Northwest Pipe Company (NWPX) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Northwest Pipe manufactures engineered steel and reinforced concrete pipe and related products for water infrastructure and other applications. The results include Ameron, acquired July 27, 2018; therefore, year-over-year comparisons reflect the acquisition as well as operating changes. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $69.2 | $28.8 | $131.8 | $62.2 |
| Gross profit (loss) | $8.2 | $(1.2) | $14.8 | $0.1 |
| Gross margin | 11.9% | (4.3)% | 11.2% | 0.2% |
| Operating income (loss) | $3.5 | $(5.8) | $5.8 | $(8.2) |
| Net income (loss) | $3.0 | $(5.7) | $5.1 | $(7.6) |
| Diluted EPS | $0.31 | $(0.59) | $0.53 | $(0.79) |
- Sales increased 140.4% in Q2 and 112.1% for the first half. Management attributed the increase primarily to higher production volume, increased demand, and Ameron, which contributed $13.8 million of Q2 sales and $25.6 million for the first half. Q2 tons produced rose 186%, while selling price per ton fell 16%, largely due to product mix.
- Higher volume and Ameron supported the gross-profit recovery. SG&A rose 23.6% in Q2 and 24.5% for the first half, mainly due to higher wages and incentive compensation. No restructuring expense was recorded in 2019, versus $0.8 million in Q2 2018 and $1.1 million in the first half of 2018.
- Six-month operating cash flow was $17.3 million, versus $0.6 million in 2018. Investing cash outflow was $2.2 million, including $2.6 million of capital expenditures and $0.4 million of fire-related insurance proceeds. Financing cash outflow was $11.7 million, primarily net line-of-credit repayments of $11.5 million.
- At June 30, cash was $10.1 million, working capital was $124.4 million, and total liabilities were $54.6 million. There were no line-of-credit borrowings, compared with $11.5 million at year-end 2018. The $60 million revolving facility had $49.4 million of additional borrowing capacity, net of letters of credit and the amount required to avoid a covenant trigger. Operating lease liabilities were $8.6 million and finance lease liabilities were $1.0 million.
Business changes, outlook, and risks
- Backlog was approximately $180.2 million at June 30. The company expected to recognize about 58% in 2019, 21% in 2020, and the remainder thereafter. This is backlog timing, not earnings guidance.
- Management said long-term U.S. water-infrastructure demand appeared strong, while near-term agency budget constraints and increased competitive capacity could pressure the business. Steel is a major input; the ability to pass through changing steel costs depends on market conditions. No specific full-year revenue or earnings guidance was provided.
- A fire at the Saginaw, Texas facility on April 21 impaired coating operations. Other sites were deployed to absorb lost production. The company incurred $3.2 million of fire-related production costs through June 30; related business-interruption insurance recovery had not been recorded. It expected 2019 capital expenditures of $12.1 million, including replacement of fire-damaged equipment.
- For the Portland Harbor Superfund matter, the company could not estimate its potential share of cleanup costs and recorded no additional adjustment. The EPA estimated total site cleanup at approximately $1 billion; that is not an estimate of the company’s liability. A related Yakama Nation claim also remained uncertain. The company said insurance may reimburse remediation costs but could not assure coverage.
- The filing disclosed a revenue-timing error: $1.2 million recognized in 2018 should have been recognized in Q1 2019. Management concluded the out-of-period adjustment was not material to 2018 or projected 2019 results. The company also reported a $20.1 million bargain-purchase gain in connection with the 2018 Ameron acquisition; no 2019 measurement-period adjustments were recorded.
- Management described disclosure controls as effective as of June 30, 2019, while noting Ameron’s internal controls were excluded from that evaluation during post-acquisition integration.
Important facts for investors to verify
- How much of the sales and margin improvement is sustainable apart from Ameron’s contribution, and how product mix and selling prices evolve.
- Whether the Saginaw facility returns to full coating capacity, the total financial impact of the disruption, and the timing and amount of insurance recoveries.
- Conversion of the $180.2 million backlog into shipments, billings, and cash collections, given the company’s significant contract assets and project timing.
- Available revolver capacity and covenant status as working-capital needs, capital spending, and production schedules change.
- Potential exposure, insurance coverage, and developments in the Portland Harbor environmental matters and Yakama Nation litigation.