Perma-Pipe International Holdings, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 31, 2022; comparisons are with the periods ended July 31, 2021. Amounts below are in U.S. dollars.
Business context
The company operates in one reportable segment, Piping Systems, engineering and manufacturing specialty piping, coatings and leak-detection systems. Results can fluctuate with the timing and scale of large projects.
Financial performance and liquidity
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $37.0 million, down 7% from $39.8 million | $68.2 million, up 6% from $64.2 million |
| Gross profit / margin | $9.9 million / 27%; prior year $10.7 million / 27% | $16.9 million / 25%; prior year $15.2 million / 24% |
| Operating income | $3.3 million, versus $4.1 million | $3.5 million, versus $3.1 million |
| Net income / diluted EPS | $1.9 million / $0.23; prior year $3.4 million / $0.41 | $1.0 million / $0.12; prior year $2.6 million / $0.31 |
| Operating cash flow | Not presented separately for the quarter | $(11.2) million, versus $(5.2) million |
- Quarterly sales and gross profit declined mainly due to lower sales volumes. For the six-month period, higher sales volumes lifted revenue and gross profit.
- Six-month net income fell despite higher sales, primarily due to increased tax expense and the end of Canadian government grants. Net interest expense also rose, reflecting higher borrowing and interest rates.
- At July 31, cash and cash equivalents were $6.2 million, with an additional $1.5 million restricted; working capital was $41.3 million. Current assets were $91.6 million and current liabilities $50.3 million.
- Total debt was $32.1 million, compared with $21.9 million at January 31, 2022. The company reported $8.6 million drawn and $5.9 million available on its North American facility, and $8.7 million drawn on foreign facilities. Foreign-facility availability is stated as both $8.2 million and $8.6 million in different sections of the filing.
- Cash, cash equivalents and restricted cash declined by $2.1 million during the six months. Cash used in operations and investing was partly offset by $10.7 million provided by financing, including net borrowing proceeds.
Material changes, outlook and risks
- Management said higher oil prices supported oil-and-gas demand, particularly in Canada. Raw-material shortages, transportation delays and inflation increased costs; the company reported using alternative suppliers, earlier purchasing and customer price adjustments. These pressures were expected to continue through 2022.
- July flooding damaged the Fujairah facility. The company was assessing damage to the facility, equipment and inventory, as well as business-interruption effects; it expected losses to be recovered through an insurance claim. No final loss amount is provided.
- A $2.7 million retention receivable from a project completed in 2015 remains outstanding pending customer commissioning; $1.1 million is classified as long-term. The company received a $0.9 million partial payment in June and recorded no allowance, but warned that a substantial allowance could be required if collection efforts fail.
- An Egyptian revolving credit facility expired in June 2022, and the company had begun renewal proceedings. The filing reports covenant compliance for the credit arrangements at July 31, 2022.
- The company continues to pursue reimbursement and additional compensation related to a customer’s 2021 call on a Qatar performance bond. It has recorded no receivable for any potential recovery.
- No formal financial guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results. Disclosure controls were assessed as effective, with no material changes to internal control reported.
Most important facts for investors to verify
- Progress and collectability of the $2.7 million retention receivable, including the commissioning status and any subsequent payments or reserve.
- Flood-related damage, business interruption, insurance coverage and any recognized impairment or loss at Fujairah.
- Actual availability under foreign credit facilities and renewal status of the expired Egyptian facility; the filing gives inconsistent availability figures.
- Working-capital cash consumption, particularly the increases in receivables, unbilled receivables and contract assets, and the company’s ability to convert them to cash.
- Effects of inflation, supply constraints, project timing, higher interest rates and the elevated effective tax rate on subsequent results.