Perma-Pipe International Holdings, Inc. — Form 10-K
Period: Fiscal year ended January 31, 2020 (the filing’s financial statements refer to this as 2019). The 10-K was filed April 21, 2020. The company operates one reportable segment, Piping Systems, engineering and manufacturing specialty piping and leak-detection systems for industrial, energy, and infrastructure projects.
Financial results and liquidity
| Metric | FY ended Jan. 31, 2020 | Prior year |
|---|---|---|
| Net sales | $127.7 million | $129.0 million |
| Gross profit / gross margin | $29.0 million / 22.8% | $23.3 million / 18.1% |
| Operating income | $5.9 million | $2.7 million |
| Income before tax | $5.0 million | $1.6 million |
| Net income (loss) | $3.6 million | $(0.6) million |
| Diluted earnings (loss) per share | $0.43 | $(0.07) |
| Cash from operations | $4.1 million | $5.0 million |
| Capital expenditures | $1.9 million | $1.4 million |
| Cash and cash equivalents at year-end | $13.4 million | $10.2 million |
| Working capital at year-end | $31.4 million | $25.9 million |
| Total debt at year-end | $16.9 million | $16.5 million |
Net sales were nearly flat, but gross profit improved substantially, primarily from higher project margins in the Middle East. Lower Canadian project revenue partly offset growth in the United States and Middle East, expansion into Egypt, and increased leak-detection demand. General and administrative expense rose 16.4% to $17.9 million, including Egypt start-up costs, personnel relocation, and higher incentive compensation. Net interest expense declined to $0.9 million from $1.1 million. The effective tax rate was 29.0%, versus 134.4%, with the prior-year rate unusually high in part because of low pretax income.
Operating cash flow declined despite the return to profitability, mainly reflecting inventory purchases for projects. Of year-end cash, approximately $13.0 million was held by foreign subsidiaries, limiting the readily available domestic cash pool. The company had $8.6 million drawn on its $18 million North American secured revolver, with $3.4 million available. Foreign facilities had $0.7 million drawn and $16.8 million additional availability; $4.2 million of foreign availability supported letters of credit. Foreign facilities generally renew annually. The company reported compliance with credit covenants at January 31, 2020.
Material changes and notable items
- Backlog fell to $46.8 million from $61.0 million, primarily after major Saudi Arabia and Gulf of Mexico projects were completed. Most remaining backlog was expected to be completed during fiscal 2020, but orders can be modified or canceled.
- Foreign customers represented 55.4% of sales, down from 61.0%. One customer accounted for 11.5% of annual sales and 13.3% of year-end receivables.
- The company adopted lease accounting standard ASC 842, recording $11.5 million of operating lease right-of-use assets and $12.3 million of operating lease liabilities at year-end. Total contractual obligations were reported as $41.4 million, including debt, leases, employment agreements, and uncertain tax positions.
- Management revised prior-period financial statements for immaterial errors in accounting for lease escalation clauses. The cumulative adjustment to opening retained earnings was approximately $0.6 million; the adjustment to the prior-year net loss was $21,000.
- A separate revenue-recognition error on one open project led management to identify a material weakness in internal control over financial reporting. The filing text does not provide a clear value for the error’s financial-statement impact.
Outlook, risks, and contingencies
- COVID-19 and oil-market downturn: Management expected fiscal 2020 results, financial condition, and cash flows to be adversely affected by the pandemic and depressed oil and gas prices. At filing, all plants except India were operating; India’s shutdown had been extended through April 21, 2020. Management reported no material supply-chain impact to date and did not expect the India shutdown to materially affect planned production, while emphasizing substantial uncertainty.
- Covenant risk: A company reforecast indicated a risk of noncompliance with a Senior Credit Facility covenant in the second quarter of fiscal 2020. Planned responses included reducing capital expenditures and nonessential expenses and, if necessary, repatriating foreign cash. A default could accelerate debt repayment. Management had applied for $3.2 million under the Paycheck Protection Program and a potential Economic Injury Disaster Loan of up to $2 million; neither application was assured.
- Demand and execution: Project timing, oil and gas prices, customer capital spending, competition, steel costs and availability, international operations, and the cancellation or delay of backlog may affect sales and margins. International oil companies reportedly announced capital-spending cuts of approximately 30%; the impact on the company was uncertain.
- Receivable exposure: A long-outstanding Middle East receivable was $4.1 million at year-end. The company had collected approximately $0.5 million during the year, recorded no allowance, and warned that unsuccessful collection could require an allowance for all or substantially all of the remaining amount.
- Controls and revenue estimates: The identified material weakness concerned revenue recorded on an open project using imputed sales amounts exceeding the contracted amount, and failure to detect the deviation in monthly reviews. Management outlined additional contract, project-reporting, and work-in-process reviews; remediation was not yet established as complete. Percentage-of-completion estimates can also result in revisions to previously recorded revenue and profit.
- The filing reports no material pending litigation at year-end. The company has never paid cash dividends and does not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- Whether COVID-19, oil-price weakness, project delays, or cancellations reduced sales, margins, collections, or backlog after the reporting date.
- Whether the company remained in covenant compliance, obtained SBA funding, and renewed foreign credit lines on acceptable terms.
- Progress collecting the $4.1 million long-outstanding receivable and whether an allowance was subsequently recorded.
- The quantified effect of the project revenue-recognition error, the adequacy of any related adjustments, and whether the material weakness was remediated and independently tested.
- The composition and accessibility of foreign-held cash, and the company’s capacity to meet near-term debt maturities and lease obligations.