Perma-Pipe International Holdings, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 31, 2021; unaudited. The company manufactures specialty piping and leak-detection systems in one reportable segment, Piping Systems. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Three months 2021 | Three months 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $39.8 | $20.4 | $64.2 | $43.1 |
| Gross profit (margin) | $10.7 (27%) | $2.4 (12%) | $15.2 (24%) | $5.8 (14%) |
| Operating income/(loss) | $4.1 | $(3.5) | $3.1 | $(5.9) |
| Net income/(loss) | $3.4 | $0.3 | $2.6 | $(2.3) |
| Diluted earnings/(loss) per share | $0.41 | $0.03 | $0.31 | $(0.28) |
Cash flow and liquidity: For the six months, operating cash flow was negative $5.2 million, versus positive $2.6 million a year earlier; investing cash flow was negative $0.9 million and financing cash flow positive $4.3 million. Cash, cash equivalents and restricted cash declined $1.6 million to $6.7 million. The operating cash outflow chiefly reflected a $19.3 million increase in accounts receivable as project activity rose.
At July 31, cash and cash equivalents were $5.5 million, restricted cash $1.2 million, working capital $38.9 million, and total assets $121.7 million. Reported debt was $8.6 million, down from $13.2 million at January 31. Separately, the balance sheet included a $9.4 million long-term finance obligation from the Tennessee property transaction and $13.3 million of operating lease liabilities. The company reported $10.3 million available under its North American facility before a $2.0 million availability block, and $10.1 million available under foreign revolving facilities.
Changes and management commentary
- Second-quarter sales nearly doubled year over year; six-month sales rose 49%. Management attributed growth to recovering activity in North America and the Middle East and a new UAE product line. Higher volume and project mix drove improved gross margins.
- For the six months, general and administrative expense increased 14% to $10.0 million with higher personnel costs. Selling expense fell 30% to $2.1 million, reflecting organizational changes and prior cost reductions.
- Prior-year comparisons included $3.2 million of PPP-related income in other income. The SBA notified the company on June 24, 2021 that the PPP loan was forgiven; PPP proceeds had already been recognized in earnings in fiscal 2021. In the current six-month period, the Canadian subsidiary received about $0.6 million under CEWS and $0.1 million under CERS, also recorded in other income.
- The company sold its Tennessee land and buildings for $10.4 million and entered a 15-year leaseback at annual rent of approximately $0.8 million, subject to 2% annual increases. It accounted for the transaction as a failed sale and leaseback, recording a finance obligation rather than a completed sale for accounting purposes.
Outlook, risks and contingencies
- No quantified financial guidance was provided. Management said all plants were operating, but COVID-19, depressed oil and gas markets, and winter-weather-related supply-chain disruption could continue to affect operations; the extent and duration remained uncertain. The company had reduced headcount, planned capital expenditures and non-essential expenses.
- The $18 million North American senior revolving facility was due to mature September 20, 2021. The company was discussing an extension or replacement and expected to finalize it before maturity. It had previously received a waiver after failing a fixed-charge-coverage covenant for October 2020; it reported compliance with applicable covenants at July 31, 2021.
- A UAE credit line’s renewal documentation was pending, with completion expected in September 2021. The company reported compliance with foreign-facility covenants at quarter-end.
- A Middle East receivable outstanding for several years totaled $3.7 million, including $3.4 million of retention tied to customer commissioning; $2.1 million was classified as long-term. No allowance was recorded. The company reported an updated customer acknowledgment and assurances of payment in August, but warned it could have to reserve all or substantially all amounts that remain uncollected.
- The company is pursuing reimbursement and lost-profit compensation related to a customer’s call on a Qatar performance bond. No potential recovery receivable was recorded. A single customer represented 12% of second-quarter sales; two customers represented 22% of receivables at July 31.
Key facts for investors to verify
- Progress and final terms for renewing or replacing the North American facility before its stated maturity, including borrowing availability and covenant requirements.
- Subsequent collections on the long-outstanding $3.7 million receivable and any resulting allowance or cash-flow effect.
- Whether improved sales and margins persist, and whether working-capital demands—especially receivables—continue to consume operating cash.
- The financial and cash-flow implications of the Tennessee leaseback obligation and ongoing lease payments.