Perma-Pipe International Holdings, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended July 31, 2019; fiscal year ends January 31. The company manufactures specialty piping and coating systems and leak-detection products in one reportable segment. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $36.7 | $32.3 | $60.9 | $61.2 |
| Gross profit | $9.7 | $5.9 | $14.4 | $10.1 |
| Gross margin | 26.3% | 18.2% | 23.6% | 16.5% |
| Operating income/(loss) | $3.7 | $0.6 | $2.7 | $(0.3) |
| Net income/(loss) | $3.7 | $(0.3) | $2.2 | $(1.4) |
| Diluted EPS | $0.46 | $(0.04) | $0.28 | $(0.18) |
- Q2 sales increased 13%; management attributed growth mainly to North American traditional insulation and leak-detection products, partly offset by lower Middle East revenue. Six-month sales were nearly flat, with lower Middle East revenue offset by leak-detection growth.
- Gross profit rose substantially in both periods, which management attributed to improved pricing and product mix, lower-cost raw-material sourcing, and quality initiatives. Q2 general and administrative expense increased to $4.6 million, primarily from higher compensation.
- Net interest expense declined to $0.2 million for Q2 and $0.4 million year to date, attributed to lower borrowings. The Q2 income-tax benefit was $0.3 million; the year-to-date tax expense was $0.05 million. Effective tax rates were unusually variable: (7.6)% for Q2 and 2.1% year to date.
Cash flow, liquidity and debt
- For the six months, operating cash flow was negative $0.9 million, improved from negative $3.5 million a year earlier. Investing cash outflow was $1.0 million, including $1.0 million of capital expenditures; financing cash outflow was $1.6 million.
- Cash and cash equivalents were $8.1 million at July 31, down from $10.2 million at January 31; restricted cash was $1.2 million. Working capital increased to $28.6 million from $25.9 million.
- Total debt was $14.7 million, down from $16.3 million at January 31. The North American revolving facility had $6.8 million outstanding and $7.1 million available. The company reported covenant compliance at July 31. Foreign facilities had $0.9 million borrowed; the filing reports $1.7 million additionally available.
- Adoption of lease accounting on February 1, 2019 added operating lease right-of-use assets of $11.5 million and operating lease liabilities of $11.5 million at July 31. This is a balance-sheet change, not a reported cash borrowing.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cautions that results may fluctuate because the business depends on large, discrete projects.
- A $4.4 million receivable from a Middle East project completed in 2015 remained outstanding, including $3.5 million classified as long-term retention. The company had collected $0.3 million in the first half and had not recorded an allowance, citing customer acknowledgment and assurances of payment. It warned that an allowance for all or substantially all of the remaining amount might be required if collection efforts fail in fiscal 2019.
- On September 3, 2019, after quarter-end, the company received notice that the East Africa Crude Oil Pipeline project had been suspended amid unresolved ownership and tax negotiations. The filing does not quantify the project’s expected contribution to revenue or earnings.
- Three customers together represented 29.3% of accounts receivable at July 31, versus 39.4% at January 31. Project concentration, customer credit and collection timing remain relevant risks.
- The $18 million North American secured revolving facility matures September 20, 2021 and includes financial covenants, restrictions on certain activities, and a $3.0 million annual capital-expenditure limit, subject to limited carryover. Management reported compliance at quarter-end.
Investor verification priorities
- Track collection of the $4.4 million aged project receivable, including the long-term retention balance and any later allowance or cash receipts.
- Assess whether the EACOP suspension affects the company’s project pipeline, orders, revenue or expected capacity utilization.
- Reconcile cash generation with reported earnings, particularly working-capital needs and inventory growth, and monitor liquidity and facility availability.
- Review customer and project concentration, gross-margin sustainability, and covenant headroom as new project results are reported.
- Check foreign revolving-facility availability: the filing gives differing amounts for availability used to support letters of credit ($6.4 million in Note 9 and $7.3 million in MD&A).