Perma-Pipe International Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 31, 2018. The company manufactures specialty piping, coating, and leak-detection systems in one reportable segment. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Quarter 2018 | Quarter 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $32.8 | $27.5 | $94.0 | $77.9 |
| Gross profit / margin | $6.9 / 21% | $3.3 / 12% | $17.0 / 18% | $8.2 / 10% |
| Operating income (loss) | $1.1 | $(2.3) | $0.8 | $(8.2) |
| Net loss | $(0.1) | $(3.3) | $(1.5) | $(8.5) |
| Basic and diluted loss per share | $(0.02) | $(0.43) | $(0.20) | $(1.11) |
Quarterly sales rose 19%, with higher North American sales; nine-month sales rose 21%, with growth across all geographic regions. Management attributed the higher gross profit and margins to increased volumes and strategic initiatives. Nine-month operating expenses were $16.2 million versus $16.4 million. Net interest expense increased to $0.8 million from $0.5 million year to date, reflecting higher borrowing and effective interest rates.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $9.6 million and restricted cash was $2.5 million at October 31, 2018, versus combined cash and restricted cash of $8.3 million at January 31. Of the October balance, $10.2 million was held at foreign subsidiaries; restricted cash includes $1.5 million pledged to the new U.S. credit facility.
- Working capital was $23.6 million, compared with $23.1 million at fiscal year-end. Nine-month operating cash use was $0.6 million, versus $4.2 million in 2017; investing cash use was $0.9 million, and financing provided $5.9 million.
- Total debt was $21.6 million, up $5.8 million since January 31. The company entered a three-year, $18 million secured revolving facility with PNC on September 20, replacing its prior $15 million facility. At quarter-end, $13.7 million was borrowed under it at a weighted-average rate of 6.45%, with $2.9 million available. The facility matures September 20, 2021.
- Foreign revolving arrangements had $0.5 million borrowed and $2.1 million additional availability; $6.6 million of facility availability supported letters of credit. The company reported compliance with the disclosed credit-covenant requirement as of October 31.
Material changes, outlook, and risks
- Year-to-date pre-tax results were approximately break-even ($1,000 income), compared with a $8.7 million pre-tax loss in 2017. However, the $1.5 million tax expense produced a $1.5 million net loss. The reported effective tax rate was 122,166% year to date; management attributed the extreme rate to near-break-even income, differences in income by jurisdiction, and a U.S. valuation allowance.
- General and administrative expenses included a one-time $0.4 million charge for the separation agreement with the retiring CFO. The quarter’s selling expense rose with sales-related commissions.
- A Middle East project receivable remained $4.9 million at October 31, including $3.7 million of retention receivable, of which $3.2 million was classified long term. The company had not recorded an allowance; it received approximately $0.1 million in November and warned it may reserve all or substantially all of any balance it cannot collect. One customer represented 18% of accounts receivable at quarter-end.
- The company had bid to supply insulation for the East Africa Crude Oil Pipeline, but stated there was no assurance it would win the project and timing was uncertain. The filing provides no quantified financial guidance.
- Management noted that results can be affected by substantial period-to-period variations in large project activity. The new credit facility limits annual capital expenditures to $3 million, subject to limited carryover, and includes EBITDA and coverage covenants. The company also reported foreign-currency translation losses of $1.5 million in other comprehensive income for the nine-month period.
- Management said the previously reported material weakness in equity-compensation accounting controls was fully remediated as of October 31, 2018. The CEO and CFO concluded disclosure controls were effective.
Important facts for investors to verify
- Collection status, timing, and potential reserve exposure for the $4.9 million long-outstanding Middle East receivable, including retention amounts.
- Current borrowing availability, covenant headroom, and liquidity after considering restricted cash and foreign-held cash.
- Whether improved gross margins and operating performance are sustained, given project concentration and the lack of quantified guidance.
- Tax expense and valuation-allowance effects, which materially separated pre-tax performance from net results.
- Outcome and timing of the East Africa pipeline bid; the filing does not establish that the work was awarded.