Perma-Pipe International Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 31, 2020. Interim financial statements are unaudited. The company manufactures specialty piping and leak-detection systems in one reportable segment.
Financial performance
| Metric | Three months ended October 31, 2020 | Nine months ended October 31, 2020 |
|---|---|---|
| Net sales | $20.3 million, down 41% year over year | $63.4 million, down 34% |
| Gross profit / margin | $2.9 million / 14%; prior year $7.6 million / 22% | $8.8 million / 14%; prior year $22.0 million / 23% |
| Operating income (loss) | $(2.8) million; prior year $1.7 million | $(8.7) million; prior year $4.1 million |
| Net income (loss) / diluted EPS | $(2.9) million / $(0.35); prior year $(0.1) million / $(0.02) | $(5.1) million / $(0.63); prior year $2.1 million / $0.25 |
| Operating cash flow | Not separately reported for the quarter | $2.0 million; prior year $2.8 million |
Quarterly and year-to-date sales and gross profit fell primarily because of lower activity in Canadian and offshore Gulf of Mexico oil-and-gas businesses amid depressed oil prices, and project delays in U.S. and Middle East district-heating and cooling businesses associated with COVID-19. Cost reductions lowered general and administrative expenses, but did not offset the decline in gross profit.
Cash, liquidity and debt
- At October 31, cash and cash equivalents were $6.6 million, plus $1.2 million restricted cash; total current assets were $52.7 million and current liabilities $23.4 million. Working capital was $29.3 million, versus $31.4 million at January 31, 2020.
- Nine-month cash flows: $2.0 million provided by operations, $1.6 million used in investing, and $7.2 million used in financing. Cash, cash equivalents and restricted cash decreased $6.9 million to $7.7 million.
- Reported debt totaled $9.7 million, down from $16.9 million at January 31. Operating lease liabilities were an additional $14.9 million.
- North American revolving-credit borrowings were $1.8 million; reported availability was $5.8 million before a subsequent $2.0 million availability reduction. Foreign facilities had $1.0 million borrowed and $14.7 million additional borrowing availability, with $4.5 million of facility availability supporting letters of credit.
Material developments, outlook and risks
- Credit covenant breach and waiver: COVID-related project delays caused the company to miss the 1.10:1.00 fixed-charge coverage covenant at October 31. On December 18, 2020, PNC waived that breach and amended future covenant tests. The agreement also required a $1.0 million foreign-subsidiary cash transfer, completed December 17; reduced availability by $2.0 million; eliminated LIBOR borrowing; and is expected to add about $0.2 million in fees. The facility matures September 20, 2021. Management said it believes liquidity is adequate for the next year, citing the waiver, possible foreign-cash repatriation, expected business and cash-flow improvement, borrowing capacity and flexible capital spending.
- Public assistance: The company recognized approximately $3.2 million of PPP proceeds as other income, believing forgiveness was reasonably assured; forgiveness was not yet confirmed and the application remained under review. Canadian subsidiary PPCA received approximately $1.1 million in CEWS grants during the nine months and may apply for further assistance, with no guarantee of additional grants.
- Contract dispute: A Qatar customer called a performance bond, resulting in approximately $0.6 million of expense. The company disputes the customer’s claims and is seeking reimbursement and compensation for lost profits.
- Collection exposure: A long-outstanding Middle East receivable was approximately $3.8 million, including $3.4 million of retention tied to commissioning that had not occurred. The company had collected about $0.2 million during the quarter and recorded no allowance; it warns that unsuccessful collection could require a substantial reserve.
- Operating outlook and risks: Management said all plants were operating and supply chains had not been materially affected to date, but the duration and effects of COVID-19 and depressed oil-and-gas markets remained uncertain and had materially adversely affected results, liquidity and cash flow. No specific revenue or earnings guidance is provided.
- Other: A Canada asset-group impairment trigger was identified, but testing found no impairment; goodwill testing also found no impairment. Management reported that a prior material weakness in percentage-of-completion revenue recognition controls had been remediated as of October 31, 2020. Disclosure controls were concluded effective.
Key investor verification points
- Track compliance with the amended fixed-charge coverage tests, borrowing availability, foreign-cash repatriation needs and the September 2021 credit-facility maturity.
- Confirm PPP loan forgiveness and whether CEWS support continues; distinguish recurring operating performance from assistance recorded in other income.
- Monitor collections and any reserve on the $3.8 million Middle East receivable, particularly the commissioning-dependent retention balance.
- Follow the Qatar performance-bond dispute, recovery prospects and any further contract-related costs.
- Assess whether sales, gross margins and operating cash flow recover from COVID-19 project delays and weak oil-and-gas demand, and whether the remediated revenue controls remain effective.