Perma-Pipe International Holdings, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended April 30, 2023. The company manufactures and sells specialty piping systems, coatings, and leak-detection systems in one reportable segment. Dollar amounts below are in millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $29.7 | $31.2 |
| Gross profit / gross margin | $6.8 / 23% | $7.0 / 23% |
| Operating income | $0.1 | $0.2 |
| Net loss | $(1.1) | $(0.9) |
| Basic and diluted loss per share | $(0.14) | $(0.11) |
| Net cash from (used in) operating activities | $3.8 | $(7.1) |
| Capital expenditures | $3.2 | $0.4 |
- Net sales fell 5%, principally due to lower North American sales volumes. Gross profit declined $0.3 million, also attributed to lower volume; gross margin remained 23%.
- Operating expenses were $6.7 million, down $0.2 million. Net interest expense increased to $0.5 million from $0.4 million. Income tax expense was $0.8 million despite a pretax loss.
- Operating cash flow improved by $10.9 million year over year, primarily reflecting changes in unbilled receivables, inventory, and contract assets, partly offset by other working-capital movements.
- Cash and cash equivalents were $8.8 million at April 30, up from $5.8 million at January 31; restricted cash was an additional $1.0 million. Of cash and equivalents, $8.3 million was held at foreign subsidiaries and $0.5 million in the U.S. Working capital was $38.5 million, down from $41.9 million.
- Reported debt totaled $27.0 million, compared with $24.3 million at January 31. The company reported $7.5 million of availability under its North American facility and $10.0 million under foreign revolving arrangements. Interest paid was $0.5 million.
Changes, outlook, and material risks
- Management said supply-chain constraints, raw-material shortages, transportation delays, and inflation continue to increase costs and delay materials; it expects these effects to continue through 2023. Mitigations include alternative suppliers, earlier purchasing, and customer price adjustments.
- No quantified earnings, revenue, or cash-flow guidance is provided in the filing. Management cautions that results can vary significantly with project activity.
- One customer represented 18.8% of quarterly sales and 16.3% of receivables at April 30. A balance of $2.7 million remains on a 2015 Middle East project awaiting customer testing and commissioning; $1.6 million is classified as long-term. No allowance was recorded, but the company says it may reserve all or substantially all of any amount it cannot collect.
- Some foreign credit arrangements had expired without renewal as of April 30, and the related borrowings could be called for repayment. Management reported ongoing bank discussions and no interruption or penalty to date. The Saudi facility was renewed in May 2023 and increased; the Egypt arrangement was still in renewal process. The company was compliant with applicable covenants except for expired, unrenewed arrangements.
- The company reported a material weakness in inventory-existence controls at its Lebanon, Tennessee facility. Disclosure controls and internal control over financial reporting were deemed ineffective as of April 30. Remediation steps include additional inventory personnel, outside consultants, revised cycle counts, and inventory-system and organization updates; management says remediation is not complete until controls operate effectively and are tested.
- The worldwide effective tax rate was negative 207.7%; the company cited a full U.S. valuation allowance on loss-related tax benefits and changes in the mix of income and loss across jurisdictions.
- The company adopted the current expected credit loss standard effective February 1, 2023, with no material effect reported for the quarter. It reported no impairment of long-lived assets or goodwill.
Important facts for investors to verify
- Whether sales volume recovers and the company sustains its 23% gross margin amid input-cost and supply constraints.
- Whether operating cash generation is repeatable, given the quarter’s working-capital contribution and higher capital spending.
- Renewal status and repayment terms for expired foreign credit facilities, and the effect of borrowing costs on liquidity and interest expense.
- Collection and commissioning progress on the $2.7 million legacy customer balance, as well as exposure to the customer representing 18.8% of quarterly sales.
- Progress in remediating and independently testing the inventory-control material weakness.