Northwest Pipe Company — Q2 2018 Form 10-Q
Business and period: The filing covers the quarter and six months ended June 30, 2018. Northwest Pipe manufactures engineered welded steel pipe for water infrastructure and reported one operating segment, Water Transmission. Comparisons below are to the corresponding 2017 periods unless stated otherwise.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $28.8 million, versus $28.7 million | $62.2 million, versus $58.3 million |
| Gross profit (loss) and margin | $(1.2) million; (4.3%), versus $0.7 million; 2.6% | $0.1 million; 0.2%, versus $2.0 million; 3.4% |
| Operating loss | $(5.8) million, versus $(2.8) million | $(8.2) million, versus $(6.3) million |
| Net loss | $(5.7) million, or $(0.59) per share, versus $(2.1) million, or $(0.22) per share | $(7.6) million, or $(0.79) per share, versus $(5.9) million, or $(0.62) per share |
- Quarterly sales were nearly flat as tons produced rose 14%, offset by a 12% decline in selling price per ton. For the six-month period, production rose 33%, offset by a 20% lower selling price per ton. Management cited a greater proportion of lower-priced, less value-added products.
- Management attributed lower gross profit to product mix and reduced fixed-cost overhead absorption. Q2 SG&A rose 6.6% to $3.8 million; six-month SG&A declined 3.0% to $7.2 million.
- Restructuring expense was $0.8 million for Q2 and $1.1 million for the first half, primarily associated with closing the Salt Lake City and Monterrey facilities. A further $0.1 million of severance expense was expected.
- Income tax benefits were $0.1 million for Q2 and $0.4 million for the first half, with effective rates of 1.9% and 4.7%. Management said valuation allowance estimates and a share-based compensation tax windfall affected the rates.
Cash, liquidity and debt
- Cash and equivalents were $41.9 million at June 30, down from $43.6 million at year-end. Working capital was $119.0 million, versus $123.8 million.
- First-half operating cash flow from continuing operations was $0.6 million, compared with cash use of $2.2 million in 2017. Total cash flow from operations was $0.6 million, versus cash use of $2.9 million in 2017, which included discontinued operations.
- Continuing-operations capital expenditures were $1.6 million; management expected approximately $6.2 million for full-year 2018, primarily for replacement. Total investing cash use was $0.9 million, including $0.75 million of proceeds from discontinued operations.
- No revolver borrowings were outstanding. The credit agreement had a $60 million commitment, subject to a borrowing base, and $14.3 million of additional capacity after letters of credit and the applicable availability limit. The fixed-charge coverage ratio was not met, triggering that limit. The agreement was scheduled to expire October 25, 2018.
- Capital lease obligations totaled approximately $1.3 million. The filing reports no other outstanding borrowings under the credit agreement.
- Management expected cash, operating cash flows and available credit to fund working capital and capital needs for at least 12 months. That assessment preceded the July acquisition described below.
Material developments, outlook and risks
- Northwest Pipe adopted revenue standard ASC 606 on January 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by $0.9 million. Reported 2018 sales were increased by $0.4 million for Q2 and $1.2 million for the first half relative to amounts shown without adoption; the corresponding net-loss effects were $0.3 million and $1.0 million. This affects comparability with 2017.
- At June 30, backlog was approximately $58.1 million. The company expected to recognize about 74% in 2018, 21% in 2019 and the remainder thereafter. No specific earnings or sales guidance was provided.
- On July 27, 2018, after quarter-end, the company completed its acquisition of Ameron Water Transmission Group for approximately $38.3 million, funded with working capital. Management cited added products and expansion in a key market; integration, cost synergies and acquisition funding were identified as risks.
- Management described long-term U.S. water-infrastructure demand as strong, but warned that constrained public-agency budgets, competitive capacity, project timing and steel-price volatility could pressure results. The March 2018 U.S. 25% steel import tariff was expected to raise costs and constrain supply; Canada’s July 25% surtax on U.S. steel imports was expected to be passed on to Canadian customers.
- The company was exploring a sale of its Houston property, classified as held for sale at $3.1 million; no impairment was recorded.
- Environmental exposure at the Portland Harbor Superfund Site remains unresolved. 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 were undetermined. The company could not estimate its obligation and recorded no additional adjustment. Related natural-resource-damage claims also remain uncertain; insurance coverage is not assured.
Most important facts for investors to verify
- Whether the low gross margin and operating losses improve as product mix, selling prices and factory utilization change.
- Backlog conversion, project timing, and the distinction between reported results and results adjusted for ASC 606.
- Ameron’s integration, purchase funding, realized synergies and any resulting liquidity needs.
- The status and terms of the revolver after its stated October 25, 2018 expiration, including borrowing availability and covenant compliance.
- Potential costs and insurance recovery related to Portland Harbor, as well as progress on the Houston property sale.
- Effects of steel tariffs, input-cost changes and competitive conditions on margins and customer pricing.