Northwest Pipe Company (10-Q) — Quarter ended September 30, 2013
Unaudited results cover the three and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. The company manufactures large-diameter steel water-transmission pipe and smaller-diameter tubular products.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $103.0m | $115.1m | $360.4m | $388.3m |
| Gross profit / margin | $8.8m / 8.6% | $11.6m / 10.1% | $45.7m / 12.7% | $41.7m / 10.7% |
| Operating income | $2.8m | $4.0m | $27.0m | $20.2m |
| Net income | $1.0m | $3.4m | $16.1m | $11.7m |
| Diluted EPS | $0.11 | $0.36 | $1.69 | $1.24 |
- Q3 sales declined 10.5% year over year; nine-month sales declined 7.2%. Q3 gross profit fell 24.0%, while nine-month gross profit rose 9.6%. Nine-month operating income increased 34.0% and net income increased 37.1%.
- Nine-month operating cash flow was $21.4m, versus $22.2m a year earlier. Investing activities used $26.3m, including $22.1m in property and equipment additions and $5.7m in notes receivable. Financing provided $4.9m. Cash was just $33,000 at quarter-end. Operating cash flow less capital expenditures was approximately negative $0.7m.
- Working capital was $178.0m, up from $167.4m at year-end 2012. Current assets were $234.0m and current liabilities $55.9m.
- Debt included $60.0m outstanding under the $165m credit facility, $7.8m of term notes, and $10.7m of capital leases. The company reported $95.9m available under its credit facility, net of letters of credit. It was in compliance with covenants: leverage ratio 1.67 versus a 3.5 maximum, tangible net worth $256.8m versus a $210.3m minimum, and fixed-charge coverage 1.82 versus a 1.25 minimum.
Business trends and material changes
- Water Transmission sales fell 26.2% in Q3, mainly from a 60% decrease in tons produced amid weak municipal markets and the absence of a prior-year project of comparable scale. For the first nine months, segment sales rose 1.5% and gross profit rose 45.0%, supported by higher selling prices, favorable project mix and cost-reduction efforts.
- Tubular Products sales increased 8.9% in Q3 as tons sold rose 20%, but nine-month sales fell 14.8%. Segment gross profit declined 54.1% in Q3 and 59.3% for nine months, pressured by pricing, weaker energy-product sales and inventory write-downs. The company recorded lower-of-cost-or-market inventory adjustments of $0.8m in Q3 and $2.0m year to date.
- Quarterly consolidated gross margin fell despite lower SG&A. For nine months, improved Water Transmission profitability more than offset lower Tubular Products earnings.
- Q3 effective tax rate was 42.3%, partly due to a valuation allowance related to an anticipated investment capital loss. The nine-month rate was 33.4%, benefiting from the research and development tax credit. The prior-year quarter included a $1.8m tax benefit from a tax-credit study, affecting comparability.
Outlook, risks and contingencies
- Management expected strained municipal budgets to continue weighing on Water Transmission near term, partly offset by infrastructure needs and drought-related Texas projects. Project timing, bidding and production can cause significant period-to-period fluctuations.
- Management did not expect a significant near-term improvement in Tubular Products selling prices or volumes in Q4 2013. Imported energy pipe, lower natural-gas prices, rig-count trends and steel-price volatility were identified as pressures. A trade investigation of OCTG imports had a preliminary harm determination; a final determination was expected in Q2 2014.
- Planned 2013 capital expenditures were approximately $26m–$30m, including mill upgrades and expansion at Saginaw. Management believed cash, operating cash flows and available credit would fund foreseeable working-capital and capital needs and expected covenant compliance over the next 12 months.
- Portland Harbor environmental matters remain unresolved. The company could not estimate its potential obligation and recorded no additional liability; it expected to spend less than $0.1m on further source-control work in 2013. It had previously paid $175,000 in an interim settlement and stated it had no further payment obligation under that settlement. Standby letters of credit totaled $3.1m.
- Forward-looking results are exposed to demand, product mix, bids and order timing, raw-material availability and prices, capacity, and trade-policy risks. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Water Transmission project awards and production recover after municipal-market weakness, and how project timing affects revenue and cash collection.
- Whether Tubular Products margins stabilize given import competition, energy-market conditions and the inventory adjustments.
- Progress and potential cost exposure in the Portland Harbor investigation and related environmental work; the filing provides no clear estimate of ultimate liability.
- Execution and funding of planned capital projects, future revolver usage, debt maturities and ongoing covenant headroom.
- Tax-rate comparability, including the 2012 tax-credit benefit and the 2013 investment valuation allowance.