Northwest Pipe Company (NWPX Infrastructure, Inc.) — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing is for Northwest Pipe Company and presents unaudited consolidated results. The company manufactures large-diameter steel water transmission pipe and other welded steel products.
Financial highlights
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $131.0M | $143.8M | $273.2M | $255.3M |
| Gross profit / margin | $13.6M / 10.4% | $16.7M / 11.6% | $30.1M / 11.0% | $31.4M / 12.3% |
| Operating income | $7.0M | $11.1M | $16.1M | $18.5M |
| Net income | $3.6M | $5.0M | $8.3M | $7.9M |
| Diluted EPS | $0.38 | $0.53 | $0.88 | $0.85 |
- First-half operating cash flow was $24.4M, compared with cash used of $4.8M in the prior-year period. Investing activities used $8.1M, primarily for facility upgrades and capacity expansion; financing activities used $16.5M.
- Cash was only $25,000 at June 30. Working capital was $112.7M, down from $170.6M at year-end 2011, largely because the $62M revolving borrowing was reclassified as current and accounts payable and accrued liabilities increased.
- Debt included $52.0M outstanding under a $115M credit facility and $13.5M of term notes; capital lease obligations were $14.1M. The company had $59.8M of available credit, net of letters of credit. It reported compliance with financial covenants, including total leverage of 1.66x and minimum fixed-charge coverage of 1.89x.
Changes versus prior comparable periods
- Q2 sales fell 8.9%, operating income fell 37.0%, and net income fell 27.6%. Lower Water Transmission volume and weaker gross margin were principal factors; SG&A also increased.
- First-half sales increased 7.0%, but gross profit decreased 4.3% and operating income decreased 12.9%. Net income rose 5.4%, helped in part by lower interest expense and a lower effective tax rate.
- Water Transmission sales declined 20.7% in Q2 and 11.7% for the first half, reflecting lower production volumes amid weak municipal markets. Tubular Products sales rose 3.8% in Q2 and 27.5% for the first half, driven by higher energy-pipe volume and prices.
- Interest expense declined to $1.5M in Q2 from $2.6M, and to $3.2M for the first half from $5.2M, reflecting lower average borrowing and rates.
Outlook, risks, and unusual items
- Management expected strained municipal budgets to weigh on Water Transmission, partly offset by drought-related Texas projects. It expected energy sales volume to decline through summer 2012 amid increased imports and buyers delaying restocking as steel prices fell. No full-year revenue or earnings guidance was provided.
- Expected 2012 capital expenditures were $22M–$25M, including capacity expansion at Saginaw and Atchison and Portland storm-water work. Management expected liquidity sources to meet needs through the credit facility’s April 30, 2013 expiration and anticipated refinancing during the second half of 2012.
- During Q2 the company began shutting down production at its leased Pleasant Grove, Utah facility and transferring equipment to other locations.
- In July 2012, the company agreed, subject to court approval, to a $12.5M securities class-action settlement, with insurers covering all but a $400,000 retention. It also agreed to $750,000 in attorneys’ fees and governance changes to settle derivative claims; insurers were to pay that amount. These settlement amounts were accrued, with insurer recoveries recorded in receivables.
- An SEC investigation related to a prior Audit Committee investigation remained unresolved; the company had not accrued a charge because the outcome was not predictable. Portland environmental matters also remained under review, and the company stated its potential liability was unknown. It spent approximately $2.0M in 2012 on specified Portland remediation work.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30 because of material weaknesses involving percentage-of-completion revenue inputs, inventory controls, property-and-equipment controls, and complex or non-routine transactions. Remediation was ongoing.
- Other risks cited include steel prices and availability, product demand and mix, bidding and delivery timing, production capacity, and trade policy. Higher inventory costs and planned downtime at Atchison also pressured Tubular Products margins.
Key facts for investors to verify
- Progress and terms of the planned credit-facility refinancing before its April 2013 expiration, and continued covenant compliance.
- Whether internal-control remediation is completed and independently tested, particularly for revenue recognition and inventory.
- Court approval and final insurer funding of the class-action and derivative settlements, and any subsequent SEC-investigation developments.
- Water Transmission backlog, municipal bidding and project timing, and the expected effect of the Pleasant Grove shutdown.
- Execution and returns on the $22M–$25M capital program, plus the costs and potential exposure from Portland environmental work.