Perma-Pipe International Holdings, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended April 30, 2020. The company manufactures specialty piping and leak-detection systems in one reportable segment. Unless noted otherwise, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $22.7 | $24.3 |
| Gross profit / margin | $3.5 / 15% | $4.7 / 19% |
| Operating loss | $(2.6) | $(1.0) |
| Net loss | $(2.5) | $(1.5) |
| Diluted loss per share | $(0.31) | $(0.19) |
| Operating cash flow | $0.6 | $1.4 |
Net sales declined 6%. Lower North American oil-related revenue and project delays in parts of the Middle East were partly offset by Egypt operations. Gross profit fell 27%, primarily because of lower project margins, particularly in Saudi Arabia and India. Selling expenses rose 31% to $1.6 million, mainly due to additional sales staff; general and administrative expense was broadly unchanged at $4.4 million. Net interest expense was $0.2 million. The income-tax line was a $0.2 million benefit, compared with $0.3 million of expense a year earlier; management attributed the effective-tax-rate change to the mix of income and losses across jurisdictions.
Liquidity, cash flow and debt
At April 30, cash and cash equivalents were $12.5 million, down from $13.4 million at January 31; restricted cash was $1.1 million. Working capital was $29.1 million, versus $31.4 million at January 31. Operating cash flow was $0.6 million; capital expenditures were $0.8 million, and cash used in financing was $1.0 million. Cash, cash equivalents and restricted cash together declined $1.1 million during the quarter.
Total debt was $15.0 million, down from $16.9 million at January 31. North American revolving-credit borrowings were $7.2 million, with $3.0 million available under the $18 million facility. Foreign revolving arrangements had $0.8 million borrowed and $16.8 million of additional borrowing availability; $3.8 million of availability supported letters of credit. The company reported compliance with its debt covenants at quarter-end. Operating lease liabilities were $12.1 million.
Material changes, outlook and risks
- Management said COVID-19 and sharply lower oil prices adversely affected results and were likely to continue doing so, although the extent and duration were uncertain. Plants were operating and global supply chains had not been materially affected as of the filing date.
- The company reduced planned capital expenditures and non-essential operating expenses in response to its reforecast. Management said it expected to remain compliant with Senior Credit Facility covenants and could repatriate foreign cash if necessary. No quantified earnings or revenue guidance was provided.
- In May 2020, after quarter-end, the company received $3.2 million under the Paycheck Protection Program. Forgiveness was uncertain, and the loan could be audited to confirm eligibility.
- A $4.1 million receivable from a long-running Middle East project remained outstanding, including $3.6 million of retention; $2.2 million was classified as long-term. No allowance was recorded, but the company warned that unsuccessful collection efforts could require an allowance for all or substantially all of the uncollected amount. It reported no collections on this account during the quarter.
- Goodwill testing identified potential impairment indicators, but the subsequent quantitative analysis found fair value above carrying value; no impairment was recorded.
- Management reported an existing material weakness in internal control over financial reporting related to revenue recognition on percentage-of-completion projects. Remediation steps had been substantially completed, but the weakness was not considered fully remediated pending sufficient operation and testing. Management separately concluded disclosure controls were effective and the presented financial statements fairly stated the company’s results.
- The filing describes an approximately $0.6 million cumulative correction for immaterial prior-period lease-accounting errors; prior-period financial statements were revised.
Investor verification priorities
- Track project margins, order activity and the continuing effects of oil prices, COVID-19 and Middle East project delays.
- Verify collection progress on the $4.1 million aged receivable and whether any allowance is required.
- Monitor liquidity, foreign cash accessibility, facility availability and covenant compliance, including the near-term maturities of foreign credit arrangements.
- Confirm PPP loan treatment, forgiveness eligibility and any audit outcome.
- Assess whether revenue-recognition controls operate effectively for a sufficient period to remediate the material weakness.