Perma-Pipe International Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2018; comparisons are to the fiscal year ended January 31, 2017. Perma-Pipe manufactures specialty piping and leak-detection systems in one reportable segment. The company rebranded from MFRI in 2017 and operates across the U.S., Canada, the Middle East, India, and other markets.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $105.2 million | $98.8 million |
| Gross profit / margin | $11.7 million / 11.2% | $11.7 million / 11.9% |
| Operating loss | $9.5 million | $11.6 million |
| Continuing-operations loss | $10.0 million | $13.2 million |
| Net loss | $10.0 million | $12.5 million |
| Basic and diluted loss per share | $1.30 | $1.67 |
| Cash used in operations | $1.8 million | $5.5 million |
Sales rose 6.5%, mainly from higher Canadian distributor sales. Gross profit was nearly flat, while gross margin fell amid product-mix changes and competitive pricing in North America and the Middle East. Selling expense declined 11.9% and general and administrative expense declined 7.8%; operating and continuing-operations losses improved. FY2016 included a $1.6 million joint-venture consolidation loss and $0.7 million of after-tax income from discontinued operations.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $7.1 million at year-end, down from $7.6 million; $6.4 million was held in foreign subsidiaries. Restricted cash was an additional $1.2 million.
- Working capital was $23.1 million, compared with $29.8 million a year earlier. Current assets were $62.3 million and current liabilities were $39.2 million.
- Total debt was approximately $16.0 million, compared with $11.9 million. The North American revolver had $7.3 million outstanding and only $0.9 million available; the company reported compliance with its covenants.
- Cash used in investing activities was $2.4 million, including $2.5 million of capital expenditures. Cash provided by financing activities was $3.5 million. Management estimated FY2018 capital expenditures of $3.0–$4.0 million.
Material changes, outlook, and risks
- International sales represented 59.5% of revenue, up from 57.0%. Canada sales increased to $31.2 million from $25.9 million; Middle East sales declined to $26.3 million from $28.0 million.
- Year-end backlog increased to $46.7 million from $44.6 million, and was expected to be completed within 12 months. Orders can be canceled or modified, so backlog is not a guarantee of future revenue.
- The U.S. revolving credit agreement expires in September 2018. The company was pursuing refinancing, with no assurance that replacement financing would be available on comparable terms. Middle East facilities renew annually.
- Steel prices were rising; management expected FY2018 prices to be above the 2017 average and intended to recover higher costs through product price increases. The filing also cites the March 2018 U.S. steel tariff and related supply and cost uncertainty.
- A $5.4 million Middle East receivable had remained outstanding for several years, including $3.7 million of retention; $3.2 million was classified as long-term. No allowance was recorded, based on customer acknowledgment and assurances, but unsuccessful collection could require a substantial allowance.
- Following departures of regional Middle East executives, the company commissioned a review of regional management activities and controls. Review and related policy-improvement costs were approximately $1.2 million in FY2017; further material costs cannot be ruled out.
- Management identified a material weakness in internal control over financial reporting related to incorrect reversals of stock-based compensation for certain vested awards. Remediation steps were implemented, but the weakness was not considered fully remediated pending testing. The auditor issued an unqualified opinion on the financial statements but did not audit internal controls.
- The Tax Cuts and Jobs Act effects were provisional. The company estimated a $23.2 million deemed foreign-income inclusion, offset by tax-loss carryforwards and domestic losses; it had not completed its assessment of GILTI tax treatment.
- The company had bid on insulation work for the East Africa Crude Oil Pipeline; the filing gives no assurance the bid would be awarded. Other principal risks include project timing, oil and gas prices, competition, international political and currency exposure, contract-cost estimates, and the ability to achieve profitability and positive cash flow.
The company reported losses in both fiscal years. No material litigation was pending at January 31, 2018, and no cash dividend was anticipated in the foreseeable future.
Most important facts for investors to verify
- Whether the September 2018 U.S. credit agreement was refinanced and on what terms, and whether liquidity and covenant compliance remained adequate.
- Whether operating results and cash flow improved enough to move toward profitability and reduce reliance on borrowing.
- Collection status of the aged $5.4 million receivable and any resulting allowance or cash recovery.
- Whether the internal-control material weakness was fully remediated and independently tested in subsequent reporting periods.
- Whether higher steel costs and tariffs were passed through to customers without further margin erosion, and whether backlog converted to revenue as expected.
- Final tax effects under the Tax Act and any additional costs or findings arising from the Middle East review.