Perma-Pipe International Holdings, Inc. annual report, FY2019

Business context and reporting period

Perma-Pipe International Holdings, Inc. filed this Form 10-K for the fiscal year ended January 31, 2019 (referred to in the filing as fiscal 2018), with comparison to the year ended January 31, 2018. The company manufactures specialty piping and leak-detection systems and reports one segment: Piping Systems. Sales are project-based and geographically diversified; 61.0% of fiscal 2018 sales were to foreign customers.

Financial performance and liquidity

Metric	FY ended Jan. 31, 2019	FY ended Jan. 31, 2018
Net sales	$129.0 million	$105.2 million
Gross profit / margin	$23.3 million / 18.1%	$11.7 million / 11.2%
Operating income (loss)	$2.7 million	($9.5 million)
Income (loss) before tax	$1.6 million	($10.2 million)
Income tax expense (benefit)	$2.2 million	($0.2 million)
Net loss	($0.5 million); ($0.07) per share	($10.0 million); ($1.30) per share
Cash from (used in) operations	$5.0 million	($1.8 million)

• Management attributed higher sales to increased oil prices, favorable product mix, improved sales and project execution, and greater leak-detection demand. Higher volumes, pricing, and manufacturing efficiencies contributed to the gross-margin improvement.
• Cash and cash equivalents were $10.2 million, versus $7.1 million; working capital was $25.9 million, versus $23.1 million. Of year-end cash, $10.1 million was held at foreign subsidiaries and $0.1 million in the U.S. Restricted cash was an additional $2.6 million.
• Debt disclosed in the notes totaled $16.5 million, including $8.9 million drawn on the North American revolver; $3.1 million remained available under that facility. The filing’s MD&A separately describes debt as $16.3 million, so the reported total should be reconciled to the debt note.
• Interest expense, net, rose to $1.1 million from $0.7 million, reflecting higher borrowings and interest rates. Capital expenditures were $1.4 million, versus $2.5 million.

Material changes versus the prior period

• Revenue increased 22.5%, while gross profit nearly doubled. The company moved from a $9.5 million operating loss to $2.7 million of operating income, but still reported a net loss after tax.
• The 132.7% effective tax rate in fiscal 2018 reflected taxes in profitable foreign jurisdictions and a U.S. valuation allowance against deferred tax assets; the company continued to report domestic net operating loss carryforwards.
• Backlog increased to $61.0 million from $46.7 million; most was expected to be completed within 12 months. Orders may nevertheless be modified or canceled.
• Cash from operations improved by $6.8 million, supported in part by higher sales and use of existing inventory. Inventory declined to $12.3 million from $16.9 million.

Outlook, risks, contingencies and unusual items

• The filing provides no formal earnings or revenue guidance. Management expected steel prices in 2019 to be higher than the 2018 average and intended to recover increases through product pricing, but cautioned that recovery is not assured. U.S. steel tariffs could raise costs or delay or cancel Canadian projects.
• The company entered a new three-year, $18 million senior secured revolving credit facility in September 2018, maturing September 2021. It was in compliance with stated credit covenants at January 31, 2019. Middle Eastern credit facilities renew annually; renewal or continued project financing is not assured.
• A $4.7 million long-outstanding customer receivable remained at year-end, including retention balances; $0.3 million was collected after year-end. No allowance was recorded, but management warned that an allowance for all or substantially all of remaining amounts could be required if collection efforts fail.
• The company had bid on insulation work for the East Africa Crude Oil Pipeline; award and final terms were uncertain. Three customers represented 39.4% of receivables at year-end, although no single customer exceeded 10% of annual sales.
• Lease accounting adoption effective February 1, 2019 was expected to recognize a right-of-use asset and lease liability of approximately $10–$11 million. The filing says the cumulative retained-earnings adjustment was expected to be zero.
• Key risks include project timing and cancellations, commodity and steel-price volatility, international and foreign-exchange exposure, customer liquidity and collections, debt repayment and facility renewal, competition, percentage-of-completion estimate revisions, product liability, and cybersecurity. No material pending litigation was reported.
• The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; a previously identified material weakness related to equity-compensation accounting was reported as remediated in October 2018. The auditor did not express an opinion on internal-control effectiveness.

Important facts for investors to verify

1. Reconcile the $16.3 million debt figure in MD&A with the $16.5 million total in the debt note, and review near-term revolver repayment and covenant requirements.
2. Track collection of the aged customer receivable and the related retention amounts, including any subsequent receipts or future allowance.
3. Assess whether improved sales and gross margins convert into sustained net profitability and operating cash flow, given the tax burden and continuing net loss.
4. Monitor steel-cost pass-through, project execution and cancellations, backlog conversion, and renewal of annually renewed foreign credit lines.
5. Review the expected balance-sheet impact of lease adoption and the company’s concentration of cash and customer receivables outside the United States.