coil cost per ton declined 14% in the first half, partly offsetting Tubular Products’ volume and mix pressures.
- The company recorded a $5.3 million Water Transmission goodwill impairment after its reporting unit’s carrying value exceeded calculated enterprise value. Management’s best estimate was that all goodwill would be impaired; final measurement adjustments, if any, were expected in Q3 2015.
- In April, the company curtailed production at its Atchison, Kansas facility and recorded $0.5 million of severance expense. It expected to resume normal operations near the end of Q3, subject to market conditions. In July, it announced it was exploring a sale of Tubular Products to focus on Water Transmission. No transaction was assured; a related-party investment bank’s fees were contingent on a future transaction.
- Management expected existing cash, operating cash flows, and available credit to fund requirements for the foreseeable future. Planned 2015 capital expenditures were approximately $8–9 million, mainly for replacement.
- Covenant risk: Although compliant at quarter-end, the company warned it might breach financial covenants later in 2015 as industry conditions and performance weakened. It was seeking lender waivers or amendments; failure to obtain them could accelerate repayment. Management did not anticipate a liquidity shortfall given the $7.1 million revolver balance, but lender agreement was not assured.
- Tax and unusual items: A $1.3 million valuation allowance was recorded against certain deferred tax assets, citing recent cumulative losses. The 2015 tax benefit rate was reduced by the nondeductible goodwill impairment and valuation allowance.
- Environmental contingencies: The company accrued $0.4 million for Houston remediation, with estimated future costs of $0.3–$2.4 million. Portland Harbor cleanup exposure could not be reasonably estimated; no additional accrual was recorded. The company had paid $0.4 million toward a natural-resource injury assessment and continued to rely on insurance for potential costs, without assurance of full coverage.
- Controls: Disclosure controls and internal control over financial reporting were deemed ineffective because of an unresolved material weakness in goodwill impairment controls. The weakness contributed to the $5.3 million goodwill adjustment; remediation work was underway but incomplete.
- The filing provided no earnings or sales guidance. Management identified demand, pricing, product mix, bidding, order and delivery timing, production levels, raw-material costs and availability, capacity, and trade policy as factors that could affect results.
Important facts for investors to verify
- Whether the company obtains covenant waivers or amendments, and the resulting availability and terms of its credit facility.
- Whether the final goodwill impairment measurement changes the recorded $5.3 million charge and whether goodwill controls are remediated.
- Whether Water Transmission demand, project mix, pricing, and margins recover, and whether Tubular Products production resumes as expected.
- Whether a Tubular Products sale proceeds, on what terms, and how any transaction affects liquidity and ongoing operations.
- How Houston remediation costs develop and whether Portland Harbor assessments or insurance coverage change the company’s exposure.