Northwest Pipe Co. hopes higher profits are in the pipeline

Vancouver-based company looks toward Michigan water project, new import tariffs, lean manufacturing

By Courtney Sherwood, Columbian freelance writer

Published:

 
photo Turbines inside Northwest Pipe's water pipes have been used to generate electricity.

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Northwest Pipe Co.

What: The company makes steel pipes used to move water and oil.

CEO: Scott Montross.

Headquarters: 5721 S.E. Columbia Way, No. 200, Vancouver.

Portland manufacturing site: 12005 N. Burgard Way, Portland.

Employees: 50 in Vancouver, 1,100 at factories across the U.S., Canada and Mexico.

Second quarter revenue: $5.6 million, up 56 percent from a year earlier.

Vancouver-based Northwest Pipe Co. is continuing a long battle to boost profits and strengthen its market share, but CEO Scott Montross is telling investors that they'll have to wait until next year before the company's recovery efforts begin to fully pay off.

That's when the company, which manufacturers steel pipe primarily for drinking water systems, hopes a $274 million Michigan water project could generate a new multimillion dollar order. That's also when Northwest Pipe and other U.S. steel manufacturers hope for a favorable ruling from the International Trade Commission that would boost taxes on imports from foreign competitors.

Also in 2014, Northwest Pipe's profits should get a boost from the company's continued efforts to become more efficient in its manufacturing operations, Montross said.

Given that Northwest Pipe's past three years have been anything but stable, investors and analysts seem content to wait for improvements. Analysts who'd previously panned the company's stock now rate it a "buy" and predict that shares will climb from roughly $29 up to $35, according to a survey by Yahoo Finance.

But Northwest Pipe's leaders still face a rocky road. It still doesn't know how the International Trade Commission will ultimately rule. It has not yet inked a deal to supply pipe for the large Michigan project. And while an increased emphasis on lean manufacturing will cut costs, Northwest Pipe needs to ink more new deals to meet expectations. The company employs about 50 people at its Tidewater Bay headquarters in Vancouver and another 1,100 at factories across North America, including a plant in north Portland.

Woes of its own making

For much of the past three years, Northwest Pipe has struggled with problems of its own making.

In late 2009, the company delayed issuing a quarterly financial report and said it was investigating its own accounting practices. Investors responded by filing a class-action lawsuit in which they alleged that the company had issued false and misleading financial data, in violation of federal securities laws. The U.S. Securities and Exchange Commission began an investigation, and Nasdaq threatened to delist the company's stock from its exchange.

In April 2010, then-president and CEO Brian Dunham resigned from his position while the investigations continued.

The company hit a low point in late 2010, when it said in a statement that "we did not have effective controls over our cash flow statements." Northwest Pipe also took a number of public steps to right itself.

Richard Roman, a long-time board member, took over as CEO. Under his leadership, the company restated financial reports going back as far as 2007. It fired Deloitte & Touche LLP as its independent accounting firm and hired Pricewaterhouse Coopers LLP in its place.

Northwest Pipe also paid $13.25 million to settle investor lawsuits. It addressed Nasdaq's concerns about timely financial reports and kept its listing there.

And despite its internal challenges, Northwest Pipe continued to innovate during this time, most notably through a partnership with Portland-based LucidEnergy. Together the two companies developed Lucid Pipe, a steel pipe that generates electricity when water runs through it. In 2012, Portland signed on to be one of the first cities to test out this fledgling technology.

Also in 2012, Northwest Pipe signed a $69 million deal to supply a water pipeline project in Texas, a deal that continues to generate revenue for the company.

While tackling its accounting problems, Northwest Pipe's leaders continued to make good business decisions, said Brent Thielman, an analyst who tracks the company for D.A. Davidson & Co. in Lake Oswego, Ore.

By Jan. 1 of this year, the internal crisis had stabilized. Roman returned to his previous role as a Northwest Pipe board member, and Montross, who had been chief operating officer, was named CEO.

This April, the SEC closed its investigation without filing any charges. Northwest Pipe appeared to be back on track.

Stock watchers registered their approval. Analysts that cover the company had put its stock on "sell" or "hold" status. Now, on average, they rate Northwest Pipe a "buy." Shares have been selling at roughly $29, and analysts expect that to climb to $35, according to a survey by Yahoo Finance.

Challenges

Montross, who declined to be interviewed by The Columbian, recently spoke to investors about three initiatives that are central to Northwest Pipe's future profit hopes:

• The $274 million Michigan water project, which could generate as much as $50 million in Northwest Pipe orders if the company is successful with its bid.

• The International Trade Commission's review of oil related pipe imports from nine countries. If Northwest Pipe gets its way, imports from these countries would face new tariffs, making U.S.-made products more competitive in this country.

• Investments in lean manufacturing at Northwest Pipe factories, which are allowing the company to create more products in fewer man-hours.

Lean manufacturing — a philosophy that's already been widely implemented by many companies across the country — is already beginning to have an impact. By boosting efficiency and focusing on continuous improvements, the company became more profitable in the second quarter of this year even though sales actually dropped 10.9 percent from the same period in 2012. Net income climbed 56 percent, to $5.6 million.

"An excellent quarter in a tough environment," said analyst Matt Sherwood of Copper Creek Partners, which follows Northwest Pipe's performance.

Montross predicted that operating margins will continue to strengthen in early 2014.

But other changes that Northwest Pipe is counting on are beyond the company's direct control.

The $274 million water project, through which the Karegnondi Water Authority hopes to pipe water from Lake Huron to eastern Michigan, is moving more slowly than originally forecast. The water authority had to postpone its first planned bond sale because investors were nervous about buying Michigan municipal bonds so soon after Detroit's bankruptcy. A second attempt, completed Monday, seems to have been successful.

To profit now that the project appears to be moving ahead, Northwest Pipe must wait to hear if its bid to supply steel pipelines for the water project succeeds.

"Depending on how much that job we get, how competitive the bidding is, we could get a pretty substantial piece of that job," Montross said.

But even in a best-case scenario, the company won't see revenue from that project until late this year, if not later. As a result, Montross expects profits to be down in the third quarter of 2013.

The company's trade complaint, likewise, is out of its control — though the deck might be stacked in Northwest Pipe's favor. Observers expect an International Trade Commission ruling in 2014.

When steel companies filed a similar complaint against Chinese oil and gas pipeline manufacturers in 2009, they won U.S. duties that averaged 86 percent in a ruling that strengthened sales by American companies.

Michelle Applebaum, managing partner at Steel Market Intelligence in Chicago, told Bloomberg Businessweek magazine that if American companies are successful with their trade case, it would be a "landmark record win for the U.S. steel industry," and for Northwest Pipe.