Business context and reporting period
Northwest Pipe Company filed this Form 10-K for the fiscal year ended December 31, 2020. It manufactures engineered steel water pipelines, concrete pipe and precast products, and related components for water, wastewater, stormwater, and sewer infrastructure. The company reports one operating segment.
On January 31, 2020, the company acquired Geneva Pipe and Precast Company for $49.4 million, expanding its concrete pipe and precast operations in Utah. Geneva contributed $44.2 million of 2020 sales.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $285.9 million | $279.3 million |
| Gross profit / margin | $50.5 million / 17.7% | $47.2 million / 16.9% |
| Operating income / margin | $25.6 million / 8.9% | $28.7 million / 10.3% |
| Net income | $19.1 million | $27.9 million |
| Diluted earnings per share | $1.93 | $2.85 |
| Cash from operating activities | $56.1 million | $42.9 million |
| Cash and cash equivalents at year-end | $37.9 million | $31.0 million |
| Working capital at year-end | $146.1 million | $153.5 million |
Investing cash outflow was $61.4 million, including $48.7 million for Geneva and $14.0 million of capital expenditures. Financing cash flow was positive $12.3 million. Long-term debt was $13.8 million; there were no revolving-loan borrowings, and additional revolver capacity was approximately $53 million. The company also reported $1.7 million of finance lease liabilities and $30.1 million of operating lease liabilities.
Material changes versus 2019
- Sales rose 2.4%, as Geneva’s contribution was largely offset by lower sales at legacy steel-pipe facilities. Legacy steel-pipe production volume fell 28%, partly offset by a 20% increase in selling price per ton from product mix.
- Gross profit increased 7.1% and gross margin improved 0.8 percentage points, reflecting Geneva, improved pricing, and a $1.4 million net business-interruption insurance recovery related to the 2019 Saginaw fire.
- Operating income fell 10.9% and net income declined 31.7%. SG&A rose 34.9% to $25.0 million, including acquisition-related transaction costs, higher compensation, and amortization.
- Operating cash flow increased, aided by a $15.7 million positive working-capital contribution. Cash used in investing increased substantially due mainly to the Geneva purchase.
- Steel purchasing cost averaged approximately $655 per ton, down from $803 in 2019. Interest expense rose to $0.9 million from $0.5 million.
Outlook, risks, contingencies, and unusual items
Management expects long-term demand for U.S. water infrastructure to remain strong, but cautions that near-term government and water-agency budget constraints, financing availability, increased manufacturing capacity, competition, and steel-price volatility may pressure the business. No specific revenue or earnings guidance was provided. The company expects 2021 capital expenditures of approximately $12 million to $15 million and says cash, operating cash flow, and available credit should fund anticipated needs for at least the next 12 months.
Signed steel-pipe backlog was approximately $167 million at year-end, down from $199 million a year earlier; including confirmed orders without signed agreements, it was $221 million versus $258 million. The company expects to recognize about 79% of signed backlog in 2021 and 20% in 2022. Backlog may be canceled or postponed and is not a guarantee of future results.
- COVID-19 did not materially adversely affect reported 2020 results, according to management, but the ultimate impact remains uncertain. The Mexican facility was temporarily closed in April 2020 and fully restored by July.
- The Portland Harbor Superfund matter remains unresolved. Responsibility and cost allocation among more than 150 potentially responsible parties have not been determined; the company could not estimate its potential obligation and recorded no reserve.
- The $13.8 million term loan bears variable LIBOR-based interest, matures in October 2024, and requires a $4.6 million excess-cash-flow prepayment in 2021. The company reported compliance with its financial covenants at year-end.
- Revenue estimates on customized steel-pipe contracts depend on management’s estimates of total costs and project progress. The auditor identified this as a critical audit matter, as well as valuation of Geneva’s acquired intangible assets.
- The 2020 results include acquisition-related costs and insurance recoveries; 2019 included a $2.3 million favorable legal settlement and fire-related costs. These items affect year-over-year comparability.
Important facts for investors to verify
- Whether Geneva integration, acquired assets, and expected operating benefits translate into sustained sales and margins, given higher SG&A and lower reported net income.
- Whether steel-pipe production volumes and signed backlog recover, and how backlog cancellations, project timing, or competition affect future revenue.
- Whether cash generation and available borrowing capacity remain adequate after required debt payments, planned capital spending, and working-capital needs.
- Developments in Portland Harbor investigations and litigation, including any eventual allocation of cleanup or natural-resource damages and insurance recoveries.
- How COVID-19, public-project funding, steel prices, and the transition from LIBOR affect operations, demand, and financing costs.