Northwest Pipe Company (NWPX) Q3 2019 Earnings Call Transcript

Northwest Pipe Company (NWPX 1.01%)
Q3 2019 Earnings Call
Oct 31, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome, and thank you for standing by. [Operator instructions] This conference call is being recorded. [Operator instructions] Now I'll turn the meeting over to Scott Montross, CEO of Northwest Pipe. You may begin.

Scott Montross -- Chief Executive Officer

Thank you, Donna. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross. I'm president and CEO of the company.

I'm joined by Robin Gantt, our chief financial officer. As we begin, I would like to remind everyone that statements that we make in this call about our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause actual results to differ materially from expectations. I will now turn to Robin, who will discuss our third-quarter results.

Robin Gantt -- Chief Financial Officer

Thank you, Scott. Our adjusted third-quarter net income was $9.1 million or $0.93 per diluted share, compared to an adjusted net income of $2.1 million or $0.21 per diluted share in the third quarter of 2018. Sales were $75.2 million in the third quarter of 2019, compared to $52.5 million in the third quarter of 2018. Gross profit as a percent of sales was 20.6% in the third quarter of 2019, compared to 9.9% in the third quarter of 2018.

The sales increase was due to a significant increase in tons produced, partially offset by a decrease in selling prices per ton that occurred with a change in product mix. Gross profit and gross profit as a percent of sales improved with the increases in production volumes. In addition, we received $300,000 in insurance proceeds, net of the expenses incurred in the third quarter related to the fire at our Saginaw facility. If we exclude the benefit of these net proceeds, our gross profit as a percent of sales would have been 20.2%, which is the best quarter since 2014.

You'll recall that we had additional cost of $3.2 million in the second quarter. So the net impact of the fire on gross margin through the end of September is about $2.9 million, which gives us a year-to-date gross margins of 16%. We will have additional costs in the fourth quarter, but we will also hopefully have additional insurance proceeds to offset the remaining cost. Selling, general and administrative cost decreased to $4.9 million in the third quarter of 2019 from $5.3 million in the third quarter of 2018.

This decrease was primarily due to nonrecurring costs in the third quarter of 2018 related to the acquisition of Ameron, which were partly offset by increased incentive compensation expense. Our adjusted net income excludes about $1.7 million after tax for our legal settlement we received related to pipe produced at our former tubular product facilities. We had an income tax rate of 19% in the third quarter of 2019, compared to a rate of 14.2% in the third quarter of 2018. Our 2019 rate was impacted by the estimated changes in the valuation allowance and by the issuance of final Section 965 regulations in June related to certain foreign tax credit aspects of the transition tax.

In the first nine months of 2019, the company provided $21.4 million in cash from continuing operations. Depreciation and amortization were $9.5 million in the first 9 months of 2019 and $6 million in the first nine months of 2018. Capital expenditures were $5.9 million in the first nine months of 2019, which were for ongoing maintenance capital expenditures. We have planned about $11 million in total capital expenditures for 2019, most of which falls under maintenance capital spending and includes the replacement building and equipment in Saginaw.

Now I'll turn it over to Scott for an update on our business.

Scott Montross -- Chief Executive Officer

As of September 30, 2019, our backlog remained at near-record levels, including confirmed orders, backlog was $270 million, compared to $276 million in the second quarter and $201 million in the third quarter of 2018. As we move into the slower bidding period of 2019, we expect our backlog to drift a bit lower and to end the year similar where we ended 2018, which by historical standards is very elevated levels. The fire-related rebuild of the Saginaw coating facility was completed earlier in October. We are currently processing customer orders, and we are back on normal coating schedule.

The strong demand levels, elevated backlog, and stable competitive landscape that we've experienced throughout 2019 have led to a third quarter that's shown strong improvement in revenue and a significant improvement in gross profit and gross profit margin. We expect fourth-quarter revenues to be only slightly lower as we move into the time of the year that can be affected by weather and holiday schedules. However, we expect margin levels to remain fairly stable. As we stated in the previous earnings calls, we expect the next couple of quarters to have anomalies related to the timing of expenses and insurance reimbursements from the fire at the Saginaw coating plant.

The following is a look at current and upcoming water transmission projects. Northwest Pipe was recently selected by Garney Construction to supply 14 miles of 54-inch engineered steel pipe for the new Cape Fear Public Utility Authority, Raw Water main in North Carolina. This project represents 5,000 tons of pipe, with production expected to begin in late fourth quarter. In the Texas market, the SWIFT program has funded over $8 billion in projects over the last six years.

SWIFT is expected to continue to fund major projects like the Houston project and Bois d'Arc lake project well into the future. The Houston surface water project is a major multiyear, multiagency program with a series of segments representing 90,000 tons of pipe. Northwest Pipe has been the successful bidder on multiple Houston segments, representing over 15,000 tons of pipe. The production of the individual segments are in various stages from premanufacturing to ship complete.

There are additional segments of the Houston project that will bid through 2020 that represent about 35,000 tons of pipe. The Bois d'Arc lake project by the North Texas Municipal Water District has begun construction and represents approximately 60,000 tons of pipe. Northwest Pipe was a successful bidder on a portion of the Raw Water line for Bois d'Arc lake project in the fourth quarter of 2018. The segments that we were awarded represent approximately 25,000 tons of pipe, which are currently in various stages of production.

The finished water line, representing 22,000 tons for this project, bid in June of 2019 and was awarded to Northwest Pipe. We will begin production late this year. In the Western market, the California prop 1 $7.1 billion bond for water infrastructure has created the much-needed funding for projects within the state. According to the California Natural Resources Agency, 86% of those funds have been appropriate for various projects as of the 2017-2018 fiscal year.

We expect requirements for these projects to stretch out over the next several years. The water reuse programs have generated new opportunities in the California market, on which we expect to see bidding activity continue for the next year, representing 8,000 tons. The PCCP rehabilitation program will result in about 10,000 tons annually over the next two to three years. The site's reservoir is a water storage project that has received funding from prop one.

It will involve over 30 miles of 144-inch pipeline. This project is projected to begin in 2024. In North Dakota, progress has slowed on the 140-mile 87,000 ton Red River Valley Water Supply Project, as it is competing for funding with an urgent flood diversion project, which appears to be taking priority. We are hopeful that bidding on this project will start sometime within the next year.

Navajo-Gallup is a multi-phased major project under way in New Mexico. Northwest Pipe was selected to supply the most recent phase, which represents over 7,300 tons of pipe. Production is scheduled to start in mid-November. Throughout 2019, we have seen a solid bidding year in terms of volume, a stable bidding environment and a backlog that continues to hover in near-record territory.

As a result, we have seen strong revenues and margins that have continued to improve as we have progressed through 2019. And because a substantial portion of the work currently bidding represents multiyear programs, we expect to see continued strength in the backlog for the near term, which should translate into continued positive business conditions beyond 2019. As we move forward, we will be focused on: one, improving performance of the business by focusing on margin over volume; two, driving cost reductions and efficiencies at all levels of the company; and three, finding strategic growth opportunities for our water infrastructure business. At this time, we'd be happy to answer any of your questions.

Questions & Answers:

Operator

Thank you, speakers. [Operator instructions] Our first question comes from the line of Brent Thielman of D.A. Davidson.

Brent Thielman -- D.A. Davidson -- Analyst

Thanks. Good morning. Congratulations on a great quarter.

Scott Montross -- Chief Executive Officer

Good morning, Brent. Thank you.

Robin Gantt -- Chief Financial Officer

Hey, Brent.

Brent Thielman -- D.A. Davidson -- Analyst

Yeah. I guess first question, obviously, I guess vast majority of the growth driven by volume. You mentioned kind of the decline in price per ton due to mix. Can you talk about the change in mix you're seeing where that might be headed? Or whether that's changing? And then would that have any adverse impact on these margins despite how high they were in the quarter?

Scott Montross -- Chief Executive Officer

Yeah. I think when you look at the price that we get -- that we report on the earnings call, it's a matter of timing and the mix in specific months based on specifically the tons that come off of the spiral mills. So if you have a month that has really high tons without a lot of downstream processing, you can see a price that looks somewhat lower. Conversely, if you have a month that has relatively few tons processed on the spiral mill and a lot of downstream processing, you're going to see a price that's significantly higher.

We just happen to be in the phase now when we're going through these projects like Bois d'Arc and Houston and a lot of other these projects, where we're producing a lot of tons off of the spiral mill. And Brent, when you look at kind of pricing levels and what the effect is on pricing levels, we look at what we've booked year over year, and looking at 2018 versus 2019, the pricing levels are still moving up. I think the other thing that we're starting to see is the spread between the pipe price and the hot-rolled coil price is continuing to increase as that coil price moderates back toward normal levels. As everybody knows, when 232 was announced, it really had a huge driving-up effect on the coil price where hot-rolled coil was in the mid-$900 range.

Now you're getting back down to relatively normal levels where it's in the $500 a ton range. So that spread continues to increase between that hot-rolled coil price and the pipe selling price, which obviously has an additional positive impact on the market -- or on the margins. So it's -- the prices that you're looking at when we report is a matter of the timing and mix that we're running in the facilities. But when you look at overall pricing, we still see pricing moving up, and we see the spread increasing between hot-rolled coil and pipe price.

Brent Thielman -- D.A. Davidson -- Analyst

OK. And Scott, did you burn through any legacy backlog associated with Ameron or the work they bid prior to when you did the deal? Or is that behind you now?

Scott Montross -- Chief Executive Officer

We are -- there's still a little bit of that being done now that we're getting through. There's not a whole lot of that left. I think what we would say is we're starting to really get into the meat of the backlog now that we've seen that's resulted from the bidding over the last year that we've been talking about in these calls, which ultimately has very solid margins in the backlog.

Brent Thielman -- D.A. Davidson -- Analyst

OK. And it sounds like you'll burn through more of this backlog into year end. Can you talk about maybe how the schedules sort of look for -- bid schedules look for early 2020. I don't know -- I know you don't provide an outlook, but I guess, how kind of you're thinking about 2020 and how the market's shaping up for next year?

Scott Montross -- Chief Executive Officer

Yeah. We look at -- first, looking at the fourth quarter, where it's -- we expect a little bit down because again, you move into a period of the year that's affected by the holiday schedules and can be affected by weather-related. But what we're seeing right now doesn't have it down being very much. As we look out into 2019, we're seeing a year that looks pretty similar -- excuse me, into 2020, we're seeing a year that looks very similar to what we saw in 2019 as far as total demand with even maybe a little bit of upside potential as far as the demand is concerned.

So I think what you'll see is you're going to see a backlog that remains elevated by historical standards as we go through the year, but it's going to fluctuate based on the bidding levels in the specific quarters because, as you know, you've got -- the first quarter is usually a little bit slower and then that grows in the second and third quarter. And what we're seeing this year is more of a growth in the late third quarter, early fourth quarter of 2020. So we're expecting a pretty strong year in 2020 and expect those backlogs to remain historically relatively high levels. I think the interesting thing about the backlog is, is that when you look at it and look at year-end backlogs for the past 13 years, same for the last quarter of 2018, which was a relatively large backlog, which we're comparing the last quarter of '19 to, we only had like one quarter, I believe, that ended over $200 million.

OK? So when you look at where we are now, for the last five quarters, we've had $200-plus million in backlog. And obviously, we're expecting the fourth quarter to be pretty high, too, which bodes well for going into 2020. So if you look at 2020, projecting out, I think you're starting to see more of the same that we've recently seen in 2019.

Brent Thielman -- D.A. Davidson -- Analyst

OK. I'll pass it on. Thank you.

Scott Montross -- Chief Executive Officer

Thank you.

Operator

Thank you, Brent. The next question comes from David Wright of Henry Investment. Your line is open.

David Wright -- Henry Investment -- Analyst

All right. OK. Good morning.

Scott Montross -- Chief Executive Officer

Good morning, David.

Robin Gantt -- Chief Financial Officer

Good morning, David.

David Wright -- Henry Investment -- Analyst

So you made $10 million on $75 million in revenue.

Scott Montross -- Chief Executive Officer

Yes.

David Wright -- Henry Investment -- Analyst

That's a great quarter.

Scott Montross -- Chief Executive Officer

Thank you.

David Wright -- Henry Investment -- Analyst

Congratulations. A couple of questions. In your remarks, Scott, here for the three goals, number one was sort of trying to continue to drive margins higher. I think in the past, you've sort of said, well, 18%, 20% is kind of historical peak, and we'd like to get back to it.

And you did this quarter. Do you think you can get up into the low 20s?

Scott Montross -- Chief Executive Officer

Well, I think one of the things that we've continued to work on, David, is cost reductions through our lean manufacturing programs and taking the hours it does or it takes to do a specific job down, which I think should lend itself to improvement in those margins that we've seen historically. Now we get really careful about saying how high the margin is going to go. But I think that based on cost reductions that the team is working on here that certainly, you should start seeing that or you should continue to see that show up in the margin levels as we move forward. As long as we have a relatively stable market condition, which appears -- which it appears that we have for a prolonged period of time here going forward.

David Wright -- Henry Investment -- Analyst

OK. And on the Cape Fear contract, are you going to produce that in West Virginia?

Scott Montross -- Chief Executive Officer

We would likely produce that in West Virginia. Yes.

David Wright -- Henry Investment -- Analyst

Can you -- that's kind of a new geography for you, yes?

Scott Montross -- Chief Executive Officer

Well, we've had jobs in the East, down in North Carolina. It's a little bit of a new geography for us. I think that the the owner and the contractors recognize the importance of having a study product like steel in that kind of project. So I think that may be a little bit of new ground for us.

And hopefully, that kind of thing continues as we go into the future. So I think the team has done a really good job promoting the steel pressure pipe advantages in all regions of the country. And I think we're making a little headway in some the different regions now than maybe what we were making previously.

David Wright -- Henry Investment -- Analyst

OK, great. Thanks very much.

Scott Montross -- Chief Executive Officer

Thank you.

Robin Gantt -- Chief Financial Officer

Thank you, David.

Operator

Thank you, David. The next question comes from Brent Thielman of D.A. Davidson.

Brent Thielman -- D.A. Davidson -- Analyst

Hey, thanks for taking the follow-up. Again, phenomenal margins. You guys talked for a while this is kind of the threshold you want to get to, Scott, the sort of 20-plus percent or where you think the business should be operating at, notwithstanding some seasonality you're going to see in the business here and there quarter to quarter. Is this the new base we can kind of think about going forward?

Scott Montross -- Chief Executive Officer

Well, we've talked about these for a period of time, as you've mentioned, Brent. And we think those are the kind of margins in a stable market condition with stable demand levels that are, I guess, what we would call, good demand levels. Those are the kind of margin levels that we think we should see. Again, that doesn't stop variations from quarter to quarter.

You can see one-off things hit quarters like the fourth quarter could be impacted by, for example, a lot of insurance recovery, which could show things being significantly higher. But I think when you look at natural margins that are produced from the business. Those are the kind of numbers that we like to think that we're going to keep going forward, and we're going to expect going forward.

Brent Thielman -- D.A. Davidson -- Analyst

OK. And just real quick on your thoughts on cash flow into year end?

Robin Gantt -- Chief Financial Officer

Well, basically, we see it continuing. We've been able to maintain fairly even sales volume over the year. And so working capital has grown a little bit, but at an even pace. And so clearly, we've been able to stay at.

We did have borrowings at the beginning of the year, and we paid that down. And so we've been able to maintain fairly debt-free for the year. So we see that continuing. We may -- anything what timing could cause us to be in a position of any one day of being borrowing.

But with what the activity we're seeing right now, we should maintain our balance sheet pretty much where we are today.

Brent Thielman -- D.A. Davidson -- Analyst

OK. Great. Congrats again. Thank you.

Scott Montross -- Chief Executive Officer

Thanks, Brent.

Operator

Thank you, Brent.[Operator instructions] Our next question comes from the line of Mike Morales of Walthausen & Company. Your line is open.

Mike Morales -- Walthausen & Company -- Analyst

Hi. Good morning, guys. Congratulations on the strong quarter.

Scott Montross -- Chief Executive Officer

Good morning, Mike. Thank you.

Robin Gantt -- Chief Financial Officer

Good morning, Mike.

Mike Morales -- Walthausen & Company -- Analyst

Touching on the third point of your priorities looking forward, the strategic growth opportunities. Can you just give us a little bit of color on, as you see the landscape today, what the margin profile of the potential M&A you're looking at is relative to the corporate average now? And then what you're seeing from a multiple perspective out there?

Scott Montross -- Chief Executive Officer

Yeah. I -- what I would say is the margin profile that we look -- the things that we're looking at. And as we've mentioned, Mike, when we talked to you before, we've been on this M&A track for many, many years and continue to look at various things that fit. When we look at the margin profile, we look at things that have EBITDA margins that are similar or better than what we have in this period of time.

And the other thing that we look at is a situation with cash flow. Ultimately, we've done a lot, and I think Brent asked the question just recently about the cash flow, we've done a lot to work on cash flow with reducing the amount of day sales outstanding, with working on getting progress payments on some jobs, and things like that to really improve the cash flow of the existing business. So we're looking at something that has margin levels that are at least just good, if not better, with a better cash flow profile and likely something that is a little bit more opex related that you see quicker turns and have a lot more, I guess, bats on -- as you go through the market in a specific year. And something that is -- that we can take and we can, because of our skill sets, mold into the company and be successful at doing it.

So those are really the things that we look at.

Mike Morales -- Walthausen & Company -- Analyst

And as far as the multiples that you're seeing out there, Scott?

Scott Montross -- Chief Executive Officer

No. Right now, it depends on the size of what you look at, but the multiples are still relatively heavy. We see anywhere from probably 7.5x up to, in some cases, nine times. When you look at some of the bigger technology companies that, quite frankly, are out of our reach at this current time, you see multiples that are significantly higher.

You can see 12 times, 13 times, 15 times, but stuff that we're looking looks like more like 7.5 times to probably 8.5 times.

Mike Morales -- Walthausen & Company -- Analyst

That's very helpful, Scott. Thank you for the color, and keep up the good work.

Scott Montross -- Chief Executive Officer

Thanks, Mike.

Robin Gantt -- Chief Financial Officer

Thanks, Mike.

Operator

Thank you, Mike. At this time, speakers, we no longer have any questions in queue. [Operator instructions] At this time, we still do not have any questions in queue.

Scott Montross -- Chief Executive Officer

OK. Well, we thank, everybody, for listening in on the call. Obviously, we are starting to get back to the business levels and the profitability levels that we've been working for for a long time. We think we continue to have some work to do on those things, with continuing to improve those and to grow the business.

So we look forward to our next call, which will be in --

Robin Gantt -- Chief Financial Officer

March.

Scott Montross -- Chief Executive Officer

March of next year. So thank you very much, everyone.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Scott Montross -- Chief Executive Officer

Robin Gantt -- Chief Financial Officer

Brent Thielman -- D.A. Davidson -- Analyst

David Wright -- Henry Investment -- Analyst

Mike Morales -- Walthausen & Company -- Analyst

MIke Morales -- Walthausen & Company -- Analyst

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