Northwest Pipe(NWPX) - 2022 Q4 - Annual Report

Part I Item 1. Business Northwest Pipe Company manufactures water infrastructure products through SPP and Precast segments, expanding via acquisitions to address aging systems - The company operates through two primary segments: Engineered Steel Pressure Pipe (SPP) and Precast Infrastructure and Engineered Systems (Precast)[25][26] - Recent strategic growth includes the acquisition of ParkUSA in October 2021 for $90.2 million and Geneva Pipe and Precast in January 2020 for $49.4 million, significantly expanding the Precast segment[22][23] Engineered Steel Pressure Pipe (SPP) Backlog | Date | Backlog | Backlog including Confirmed Orders | | :--- | :--- | :--- | | Dec 31, 2022 | $274 million | $372 million | | Dec 31, 2021 | $183 million | $290 million | - The company believes the total addressable market for its engineered welded steel pipeline system products will be approximately $2.0 billion over the next three years, driven by aging infrastructure and population growth[35] - As of December 31, 2022, the company had 1,312 employees, with approximately 5% covered by a collective bargaining agreement. The weighted-average tenure of employees is 8 years[67] Our Segments The company operates two segments: Engineered Steel Pressure Pipe (SPP) for large pipelines and Precast for stormwater/wastewater products - Engineered Steel Pressure Pipe (SPP): Manufactures large-diameter, high-pressure steel pipeline systems for drinking water, hydroelectric power, and wastewater systems. It has seven manufacturing facilities across the U.S. and Mexico[25] - Precast Infrastructure and Engineered Systems (Precast): Manufactures stormwater/wastewater technology products, precast/reinforced concrete products (manholes, culverts), and pump lift stations. It has six manufacturing facilities in Texas and Utah[26] Our Industries The company operates in the water infrastructure industry, driven by aging systems, population growth, and federal/state funding initiatives - The Bipartisan Infrastructure Deal (Infrastructure Investment and Jobs Act) signed in November 2021 will invest $55 billion to expand access to clean drinking water[28] - The EPA's Sixth Drinking Water Infrastructure Needs Survey estimates a need for $473 billion in capital improvements from 2015 to 2034[30] - The ASCE's 2021 Infrastructure Report Card for Wastewater notes that drinking water and wastewater pipes are, on average, 45 years old, with a typical lifespan of 50 to 100 years[36] Competition The company faces vigorous price competition in both SPP and Precast segments from various regional and national players - SPP Competitors: Imperial Pipe and West Coast Pipe in the western U.S., and Thompson Pipe Group, American SpiralWeld Pipe, and Mid America Pipe Fabricating & Supply, LLC east of the Rockies[57] - Precast Competitors: Oldcastle Infrastructure in Texas and Utah, and The QUIKRETE Companies in Texas[59] Raw Materials and Supplies Steel is the primary raw material for SPP, while cement, steel, and aggregate are key for Precast, with supply chain challenges noted in 2022 - The main raw material for the SPP segment is steel, which is a substantial portion of the cost of sales. The steel industry is highly cyclical and prices fluctuate significantly[61] - The Precast segment's main raw materials are cement, steel, and aggregate. The company faced cement supply chain challenges in Texas and Utah during 2022[62] Item 1A. Risk Factors The company faces significant risks including material weakness in internal controls, dependence on government spending, volatile steel prices, and acquisition integration challenges - A material weakness in internal controls over financial reporting was identified related to the ERP system implementation at ParkUSA, which could prevent or fail to detect a material misstatement of financial statements[88][133] - The business is highly dependent on spending for public water transmission projects, which can be affected by project delays, downturns in government spending, and budgetary constraints[89][90] - Fluctuations in steel prices and availability pose a significant risk. The average cost per ton of steel has been volatile, moving from $655 in 2020 to $1,291 in 2021, and $1,174 in 2022[120] - The company faces risks related to the integration of recent acquisitions (ParkUSA, Geneva), including challenges with integrating cultures, information systems, and realizing anticipated synergies[100][101] - The company is subject to stringent environmental laws and potential liabilities, including costs related to the Portland Harbor Superfund Site[97][98] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[140] Item 2. Properties As of December 31, 2022, the company operates 13 manufacturing facilities, with SPP facilities mostly owned and Precast facilities leased Operating Facilities Overview (as of Dec 31, 2022) | Segment | Number of Facilities | Primary Ownership Status | | :--- | :--- | :--- | | Engineered Steel Pressure Pipe | 7 | Mostly Owned | | Precast Infrastructure and Engineered Systems | 6 | Leased | Item 3. Legal Proceedings The company is involved in routine legal actions not expected to be material, with further details on the Portland Harbor Superfund Site in Note 15 - The company is party to routine legal actions and does not expect them to have a material impact on financial results[144] - For more significant legal matters, the report refers to Note 15, which details the company's involvement as a potentially responsible party at the Portland Harbor Superfund Site[144][383] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[145] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, does not intend to pay future dividends, and established an ATM offering in 2022 - Common stock is traded on the Nasdaq Global Select Market under the symbol "NWPX"[148] - The company does not intend to pay cash dividends in the foreseeable future[148] - In September 2022, the company entered into an At-the-Market (ATM) agreement to sell up to $50 million of common stock. No shares were sold under this agreement in 2022[150] Stock Performance Comparison (Indexed Return) | Date | Northwest Pipe Company | Russell 2000 Index | S&P 600 Construction Machinery and Heavy Trucks Index | Peer Group | | :--- | :--- | :--- | :--- | :--- | | Dec 31, 2017 | 100.00 | 100.00 | 100.00 | 100.00 | | Dec 31, 2018 | 121.68 | 88.99 | 71.53 | 79.86 | | Dec 31, 2019 | 174.03 | 111.70 | 93.66 | 102.59 | | Dec 31, 2020 | 147.86 | 134.00 | 105.83 | 116.38 | | Dec 31, 2021 | 166.14 | 153.85 | 120.94 | 129.46 | | Dec 31, 2022 | 176.07 | 122.41 | 128.71 | 113.09 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales and gross profit significantly increased in 2022 driven by acquisitions and pricing, with improved operating cash flow despite volatile steel prices and ERP system challenges Financial Performance Summary (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Net Sales | $457,665 | $333,313 | $285,907 | | Total Gross Profit | $85,855 | $44,254 | $50,519 | | Operating Income | $44,821 | $16,032 | $25,565 | | Net Income | $31,149 | $11,523 | $19,050 | Net Sales by Segment (2022 vs 2021) | Segment | 2022 Net Sales | 2021 Net Sales | Change | | :--- | :--- | :--- | :--- | | Engineered Steel Pressure Pipe (SPP) | $307.6M | $259.8M | +18.4% | | Precast Infrastructure and Engineered Systems | $150.1M | $73.5M | +104.2% | Gross Profit by Segment (2022 vs 2021) | Segment | 2022 Gross Profit | 2021 Gross Profit | Change | | :--- | :--- | :--- | :--- | | Engineered Steel Pressure Pipe (SPP) | $44.5M (14.5% margin) | $31.3M (12.0% margin) | +42.2% | | Precast Infrastructure and Engineered Systems | $41.4M (27.6% margin) | $13.0M (17.7% margin) | +219.0% | - Net cash provided by operating activities was $17.5 million in 2022, a significant improvement from a $5.8 million use of cash in 2021[182] - Capital expenditures were $22.8 million in 2022, up from $13.3 million in 2021, and are expected to be between $24 million and $28 million in 2023[183] Critical Accounting Estimates Management identifies critical accounting estimates including revenue recognition for SPP, business combination valuations, and annual goodwill impairment testing - Revenue Recognition (SPP): Revenue is recognized over time using the cost-to-cost method, which requires significant judgment in estimating total contract costs and progress toward completion[196] - Business Combinations: Accounting for acquisitions requires significant estimates for the fair value of assets acquired and liabilities assumed, which can be adjusted for up to one year post-acquisition[199][200] - Goodwill: Goodwill is tested for impairment annually (date changed to Nov 30) or when trigger events occur, using either a qualitative or quantitative assessment that involves management judgment[201][202] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to commodity risk from steel prices, interest rate risk on variable debt, and foreign currency risk, partially mitigated by hedging instruments - Commodity Risk: The company is exposed to volatile steel prices, which make up approximately 35% of SPP project costs. The company does not hedge this risk[214][215] - Interest Rate Risk: As of Dec 31, 2022, the company had $94.5 million of variable-rate debt. This risk is partially mitigated by an interest rate swap with a notional amount of $26.7 million[216][217] - Foreign Currency Risk: The company uses foreign currency forward contracts to hedge exposure to the Canadian Dollar, Mexican Peso, and European Euro. As of Dec 31, 2022, the notional amount of these contracts was $17.1 million (CAD) and $1.1 million (EUR)[218][219] Item 8. Financial Statements and Supplementary Data This section includes consolidated financial statements and an auditor's report with an unqualified opinion on financials but an adverse opinion on internal controls due to a material weakness - The independent auditor, Moss Adams LLP, issued an adverse opinion on the Company's internal control over financial reporting as of December 31, 2022[228][264] - The material weakness identified relates to control deficiencies in the ERP system implementation at the ParkUSA subsidiary, specifically concerning the completeness of data conversion and effectiveness of controls for sales and cost of sales transactions[268] - Despite the adverse opinion on internal controls, the auditor issued an unqualified (fairly presented) opinion on the consolidated financial statements themselves[264] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[222] Item 9A. Controls and Procedures Management concluded disclosure controls and internal controls were ineffective due to a material weakness in the ParkUSA ERP system implementation, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[224] - A material weakness was identified related to the ERP system implementation at ParkUSA, specifically regarding insufficient oversight, data conversion controls, and testing for sales and cost of sales transactions[227] - The independent auditor, Moss Adams LLP, issued an adverse opinion on the effectiveness of internal control over financial reporting[228] - A remediation plan is underway, including hiring consultants, educating control owners, and implementing new monitoring controls, with completion anticipated in 2023[230][231] Item 9B. Other Information The company reports no other information for this item - None[233] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - None[234] Part III Item 10. Directors, Executive Officers and Corporate Governance This section provides executive officer information, with other governance details incorporated by reference from the 2023 proxy statement Executive Officers (as of Dec 31, 2022) | Name | Age | Position | | :--- | :--- | :--- | | Scott Montross | 57 | Director, President, and Chief Executive Officer | | Aaron Wilkins | 48 | Senior Vice President, Chief Financial Officer, and Corporate Secretary | | Miles Brittain | 59 | Executive Vice President | | Eric Stokes | 51 | Senior Vice President and General Manager of Engineered Steel Pressure Pipe | | Michael Wray | 49 | Senior Vice President and General Manager of Precast Infrastructure and Engineered Systems | | Megan Kendrick | 46 | Vice President of Human Resources | - The company has a Code of Business Conduct and Ethics for all employees and a Code of Ethics for Senior Financial Officers, which are available on its website[245] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 proxy statement - All information required by this item is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[247] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details equity compensation plan information, with security ownership incorporated by reference from the 2023 proxy statement Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 200,924 | $ - | 873,402 | | Equity compensation plans not approved by security holders | - | - | - | | Total | 200,924 | $ - | 873,402 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2023 proxy statement - All information required by this item is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[251] Item 14. Principal Accountant Fees and Services Information regarding fees paid to the independent registered public accounting firm is incorporated by reference from the 2023 proxy statement - All information required by this item is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[252] Part IV Item 15. Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the report, including the auditor's report and executive certifications - This section lists all financial statements, schedules, and exhibits filed with the report, including the auditor's report, credit agreements, and executive certifications[254][255][256] Item 16. Form 10-K Summary The company reports no Form 10-K summary for this item - None[260]