Northwest Pipe Company (NWPX) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing identifies the registrant as Northwest Pipe Company. Dollar amounts below are in millions unless noted.
Business context
The company manufactures large-diameter steel pipeline systems through its Water Transmission Group and smaller-diameter welded steel pipe through its Tubular Products Group. For the first half of 2013, the groups contributed 53.1% and 46.9% of sales, respectively.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $116.7 | $131.0 | $257.3 | $273.2 |
| Gross profit / margin | $15.7 / 13.4% | $13.6 / 10.4% | $36.9 / 14.3% | $30.1 / 11.0% |
| Operating income / margin | $9.4 / 8.0% | $7.0 / 5.4% | $24.2 / 9.4% | $16.1 / 5.9% |
| Net income | $5.6 | $3.6 | $15.1 | $8.3 |
| Diluted EPS | $0.59 | $0.38 | $1.59 | $0.88 |
- Q2 sales fell 10.9%, while net income rose 54%; first-half sales fell 5.8%, while net income rose 80.7%.
- Q2 Water Transmission sales were $58.1 million, down 1.5%; first-half sales increased 16.4% to $136.8 million. Water Transmission gross margin improved to 20.9% in Q2 and 23.4% for the half-year.
- Q2 Tubular Products sales declined 18.6% to $58.6 million; first-half sales declined 22.6% to $120.6 million. Its gross margin fell to 6.0% in Q2 and 4.0% for the half-year.
- Operating cash flow was $13.2 million for the first half, versus $24.4 million a year earlier. Investing cash outflow was $19.6 million, including $18.4 million of property and equipment additions and $2.9 million of notes receivable issued. Financing provided $6.5 million. Ending cash was $0.2 million.
- At June 30, working capital was $180.7 million, up from $167.4 million at year-end 2012. Current assets were $247.8 million and current liabilities $67.0 million.
- Debt included $60.8 million outstanding under the $165 million credit agreement and $7.8 million of term notes; capital lease obligations were $11.5 million. The company reported $101.1 million available under the credit agreement, net of letters of credit. It was in compliance with covenants: leverage ratio 1.45 versus a 3.5 maximum; tangible net worth $254.9 million versus a $209.8 million minimum; fixed-charge coverage 1.93 versus a 1.25 minimum.
Changes, outlook, and risks
- Water Transmission profitability improved with higher selling prices and favorable project mix; production timing on the Lake Texoma project affected Q2 volumes. Tubular Products was pressured by lower sales volumes and prices, imported pipe, energy-market weakness, and steel-price volatility.
- Tubular Products’ Q2 gross profit included a $1.2 million refundable state tax credit. Management also cited the retroactive federal R&D tax-credit extension as a favorable factor in the 2013 effective tax rate.
- Management expected 2013 capital expenditures of approximately $26–$30 million, including capacity and equipment projects in Atchison and Saginaw. It said existing cash, operating cash flows, and credit availability should fund foreseeable working-capital and capital needs.
- Management expected municipal budget constraints to weigh on Water Transmission, partly offset by infrastructure needs and drought-related projects in certain states. It expected energy drilling activity to remain steady in the second half, but anticipated near-term pressure from imports and delayed customer inventory replenishment. A July 2013 trade case sought investigation of certain Oil Country Tubular Goods imports.
- One Water Transmission customer represented 12.7% of Q2 sales and 17.1% of first-half sales, creating customer-concentration exposure.
- Portland Harbor environmental matters remain unresolved. The company said it could not estimate its potential obligation and recorded no additional provision; it anticipated less than $0.1 million of further source-control spending in 2013. The filing also disclosed $3.1 million of standby letters of credit.
- Forward-looking outcomes depend on demand, pricing, product mix, bidding and delivery timing, raw-material costs and availability, capacity, and trade policy. The filing states interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether stronger Water Transmission margins and first-half earnings can persist as project timing and municipal-market conditions change.
- Whether Tubular Products’ volume, pricing, and margins stabilize amid import competition, energy-market weakness, and steel-price volatility.
- Cash conversion and working-capital needs: first-half operating cash flow declined despite higher net income, and period-end cash was only $0.2 million.
- Execution, spending, and returns from the $26–$30 million capital program, along with continued covenant compliance and credit availability.
- Potential financial exposure from Portland Harbor and related environmental matters, which the company could not quantify.
- Customer concentration and the effect of the $1.2 million state tax credit on reported Tubular Products results.