NORTHWEST PIPE CO

The following tables set forth, for the periods indicated, certain financial information regarding costs and expenses expressed in dollars (in thousands) and as a percentage of total net sales.

Three and Six Months Ended June 30, 2024 Compared to Three and Six Months Ended June 30, 2023

Net sales. Net sales increased 11.3% to $129.5 million in the second quarter of 2024 compared to $116.4 million in the second quarter of 2023 and increased 12.6% to $242.7 million in the first six months of 2024 compared to $215.5 million in the first six months of 2023.

SPP net sales were $89.5 million in the second quarter of 2024 compared to $77.3 million in the second quarter of 2023 and $169.5 million in the first six months of 2024 compared to $140.8 million in the first six months of 2023. The 15.9% increase in the second quarter of 2024 compared to the second quarter of 2023 was driven by a 56% increase in tons produced resulting from an improved bidding environment coupled with changes in project timing, partially offset by a 26% decrease in selling price per ton due to a combination of lower raw materials costs and product mix. The 20.4% increase in the first six months of 2024 compared to the first six months of 2023 was driven by a 55% increase in tons produced resulting primarily from changes in project timing, partially offset by a 22% decrease in selling price per ton due to a combination of lower raw materials costs and product mix. Bidding activity, backlog, and production levels may vary significantly from period to period affecting sales volumes.

Precast net sales were$40.0 million in thesecond quarter of 2024 compared to$39.1 million in thesecond quarter of 2023 and$73.2 million in the firstsix months of 2024 compared to$74.7 million in the firstsix months of 2023. The 2.2%increase in thesecond quarter of 2024 compared to thesecond quarter of 2023 was driven by a 30%increase in volume shipped, partially offset by a 22%decrease in selling prices due to changes in product mix. The 2.0%decrease in the firstsix months of 2024 compared to the firstsix months of 2023, despite a 27%increase in volume shipped, was driven by a 23%decrease in selling prices due to changes in product mix.

Gross profit. Gross profit increased 14.8% to $25.8 million (19.9% of net sales) in the second quarter of 2024 compared to $22.5 million (19.3% of net sales) in the second quarter of 2023 and increased 17.6% to $45.9 million (18.9% of net sales) in the first six months of 2024 compared to $39.1 million (18.1% of net sales) in the first six months of 2023.

SPP gross profit was $17.0 million (19.0% of SPP net sales) in the second quarter of 2024 compared to $12.6 million (16.3% of SPP net sales) in the second quarter of 2023 and $31.2 million (18.4% of SPP net sales) in the first six months of 2024 compared to $20.4 million (14.5% of SPP net sales) in the first six months of 2023. The 35.1% increase in the second quarter of 2024 compared to the second quarter of 2023 and the 53.4% increase in the first six months of 2024 compared to the first six months of 2023 were primarily due to increased volume and changes in product mix.

Precast gross profit was $8.8 million (22.1% of Precast net sales) in the second quarter of 2024 compared to $9.9 million (25.3% of Precast net sales) in the second quarter of 2023 and $14.7 million (20.1% of Precast net sales) in the first six months of 2024 compared to $18.7 million (25.1% of Precast net sales) in the first six months of 2023. The 10.9% decrease in the second quarter of 2024 compared to the second quarter of 2023 and the 21.3% decrease in the first six months of 2024 compared to the first six months of 2023 were primarily due to changes in product mix.

Selling, general, and administrative expense. Selling, general, and administrative expense increased 10.7% to $12.2 million (9.4% of net sales) in the second quarter of 2024 compared to $11.0 million (9.4% of net sales) in the second quarter of 2023 and increased 3.3% to $23.6 million (9.7% of net sales) in the first six months of 2024 compared to $22.9 million (10.6% of net sales) in the first six months of 2023. The increase in the second quarter of 2024 compared to the second quarter of 2023 was primarily due to $1.1 million in higher incentive compensation expense. The increase in the first six months of 2024 compared to the first six months of 2023 was primarily due to $0.5 million in higher incentive compensation expense and $0.3 million in higher base compensation and benefits expense.

Income taxes. Income tax expense was $2.9 million in the second quarter of 2024 (an effective income tax rate of 25.5%) compared to $2.7 million in the second quarter of 2023 (an effective income tax rate of 26.5%) and was $4.9 million in the first six months of 2024 (an effective income tax rate of 26.3%) compared to $3.6 million in the first six months of 2023 (an effective income tax rate of 27.1%). The estimated effective income tax rates for the second quarters and the first six months of 2024 and 2023 were primarily impacted by non-deductible permanent differences. The estimated effective income tax rate can change significantly depending on the relationship of permanent income tax differences to estimated pre-tax income or loss. Accordingly, the comparison of estimated effective income tax rates between periods is not meaningful in all situations.

Liquidity and Capital Resources

Sources and Uses of Cash

Our principal sources of liquidity generally include operating cash flows and the Credit Agreement dated June 30, 2021 with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, and the lenders from time to time party thereto, including the initial sole lender, Wells Fargo (the “Lenders”), as amended by the Incremental Amendment dated October 22, 2021, the Second Amendment to Credit Agreement dated April 29, 2022, and the Third Amendment to Credit Agreement dated June 29, 2023 (together, the “Amended Credit Agreement”). From time to time our long-term capital needs may be met through the issuance of additional debt or equity. Our principal uses of liquidity generally include capital expenditures, working capital, organic growth initiatives, acquisitions, share repurchases, and debt service. Information regarding our cash flows for the six months ended June 30, 2024 and 2023 are presented in our Condensed Consolidated Statements of Cash Flows contained in Part I – Item 1. “Financial Statements” of this 2024 Q2 Form 10‑Q, and are further discussed below.

As of June 30, 2024, our working capital (current assets minus current liabilities) was $207.2 million compared to $176.3 million as of December 31, 2023. Cash and cash equivalents totaled $4.5 million and $4.1 million as of June 30, 2024 and December 31, 2023, respectively.

Fluctuations in SPP working capital accounts result from timing differences between production, shipment, invoicing, and collection, as well as changes in levels of production and costs of materials. We typically have a relatively large investment in working capital, as we generally pay for materials, labor, and other production costs in the initial stages of a project, while payments from our customers are generally received after finished product is delivered. A portion of our revenues are recognized over time as the manufacturing process progresses; therefore, cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant. As such, our payment cycle is a significantly shorter interval than our collection cycle, although the effect of this difference in the cycles may vary by project, and from period to period.

As of June 30, 2024, we had $75.9 million of outstanding revolving loan borrowings, $10.8 million of outstanding current debt, $88.0 million of operating lease liabilities, and $7.0 million of finance lease liabilities. As of December 31, 2023, we had $54.5 million of outstanding revolving loan borrowings, $10.8 million of outstanding current debt, $90.2 million of operating lease liabilities, and $7.5 million of finance lease liabilities. The increase in our revolving loan borrowings was primarily due to increased production and temporary changes in SPP working capital needs.

Net Cash Provided by (Used in) Operating Activities

Net cash provided by (used in) operating activities was ($3.8) million in the first six months of 2024 compared to $27.5 million in the first six months of 2023. Net income, adjusted for non-cash items, provided $26.2 million of operating cash flow in the first six months of 2024 compared to $21.6 million of operating cash flow in the first six months of 2023. The net change in working capital was $30.1 million of operating cash flow that was used in the first six months of 2024 compared to $5.9 million of operating cash flow that was provided in the first six months of 2023.

Net Cash Used in Investing Activities

Net cash used in investing activities was $10.6 million in the first six months of 2024 compared to $11.1 million in the first six months of 2023. Capital expenditures were $10.6 million in the first six months of 2024 compared to $8.4 million in the first six months of 2023, which includes $1.0 million in the first six months of 2024 and $2.5 million in the first six months of 2023 of investment in our new reinforced concrete pipe mill, $2.3 million in the first six months of 2024 for the construction of a building at our Salt Lake City, Utah facility for the new mill, and the remainder primarily for standard capital replacement. We currently expect capital expenditures in 2024 to be approximately $19 million to $22 million, which includes approximately $3 million of investment in our new reinforced concrete pipe mill, and associated ancillary equipment, approximately $5 million for the construction of a building at our Salt Lake City, Utah facility for the new mill, and the remainder primarily for standard capital replacement. The $2.7 million payment of the working capital adjustment for the 2021 acquisition of Park Environmental Equipment, LLC was made in the second quarter of 2023.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by (used in) financing activities was $14.8 million in the first six months of 2024 compared to ($15.9) million in the first six months of 2023. Net borrowings (repayments) on the line of credit were $21.4 million in the first six months of 2024 compared to ($13.6) million in the first six months of 2023. Repurchases of common stock were $4.4 million in the first six months of 2024. No repurchases of common stock were made in the first six months of 2023.

We anticipate that our existing cash and cash equivalents, cash flows expected to be generated by operations, and additional borrowing capacity under the Amended Credit Agreement and other loans will be adequate to fund our working capital, debt service, capital expenditure requirements, and share repurchases for the foreseeable future. To the extent necessary, we may also satisfy capital requirements through additional bank borrowings, senior notes, term notes, subordinated debt, and finance and operating leases, if such resources are available on satisfactory terms. We have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion. Any such transactions, if consummated, may necessitate additional bank borrowings or other sources of funding.

On December 4, 2023, our shelf registration statement on Form S‑3 (Registration No. 333‑275691) covering the potential future sale of up to $150 million of our equity and/or debt securities or combinations thereof, was declared effective by the SEC. This shelf registration statement, which replaced the registration statement on Form S‑3 that expired on November 3, 2023, provides another potential source of capital, in addition to other alternatives already in place. We cannot be certain that funding will be available on favorable terms or available at all. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. As of the date of this 2024 Q2 Form 10‑Q, we have not yet sold any securities under this registration statement, nor do we have an obligation to do so. Please refer to the factors discussed in Part I – Item 1A. “Risk Factors” in our 2023 Form 10‑K.

On November 2, 2023, we announced our authorization of a share repurchase program of up to $30 million of our outstanding common stock. The program does not commit to any particular timing or quantity of purchases, and the program may be suspended or discontinued at any time. Under the program, shares may be purchased in open market, including through plans adopted pursuant to Rule 10b5‑1 of the Exchange Act, or in privately negotiated transactions administered by our broker, D.A. Davidson Companies. At this time, we have elected to limit our share repurchase transactions to only those under the Rule 10b5‑1 trading plan we executed in November 2023, which we believe considers our liquidity, including availability of borrowings and covenant compliance under our Amended Credit Agreement, and other capital allocation priorities of the business. Our Rule 10b5‑1 trading plan designates up to $10 million for daily share repurchases with volumes that fluctuate with changes in the trading price of our common stock. We expect to consider share repurchase strategies beyond the current Rule 10b5‑1 trading plan at a future date. For a summary of shares repurchased during the second quarter of 2024, see Part II — Item 2. “Unregistered Sales of Equity Securities and Use of Proceeds” of this 2024 Q2 Form 10‑Q. Please refer to the factors discussed in Part I – Item 1A. “Risk Factors” in our 2023 Form 10‑K.

Credit Agreement

The Amended Credit Agreement provides for a revolving loan, swingline loan, and letters of credit in the aggregate amount of up to $125 million (“Revolver Commitment”), with an option for us to increase that amount by $50 million, subject to provisions of the Amended Credit Agreement. The Amended Credit Agreement will expire, and all obligations outstanding will mature, on June 29, 2028. We may prepay outstanding amounts at our discretion without penalty at any time, subject to applicable notice requirements. As of June 30, 2024 under the Amended Credit Agreement, we had $75.9 million of outstanding revolving loan borrowings, $1.6 million of outstanding letters of credit, and additional borrowing capacity of approximately $47 million.

Revolving loans under the Amended Credit Agreement bear interest at rates related to, at our option and subject to the provisions of the Amended Credit Agreement, either: (i) Base Rate (as defined in the Amended Credit Agreement) plus the Applicable Margin; (ii) Adjusted Term Secured Overnight Finance Rate (“SOFR”) (as defined in the Amended Credit Agreement) plus the Applicable Margin; or (iii) Adjusted Daily Simple SOFR (as defined in the Amended Credit Agreement) plus the Applicable Margin. The “Applicable Margin” is 1.75% to 2.35%, depending on our Consolidated Senior Leverage Ratio (as defined in the Amended Credit Agreement) and the interest rate option chosen. Interest on outstanding revolving loans is payable monthly. Swingline loans under the Amended Credit Agreement bear interest at the Base Rate plus the Applicable Margin. As of June 30, 2024, the weighted-average interest rate for outstanding borrowings was 7.42%. The Amended Credit Agreement requires the payment of a commitment fee of between 0.30% and 0.40%, based on the amount by which the Revolver Commitment exceeds the average daily balance of outstanding borrowings (as defined in the Amended Credit Agreement). Such fee is payable monthly in arrears. We are also obligated to pay additional fees customary for credit facilities of this size and type.

The letters of credit outstanding as of June 30, 2024 relate to workers’ compensation insurance and a public improvement project. Based on the nature of these arrangements and our historical experience, we do not expect to make any material payments under these arrangements.

The Amended Credit Agreement contains customary representations and warranties, as well as customary affirmative and negative covenants, events of default, and indemnification provisions in favor of the Lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, annual capital expenditures, certain investments, acquisitions, and dispositions, and other matters, all subject to certain exceptions. The Amended Credit Agreement requires us to regularly provide financial information to Wells Fargo and to maintain a consolidated senior leverage ratio no greater than 3.00 to 1.00 (subject to certain exceptions) and a minimum consolidated earnings before interest, taxes, depreciation, and amortization (“EBITDA”) (as defined in the Amended Credit Agreement) of at least $35 million for the four consecutive fiscal quarters most recently ended. Pursuant to the Amended Credit Agreement, we have also agreed that we will not sell, assign, or otherwise dispose or encumber, any of our owned real property. The occurrence of an event of default could result in the acceleration of the obligations under the Amended Credit Agreement. We were in compliance with our financial covenants as of June 30, 2024, and expect to continue to be in compliance in the near term.

Our obligations under the Amended Credit Agreement are secured by a senior security interest in substantially all of our and our subsidiaries’ assets.

Current Debt

The Interim Funding Agreement dated August 2, 2022 with Wells Fargo Equipment Finance, Inc. (“WFEF”), as amended January 23, 2023, March 15, 2023, July 21, 2023, and November 2, 2023 (together, the “IFA”), provides for aggregate interim funding advances up to $10.8 million of equipment purchased for a new reinforced concrete pipe mill, to be converted into a term loan upon final delivery and acceptance of the financed equipment. As of June 30, 2024, the outstanding balance of the IFA was $10.8 million, which was classified as a current liability since there was not a firm commitment for long-term debt financing. The IFA bears interest at the SOFR Average plus 2.00%. As of June 30, 2024, the weighted-average interest rate for outstanding borrowings was 7.07%. The IFA requires monthly payments of accrued interest and grants a security interest in the equipment to WFEF. Effective November 2, 2023, the IFA requires us to maintain a consolidated senior leverage ratio no greater than 3.00 to 1.00 (subject to certain exceptions) and to maintain a minimum consolidated EBITDA (as defined in the IFA) of at least $35 million for the four consecutive fiscal quarters most recently ended. We were in compliance with our financial covenants as of June 30, 2024, and expect to continue to be in compliance in the near term.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements affecting our Company, including the dates of adoption and estimated effects on financial position, results of operations, and cash flows, see Note 13, “Recent Accounting and Reporting Developments” of the Notes to Condensed Consolidated Financial Statements in Part I – Item 1. “Financial Statements” of this 2024 Q2 Form 10‑Q.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements included in Part I – Item 1. “Financial Statements” of this 2024 Q2 Form 10‑Q, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, we evaluate all of our estimates, including those related to revenue recognition, goodwill, income taxes, and litigation and other contingencies. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting estimates during the six months ended June 30, 2024 as compared to the critical accounting estimates disclosed in our 2023 Form 10‑K.