Business context and reporting period
Northwest Pipe Company (NWPX) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company manufactures engineered steel water pipeline systems and concrete water-infrastructure products, and reports one segment. January’s acquisition of Geneva Pipe and Precast expanded its concrete pipe and precast offerings.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $77.6 | $75.2 | $216.5 | $207.1 |
| Gross profit / margin | $15.6 / 20.1% | $15.5 / 20.6% | $38.2 / 17.6% | $30.3 / 14.6% |
| Operating income / margin | $10.0 / 12.8% | $10.6 / 14.1% | $19.0 / 8.8% | $16.4 / 7.9% |
| Net income | $7.3 | $10.7 | $13.8 | $15.9 |
| Diluted EPS | $0.73 | $1.10 | $1.40 | $1.63 |
- Quarterly comparison: Sales rose 3.2%, but net income fell 32.4%. Operating income declined despite higher sales; gross margin eased 0.5 percentage points and operating margin 1.3 points.
- Nine-month comparison: Sales increased 4.6%, gross profit 26.1%, and operating income 15.6%; net income declined 12.9%. Higher SG&A and income taxes offset operating improvement.
- Cash flow: Nine-month operating cash flow was $43.4 million versus $21.4 million in 2019. Investing cash outflow was $57.2 million, including $48.7 million for Geneva and $9.8 million in capital expenditures. Financing provided $13.2 million. Cash decreased $0.7 million to $30.4 million.
- Liquidity and debt: Working capital was $147.9 million, down from $153.5 million at year-end 2019. At September 30, the term-loan balance was $14.6 million; there were no revolver borrowings and $54.8 million of additional revolver capacity. The company reported compliance with debt covenants. The credit facility permits up to $74 million of revolving loans and letters of credit, subject to a borrowing base.
- Backlog: Signed steel-pipe backlog was approximately $143 million; the company expected to recognize about 41% in the remainder of 2020, 50% in 2021, and the balance thereafter.
Changes, outlook, risks and unusual items
- Geneva was acquired for $49.4 million in cash on January 31, 2020. It contributed $12.5 million of Q3 sales and $32.9 million from acquisition through September 30; its net-income contribution was not separately determinable. Purchase accounting remained preliminary.
- Legacy-facility sales were pressured by lower production volumes and project timing. The company attributed higher nine-month gross profit partly to Geneva, improved product pricing, and $1.4 million of net business-interruption insurance recovery related to the 2019 Saginaw fire; the comparable 2019 period included $2.9 million of net incremental production costs.
- Geneva-related transaction costs and compensation and amortization expenses increased SG&A. Nine-month income taxes were higher, with the effective tax rate rising to 27.7% from 16.6%, primarily because some Geneva acquisition costs were expected to be nondeductible.
- COVID-19 had not materially adversely affected reported results through September, but the company said future effects were uncertain. Its Mexican facility closed in April under government orders, resumed staged operations in June, and was fully restored by July. Potential risks include delayed or reduced municipal project funding, supply-chain disruption, and input-cost volatility.
- Management cited strong long-term U.S. water-infrastructure demand, while warning that near-term public-agency budget constraints, competition and steel-price movements could affect results. No sales or earnings guidance was provided. The company expected 2020 capital expenditures of approximately $15 million and said cash, operating cash flow and available credit should fund needs for at least 12 months.
- The Portland Harbor Superfund matter remains unquantifiable: responsibility and allocation among more than 150 potentially responsible parties have not been determined, and no further financial-statement adjustment was recorded. The company also disclosed a Yakama Nation claim and could not assess loss likelihood or amount. Insurance coverage may not cover all costs.
- The company’s November 3, 2020 effective shelf registration allows potential issuance of up to $150 million of equity and/or debt securities; no securities had been sold under it as of the filing.
Most important facts for investors to verify
- Whether Geneva integration, preliminary purchase accounting, and acquisition-related costs deliver the expected financial benefits.
- Whether backlog converts on schedule and legacy production volumes recover, given project timing and public-sector funding uncertainty.
- Whether operating cash generation remains sufficient after capital spending, debt service, and any required excess-cash-flow loan prepayment.
- Potential financial exposure from Portland Harbor and related claims, including the scope of insurance recovery.
- Future COVID-19 effects, steel and other input costs, and the extent of any use of the shelf registration.