Perma-Pipe International Holdings, Inc. — Q1 FY2023 (10-Q)
Reporting period: Three months ended April 30, 2022; comparisons are with the three months ended April 30, 2021. Fiscal year ends January 31. The company manufactures specialty piping and leak-detection systems in one reportable segment.
Key financial metrics
Amounts in millions of dollars except per-share data and margins; figures may not sum due to rounding.
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Net sales | $31.2 | $24.4 |
| Gross profit / gross margin | $7.0 / 22.6% | $4.5 / 18.4% |
| Operating income (loss) / margin | $0.2 / 0.5% | ($0.9) / (3.9%) |
| Net loss / loss per share | ($0.9) / ($0.11) | ($0.8) / ($0.10) |
| Net cash used in operations | ($7.1) | ($2.4) |
At April 30, 2022, cash and cash equivalents were $6.4 million, restricted cash was $1.5 million, working capital was $38.7 million, and total debt was $26.3 million. Current assets were $81.5 million and current liabilities $42.8 million. The company reported $4.9 million available under its North American revolver and $6.5 million available under foreign revolving facilities.
Material changes versus prior period
- Sales increased 28%, which management attributed to higher volumes, including recovery from pandemic-related delays. Gross margin improved to 23% from 18%, driven by higher volumes and project and product mix.
- G&A expense rose $1.2 million to $5.7 million; about $0.9 million of the increase related to incentive compensation. Net interest expense increased to $0.4 million, primarily due to the Tennessee sale-leaseback. Prior-year other income included approximately $0.4 million of Canadian government grants, which had ended by the second quarter of 2021.
- Despite improved operating results, net loss was slightly higher, at $0.9 million versus $0.8 million, reflecting higher interest and income tax expense.
- Operating cash outflow increased to $7.1 million, chiefly associated with higher contract assets and changes in receivables and other working-capital accounts. Financing provided $5.1 million, including net revolver borrowings; cash, cash equivalents and restricted cash decreased $1.9 million.
- Debt increased from $21.9 million at January 31, 2022 to $26.3 million at April 30, 2022. North American revolver borrowings rose to $5.2 million from $0.6 million.
Outlook, risks and notable items
- No quantified earnings or revenue guidance is provided. Management said higher oil prices supported demand, with activity in Canada increasing significantly. It expected supply shortages, transportation delays and raw-material inflation to continue through 2022; the company was using alternative suppliers, earlier purchasing and customer price changes to mitigate these pressures.
- Management reported no significant current negative operating impacts from COVID-19 and no direct regional business disruption from the Ukraine war, but said the war and resulting boycotts contributed to oil-price increases affecting some material and freight costs.
- Income tax expense was $0.7 million despite a pretax loss of $0.2 million; the reported effective tax rate was (455.9%). Management attributed the rate and its year-over-year change primarily to the mix of income and losses among jurisdictions.
- A $3.6 million receivable from a Middle East project completed in 2015 remains outstanding; $3.4 million is retention dependent on system commissioning, and $1.4 million was classified as long-term. No allowance was recorded, based on customer assurances and ongoing cooperation. In June 2022, the company received a partial payment of $0.9 million.
- Unbilled receivables rose to $6.7 million from $2.7 million; management expected all of the April balance to be billed before July 31, 2022. Costs and estimated earnings in excess of billings were $6.0 million, versus $2.3 million at January 31.
- A partial termination of a Fujairah lease reduced recorded operating lease assets and liabilities and decreased quarterly rent expense by $0.8 million. The company also continues to lease back its former Tennessee property under a 15-year arrangement with approximately $0.8 million annual rent, subject to increases.
- The company was in compliance with its disclosed credit covenants at quarter-end. Renewal documentation for one UAE facility was pending, with completion expected in June 2022; an Egyptian project-finance facility was expected to expire in June 2022.
- The company reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Track collection and commissioning progress for the long-outstanding $3.6 million receivable, including the remaining balance after the $0.9 million June payment.
- Monitor operating cash burn, growth in contract assets and unbilled receivables, and conversion of those balances into billings and cash.
- Confirm borrowing availability, facility renewals and covenant headroom, particularly for foreign facilities and the North American revolver.
- Assess whether pricing and sourcing measures offset inflation, raw-material shortages and freight delays, and whether improved sales volumes and margins persist.
- Review the unusually high tax expense and the effect of geographic earnings mix on future tax rates and cash taxes.