NWPX Infrastructure, Inc. (Northwest Pipe Company) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. The filing identifies the registrant as Northwest Pipe Company.
Business context and financial performance
The company primarily manufactures engineered steel pipe systems for water infrastructure. It is exploring a sale of its remaining Tubular Products business; the Atchison facility was idled in January 2016. Water Transmission accounted for virtually all Q1 2017 sales.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $29.7 million | $33.9 million |
| Gross profit (loss) | $0.8 million; 2.6% margin | ($5.4 million); (16.0%) margin |
| Operating loss | ($3.9 million); (13.3%) margin | ($10.0 million); (29.6%) margin |
| Net loss | ($3.9 million); ($0.40) per share | ($9.6 million); ($1.00) per share |
| Operating cash flow | ($0.3 million) | $1.2 million |
| Capital expenditures | $0.5 million | $0.7 million |
Water Transmission sales rose 1.0% to $29.7 million, while total sales fell 12.6%, chiefly because Tubular Products sales declined to a nominal $9,000 from $4.6 million. Water Transmission selling price per ton increased 130%, offset by a 56% decline in tons produced, which management attributed to project timing. Its gross margin improved to 3.9% from (19.6%).
Liquidity, debt and cash
- Cash was $20.8 million at March 31, down from $21.8 million at year-end. Working capital was $91.2 million, versus $93.6 million at year-end; current assets were $103.2 million and current liabilities $12.0 million.
- No line-of-credit borrowings were outstanding. The $60 million revolving facility expires October 25, 2018; availability was $12.5 million, net of $2.0 million in letters of credit, because the fixed-charge coverage ratio was not met and an availability limit applied.
- Capital lease obligations totaled $0.8 million. The company reported $0.3 million of cash used in operations, $0.5 million used in investing and $0.2 million used in financing.
- Management expected cash, operating cash flows and available credit to cover working capital and capital spending for at least 12 months. Expected 2017 capital expenditures were approximately $6.0 million.
Material changes, outlook and risks
- Gross profit improved substantially from the prior-year quarter, reflecting better Water Transmission pricing and a focus on margin over volume. SG&A declined 16.5% to $3.8 million, mainly due to lower wages and professional fees.
- Q1 included $0.9 million of restructuring expense for demobilizing the Denver facility, which was sold in October 2016; the company completed the move and vacated the facility during the quarter.
- Management described long-term water-infrastructure demand as strong, but cited near-term pressure from constrained public-agency budgets, competition and steel-cost volatility. Tubular Products demand is exposed to oil and gas activity, imports and domestic capacity expansion. Project timing, bidding, order delivery, product mix and raw-material availability can cause substantial period-to-period variation.
- One Water Transmission customer represented 32.2% of Q1 sales, compared with two customers representing 32.1% and 14.0% in Q1 2016.
- The company filed a registration statement for potential issuance of up to $120 million of equity and/or debt securities; it was not yet effective. Funding availability and terms were not assured, and equity issuance could dilute shareholders.
- Environmental contingency: The EPA selected a Portland Harbor cleanup remedy estimated to cost $1.05 billion over 13 years, but allocation among more than 100 potentially responsible parties was undetermined. The company could not estimate its share and recorded no additional liability; insurance may not cover all costs. The Yakama Nation filed a related natural-resource damages complaint in January 2017.
- Houston remediation: Estimated future costs were $0.1 million to $1.6 million, with a $0.2 million accrual. Additional asbestos sampling was planned; completion of the voluntary cleanup process was estimated between Q3 2017 and Q3 2019.
- Adoption of new share-based compensation accounting resulted in $0.8 million of excess tax deficiencies recorded as income tax expense, contributing to a low 5.4% effective tax benefit rate. Adoption of the new inventory standard had no material impact.
Most important facts for investors to verify
- Whether Water Transmission pricing and gross-margin recovery persist as production volumes and project timing fluctuate.
- Customer concentration, backlog and upcoming project schedules, given the 32.2% sales contribution from one customer.
- Actual revolver availability and compliance with borrowing-base and fixed-charge provisions; reported availability was $12.5 million despite the $60 million commitment.
- Potential Portland Harbor liability, allocation among responsible parties, insurance coverage and progress on the Houston cleanup.
- Progress and terms of any Tubular Products sale and whether the proposed securities registration becomes effective or is used.