Business context and reporting period
Northwest Pipe Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. The company manufactures large-diameter steel water-transmission pipe and other welded steel pipe products. Its reportable segments are Water Transmission and Tubular Products. Financial amounts below are in U.S. dollars; “million” is abbreviated as “M.”
Financial performance and liquidity
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $143.8M | $96.1M | $255.3M | $176.5M |
| Gross profit / margin | $17.9M / 12.5% | $5.8M / 6.0% | $33.5M / 13.1% | $14.9M / 8.4% |
| Operating income (loss) | $12.5M | ($0.9M) | $20.8M | $1.6M |
| Net income (loss) / diluted EPS | $5.4M / $0.57 | ($1.4M) / ($0.15) | $8.9M / $0.96 | ($0.3M) / ($0.04) |
- Quarterly sales grew 49.6%; six-month sales grew 44.6%. Both segments expanded, with Tubular Products sales rising 73.1% in the quarter and 80.3% year to date, supported by energy-pipe demand and increased capacity at Bossier City.
- Water Transmission sales increased 32.8% in the quarter and 22.4% for six months. Management attributed improved segment margins to higher volumes, contract mix, and completion of lower-margin contracts awarded in 2009.
- Tubular Products margins also improved, reflecting higher energy-pipe volumes and a more favorable product mix; rising steel costs partly offset those benefits. Material cost per ton rose 15% in the quarter and 13% for the six-month period year over year.
- SG&A was $5.4M for the quarter and $12.7M for six months, down year over year. Management cited insurance-related credits connected to the accounting investigation, partly offset by higher compensation and other business costs.
- For the six months, operating cash flow was negative $5.6M, versus negative $27.5M in 2010. Investing activities provided $5.6M, primarily from the $13.7M sale of the Houston traffic-systems business; financing activities provided $0.04M. Cash ended at just $43,000.
- At June 30, 2011, working capital was $99.4M, down from $155.2M at year-end, mainly because $72.8M of credit-facility borrowing was classified as current. Current assets were $235.8M and current liabilities $136.4M.
- Total debt and capital-lease obligations were approximately $100.3M, including $72.8M outstanding under the credit facility and $8.3M in capital leases. The company reported $41.0M of additional facility borrowing capacity. The $125M credit agreement expires May 31, 2012.
Material changes, outlook, risks and unusual items
- In the second quarter, the company recorded a $3.2M allowance on notes receivable and a $1.6M gain on sale of the Houston traffic-systems business; the sale also included a $1.0M goodwill write-off in calculating the gain. The company also sold its interest in Northwest Pipe Asia for $0.8M, of which $0.6M had been received by June 30.
- Management expected 2011 capital expenditures of approximately $16M–$18M, including capacity and productivity projects at the Atchison and Houston facilities. It expected available cash, operating cash flows, and credit-facility availability to meet working-capital and capital needs for the foreseeable future and projected covenant compliance for the next 12 months. No earnings or revenue guidance was provided.
- Near-term Water Transmission demand faces pressure from strained municipal budgets. Results are also exposed to steel prices and availability, product mix, customer order and delivery timing, demand in energy and construction markets, and production capacity. One Tubular Products customer represented 13.5% of quarterly sales and 12.3% of six-month sales.
- Environmental matters include Portland Harbor investigations and remediation. The company expected to spend approximately $2.3M in 2011 on Portland-related soil and storm-water measures; its ultimate Harbor liability remains unknown and no additional accrual was recorded. The filing also describes a securities class action, a stayed derivative action, and an SEC investigation; outcomes were uncertain and no related charges were accrued.
- Management reported material weaknesses in internal control over financial reporting, including deficiencies in the control environment and accounting expertise, review of estimates and spreadsheets, and timely communication of transactions. Disclosure controls were deemed ineffective as of June 30, 2011. Remediation was in progress but incomplete.
- The company stated it was in compliance with financial covenants at quarter-end: senior and total leverage ratios were each 2.56:1.0 against a 4.75:1.0 maximum; fixed-charge coverage was 1.97:1.0 against a 1.1:1.0 minimum. The credit agreement’s May 2012 maturity and the company’s low cash balance remain important liquidity considerations.
Most important facts for investors to verify
- Whether operating cash flow and collections improve, given negative first-half operating cash flow and significant working-capital demands.
- Repayment, refinancing, or renewal plans for the credit facility before its May 31, 2012 expiration, including available borrowing capacity and covenant headroom.
- Recoverability of notes receivable following the $3.2M allowance, and collection of the remaining $0.2M due from the Northwest Pipe Asia sale.
- Whether sales growth and segment-margin gains persist as contract mix changes, steel costs move, and municipal budgets constrain water-infrastructure spending.
- Progress in remediating material weaknesses and the status and potential financial impact of litigation, the SEC investigation, and Portland Harbor environmental matters.