Northwest Pipe Company (NWPX) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. The company manufactures engineered steel pipe systems, primarily for water infrastructure. Its remaining Tubular Products business at the Atchison facility is classified as discontinued operations while the company explores a sale.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Continuing-operations sales | $38.8 | $41.1 | $97.2 | $110.2 |
| Gross profit (loss) | $1.9 | $2.9 | $3.7 | $(4.1) |
| Gross margin | 4.9% | 7.2% | 3.9% | (3.7)% |
| Operating loss | $(1.5) | $(1.3) | $(8.0) | $(16.7) |
| Net income (loss), including discontinued operations | $(2.1) | $0.7 | $(8.0) | $(15.1) |
| Diluted net income (loss) per share | $(0.21) | $0.08 | $(0.83) | $(1.58) |
- Q3 sales declined 5.5%; lower production tonnage, attributed to project timing, was partly offset by higher selling prices per ton. Gross margin fell year over year, which management attributed to project timing and product mix.
- Nine-month sales declined 11.8%. Management reported a 51% decrease in tons produced, offset by a 79% increase in selling price per ton. Improved pricing and a focus on margin over volume helped move gross profit from a loss in 2016 to a profit in 2017.
- Q3 continuing-operations loss was $1.6 million, versus income of $1.4 million in the prior-year quarter; the comparison includes a much smaller tax benefit in 2017. Nine-month continuing-operations loss improved to $6.6 million from $13.6 million.
Cash, liquidity and debt
- Cash and equivalents were $5.3 million at September 30, 2017, down from $21.8 million at December 31, 2016. Cash used in operating activities was $14.2 million for the nine months, including $13.1 million from continuing operations; the prior-year period generated $4.8 million in total operating cash.
- Management attributed continuing-operations cash use mainly to working-capital movements, including increased costs and estimated earnings over billings, and decreases in accounts payable and accrued liabilities. Working capital excluding assets held for sale was $87.8 million, versus $93.2 million at year-end 2016.
- Capital expenditures were $2.1 million for the nine months; approximately $3.7 million was expected for full-year 2017. No line-of-credit borrowings were outstanding. The $60 million revolving facility had $15.1 million of additional borrowing capacity, net of letters of credit, after a borrowing-availability limit applied because the fixed-charge coverage ratio was not met.
- Capital lease obligations totaled $0.7 million. Management said cash, expected operating cash flow and available credit should fund working capital and capital expenditures for at least the next 12 months.
Outlook, changes and risks
- Management described long-term U.S. water-infrastructure demand as strong, but cautioned that near-term government and water-agency budget constraints, increased competitive capacity, project timing and fluctuating steel costs could affect results. The ability to pass steel-cost changes through to selling prices depends on market conditions. No specific earnings or sales guidance was provided.
- The Atchison Tubular Products business had $36.4 million of assets classified as held for sale. The company said a sale was probable within 12 months; no impairment was recorded because estimated fair value less selling costs exceeded carrying value. The business recorded a $1.5 million loss for the first nine months of 2017.
- Customer concentration was material: two customers represented 17.6% and 13.9% of Q3 continuing-operations sales; one customer represented 11.9% of nine-month sales.
- For the Portland Harbor Superfund site, the EPA selected a cleanup remedy estimated to cost approximately $1 billion over 13 years, but responsibility and allocation among more than 100 potentially responsible parties remain undetermined. The company said it could not estimate its share and recorded no additional adjustment; insurance may not cover all costs.
- For the Houston environmental cleanup program, estimated future costs were $0–$1.5 million, with only a nominal amount accrued. The company anticipated completion in late 2017 or early 2018.
- The company had an effective registration statement allowing potential issuance of up to $120 million of equity and/or debt securities, but had not sold securities under it. Equity issuance could dilute shareholders. Revenue standard adoption was planned for January 1, 2018; management preliminarily expected no material change in revenue-recognition patterns.
Important facts for investors to verify
- Progress and expected timing and proceeds, if any, from the proposed Atchison business sale.
- Operating cash flow, working-capital needs, and borrowing availability under the revolver, including the fixed-charge coverage restriction.
- Changes in project timing, production volumes, customer concentration, steel costs and pricing, and their effects on margins.
- Developments in Portland Harbor liability allocation, insurance coverage, and the Houston cleanup estimate and completion.
- Whether the planned revenue-standard adoption or any securities issuance changes reported results, disclosures or share dilution.