NWPX Infrastructure, Inc. (Northwest Pipe Company) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results; dollar amounts below are in millions except per-share data. The company operates as one Water Infrastructure segment, producing engineered steel water pipe and concrete infrastructure products.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $70.0 | $69.2 | $138.9 | $131.8 |
| Gross profit / margin | $13.0 / 18.5% | $8.2 / 11.9% | $22.5 / 16.2% | $14.8 / 11.2% |
| Operating income | $7.4 | $3.5 | $9.0 | $5.8 |
| Net income | $6.0 | $3.0 | $6.6 | $5.1 |
| Diluted EPS | $0.61 | $0.31 | $0.67 | $0.53 |
- First-half operating cash flow was $28.8, versus $17.3 a year earlier. Investing cash outflow was $54.7, including $48.7 for Geneva net of cash acquired; financing cash inflow was $14.1. Cash declined $11.8 to $19.2.
- At June 30, cash was $19.2, working capital $137.5, and current assets and current liabilities were $172.5 and $35.1, respectively. The filing reports $15.4 of term debt, no revolver borrowings, $55.1 of additional revolver capacity, and $1.6 of letters of credit. Debt and revolver availability are subject to borrowing-base terms and covenants.
- Backlog for signed steel-pipe contracts was approximately $159 at June 30; the company expected to recognize about 54% in 2020, 42% in 2021, and the remainder thereafter.
Changes and notable items
- Reported Q2 sales rose 1.1% year over year and first-half sales rose 5.3%. Geneva, acquired January 31 for $49.4 cash, contributed $12.4 of Q2 sales and $20.4 from acquisition through June 30. Thus, reported growth includes the acquisition.
- At legacy facilities, steel-pipe production volume fell 31% in Q2 and 22% in the first half, primarily reflecting the San Luis Río Colorado, Mexico facility closure and project timing. Higher selling prices per ton partly offset lower volumes.
- Gross profit improved on stronger steel pressure-pipe pricing and Geneva’s contribution, partly offset by lower production and Mexico facility shutdown costs. First-half SG&A included $2.6 of Geneva-related transaction costs; acquisition costs expected to be nondeductible also affected the first-half effective tax rate.
- First-half results included $1.4 of Saginaw fire business-interruption insurance recovery, net of incremental production costs; the comparable 2019 period included $3.2 of incremental production costs. The company also reported $1.1 of other income in Q2; the filing’s text does not clearly identify the full composition of that line item.
Outlook, risks and contingencies
- Management said COVID-19 had not materially adversely affected reported first-half results, but its future impact could be material and cannot be reliably estimated. U.S. facilities continued operating; the Mexican facility was ordered closed in early April, with workforce increases permitted from early June. Potential effects include project funding delays, operational or supply-chain disruption, and input-cost volatility.
- Management described long-term U.S. water-infrastructure demand as strong, while warning that constrained government and water-agency budgets, financing, increased competition, steel-cost fluctuations and the timing of projects may pressure near-term performance. No full-year revenue or earnings guidance was provided.
- Expected 2020 capital expenditures were approximately $12–$14, primarily for routine replacement. Management believed cash, operating cash flow and available credit would cover anticipated needs for at least 12 months, depending on COVID-19 developments.
- The amended credit agreement runs to October 2024; it requires a senior leverage ratio no greater than 3.00 and a fixed-charge coverage ratio of at least 1.10:1. The company reported compliance at June 30 and expected to remain compliant over the next 12 months.
- Environmental exposure at the Portland Harbor Superfund Site remains unquantifiable; the EPA-selected cleanup is estimated at approximately $1 billion overall, but responsibility and allocation among more than 150 potentially responsible parties are undetermined. The company recorded no additional liability. A related natural-resource-damages claim is also unresolved; insurance coverage may not cover all costs.
- Geneva’s purchase-price allocation remained preliminary. Geneva represented approximately 24% of total assets; its internal controls were excluded from management’s June 30 disclosure-controls evaluation while integration assessment continued. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Geneva integration, synergies and acquired operations support sustained earnings and cash generation, given acquisition costs and the preliminary purchase-price allocation.
- Whether Mexico facility production recovers and whether project timing, steel pricing and lower legacy volumes affect backlog conversion and margins.
- COVID-19’s evolving effects on municipal project funding, customers, suppliers, operations and liquidity, alongside covenant compliance and borrowing-base availability.
- Potential additional costs or liabilities from Portland Harbor environmental and natural-resource-damages matters, including the extent of insurance recovery.