Perma-Pipe International Holdings, Inc. — Q3 2022 Form 10-Q
Business context and reporting period: The filing covers the fiscal quarter and nine months ended October 31, 2022. Perma-Pipe designs, manufactures and sells specialty piping, coating and leak-detection systems, reporting as one Piping Systems segment. Fiscal year-end is January 31. Financial figures below are in U.S. dollars; financial-statement amounts are generally converted from thousands to millions.
Financial performance and position
| Metric | Three months ended Oct. 31 | Nine months ended Oct. 31 |
|---|---|---|
| Net sales | $37.9 million, up 8% from $35.2 million | $106.1 million, up 7% from $99.4 million |
| Gross profit / margin | $11.1 million / 29%, versus $7.6 million / 22% | $28.1 million / 26%, versus $22.9 million / 23% |
| Operating income | $4.5 million, versus $1.7 million | $8.0 million, versus $4.8 million |
| Net income | $1.7 million, versus $0.5 million | $2.7 million, versus $3.1 million |
| Diluted earnings per share | $0.21, versus $0.06 | $0.33, versus $0.36 |
| Net interest expense | $0.7 million, versus $0.3 million | $1.6 million, versus $0.7 million |
Quarterly sales and gross-profit gains reflected higher volumes and pricing in North America, with improved gross margins. For the nine-month period, higher gross profit was more than offset at the bottom line by higher operating expenses, interest and other expense. Nine-month effective tax rates were 50% in 2022 and 40% in 2021.
- Cash flow: Nine-month operating cash flow was negative $5.1 million, compared with negative less than $0.1 million in 2021. Investing cash flow was negative $3.1 million (versus negative $1.9 million); financing cash flow was positive $7.6 million (versus positive $5.3 million). Cash, cash equivalents and restricted cash ended at $9.7 million, down $0.05 million from the start of the fiscal year.
- Liquidity: Cash and cash equivalents were $8.6 million at October 31, 2022, including $8.5 million held at foreign subsidiaries and $0.1 million in the United States. Working capital was $41.9 million. North American facility availability was $7.9 million, with $7.1 million borrowed; foreign facility availability was $12.1 million, with $6.6 million borrowed. Restricted cash was an additional $1.1 million.
- Debt: Reported total debt was $28.0 million, up from $21.9 million at January 31, 2022. The North American revolving facility bears a reported rate of 7.25% on borrowings and matures in September 2026. Foreign facility rates ranged from 5.05% to 8.00%, with a 7.36% weighted average. The company reported compliance with applicable covenants at quarter-end.
- Other balance-sheet items: Total assets were $125.8 million and stockholders’ equity was $54.8 million. Unbilled accounts receivable rose to $8.7 million from $2.7 million at January 31, 2022; contract assets net of contract liabilities were $4.1 million.
Material changes, outlook and risks
- Management attributed higher sales to increased North American volume and pricing. Higher oil prices supported demand in oil and gas markets, with activity in Canada increasing significantly.
- Inflation, raw-material shortages and transportation delays continued to raise costs and disrupt production. The company cited alternative suppliers, earlier purchasing and customer price updates as mitigation measures, and expected these impacts to continue through 2022.
- Management reported no direct business impact from the war in Ukraine, but noted that related oil-price increases affected some material and freight costs.
- Quarterly and year-to-date other expense included a $0.9 million non-cash pension settlement charge following approval to terminate a frozen defined-benefit plan. The termination did not require a company cash outlay; a remaining pension surplus investment balance of approximately $0.9 million was expected.
- A long-outstanding customer retention receivable was $2.7 million, including $2.5 million classified as long-term. The related system, for which the company completed its deliverables in 2015, has not yet been commissioned. No allowance was recorded; the company cautioned that it could reserve some or substantially all of any amount it cannot collect.
- Flooding at the Fujairah facility in July resulted in a reported net loss of less than $0.1 million after approved insurance proceeds; the company expected insurance to recover losses and said further effects would be recorded as information became available. The company was preparing to relocate operations to Abu Dhabi.
- Management provided no specific financial guidance in the supplied filing text. Results may vary with large project timing and activity. Other relevant exposures include higher borrowing costs, foreign exchange movements, customer collection risk and reliance on foreign-held cash. One customer represented 10.5% of quarterly sales; one customer represented 11.2% of receivables at quarter-end.
The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. It reported no material subsequent events through December 6, 2022.
Important facts for investors to verify
- Whether the $2.7 million retention receivable is collected and the customer’s commissioning timetable progresses.
- Whether negative operating cash flow and the increase in unbilled receivables reverse as projects are billed and collected.
- Whether gross-margin improvement is sustained as supply, freight and inflationary pressures continue.
- Current borrowing levels, facility availability, interest rates and covenant headroom, including renewal or extension of foreign credit arrangements approaching expiry.
- Progress on the Abu Dhabi relocation and the outcome of the Fujairah flood insurance claim.
- The effects of currency movements and the practical availability of cash held at foreign subsidiaries.