Business context and reporting period
Perma-Pipe International Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended July 31, 2020. The company operates in one segment, manufacturing specialty piping, coating and leak-detection systems for energy, industrial and infrastructure uses.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages. Fiscal Q2 is the three months ended July 31; year to date is the six months ended July 31.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $20.4 | $36.7 | $43.1 | $60.9 |
| Gross profit / margin | $2.4 / 12% | $9.7 / 26% | $5.8 / 14% | $14.4 / 24% |
| Operating income/(loss) | $(3.5) | $3.4 | $(5.9) | $2.4 |
| Net income/(loss) | $0.3 | $3.7 | $(2.3) | $2.2 |
| Diluted earnings/(loss) per share | $0.03 | $0.45 | $(0.28) | $0.27 |
- Cash flow: For the six months, operating activities provided $2.6 million, compared with $0.9 million used in 2019. Investing used $0.8 million, principally capital expenditures; financing used $6.3 million. Cash, cash equivalents and restricted cash declined $4.4 million to $10.3 million.
- Liquidity: At July 31, cash and cash equivalents were $9.1 million and restricted cash was $1.2 million. Working capital was $31.1 million, versus $31.4 million at January 31, 2020. Most cash and cash equivalents—$8.9 million—was held at foreign subsidiaries.
- Debt and facilities: Reported debt was $10.5 million, down from $16.9 million at January 31, 2020. The North American revolving facility had $2.5 million drawn and $5.2 million available. Foreign revolving facilities had $1.0 million drawn and $14.7 million available; $4.3 million of foreign availability supported letters of credit. The company reported compliance with applicable debt covenants at quarter-end.
- Other balance-sheet items: Total assets were $100.0 million and stockholders’ equity was $53.4 million at July 31. Operating lease liabilities totaled $11.9 million.
Material changes versus the prior comparable period
- Q2 sales fell 44% year over year; six-month sales fell 29%. Management attributed the decline to lower oil prices and COVID-19-related project delays, affecting North American oil-and-gas activity and certain U.S. and Middle East district-heating and cooling projects.
- Gross profit and gross margin contracted sharply, primarily because of lower sales volumes. Cost-cutting reduced Q2 general and administrative expenses, while year-to-date selling expenses increased due mainly to sales staff added in 2019.
- Q2 operating loss was $3.5 million, but reported net income was $0.3 million, supported by $3.7 million of other income. Six-month results shifted from net income of $2.2 million to a net loss of $2.3 million.
- Operating cash flow improved year over year, primarily reflecting greater collections of receivables and lower inventory purchases. The company also reduced capital spending and repaid more revolving debt than it borrowed during the period.
Outlook, commentary, risks and unusual items
- Management said COVID-19 and depressed oil-and-gas markets adversely affected 2020 results, liquidity and cash flow and were likely to continue to have a material adverse effect; the duration and extent remained uncertain. Plants were operating and global supply chains had not been materially affected as of the filing, but future disruption remained possible.
- The company reduced planned capital expenditures and non-essential operating expenses and said it believed it would remain in covenant compliance. It provided no quantified revenue or earnings guidance.
- PPP loan: The company received approximately $3.2 million under the Paycheck Protection Program and recorded the proceeds as other income in Q2, based on its expectation of forgiveness. All proceeds were used for qualified expenses, all payroll-related. Forgiveness was not assured, and the loan could be audited.
- Other government support: The Canadian subsidiary received approximately $0.6 million under the Canadian Emergency Wage Subsidy program during the six months. It planned to apply for further grants, with no assurance of approval. The filing does not clearly reconcile the individual components of reported other income to its total.
- Collection risk: A $4.1 million receivable related to a Middle East project completed in 2015 remained outstanding, including $3.6 million of retention. No allowance was recorded. The company received approximately $0.2 million in August 2020 and expected further receipts, but warned that unsuccessful collection could require a substantial allowance.
- Credit-facility renewals: Certain UAE and Egyptian facility expirations had been extended to September 2020 because pandemic-related delays prevented completion of renewal documentation. The facilities were guaranteed by the company; confirm their subsequent renewal and terms.
- Impairment and controls: Testing identified no long-lived-asset or goodwill impairment for the period. A previously reported material weakness involved improper revenue recognition on an open project under percentage-of-completion accounting. Management said remediation steps were substantially completed, but the weakness was not considered fully remediated pending sufficient operation and testing. Management nevertheless concluded disclosure controls were effective and the financial statements fairly presented.
Investor verification priorities
- Assess the extent to which sales, margins and project activity recover from COVID-19 disruption and depressed oil-and-gas markets.
- Verify PPP forgiveness and the accounting treatment of the $3.2 million recognized in other income; distinguish recurring operating performance from grant-related income.
- Track collection of the long-outstanding $4.1 million receivable and any resulting reserve or cash receipts.
- Confirm renewal of the UAE and Egyptian credit facilities, ongoing covenant compliance and the location and accessibility of foreign-held cash.
- Monitor remediation and independent testing of the revenue-recognition material weakness.