Northwest Pipe Company: Q2 2014 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2014. The company manufactures welded steel pipe, principally through its Water Transmission and Tubular Products groups. The OCTG business was sold on March 30, 2014; its results are presented as discontinued operations.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales from continuing operations | $102.0 million | $87.9 million | $184.6 million | $195.3 million |
| Gross profit / margin | $11.3 million / 11.1% | $15.2 million / 17.3% | $15.6 million / 8.5% | $38.1 million / 19.5% |
| Operating income | $5.4 million | $9.3 million | $4.3 million | $26.2 million |
| Income from continuing operations | $3.2 million | $5.5 million | $2.0 million | $16.5 million |
| Net income (loss), including discontinued operations | $3.2 million | $5.6 million | $(8.9) million | $15.1 million |
| Diluted EPS | $0.33 | $0.59 | $(0.93) | $1.59 |
- Q2 sales increased 16.0% year over year, while six-month sales fell 5.4%. Q2 sales growth included a 7.0% rise in Water Transmission and a 33.5% rise in Tubular Products.
- Six-month continuing-operations gross margin declined to 8.5% from 19.5%. Water Transmission gross profit fell to $13.2 million from $32.0 million; Tubular Products gross profit fell to $2.5 million from $6.1 million.
- Six-month net loss includes a $12.1 million loss on the OCTG sale and $2.6 million of discontinued-business operating losses, partly offset by a $3.8 million tax benefit on discontinued operations. The sale generated $31.6 million in net proceeds at closing.
- Operating cash flow was $33.2 million for the first six months, versus $13.2 million in 2013; it included $11.7 million from discontinued operations. Investing cash flow was $22.6 million, including sale proceeds, and financing cash flow was a $56.4 million outflow, primarily from debt repayments. Cash ended at $75,000.
- At June 30, total assets were $355.8 million, current assets $179.5 million, and current liabilities $33.4 million. Working capital was $146.1 million, down from $195.4 million at year-end, primarily following the OCTG sale.
- Debt included $39.9 million borrowed under the credit agreement and $2.1 million of capital lease obligations; term notes had been fully repaid. The company reported $50.2 million available under its $165 million credit facility, net of letters of credit, and compliance with all financial covenants.
Material changes, outlook, and risks
- Management attributed weaker margins to lower Water Transmission volume and project mix, higher steel costs relative to selling prices in Tubular Products, and inventory write-downs. Tubular Products recorded a $1.6 million lower-of-cost-or-market inventory adjustment in Q2; the six-month adjustment was $1.7 million.
- Water Transmission faced reduced bidding activity for several quarters, increased competition, and strained municipal budgets. Results may fluctuate with project timing, order volume, production levels, pricing, and customer concentration. One customer represented 19.1% of continuing-operations sales in Q2.
- Tubular Products sales volumes increased following expanded capacity and shipments for the Double H Pipeline project, but imported-pipe pricing pressure continued. Steel costs and product mix remain important margin risks.
- Management expected 2014 capital expenditures of approximately $14 million to $17 million and stated that cash, operating cash flow, and available credit were expected to fund foreseeable working-capital and capital needs. This is not quantified earnings guidance.
- Portland Harbor environmental exposure remains unquantifiable. The company accrued $360,000 for a natural-resource injury assessment and anticipated less than $100,000 of further source-control work in 2014; it could not estimate its eventual share of site cleanup costs. Houston groundwater and soil issues are under review, with potential cleanup costs not yet estimated; the company expected to estimate them by early 2015.
- Management disclosed ineffective disclosure controls as of June 30, 2014 due to a material weakness in controls over goodwill impairment assessments. It planned remediation, targeting completion by year-end, with no assurance the target would be met. The company also said it would amend its 2013 Form 10-K and Q1 2014 Form 10-Q to reflect revised control conclusions.
- A tax-accounting error overstated the Q1 tax benefit on discontinued-operation losses by $2.2 million. Management deemed the error not material and revised Q1 amounts; the six-month results reflect the correction. The filing also notes adoption assessment for the new revenue standard, effective for the company beginning in 2017.
Important facts for investors to verify
- Progress and effectiveness of the goodwill-impairment control remediation, and the planned amendments to prior filings.
- Subsequent performance, project awards, backlog, and bidding activity in both continuing-operations segments, especially Water Transmission.
- Whether Tubular Products can sustain volume gains while recovering margins amid steel-cost changes and import competition.
- Final OCTG sale working-capital adjustment, escrow release, and any further obligations or property-related costs.
- Updates on Portland Harbor and Houston environmental matters, including cleanup estimates, insurance coverage, and purchaser reimbursement conditions.
- Cash generation, facility availability, covenant headroom, and the impact of the exceptionally low reported cash balance.