Perma-Pipe International Holdings, Inc. — FY2021 Form 10-K
Business and period: The company manufactures specialty piping, pipeline coating and leak-detection systems in one reportable segment. This annual filing covers the fiscal year ended January 31, 2022 (called “2021” in the filing), compared with the year ended January 31, 2021. The business is project-driven, and results can fluctuate with project timing and acceptance.
Financial performance and liquidity
| Metric | FY ended Jan. 31, 2022 | Prior year |
|---|---|---|
| Net sales | $138.6 million | $84.7 million |
| Gross profit / margin | $32.5 million / 23.5% | $11.2 million / 13.2% |
| Operating income (loss) | $8.1 million | ($11.4) million |
| Net income (loss) | $6.1 million | ($7.6) million |
| Diluted earnings (loss) per share | $0.72 | ($0.94) |
| Cash from (used in) operations | ($2.6) million | $0.2 million |
| Capital expenditures | $2.3 million | $2.0 million |
- Cash and cash equivalents were $8.2 million, versus $7.2 million; restricted cash was $1.6 million. Nearly all cash was held by foreign subsidiaries, with less than $0.1 million in the U.S.
- Working capital was $40.0 million, up from $25.6 million. The filing states management expects to meet working-capital needs and planned capital expenditures for the following 12 months using cash, operating cash flows and available credit.
- Reported total debt was $21.9 million, compared with $13.2 million. The company also reported a $9.3 million long-term finance obligation related to its Tennessee sale-and-leaseback. North American revolver availability was $8.5 million before an availability block that was subsequently removed based on year-end performance.
- Foreign revolving lines had $6.0 million drawn and $6.1 million available at year-end. The filing reports $4.2 million of foreign credit facilities and $1.8 million of project financing coming due in 2022; renewal and continued access are not assured.
Material changes and notable items
- Sales rose 63.6%, primarily on higher North American and Middle East, North Africa and India volumes as pandemic-delayed projects resumed. Gross margin improved with higher volume and a high-margin product line introduced in the UAE in late 2020.
- Backlog fell to $39.3 million from $52.6 million, mainly because delayed projects were completed during the year. Most remaining backlog was expected to be completed in fiscal 2022; orders can be modified or canceled.
- Operating cash flow turned negative despite the return to profitability, primarily because of higher accounts receivable and inventory. Trade receivables rose to $44.4 million from $25.2 million.
- The April 2021 Tennessee property transaction generated $9.1 million of net cash proceeds. The company leased the property back for 15 years at about $0.8 million annual rent, with 2% annual increases; it accounted for the transaction as a failed sale and leaseback.
- The company repurchased 234,281 shares for approximately $2.0 million under a $3.0 million authorization. No cash dividends have been paid, and none are anticipated in the foreseeable future.
- FY2020 results included $3.2 million of PPP forgiveness recognized in other income. Canadian CEWS and CERS grants also declined in FY2021 and ended in the second quarter.
Outlook, risks and contingencies
- No quantified earnings, revenue or margin guidance is provided. Management said pandemic-related supply-chain delays, material shortages, transportation constraints and inflation were expected to continue into 2022; the extent of future operational disruption was uncertain. The company said it was using alternative suppliers, earlier purchasing and customer price increases to mitigate these pressures.
- Management cited recovering oil prices as supportive of energy-sector spending historically, but gave no assurance that higher prices would increase company sales or earnings. Oil and gas price volatility, steel costs and the ability to pass cost increases to customers remain risks.
- A $3.6 million Middle East receivable from a 2013 project remained outstanding, including $3.4 million of retention tied to commissioning. The company had collected about $0.1 million during FY2021 and recorded no allowance; it warned that unsuccessful collection could require a substantial allowance.
- An Egyptian project-financing covenant was not met at year-end; the company reported receiving a bank waiver. A UAE facility renewal was pending formal bank notification, and foreign credit facilities are generally subject to annual renewal.
- The auditor identified over-time revenue recognition at U.S. entities as a critical audit matter because revenue depends on estimates of total contract costs and progress. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not express an opinion on internal controls.
- Other key risks include project delays or cancellations, customer liquidity, international and political risks, debt repayment and covenant compliance, foreign-exchange exposure, tax matters, product defects, and the ability to collect receivables. The company reported no material pending litigation at January 31, 2022.
Investor verification priorities
- Track collection and commissioning progress for the $3.6 million Middle East receivable, particularly the $3.4 million retention balance.
- Confirm renewal and repayment status of foreign facilities and project financing, including the UAE renewal and Egypt waiver compliance.
- Assess whether growth in receivables and inventory converts into operating cash flow, and whether the $39.3 million backlog is executed on schedule without cancellations.
- Compare price increases with steel, freight and other input-cost inflation to test whether the FY2021 gross-margin improvement is sustainable.
- Review contract cost-to-complete estimates and future revenue adjustments, given the auditor’s critical audit matter and management’s reliance on over-time recognition.