Perma-Pipe International Holdings, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended April 30, 2018; comparison is with the three months ended April 30, 2017. The company manufactures and sells specialty piping, coating, and leak detection systems in one reportable segment, Piping Systems.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $28.9 million | $23.5 million | Up 22.9% |
| Gross profit | $4.2 million | $1.8 million | Up 136.7% |
| Gross margin | 14.6% | 7.6% | Up 7.0 percentage points |
| Operating expenses | $5.1 million | $5.6 million | Down $0.5 million |
| Operating loss | $0.9 million | $3.8 million | Improved $2.9 million |
| Net loss | $1.1 million | $3.5 million | Improved $2.4 million |
| Basic and diluted loss per share | $0.14 | $0.46 | Improved $0.32 |
| Net interest expense | $0.3 million | $0.2 million | Increased $0.1 million |
Management attributed higher sales to increased domestic oil and gas business and Middle East activity. Gross-margin improvement reflected increased volume, North American product mix, and use of $0.4 million of previously reserved inventory. Lower G&A included the absence of a $0.4 million foreign-exchange loss recorded in the prior-year quarter; lower selling expense reflected Middle East management changes and a North American sales reorganization. Higher borrowing and interest rates increased interest expense.
Cash, debt, and liquidity
- Cash and cash equivalents were $9.9 million and restricted cash was $1.1 million at April 30, 2018, for total cash, cash equivalents, and restricted cash of $11.0 million, compared with $8.3 million at January 31, 2018. The company reported that $10.6 million of the total was held at foreign subsidiaries.
- Working capital was $22.8 million, versus $23.1 million at January 31, 2018.
- Operating cash flow was approximately breakeven, with $3,000 used, compared with $1.0 million used in the prior-year quarter. Investing used $0.4 million; financing provided $3.2 million.
- Total debt was $18.5 million, up $2.7 million from fiscal year-end. North American revolver borrowings were $7.8 million, with $1.2 million available; additional availability was used for letters of credit. The facility’s stated combined borrowing limit was $15.0 million, subject to borrowing-base and other requirements.
- The North American credit agreement was due to expire September 25, 2018. The company was pursuing refinancing and replacement financing. Management said that, if refinancing were delayed or unavailable, foreign cash repatriation and projected operating cash flow were expected to cover repayment and near-term operating needs.
Outlook, risks, and unusual items
- The filing gives no quantified earnings or revenue guidance. Management cautioned that results can fluctuate with large discrete projects and varying project activity.
- On June 5, 2018, lenders amended the credit agreement, extended minimum-availability requirements for the Canadian subsidiary through August 1, 2018, and waived a technical reporting event of default related to the April 30 availability calculation. The filing states that the company was in compliance with credit-agreement covenants as of April 30 following the waiver.
- A $5.4 million Middle East project receivable had been outstanding for several years. It included $3.7 million of retention, of which $3.2 million was classified as long-term. The company had received an updated balance acknowledgment and assurances of payment and had recorded no allowance; it warned that failure to collect during fiscal 2018 could require an allowance for all or substantially all of the then-uncollected amount.
- One customer represented 13.5% of quarterly sales and 16.3% of receivables at April 30. The filing also notes that three customers represented 34.9% of receivables at January 31.
- The company had bid to provide pipe insulation for the East Africa Crude Oil Pipeline project, but stated that award and timing were uncertain and that there was no assurance it would win the bid.
- A material weakness in internal control over financial reporting related to accounting for stock-based compensation remained unremediated. Remediation steps included training, strengthened review procedures, and planned implementation of an equity-compensation system; management said remediation would not be complete until the controls had operated and been tested successfully.
- The company adopted ASC 606 using the modified retrospective method on February 1, 2018 and reported no material adoption impact or opening retained-earnings adjustment. More than 90% of revenue was from Systems contracts, generally recognized over time.
- Foreign currency translation reduced other comprehensive income by $0.7 million in the quarter. No long-lived-asset or goodwill impairment was recorded.
Most important facts for investors to verify
- Progress, terms, and availability under refinancing or replacement financing before the September 25, 2018 facility maturity.
- Collection status of the $5.4 million aged receivable and any resulting allowance or cash-flow impact.
- Whether the stock-based compensation control weakness is remediated and independently tested.
- Actual borrowing and unused availability under foreign credit arrangements; the filing’s Note 9 and MD&A descriptions of foreign-line borrowings are not fully consistent.
- Project awards, customer concentration, and the sustainability of the gross-margin improvement, including the contribution from reserved inventory.