Perma-Pipe International Holdings, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The company manufactures specialty piping systems, coatings and leak-detection products in one reportable segment. This unaudited quarterly report covers the three and nine months ended October 31, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Net sales | 2019: $34.5 million; 2018: $32.8 million, up 5% | 2019: $95.4 million; 2018: $94.0 million, up 1% |
| Gross profit and margin | $7.6 million, 22%; 2018: $6.9 million, 21% | $22.0 million, 23%; 2018: $17.0 million, 18% |
| Operating income | $1.7 million; 2018: $1.1 million | $4.4 million; 2018: $0.8 million |
| Income before taxes | $1.6 million; 2018: $0.8 million | $3.8 million; 2018: approximately break-even |
| Net income/(loss) | $(0.1) million; 2018: $(0.1) million | $2.1 million; 2018: $(1.5) million |
| Diluted earnings/(loss) per share | $(0.02); 2018: $(0.02) | $0.26; 2018: $(0.20) |
Quarterly sales growth was driven by the Middle East, partly offset by weaker North American revenue, particularly in Canada. Year-to-date growth also reflected stronger leak-detection sales. Management attributed higher gross profit to improved pricing and product mix, favorable raw-material sourcing and quality-focused cost reductions. General and administrative expense increased, while quarterly selling expense and interest expense declined.
- Cash flow: Nine-month operating cash flow was $2.8 million, versus cash used of $0.6 million in 2018. Investing used $1.4 million, primarily for capital expenditures. Financing used $0.8 million, compared with $5.9 million provided in 2018, as revolving-credit repayments slightly exceeded borrowings.
- Liquidity: October 31 cash and cash equivalents were $12.2 million, plus $1.1 million restricted cash. Working capital was $28.2 million, compared with $25.9 million at January 31, 2019; current assets were $65.8 million and current liabilities $37.7 million. Most cash, $11.8 million, was held at foreign subsidiaries.
- Debt and facilities: Reported debt was $16.3 million, unchanged from January 31, 2019. North American revolver borrowings were $7.8 million at a weighted-average 6.01%, with $4.9 million available. Foreign facilities had $0.9 million borrowed and $2.9 million additional borrowing availability; $5.2 million of facility capacity supported letters of credit. The company reported compliance with applicable debt covenants. The $18 million North American facility matures September 2021.
- Leases: Adoption of lease accounting in February 2019 resulted in recognition of operating lease liabilities; at quarter-end these totaled $11.7 million, alongside $11.7 million in right-of-use assets. Finance lease liabilities were $1.2 million.
Material changes, outlook and risks
- Year-to-date gross margin improved to 23% from 18%, and net results moved from a $1.5 million loss to $2.1 million of income. However, the third quarter remained loss-making because income tax expense of $1.7 million exceeded pretax income of $1.6 million. The reported effective tax rate was 109.3% for the quarter and 45.7% year to date; management cited differing income and loss mixes across jurisdictions and the prior-year near-break-even result.
- Management stated that results can vary materially with project activity. No specific financial guidance or quantified forward outlook is provided in the filing.
- The East Africa Crude Oil Pipeline project, for which the company had bid to insulate pipe, was suspended on September 3, 2019 amid unresolved ownership and tax negotiations. The filing does not quantify any expected financial effect.
- A Middle East project receivable remained outstanding: $4.2 million at October 31, including $3.7 million of retention, of which $3.5 million was classified as long term. The company had collected $0.5 million during the first nine months and recorded no allowance, relying in part on updated customer acknowledgment and assurances. Management warned that unsuccessful collection efforts could require an allowance for all or substantially all of the remaining amount.
- Customer concentration increased: one customer represented 16% of quarterly sales and 11% of year-to-date sales; three customers together represented 29.8% of receivables at quarter-end. Management also identified foreign-exchange, tax-estimation, credit-collection, project-activity and credit-facility covenant risks.
- Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and timing of collection on the $4.2 million aged receivable, including the long-term retention balance and any subsequent allowance or cash receipt.
- Whether the suspended EACOP project resumes, and whether its status affects orders, capacity or expected revenue.
- Customer concentration, receivable quality and the company’s dependence on Middle East project revenue.
- Availability under borrowing-base and foreign credit facilities, covenant compliance, debt maturities and interest costs.
- Cash accessibility given that most cash was held by foreign subsidiaries, and the timing of lease and other contractual payments.
- Whether improved pricing, mix and cost controls sustain the higher gross margin, and how jurisdictional tax differences affect future earnings.