Perma-Pipe International Holdings, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended October 31, 2021; fiscal year ends January 31. Unaudited consolidated results. Perma-Pipe manufactures specialty piping and leak-detection systems and reports one operating segment.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $35.2 | $20.3 | $99.4 | $63.4 |
| Gross profit / margin | $7.6 / 21.7% | $2.9 / 14.5% | $22.9 / 23.0% | $8.8 / 13.8% |
| Operating income (loss) | $1.7 | $(2.8) | $4.8 | $(8.7) |
| Net income (loss) | $0.5 | $(2.9) | $3.1 | $(5.1) |
| Diluted EPS | $0.06 | $(0.35) | $0.36 | $(0.63) |
Q3 operating margin was approximately 4.8%, versus negative 13.6% a year earlier; nine-month operating margin was approximately 4.9%, versus negative 13.7%. The company attributed the improvement primarily to greater sales volumes in North America and the Middle East, North Africa and India (MENA), recovery from COVID-19 disruption, and a new UAE product line. Higher volume and project/product mix also improved gross margins.
Cash flow, liquidity and debt
- Nine-month operating cash flow was a use of $0.03 million, compared with $2.0 million provided in the prior-year period. Higher activity increased working-capital needs, particularly receivables; the filing cites approximately $13.5 million of cash used by the increase in accounts receivable.
- Investing cash outflow was $1.9 million, including $2.0 million of capital expenditures. Financing cash inflow was $5.3 million. Cash, cash equivalents and restricted cash increased $3.4 million to $11.8 million; unrestricted cash was $10.0 million.
- Working capital was $38.2 million, up from $25.6 million at January 31, 2021. Cash held by foreign subsidiaries was $7.4 million, versus $2.6 million in the United States.
- Reported debt was $10.2 million, down from $13.2 million at January 31, 2021. The company had no North American revolver borrowings and $4.1 million outstanding under foreign revolving arrangements. North American availability was reported as $5.9 million before a $3.0 million availability block; foreign availability was $9.4 million.
- North American revolving credit was renewed as an $18.0 million senior secured facility maturing September 2026. The company reported compliance with its covenants at October 31, 2021. Foreign facilities are subject to local covenants and some near-term maturities or renewals.
Material changes and unusual items
- In April 2021, the company sold its Tennessee land and buildings for $10.4 million and leased them back for 15 years, with annual rent of approximately $0.8 million and annual increases of 2%. The transaction was accounted for as a failed sale-leaseback; $9.3 million was recorded as a long-term finance obligation. The transaction generated approximately $9.1 million in net cash proceeds, which helped fund liquidity and repayment of borrowings.
- Other income for the nine-month period was $1.0 million, down from $3.7 million, primarily because the prior-year period included $3.2 million of PPP assistance. The PPP loan was forgiven in June 2021. Canadian CEWS and CERS grants received in the current nine-month period totaled approximately $0.7 million; the programs ended in the second quarter.
- The board authorized up to $3.0 million of share repurchases over 12 months. In October, the company repurchased 58,528 shares at an average $8.45 per share, for approximately $0.5 million; $2.5 million remained available under the authorization.
Outlook, commentary and risks
- No formal numerical revenue or earnings guidance is provided. Management said business activity and financial results improved after April 30, 2021 as COVID-related impacts eased and oil and gas prices rose. It also reported continuing global supply-chain difficulties and uncertainty about future disruption.
- The effective tax rate was 67.6% in Q3 and 40.0% year to date, compared with 0.8% and 6.2%, respectively, in the prior-year periods. Management attributed the change mainly to the geographic mix of income and losses and a full valuation allowance that prevents recognition of U.S. tax benefits on losses.
- A Middle East customer receivable has remained outstanding for several years. The balance was approximately $3.7 million, including $3.4 million of retention tied to project commissioning; $2.4 million of the retention was classified as long-term. The company recorded no allowance, citing ongoing collection efforts and updated customer assurances, but warned it could reserve all or substantially all of any amount that remains uncollected.
- A UAE revolving facility whose renewal documentation was pending was expected to complete renewal in December 2021; other UAE facilities were due to expire in January 2022. The Egyptian subsidiary also had project financing due to expire in December 2021 and a revolving facility expiring in August 2022.
- The company is pursuing reimbursement and lost-profit compensation related to a Qatar contract dispute after a customer called a performance bond. No receivable for the potential recovery was recorded. The company also noted that actual results may differ from forward-looking statements due to operational and business risks.
Most important facts for investors to verify
- Whether sales growth, gross-margin improvement and operating profitability continue, given the company’s project-driven revenue and reliance on project mix and activity levels.
- Whether operating cash flow improves as receivables and other working-capital requirements are collected or normalize.
- Collections and expected timing for the long-outstanding Middle East receivable, including the commissioning-dependent retention and the absence of an allowance.
- Completion and renewal status of foreign credit facilities, available borrowing capacity after restrictions, and continued compliance with debt covenants.
- The ongoing cash and earnings effects of the Tennessee leaseback, elevated effective tax rates, supply-chain disruption and any further share repurchases.