Northwest Pipe Company (NWPX) Q1 2019 Earnings Call Transcript

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Northwest Pipe Company (NWPX -0.79%)
Q1 2019 Earnings Call
May. 09, 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] Today's call is being recorded. If you have any objections, you may disconnect at this time. Now I'll introduce your first speaker for today, Scott Montross.

Please go ahead.

Scott Montross -- President and Chief Executive Officer

Thank you, Tom. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross, and 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 we make in this call that are expectations for the future are forward-looking statements and actual results could differ materially. Please refer to our most recent SEC filings 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 first-quarter results.

Robin Gantt -- Chief Financial Officer

Thank you, Scott. Our first-quarter net income was $2.2 million or $0.22 per diluted share compared to an adjusted net loss of $1.7 million or $0.18 per diluted share in the first quarter of 2018. Sales were $62.6 million in the first quarter of 2019 compared to $33.4 million in the first quarter of 2018. Gross profit as a percent of sales was 10.5% in the first quarter of 2019 compared to 4% in the first quarter of 2018.

The sales increase was due to a 68% increase in tons produced. The Ameron acquisition added about $11.8 million in sales. Gross profit as a percent of sales improved with the increases in production volume. Selling, general and administrative costs increased to $4.2 million in the first quarter of 2019 from $3.4 million in the first quarter of 2018.

This increase was due to higher incentive compensation expense. We had an income tax expense rate of 8.1% in the first quarter of 2019 compared to an income tax benefit rate of 12.2% in the first quarter of 2018. Our 2019 rate was impacted by the estimated changes in the valuation allowance. In the first quarter of 2019, the company provided $10.4 million in cash from continuing operations.

Depreciation and amortization were $2.8 million in the first quarter of 2019 and $1.6 million in the first quarter of 2018. Capital expenditures were $1.6 million in the first quarter of 2019, which were for ongoing maintenance capital expenditures. We've planned about $9 million in total capital expenditures for 2019, most of which falls under maintenance capital spending and does not include any amounts we may need for replacement equipment in Saginaw. As all of you saw in our recent press release, we had an accidental fire in the coatings operation at our Saginaw, Texas facility on April 21.

The accounting for the fire, recovery and related insurance reimbursement will likely cause some unpredictability in gross profit until the claim is completely closed. The accounting rules have different timing points on recognizing anticipated insurance reimbursement. Therefore, our gross profit may have additional cost that will ultimately be reversed with insurance reimbursement that will appear as gain in later quarters. We will detail these impacts as practicable to help shareholders understand the impact.

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

Scott Montross -- President and Chief Executive Officer

Work on integrating the Ameron assets continues to progress. This acquisition has added significant strength to our platform and is expected to have major impact on the ongoing earnings potential of the company. As of March 31, 2019, our backlog, including confirmed orders, was $242 million compared to $252 million in the fourth quarter and $87 million in the first quarter of 2018. As we projected in the last earnings call, backlog fell slightly in the first quarter due to the majority of the projects bidding late in the quarter.

Based on current bidding schedule, we expect backlog to stay elevated and relatively stable as we move through 2019. The current demand levels, strong backlog and stable competitive landscape have led to a stronger first quarter than we've seen recently reversing the trend of relatively slow first quarters for the last few years, and should lead to strong revenues and margin levels that continue to improve as we progress through 2019. However, the next couple of quarters could have anomalies related to the timing of expenses and insurance coverage from the fire at the Saginaw coatings plant. The fire has temporarily interrupted our ability to coat pipe.

However, since the coating facility occupies a very small area, the rest of the Saginaw plant has been operating normally. We have 6 operating water transmission facilities and more than enough coating capacity to handle the Saginaw requirements while the coating facility is repaired. The following is a look at current and upcoming water transmission projects. In the Texas market, the SWIFT program has funded over $8 billion in projects over the last 6 years.

SWIFT is expected to continue to fund major projects like the Houston project and Bois d'Arc Reservoir well into the future. The Houston surface water project is a 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. Production of the individual segments that are in various stages from pre-manufacturing to ship complete.

There are additional segments of the Houston project that will bid throughout 2019 and 2020 that represent about 35,000 tons of pipe. The Bois d'Arc Reservoir 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 Reservoir in the fourth quarter of 2018. The segments that we were awarded represent approximately 25,000 tons of pipe scheduled to be produced in 2019.

The finished water line for this project is forecast to bid in the second half of 2019 and represents an additional 22,000 tons of pipe. In the Western market, California Proposition 1's $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 appropriated for various projects as of the 2017, 2018 fiscal year, and we expect requirements for these projects to stretch out over the next several years. Water reuse programs have generated new opportunities in California market on which we expect to see bidding activity continue for the next year representing 8,000 tons.

The pre-stressed concrete pipe rehabilitation programs will result in about 10,000 tons annually over the next two to three years. 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. In closing, with a strong backlog, a stable bidding environment and a solid bidding year projected for 2019, we expect strong revenues and a positive margin trend throughout 2019.

And because a substantial portion of the work bidding on multi-year programs, we expect to continue to see strength in backlog, which should translate into positive business conditions beyond 2019. The acquisition of the Ameron Water Transmission Group further strengthens our position in the business. As we move forward, we will remain focused on: one, continuing progress on the integration of the Ameron Water Transmission Group; two, the fast cost efficient and safe repair and restart of our Saginaw coating facility; three, improving the performance of the business by focusing on margin over volume; and four, driving cost reductions and efficiencies at all levels of the company. At this time, we'd be happy to answer any of your questions

Questions & Answers:

Operator

Thank you. [Operator instructions] And speakers, our first question comes from Zane Karimi. Your line is open. 

Zane Karimi -- D.A. Davidson Companies -- Analyst

Good morning and congratulations on the quarter, Scott and Robin. So first off, I was wondering if you can talk a little about the backlog. And you burned through a bit this quarter. Is there any way to quantify how much of that reflects the new workbook into the combination with Ameron? And are you still burning through a lot of the work inherited with that transaction? And when do you expect you'll work through all of that?

Scott Montross -- President and Chief Executive Officer

Yes. We still -- there's still a considerable amount of work that we're working through from the Ameron transaction. So I mean it's a little bit hard to, I guess, define exactly when we would burn through all of it, but there was a little bit of a backlog when we took over. And we're still going through that and likely we'll be going through that through probably at least through the third quarter.

So as far as bidding in the first quarter, I think what we saw, Zane, was a first quarter that had relatively slow January and February, which we kind of talked about in the last earnings call and we said we thought we're going to see a little bit of a dip in the backlog. And really, we got into the March time frame which has been kind of the trend that we've seen over the last few years where you get late in the first quarter and things start to hit. So just a lot of the work started hitting in the late first quarter and -- which is resulting in the backlog showing a little bit of drop. But based on what we see in front of us with the bidding schedule, I think -- the current view is, certainly, we expect to see an elevated backlog continue and be relatively stable throughout this year based on the current view of what we have bidding in front of us.

Zane Karimi -- D.A. Davidson Companies -- Analyst

Great. Sounds like there should be a stable and a little ramp there. But then, into 2020, do you have any better visibility of this quarter from last? And how do you think about that?

Scott Montross -- President and Chief Executive Officer

Yes. I think part of the thing that we see for what's going on right now with the step that's bidding is, a lot of these are multi-year programs, right, that continue on like the program in Houston, the surface water program in Houston is multi-year. I think we've talked about Bois d'Arc being a multi-year program. We have another big patch of that bidding in the second half of this year and those things really stretch through 2020.

The support programs in California that are being supported by the funding from the proposition 1 general obligation bonds really stretch out over the next several years. So that all bodes well for 2020. Pretty solid bidding year. As we look at it right now in our project tracking system, we are seeing a 2020 year that at least right now looks like it's a little stronger than what we're seeing in 2019.

I would not say it's as strong as what we saw in 2018 because 2018 was at 250,000 tons, a really large year. But I think what it did is it really -- it buoyed the backlogs around the industry. It certainly made the competitive landscape more stable, and I think that those stronger backlogs do that. So we're definitely seeing continued strength as we go through 2019 into 2020.

Zane Karimi -- D.A. Davidson Companies -- Analyst

Got you. And as a quick follow-up on the Saginaw fire. Can you provide any commentary there on just maybe quarter quantify how much is it impacting? Just so I have a better idea of looking to the rest of the year.

Scott Montross -- President and Chief Executive Officer

Well, I think the thing is -- and I'm going to let Robin talk about the insurance stuff because she's been pretty deep into this. I think one thing to note about the Saginaw fire is, is it occurred at our coating facility, which quite frankly, is a very, very small part of our Saginaw plant. I think when you look at the total manufacturing space in the coating facility, it's really a very, very small percentage of the total manufacturing space at the Saginaw facility. So really, the day after the fire occurred, the rest of the plant was up and running relatively as normal.

It's just that one coating facility. And as I said, Zane, we had six operating water transmission facilities and way more than enough capacity to handle anything like that. So it's certainly an inconvenience to deal with, but we kind of broke this down into the current term stuff where we had focused on getting near term orders taken care of, which is going very smoothly with moving things around some of which going to our other plants as I mentioned. But it's really -- it's an inconvenience.

It creates a bunch of work, but certainly, we can work around that. Now the impact on the financial performance over the next couple of quarters is really going to -- as I talked about, you have expenses and then you have insurance coverage. And that's where I'm going to let the expert talk about that. So...

Robin Gantt -- Chief Financial Officer

I don't know about the expert. Certainly, more recent expert. But looking at the coverage and the accounting rules, different aspects of the coverage have different rules. So the property damage basically, you deal with that pretty quickly.

That is also for a lot of claims that tends to be what's taken care of first. The longer-term business interruption, those types of things, that actually -- you pretty much have to wait until you have the insurance reimbursement on hand. So that's where, I think, we'll see a lot more volatility. We will definitely have impacts in second quarter because we're definitely already doing what we can to get the jobs done, get everything complete, start working on replacing the equipment.

So we are going to have that as well as, of course, moving the jobs to the other facility Scott was mentioning to make sure that our commitments are made without an issue. So we know we will have them. We don't know what those costs will be, but we will point them out to folks so that they can see what they are.

Zane Karimi -- D.A. Davidson Companies -- Analyst

Well, appreciation for the clarity there. It sounds like you're managing it all well. So congrats on the quarter, and thanks for the time this morning.

Robin Gantt -- Chief Financial Officer

Thank you, Zane.

Operator

Thank you. And speakers, we show no further questions in queue. [Operator instructions] Thank you for waiting, speakers. We show no further questions in queue.

Scott Montross -- President and Chief Executive Officer

OK. I thank everybody for your attendance. We are talking again...

Robin Gantt -- Chief Financial Officer

In early August.

Scott Montross -- President and Chief Executive Officer

In early August, and we look forward to speaking with you then. So thank you very much.

Operator

[Operator signoff]

Duration: 18 minutes

Call participants:

Scott Montross -- President and Chief Executive Officer

Robin Gantt -- Chief Financial Officer

Zane Karimi -- D.A. Davidson Companies -- Analyst

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