Perma-Pipe International Holdings, Inc. annual report, FY2021

Perma-Pipe International Holdings, Inc. — FY2020 Form 10-K

Business and period: Perma-Pipe engineers, manufactures and sells specialty piping and leak-detection systems in one reportable segment. This annual report covers the fiscal year ended January 31, 2021; comparisons are with the year ended January 31, 2020.

Financial performance

Metric	FY ended Jan. 31, 2021	FY ended Jan. 31, 2020
Net sales	$84.7 million	$127.7 million
Gross profit / margin	$11.2 million / 13.2%	$29.0 million / 22.8%
Operating income (loss)	$(11.4) million	$4.9 million
Net income (loss)	$(7.6) million; $(0.94) per diluted share	$3.6 million; $0.42 per diluted share
Cash from operating activities	$0.2 million	$4.1 million
Cash and cash equivalents at year-end	$7.2 million	$13.4 million
Total debt at year-end	$13.2 million	$16.9 million

Working capital was $25.6 million, down from $31.4 million. Of year-end cash, $7.1 million was held by foreign subsidiaries and $0.1 million in the United States; a further $1.2 million of foreign cash was restricted. Capital expenditures were $2.0 million. The company reported $38.4 million of total contractual obligations, including $24.6 million of operating lease payments; this is not the same as debt.

Changes and material items

• Sales fell 33.7%, primarily because depressed oil and gas markets reduced demand and COVID-19 delayed projects. Gross profit declined 61.5%, and gross margin contracted by 9.6 percentage points.
• General and administrative expense decreased to $17.2 million from $18.9 million, largely from cost reductions; selling expense was $5.3 million versus $5.2 million.
• Other income was $4.0 million, including $3.2 million of PPP proceeds recognized based on expected forgiveness and Canadian CEWS/CERS grants of approximately $2.0 million. These items are non-recurring; SBA forgiveness remained pending.
• The company recorded approximately $0.6 million of expense after a Qatar customer drew on a performance bond. The company disputes the customer’s claims and is seeking reimbursement and lost-profit compensation; no recovery receivable was recorded.
• Backlog increased to $52.6 million from $46.8 million. Management attributed the increase to pandemic-related delays and Middle East project awards; most was expected to be completed during fiscal 2021, but orders may be changed or canceled.

Liquidity, outlook and risks

• The company failed its North American fixed-charge coverage covenant for the three months ended January 31, 2021. It planned to repatriate approximately $0.8 million from its UAE subsidiary in April 2021 to cure the breach. The lender had waived an earlier breach and amended covenant terms; North American facility availability was reduced by $2.0 million.
• The $18 million North American senior revolving facility matures September 20, 2021. At year-end, $2.8 million was drawn and $1.7 million was available. Management said it believed it could meet obligations for the following year, citing the waiver, access to foreign cash, expected business improvement and ability to defer capital spending.
• A UAE credit-line renewal and an Egyptian facility renewal were still being finalized, with completion expected in April 2021. A covenant breach on an Egyptian project-financing facility had been waived while the company worked to cure it.
• Management expected delayed projects to begin in 2021 and anticipated increased activity and operating cash flow, but provided no quantified earnings or revenue guidance. Oil prices had risen from about $35 per barrel in October 2020 to about $60 in March 2021; management cautioned that higher prices did not assure improved sales or earnings.
• Other significant exposures include pandemic disruption, oil and gas spending and pricing, steel costs and tariffs, project timing and execution, covenant compliance and refinancing, international operations, and collection of a long-outstanding $3.8 million Middle East receivable. The latter includes $3.4 million of retention tied to project commissioning; no allowance was recorded, but substantial impairment may be required if collection efforts fail.
• The company reported no material pending litigation as of January 31, 2021. Its auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective and said a prior weakness involving percentage-of-completion revenue recognition had been remediated.

Investor verification priorities

1. Confirm the $0.8 million foreign-cash repatriation occurred and whether subsequent periods complied with the amended lending covenants.
2. Check renewal or replacement of the North American facility at its September 2021 maturity and the status and available capacity of foreign credit lines.
3. Verify SBA forgiveness of the $3.2 million PPP loan and assess the earnings effect when government assistance does not recur.
4. Track conversion of the $52.6 million backlog into sales and cash, including further project delays, changes or cancellations.
5. Monitor collection or impairment of the $3.8 million Middle East receivable and the outcome of the Qatar bond dispute.