Northwest Pipe Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Northwest Pipe manufactures engineered welded steel pipe systems for water infrastructure and related applications. Following the 2017 sale of its Atchison facility, it reports one segment: Water Transmission.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales from continuing operations | $33.4 million | $29.7 million |
| Gross profit / margin | $1.3 million / 4.0% | $1.2 million / 4.2% |
| Operating loss | ($2.3 million) | ($3.5 million) |
| Loss from continuing operations | ($2.0 million) | ($3.5 million) |
| Net loss | ($2.0 million) | ($3.9 million) |
| Basic and diluted loss per share | ($0.20) | ($0.40) |
| Cash used in operating activities | $2.3 million | $0.3 million |
Sales increased 12.5%, as tons produced rose 49%, partly offset by a 24% decline in selling price per ton due to product mix and fewer downstream fabrication services. Gross profit rose with sales, but gross margin declined 0.2 percentage points. SG&A fell 11.8% to $3.4 million, primarily because of lower incentive compensation. Restructuring expense was $0.3 million versus $0.9 million, which related to the prior-year Denver facility closure.
Operating cash use reflected working-capital movements, including higher contract assets and lower payables and accrued liabilities. Investing activities used $0.7 million, mainly for capital replacement; management expected full-year 2018 capital expenditures of approximately $8.6 million. Financing activities used $1.4 million, mainly for tax withholdings on vested stock awards.
Financial position and liquidity
At March 31, 2018, cash and cash equivalents were $40.0 million, working capital was $120.8 million, and total assets were $219.7 million. Total liabilities were $23.5 million; there were no revolving-credit borrowings. Capital lease obligations totaled $1.4 million. The company had $14.9 million of additional borrowing capacity under its credit agreement, net of $2.0 million of letters of credit, after a borrowing-base availability limit applied because its fixed-charge coverage ratio was not met. The agreement was scheduled to expire October 25, 2018. Management expected cash, operating cash flows, and available credit to fund requirements for at least 12 months.
Changes, outlook, and risks
- Northwest Pipe adopted Topic 606 on January 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption reduced opening retained earnings by $0.9 million. For Q1 2018, reported sales were $0.8 million lower and net loss $0.7 million higher than they would have been without adoption, affecting comparability.
- Backlog was approximately $40.8 million at quarter-end; the company expected to recognize about 77% in 2018 and 15% in 2019. Backlog is not a guarantee of future revenue.
- Plans announced in March called for closing the Salt Lake City facility and moving production to St. Louis, and closing the Monterrey facility, with closures expected in Q2 2018. Management cited reduced duplicate overhead, greater production flexibility, and a focus on Water Transmission. It expected a further $0.8 million of restructuring expense and related future cash outlays.
- Management described long-term water-infrastructure demand as strong, but warned that constrained public-agency budgets, competition and production timing may weigh on near-term results. Steel tariffs and already-rising domestic steel prices were expected to increase input costs and constrain supply; the ability to pass costs through depends on market conditions.
- The company could not estimate its share of Portland Harbor Superfund cleanup costs and recorded no additional liability. The EPA’s selected remedy was estimated to cost about $1 billion overall; allocation among more than 100 potentially responsible parties remains unresolved. Insurance may not cover all costs. A related natural-resource-damages claim is also disclosed.
- No specific earnings guidance was provided. Management’s liquidity and capital-spending expectations are forward-looking and subject to risks, including project timing, steel costs and availability, product mix, bidding activity, and demand.
Key facts for investors to verify
- How Topic 606 affected revenue, earnings, contract assets, and comparison with 2017.
- Whether backlog converts on schedule and whether improved production volume translates into stronger margins.
- Actual closure costs, savings, and operational effects from the Salt Lake City and Monterrey closures.
- Credit availability and refinancing or renewal plans before the October 2018 facility expiration, given the fixed-charge coverage limitation.
- Developments in steel costs and supply, and the company’s ability to reflect cost changes in selling prices.
- Any new estimates, claims, or insurance recoveries relating to Portland Harbor environmental matters.