Northwest Pipe Company — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The filing was signed April 27, 2012. The company manufactures water-transmission pipeline systems and tubular steel products. The filing identifies the registrant as Northwest Pipe Company.
Financial performance
Amounts below are in millions of dollars unless otherwise noted. Prior-year comparative figures are restated.
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $139.3 | $112.8 | $394.5 | $289.3 |
| Gross profit / margin | $16.5 / 11.9% | $10.5 / 9.3% | $48.0 / 12.2% | $23.6 / 8.2% |
| Operating income / margin | $10.0 / 7.3% | $2.2 / 2.0% | $28.6 / 7.3% | $1.5 / 0.6% |
| Net income (loss) | $3.3 | $(0.1) | $11.2 | $(2.8) |
| Diluted EPS | $0.35 | $(0.01) | $1.20 | $(0.30) |
- Sales increased 23.5% in Q3 and 36.4% year to date. Water Transmission sales rose 29.7% in Q3 and 25.0% year to date; Tubular Products sales rose 16.6% and 52.2%, respectively.
- Water Transmission gross margin improved to 17.3% in Q3 and 16.6% year to date, versus 11.6% and 10.5%. Tubular Products gross margin was 5.1% in Q3, down from 6.7%, but improved to 7.1% year to date from 4.9%.
- Management attributed growth to higher prices and volumes, including stronger energy-pipe demand. Water Transmission margins benefited from contract mix and higher throughput; Tubular Products’ Q3 margin faced customer credits, higher depreciation, the traffic-business sale, and weak structural and standard-pipe markets.
Cash flow, balance sheet and debt
- For the first nine months, operating cash flow was $9.5 million, investing cash flow was $3.1 million, and financing cash flow was negative $12.6 million. Ending cash was only $72,000.
- At September 30, current assets were $234.3 million and current liabilities $69.7 million, for working capital of $164.6 million and a current ratio of approximately 3.4. Receivables were $85.2 million, contract costs in excess of billings $47.6 million, and inventories $91.9 million.
- Reported borrowings included $62.0 million under the credit agreement, $19.2 million of term debt and $16.5 million of capital leases. The company had $59.5 million of additional net borrowing capacity under its facility at quarter-end. It reported compliance with financial covenants.
- On March 29, 2012, the credit agreement was amended: maturity was extended to April 30, 2013, lender commitments were set at $115 million, and certain covenants were waived or revised. Management said existing cash, expected operating cash flow and available credit should fund foreseeable working-capital and capital needs.
- Capital expenditures were $11.5 million year to date. Management expected 2011 capital spending of approximately $16–18 million, including capacity and productivity investments.
Restatement, outlook and material risks
- The company restated 2010 comparative financial statements for errors involving depreciation estimates, a Lucid Energy arrangement, lease accounting, and costs capitalized for a facility relocation, among other items. Restatement changed Q3 2010 net income of $0.7 million to a $0.1 million loss and nine-month 2010 net income of $0.4 million to a $2.8 million loss.
- Material weaknesses in internal control over financial reporting remained at September 30, 2011; management also concluded disclosure controls were ineffective. Weaknesses included accounting expertise and review, validation of estimates, spreadsheet controls, transaction communication, and depreciation and asset-record controls. Remediation was underway, but new controls had not operated long enough to establish effectiveness.
- Unusual items included $4.1 million of impairment allowances on notes receivable for the first nine months, partly offset by a $2.9 million gain on the sale of the Houston traffic-products business. The filing also reports conversion of $2.3 million of Lucid Energy loans and accrued interest into a 50% interest in Lucid Energy LLC.
- Management noted that strained municipal budgets could weigh on Water Transmission demand. Other business sensitivities include steel prices, product mix, bidding and order timing, raw-material availability, and energy and construction activity. Management gave no specific sales or earnings guidance.
- Contingencies include securities and shareholder derivative lawsuits, an SEC investigation related to an audit committee investigation, and Portland Harbor environmental matters. Outcomes and potential liabilities were not determinable; no charges were accrued for the lawsuits or SEC investigation. The company expected to spend an additional $1.6 million in 2012 on specified Portland facility remediation work.
- One Water Transmission customer represented 10.3% of Q3 2011 sales. Foreign-currency forwards were used to manage exposure, primarily on Canadian-dollar sales.
Investor verification priorities
- Review the restatement details and the related amended 2011 quarterly filings and 2011 Form 10-K; confirm how corrected depreciation and lease accounting affect reported trends.
- Track remediation of material control weaknesses and whether management later concludes controls are effective.
- Verify credit-facility availability, covenant compliance, refinancing terms and liquidity given the very low cash balance and working-capital requirements.
- Assess the recoverability of notes receivable, the results of the Lucid Energy investment, and the effects of asset-sale proceeds and gains.
- Monitor the securities litigation, SEC investigation and environmental assessments for developments that could change exposure or require accruals.