Northwest Pipe Company — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Northwest Pipe manufactures engineered welded-steel pipe systems, primarily for water transmission; following the Atchison sale, it reported one operating segment, Water Transmission.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Continuing-operations net sales | $132.8 million | $149.4 million |
| Gross profit (margin) | $5.8 million (4.4%) | $(0.3) million (-0.2%) |
| Operating loss | $(9.2) million | $(10.4) million |
| Loss from continuing operations | $(8.4) million | $(6.7) million |
| Net loss | $(10.2) million; $(1.06) per share | $(9.3) million; $(0.97) per share |
| Cash from operating activities | $(7.5) million total; $(5.8) million continuing operations | $1.5 million total; $(1.8) million continuing operations |
| Cash and cash equivalents at year-end | $43.6 million | $21.8 million |
| Total assets / stockholders’ equity | $230.3 million / $200.3 million | $241.6 million / $209.2 million |
Continuing-operations net sales fell 11.1%. Production tonnage declined 45%, while average selling price per ton rose 62%, reflecting improved pricing, product mix and higher material costs. Management said it favored margin over volume by declining projects that did not meet gross-profit goals. Gross margin improved, but operating and net losses continued. The fourth-quarter gross profit included a $1.2 million charge to cost of sales for a workers’ compensation reserve estimate change.
At December 31, 2017, working capital excluding assets held for sale was $123.8 million. The company had no line-of-credit borrowings, approximately $1.1 million in capital lease obligations, and $19.1 million of additional revolver availability after borrowing-base limits and letters of credit. The $60 million revolver expires October 25, 2018. Capital expenditures were $2.9 million; management expected approximately $8.6 million in 2018. No cash dividends were paid in 2017 or 2016.
Material changes and unusual items
- On December 26, 2017, the company sold substantially all Atchison, Kansas facility assets for $37.2 million cash, with a nominal gain. $0.75 million was held in escrow until February 2018 and approximately $3.7 million for twelve months. Atchison’s results are presented as discontinued operations.
- 2017 total net loss included a $1.8 million discontinued-operations loss, compared with $2.5 million in 2016. The Atchison business had only $12,000 in 2017 sales before its sale.
- Cash from operations was negative despite higher year-end cash, principally because of working-capital movements. The Atchison sale contributed $32.5 million of discontinued-operations investing cash flow; the filing states total 2017 cash increased by $21.8 million.
- The 2016 comparison included a $7.9 million gain on sale of the Denver facility; 2017 had no comparable continuing-operations gain.
- The 2017 tax benefit from continuing operations was $1.1 million, versus $4.1 million in 2016. The Tax Cuts and Jobs Act produced an estimated $0.9 million of additional income tax expense in fourth-quarter 2017; certain amounts were provisional pending further analysis.
Outlook, risks and contingencies
- Management described long-term U.S. water-infrastructure demand as strong, but warned that strained public-agency budgets and expanded competitor capacity could pressure near-term demand, sales and margins. No quantitative earnings or revenue guidance was provided.
- Backlog was approximately $53 million at year-end, down from $57 million in 2016. Backlog plus confirmed orders was approximately $88 million, versus $66 million. Orders may be delayed or canceled, and backlog is not a guarantee of future results.
- Steel is a substantial input cost: reported average cost was approximately $650 per ton in 2017, versus $474 in 2016. The company does not hedge commodity exposure and may not fully pass cost increases through to customers. The filing notes that the March 2018 25% U.S. tariff on most imported steel was expected to raise costs and constrain availability.
- Subsequent to year-end, the company announced plans to close its leased Salt Lake City Permalok facility and shift production to St. Louis and Adelanto, and to close its Monterrey facility early in the second quarter of 2018.
- Environmental exposure remains uncertain at Portland Harbor, where the EPA selected a cleanup remedy estimated to cost approximately $1 billion across the site and more than 100 potentially responsible parties. The company could not estimate its share and recorded no further reserve. It believes insurance may reimburse some costs but gives no assurance of coverage. A Houston environmental matter received a TCEQ Certificate of Completion in December 2017.
- Revenue recognition relied on percentage-of-completion estimates. The company expected adoption of the new revenue standard in 2018 to result in an approximately $1 million opening retained-earnings adjustment, without materially changing revenue patterns. It expected the 2019 lease standard to materially increase balance-sheet assets and liabilities.
- Management and the auditor reported effective disclosure controls and internal control over financial reporting at December 31, 2017. The filing notes material weaknesses had been identified in prior years, but none in 2015–2017.
Investor verification priorities
- Confirm revolver renewal or replacement before its October 2018 expiration, borrowing-base availability, and compliance with the fixed-charge coverage covenant.
- Track order conversion, cancellations, backlog quality, project timing and whether pricing can offset steel-cost increases and tariffs.
- Review post-sale escrow releases, any remaining Atchison obligations, and the financial and operational effects of the Salt Lake City and Monterrey closures.
- Monitor Portland Harbor allocation, legal developments, insurance coverage and any resulting reserve or cash requirement.
- Check completion of the provisional Tax Act calculations and the actual opening retained-earnings impact of revenue-standard adoption.