Perma-Pipe International Holdings, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended October 31, 2023; fiscal year ends January 31. Dollar amounts below are in millions except per-share data. The company reports one segment, Piping Systems, serving district energy, oil and gas, and related markets.
Financial performance
| Metric | Three months 2023 | Three months 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $45.7 | $37.9 | $110.5 | $106.1 |
| Gross profit / margin | $13.2 / 28.9% | $11.1 / 29.4% | $29.4 / 26.6% | $28.1 / 26.4% |
| Operating income | $6.0 | $4.5 | $8.8 | $8.0 |
| Net income | $3.4 | $1.7 | $3.4 | $2.7 |
| Net income attributable to common stock | $1.9 | $1.7 | $1.8 | $2.7 |
| Diluted EPS attributable to common stock | $0.24 | $0.21 | $0.23 | $0.33 |
- Revenue and margins: Quarterly sales rose 21%, primarily on higher Saudi Arabia volumes; nine-month sales increased 4% for the same stated reason. Gross profit increased in both periods, while quarterly gross margin was slightly lower year over year and nine-month margin improved modestly.
- Expenses and taxes: Nine-month G&A and selling expenses increased to $16.4 and $4.2, respectively. Nine-month interest expense rose to $1.8 from $1.6, attributed to higher rates and borrowing activity. Effective tax rates were 31% in 2023 versus 40% in 2022 for both reported comparisons; management cites jurisdictional income mix and a U.S. valuation allowance.
- Cash flow: Nine-month operating cash flow was $7.6, versus cash use of $5.1 a year earlier. Investing used $8.2, largely capital expenditures of $8.2; financing provided $1.2. Cash and cash equivalents were $6.0 at October 31, with restricted cash of $1.4. Total cash, cash equivalents and restricted cash increased $0.6 during the nine months.
- Liquidity and debt: Working capital was $37.1, down from $41.9 at January 31, 2023. Total debt was $27.2 versus $24.3. The company reported $4.6 available on its North American facility and $13.7 available under foreign revolving arrangements; $6.7 of foreign facility availability supported letters of credit.
Material changes and notable items
- Despite higher consolidated net income, nine-month income attributable to common stock fell to $1.8 from $2.7, principally because the newly formed Saudi joint venture’s noncontrolling interest received $1.6 of nine-month income. In Q3, $1.4 of the quarter’s $3.4 net income was attributable to the noncontrolling interest.
- On June 1, 2023, the company formed a joint venture with Gulf Insulation Group, retaining a 60% controlling interest. It contributed land and equipment and recorded a $2.7 related-party promissory note payable to GIG.
- Foreign currency translation reduced other comprehensive income by $2.1 for the nine months. The company repurchased shares for $0.9 during the nine-month period, including use of the remaining authorization during Q3.
- A $2.4 balance remains on a Middle East project completed in 2015 but not yet commissioned; $1.6 is classified as long-term. The company has recorded no allowance, but says it may reserve all or substantially all of any amount it cannot collect.
Outlook, risks and controls
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management notes that results can vary significantly with discrete project activity and identifies higher Saudi Arabia sales volumes as the principal driver of growth.
- The North American credit facility’s calculated coverage ratio was below 1.10 to 1.00 at quarter-end, although the company states it was in compliance with the covenant as of October 31. Covenant testing depends on specified borrowing-availability thresholds. Several foreign credit arrangements had expired and were not yet renewed; banks had continued them without interruption or penalty, but could require repayment.
- Disclosure controls and procedures were deemed ineffective due to a previously reported material weakness in inventory-existence controls at the Lebanon, Tennessee facility. Management says remediation was substantially complete, but the weakness was not considered fully remediated pending operating-effectiveness testing. Management nevertheless concluded the interim financial statements were fairly presented.
- The company is involved in ongoing legal proceedings with uncertain outcomes; it does not currently expect other matters to materially affect financial position, liquidity, or future operations.
Most important facts for investors to verify
- Whether Saudi Arabia-driven sales growth and project margins continue, given the company’s project-based, geographically dispersed business.
- Collection and commissioning status of the $2.4 million legacy customer retention balance and the basis for maintaining no allowance.
- Renewal status and repayment terms for expired foreign facilities, alongside the North American facility’s availability-dependent covenant test and stated compliance.
- Completion and independent testing of inventory-control remediation, and whether management later concludes controls are effective.
- Reconciliation of the MD&A cash-flow narrative: it includes a statement describing $8.2 million and $3.1 million as operating cash flow, while the cash-flow statement reports operating cash flow of $7.6 million and operating cash use of $5.1 million; $8.2 million is reported as investing cash use for 2023.