Perma-Pipe International Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 31, 2017. The company operates in one reportable segment, Piping Systems, which designs and sells specialty piping and leak-detection systems. The fiscal year ends January 31.
Financial performance
| Metric | Three months ended Oct. 31, 2017 | Prior-year quarter | Nine months ended Oct. 31, 2017 | Prior-year period |
|---|---|---|---|---|
| Net sales | $27.5 million | $25.3 million | $77.9 million | $71.2 million |
| Gross profit / margin | $3.3 million / 12% | $3.7 million / 15% | $8.2 million / 10% | $8.7 million / 12% |
| Operating loss | $2.3 million | $1.2 million | $8.2 million | $8.0 million |
| Net loss | $3.3 million | $3.9 million | $8.5 million | $10.2 million |
| Loss per diluted share | $0.43 | $0.52 | $1.11 | $1.37 |
Quarterly sales rose 9%, driven by domestic oil-and-gas activity, U.S. district heating and cooling projects, and Canadian distributor business. Year-to-date sales also rose 9%, reflecting higher Canadian coating volumes and increased U.S. project demand. Gross margins fell in both periods because of product mix and competitive conditions. The quarterly operating loss worsened despite higher sales; the year-to-date pretax loss improved, partly because the prior-year period included a $1.6 million non-cash joint-venture consolidation loss and a $0.8 million legal settlement.
Quarterly income tax expense was $0.8 million despite a pretax loss of $2.5 million; year-to-date tax benefit was $0.2 million. The company attributed the change in effective tax rates primarily to shifts in foreign income and losses. No discontinued-operations income or loss was reported in 2017; the prior-year results included discontinued operations.
Cash, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $9.3 million at October 31, 2017, versus $8.7 million at January 31. Only $0.2 million was held in the U.S.; $9.1 million was held by foreign subsidiaries and designated for overseas operations and investment.
- Working capital was $22.0 million, down from $27.8 million at fiscal year-end. Current assets were $57.6 million and current liabilities $35.7 million.
- Operating activities used $4.2 million of cash in the first nine months, compared with $6.2 million used in the prior-year period. Investing activities used $1.9 million; financing activities provided $6.0 million. Capital expenditures were $2.1 million.
- Total debt was $17.9 million, up $6.2 million from January 31. The North American revolver had $9.1 million drawn and $0.7 million available at October 31. The facility was scheduled to mature September 24, 2018.
- Management said cash, operating cash flow and borrowing capacity, including facilities refinanced before expiry, should fund operations, working capital and capital spending for at least 12 months.
Material developments, outlook and risks
- Middle East review: Following the departure of regional senior executives, the company commissioned an external review of regional activities dating to early 2014. It found policies were generally followed, except for immaterial aggregate commissions paid to a third-party sales representative in 2015 and 2016. Review and policy-improvement costs were about $0.8 million in the quarter and $1.1 million year to date. The company cautioned further material costs could arise.
- Credit amendment after quarter-end: On December 14, 2017, lenders increased the Canadian subsidiary’s borrowing limit, adjusted U.S. and Canadian minimum-availability requirements, and granted a limited waiver of related covenant non-compliance retroactive to October 31. The company said it was otherwise in compliance with the North American facility covenants at quarter-end.
- Controls: The company reported a material weakness in internal control over financial reporting relating to stock-based compensation accounting and insufficient technical accounting expertise. It described remediation steps, but the weakness was not yet fully remediated pending operation and testing of the controls. Prior-period figures were revised for errors management judged immaterial; the nine-month 2016 net loss was increased by $0.6 million.
- Concentration and operating variability: One customer represented 19% of accounts receivable at October 31. Management noted that large discrete projects can cause significant swings in demand and results. Foreign cash is not considered necessary to repatriate and is subject to operating needs and certain foreign credit covenants.
- Outlook: No specific revenue or earnings guidance was provided. Management said Topic 606 adoption was not expected to materially affect financial statements, but could significantly affect processes, records and disclosures; the company planned adoption in 2018 using the modified retrospective method.
Investor facts to verify
- Whether the amended North American credit terms and covenant waiver provide adequate borrowing availability through the facility’s 2018 maturity.
- The remediation and independent testing status of the reported material weakness.
- Whether additional expenses or other findings arise from the Middle East review.
- The foreign revolving-credit disclosure: the notes report $0.4 million borrowed and $5.8 million available, while MD&A says there were no borrowings and $5.8 million remained unused.
- Whether lower margins and operating losses persist as product mix, competition and project timing change.