Business context and reporting period
Northwest Pipe Company’s unaudited Form 10-Q covers the three months ended March 31, 2013, with comparisons to the first quarter of 2012. The company manufactures steel pipe through its Water Transmission and Tubular Products groups.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data. Balance-sheet comparisons are with December 31, 2012.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $140.6 | $142.2 |
| Gross profit / margin | $21.2 / 15.1% | $16.5 / 11.6% |
| Operating income / margin | $14.8 / 10.6% | $9.2 / 6.5% |
| Net income | $9.5 | $4.7 |
| Diluted EPS | $1.00 | $0.50 |
| Operating cash flow | $3.8 | $17.7 |
| Capital expenditures | $9.8 | $4.4 |
- Operating cash flow less capital expenditures was approximately negative $5.9 million. Cash and cash equivalents were only $47,000 at quarter-end.
- Working capital was $177.8 million, up from $167.4 million at year-end, primarily reflecting increased receivables, partly offset by higher accounts payable. Receivables rose to $65.4 million from $41.5 million.
- At March 31, the company had $56.2 million outstanding under its $165 million credit agreement and $9.3 million of term debt, plus $11.6 million in capital lease obligations. It reported $105.6 million available under the credit agreement, net of letters of credit.
- Debt covenants were met: leverage ratio 1.45:1.0 (maximum 3.5:1.0), tangible net worth $248.4 million (minimum $207.0 million), and fixed-charge coverage 2.37:1.0 (minimum 1.25:1.0).
Material changes versus the prior comparable period
- Sales fell 1.1%, but gross profit rose 28.5% and net income approximately doubled. Lower SG&A, reduced interest expense, and improved Water Transmission results contributed to stronger earnings.
- Water Transmission sales increased 34.5% to $78.6 million; gross profit more than doubled to $19.9 million. Higher production, including for the Lake Texoma project, favorable project mix, and improved fixed-cost absorption helped results. Selling prices per ton declined 12%, broadly in line with lower material costs.
- Tubular Products sales declined 26.0% to $62.0 million, and gross profit fell 80.4% to $1.3 million. Tons sold declined 19% and selling prices per ton fell 9%. Energy-pipe sales declined 29%; lower volume, import competition, and a $0.8 million inventory lower-of-cost-or-market adjustment weighed on profit.
- Operating cash flow decreased from $17.7 million to $3.8 million, mainly reflecting the $24.0 million increase in receivables, partly offset by lower inventory and higher accounts payable.
Outlook, commentary, risks and unusual items
- No full-year revenue or earnings guidance is provided. Management expected 2013 capital expenditures of approximately $30 million to $35 million, including strategic mill and Saginaw plant expansion projects.
- Management said strained municipal budgets may constrain Water Transmission demand, with infrastructure needs and drought-related projects in Colorado and Texas expected to help offset weakness elsewhere. For Tubular Products, it anticipated near-term pressure on energy sales from imports, low natural-gas prices, and uncertain steel prices; drilling activity was expected to remain relatively steady through the first half of 2013.
- Key operating risks include project timing and bidding, customer orders and deliveries, steel prices and availability, production capacity, demand, and import competition. One Water Transmission customer represented 20.8% of Q1 sales; no customer exceeded 10% in Q1 2012.
- On April 1, 2013, the company entered into a $5.7 million note receivable, repayable over ten years at 4.5% interest.
- Shareholder class and derivative lawsuits were settled and dismissed in March 2013; the $12.5 million class settlement was funded by insurers except for previously expensed retention amounts. The $750,000 derivative settlement is also covered by insurers and includes corporate-governance modifications. On April 3, 2013, the SEC informed the company it would not recommend enforcement action against it.
- Environmental uncertainty remains regarding Portland Harbor and related site investigations. The company reported no further recorded adjustment for these matters, had no assumed payment obligation for trustee assessments, and anticipated spending less than $0.1 million on further source-control work in 2013. It also disclosed $3.1 million of standby letters of credit.
- The company was under IRS examination for 2009 and 2010 and reported $5.7 million of unrecognized tax benefits. Management stated it expected existing cash, operating cash flow, and credit availability to fund foreseeable working-capital and capital needs and believed it would remain covenant-compliant for the next 12 months.
Important facts for investors to verify
- Whether Water Transmission project volumes and the Lake Texoma contribution are sustainable, and how the major customer concentration evolves.
- Whether Tubular Products margins recover amid import competition, energy-market conditions, and steel-price changes.
- Receivables collection and working-capital requirements, given low cash balances and operating cash flow well below capital expenditures.
- Execution, cost, and expected returns of the $30 million to $35 million capital program, including Saginaw expansion.
- Updates on Portland Harbor/site environmental exposure and the IRS examination; the filing does not quantify a potential environmental liability.