Business context and reporting period
Perma-Pipe International Holdings, Inc. filed this Form 10-Q for the fiscal quarter ended April 30, 2019. The company operates in one reportable segment, Piping Systems, engineering and manufacturing specialty piping, coatings, and leak-detection systems.
Key financial results
All amounts are in U.S. dollars; financial statement figures are in thousands unless noted.
- Revenue: $24.3 million, down 16% from $28.9 million in the prior-year quarter. Management attributed the decline to delayed project timelines in the Middle East.
- Gross profit and margin: $4.7 million and 19.5%, versus $4.2 million and 14.6%. Management cited operating-cost improvement initiatives.
- Operating results: Operating loss was $980,000, compared with $899,000. Higher gross profit was more than offset by increased operating expenses: G&A rose to $4.4 million from $4.0 million, and selling expense to $1.3 million from $1.1 million.
- Net loss and EPS: Net loss was $1.5 million, or $0.19 per diluted share, versus $1.1 million, or $0.14 per share. The company recorded $312,000 of income tax expense despite a pretax loss; the reported effective tax rate was (26.1%), compared with 4.1%.
- Cash flow: Operating activities provided $1.4 million, compared with approximately zero in the prior-year quarter. Investing activities used $505,000, primarily for capital expenditures; financing activities used $3.0 million. Cash, cash equivalents, and restricted cash declined $2.2 million during the quarter.
- Liquidity: Cash and cash equivalents were $8.0 million and restricted cash was $2.6 million at April 30. Working capital was $22.2 million, down from $25.9 million at January 31. Of the combined $10.6 million cash and restricted cash, $8.8 million was held by foreign subsidiaries; $1.5 million of U.S. restricted cash collateralized the senior facility.
- Debt and leases: Debt was $13.3 million, down from $16.3 million at January 31. The $18 million North American revolving facility had $5.6 million drawn and $2.8 million available, subject to borrowing-base limits. The balance sheet also reported $10.3 million of operating lease liabilities after adoption of the new lease standard.
Material changes and management commentary
- Product revenue increased to $4.9 million from $2.4 million, while specialty piping systems and coating revenue declined to $19.4 million from $26.5 million.
- Management said improved margins reflected operating-cost initiatives. Lower borrowings reduced net interest expense to $210,000 from $266,000, while higher G&A reflected increased headcount and other cost increases; the prior-year quarter included a $100,000 settlement payment.
- Effective February 1, 2019, the company adopted ASC 842 for leases, recognizing operating lease right-of-use assets and liabilities. Adoption did not affect retained earnings.
- The company reported compliance with its credit covenants at April 30, 2019. Its senior facility includes a minimum 1.10-to-1.00 adjusted coverage covenant and limits, among other things, capital expenditures to $3.0 million annually, subject to limited carryover.
Outlook, risks, and unusual items
- The filing gives no quantified revenue or earnings guidance. Management noted that results can be affected by large variations in project activity and that Middle East project delays reduced current-quarter sales.
- A Middle East receivable from a project completed in 2015 remained $4.4 million at April 30, including $3.7 million of retention; $3.5 million was classified as long-term. The company collected $300,000 in the quarter, recorded no allowance, and said it may need to reserve all or substantially all of the remaining uncollected amount if collection efforts are unsuccessful in fiscal 2019.
- The company had bid to provide pipe insulation for the East Africa Crude Oil Pipeline project. The filing cautions that award, final terms, and timing are uncertain.
- Tax expense and the effective tax rate reflect different income and loss positions across jurisdictions, including jurisdictions with zero tax rates or full valuation allowances. Management noted that tax estimates and actual outcomes may differ.
- Cash held abroad and restricted cash may limit immediately available liquidity. Credit facilities also carry borrowing-base conditions, collateral requirements, covenants, and default provisions.
Important facts for investors to verify
- Progress and expected timing of collection of the $4.4 million aged Middle East receivable, and whether any allowance becomes necessary.
- Whether delayed Middle East projects resume on schedule and how project timing affects revenue, margins, and working capital.
- Actual borrowing-base availability, cash accessibility, and continuing compliance with debt covenants.
- Whether the East Africa pipeline bid is awarded and, if so, the contract’s terms and expected contribution.
- How jurisdictional income mix and tax estimates affect tax expense in subsequent periods.