Northwest Pipe Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Northwest Pipe operates in one segment, Water Transmission, manufacturing engineered steel pipe, reinforced concrete pipe and related products for water infrastructure and other markets.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $62.6 million | $33.4 million |
| Gross profit / margin | $6.6 million / 10.5% | $1.3 million / 4.0% |
| Operating income (loss) | $2.3 million | $(2.3) million |
| Net income (loss) | $2.2 million; $0.22 per diluted share | $(2.0) million; $(0.20) per diluted share |
| Operating cash flow | $10.4 million | $(2.3) million |
Sales rose 87.8% year over year. The Ameron acquisition contributed $11.8 million of the increase; production tonnage was up 68% and selling price per ton was up 12%. Higher production volume primarily drove the improvement in gross profit. SG&A increased 25.5% to $4.2 million, mainly due to $0.8 million of higher wages and incentive compensation. Q1 2018 included $0.3 million of restructuring expense; none was recorded in Q1 2019.
Balance sheet and liquidity
At March 31, 2019, cash was $3.8 million, working capital was $118.6 million, and total stockholders’ equity was $220.8 million. Cash declined from $6.7 million at year-end 2018. There were no line-of-credit borrowings, versus $11.5 million at December 31, 2018; available borrowing capacity was $49.5 million, net of letters of credit and the amount needed to avoid a covenant trigger. The credit facility is a $60 million revolving commitment, expiring October 2023, secured by substantially all company and subsidiary assets.
Operating cash generation reflected net income and working-capital movements. Investing activities used $1.6 million, primarily for capital expenditures; financing activities used $11.6 million, mainly for net line-of-credit repayments. Management expects 2019 capital expenditures of $9.0–$12.5 million for standard replacement, excluding any equipment replacement related to the Saginaw fire.
Outlook, risks and unusual items
- Backlog was approximately $167.3 million at quarter-end; the company expects to recognize about 71% in 2019, 25% in 2020 and the remainder thereafter. Management said long-term U.S. water-infrastructure demand appears strong, but near-term constrained public-agency budgets and increased competition could affect business.
- Management expects available cash, operating cash flows and credit availability to fund working capital and capital expenditures for at least 12 months. Results remain subject to project timing, bidding, production levels, steel prices and availability, and the ability to pass cost changes through to customers.
- Steel tariffs imposed by the U.S., Mexico and Canada may affect raw-material and finished-product costs and could contribute to project delays or cancellations, including for cross-border operations.
- An April 21, 2019 accidental fire damaged the coatings building at the Saginaw, Texas facility. Coating capacity there was impaired while repairs were assessed; other facilities could absorb lost production. Insurance covers property damage and business interruption up to specified amounts; the filing does not quantify the loss or expected recovery.
- The company disclosed a $1.2 million revenue-timing error: revenue that should have been recorded in Q1 2019 was recorded in Q3 and Q4 2018 due to an error in estimating costs at an acquired Ameron facility. Management concluded the error was not material to 2018 or projected 2019 results.
- Portland Harbor Superfund remediation costs and allocation among more than 150 potentially responsible parties remain undetermined; the company could not estimate its obligation and recorded no additional adjustment. A Yakama Nation complaint seeks natural-resource damages, but the company could not assess likelihood or amount. Insurance coverage is not assured for all potential costs.
- Ameron’s preliminary purchase-price allocation included a $20.1 million bargain-purchase gain at acquisition in 2018; no measurement-period adjustment was recorded in Q1 2019. The company adopted lease accounting in January 2019 and recognized approximately $8.0 million of operating-lease right-of-use assets and liabilities.
Important facts for investors to verify
- Whether backlog converts to revenue and cash on the expected schedule, given contract assets of $70.3 million and the company’s longer collection cycle.
- The effect of the Saginaw fire on production, repair and replacement costs, insurance recovery and the capital-expenditure outlook.
- Steel-price and tariff effects on margins, bids and project timing, particularly for cross-border operations.
- Developments in the Portland Harbor remediation and natural-resource-damage claims, including any cost allocation or insurance response.
- Ameron integration and final purchase-price allocation; the filing notes Ameron internal controls were excluded from management’s controls evaluation during integration.