Northwest Pipe Company — Q2 2017 Form 10-Q
Business context and reporting period: The filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. The company manufactures engineered steel pipe, primarily through its Water Transmission segment. It is exploring a sale of its remaining Tubular Products business, whose Atchison facility is idle.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $28.7 million | $42.1 million | $58.4 million | $76.0 million |
| Gross profit (loss) | $0.05 million | $(2.2) million | $0.8 million | $(7.6) million |
| Gross margin | 0.2% | (5.1)% | 1.4% | (10.0)% |
| Operating loss | $(3.5) million | $(6.3) million | $(7.5) million | $(16.3) million |
| Net loss | $(2.1) million | $(6.2) million | $(5.9) million | $(15.8) million |
| Loss per share, diluted | $(0.22) | $(0.65) | $(0.62) | $(1.65) |
- Revenue and segment performance: Q2 sales fell 31.8%; six-month sales fell 23.2%. Water Transmission sales declined as tons produced fell 73% in Q2 and 65% in the first half, primarily due to project timing. Higher selling prices per ton—up 163% in Q2 and 144% year to date—partly offset lower volume; the increases reflected improved pricing, product mix, and higher steel costs. Water Transmission gross profit improved to $0.7 million in Q2 and $1.8 million year to date, attributed to improved pricing and a focus on margin over volume. Tubular Products contributed nominal first-half sales and continued to report gross losses.
- Cash flow: First-half operating cash flow was $(2.9) million, versus $1.5 million provided in 2016. Investing cash flow was $(1.1) million, including $1.2 million of capital expenditures; financing cash flow was $(0.3) million. Cash declined to $17.5 million from $21.8 million at year-end 2016.
- Margins and expenses: First-half SG&A declined 14.7% to $7.4 million, primarily from lower wages and benefits. A $0.9 million restructuring charge was recorded in the first half for demobilizing the Denver facility; the project was completed in Q1.
- Liquidity and debt: Working capital was $88.7 million at June 30, versus $93.6 million at year-end. There were no line-of-credit borrowings. The $60 million revolving facility (potentially expandable to $100 million) had $12.7 million of additional borrowing capacity, net of $2.0 million in letters of credit, after a fixed-charge-coverage limitation applied because the required ratio was not met. Capital-lease obligations totaled $0.7 million. Management said cash, expected operating cash flow, and available credit should fund needs for at least 12 months.
Outlook, risks, and unusual items
- Management expects approximately $6.0 million of capital expenditures in 2017 and says it expects sufficient credit availability to support operations. No revenue or earnings guidance is provided.
- Management describes long-term U.S. water-infrastructure demand as strong, but warns that constrained public-agency budgets and increased competition could weigh on near-term demand. Steel-price changes, the ability to pass costs through, project timing, bidding activity, and production levels may affect results.
- The Tubular Products business faces oil-and-gas market exposure, foreign imports, and expanded domestic competitor capacity. The company is exploring a sale of the remaining business.
- Environmental matters: The Portland Harbor Superfund cleanup remedy is estimated by the EPA to cost about $1 billion and take 13 years. The company cannot estimate its share of costs; no additional accrual was recorded, and insurance may not cover all costs. For the Houston site, estimated future cleanup costs range from $0 to $1.5 million; $0.1 million was accrued. The company anticipates a TCEQ completion certificate in early 2018.
- Tax and accounting items: The Q2 tax benefit included a favorable effect from the lapse of a statute of limitations. For the first half, adoption of share-based-payment accounting guidance resulted in $0.8 million of excess tax deficiencies recognized as income tax expense. The company expects to adopt the new revenue standard in 2018 and preliminarily expects no material change to revenue-recognition patterns.
- The company filed a Form S-3 registration statement for potential future issuance of up to $120 million of equity and/or debt securities; it was not yet effective. Equity issuance could dilute shareholders, and financing may not be available on favorable terms.
Most important facts for investors to verify
- Whether scheduled Water Transmission projects, order timing, and production volumes recover, and whether improved pricing translates into sustainable margins.
- Actual cash conversion and working-capital needs, particularly inventory, contract assets, and collections; reported first-half operating cash flow was negative.
- Available revolver capacity and covenant status, including the fixed-charge-coverage restriction and the facility’s October 2018 expiration.
- Progress and potential exposure related to Portland Harbor and Houston environmental matters, including insurance coverage and the Houston accrual.
- Whether the Tubular Products business is sold, and the status and potential dilution implications of the proposed securities registration.