Perma-Pipe International Holdings, Inc. — Q2 2017 Form 10-Q
Business and reporting period. The filing covers the quarter and six months ended July 31, 2017, in the company’s fiscal year ending January 31. Perma-Pipe manufactures specialty piping and leak-detection systems in one reportable segment, Piping Systems. The former Filtration Products business is reported as discontinued operations. The company changed its name from MFRI, Inc. in March 2017.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $26.9 million vs. $22.9 million, up 17% | $50.4 million vs. $45.9 million, up 10% |
| Gross profit / margin | $3.1 million / 11%, vs. $3.0 million / 13% | $4.8 million / 10%, vs. $5.0 million / 11% |
| Operating loss | $2.1 million vs. $2.2 million | $5.9 million vs. $6.8 million |
| Loss from continuing operations | $1.7 million vs. $1.2 million | $5.2 million vs. $7.4 million |
| Net income (loss) | Loss of $1.7 million vs. income of $0.1 million | Loss of $5.2 million vs. loss of $6.3 million |
| Net cash used in operating activities | Not presented as a quarterly figure | $2.8 million vs. $0.9 million |
Quarterly pretax loss from continuing operations was approximately $2.3 million, essentially unchanged from the prior-year quarter. Prior-year net income included $1.3 million from discontinued operations; there was no discontinued-operation income in 2017. For the six-month comparison, the prior year included a $1.6 million noncash loss on consolidation of a joint venture and discontinued-operation income of $1.1 million.
Liquidity, debt and other key metrics
- At July 31, cash, cash equivalents and restricted cash totaled $9.4 million, including $8.5 million of unrestricted cash. Management reported working capital of $24.8 million, down from $27.8 million at January 31.
- Six-month investing cash outflow was $1.4 million; financing cash inflow was $4.3 million. Cash, cash equivalents and restricted cash increased $0.7 million during the period.
- Total debt was $16.3 million, up $4.6 million from January 31. North American revolving borrowings were $7.9 million, with $4.8 million available; foreign facilities had no borrowings and $15.5 million unused after letters-of-credit support. The company reported compliance with applicable debt covenants.
- Current assets were $58.2 million and current liabilities $33.4 million. The North American revolving balance is classified as current due to a subjective acceleration clause. The credit agreement matures September 24, 2018.
- One customer represented 20% of accounts receivable at July 31. No customer represented 10% or more of quarterly or current year-to-date sales.
Changes, outlook and risks
- Management attributed sales growth to increased coated-pipe distributor business in Canada and stronger project activity in the Middle East for the quarter, and increased U.S. project demand and Canadian coating volumes year to date. Gross margin declined in both comparisons because of product mix.
- Quarterly corporate general and administrative expense increased, including professional-service costs associated with Middle East executive transition and operations. In the six-month period, consolidated pretax loss improved partly because the prior-year period included the joint-venture consolidation loss and legal-settlement expense.
- Management said current cash, operating cash flow and available borrowing capacity should fund anticipated operations, working capital and capital spending for at least the next 12 months. Approximately $9.2 million of cash and restricted cash was held at foreign subsidiaries; foreign earnings are considered indefinitely reinvested, and those funds are designated for overseas working capital and operational investment.
- Results may fluctuate because the business depends on large, discrete projects and changing market demand. Additional risks include weaker gross margins from product mix, working-capital needs, customer receivable concentration, foreign-currency and international operating exposure, and borrowing-base and covenant restrictions.
- The company identified an accounting error involving stock-based compensation for vested awards that expired, terminated or were cancelled unexercised. It concluded prior-period errors were not material and revised prior-period figures; the filing reports a cumulative adjustment of approximately $846,000 for May 2015 through January 2016 and adjustments to 2016–2017 periods.
- Management concluded disclosure controls were not effective as of July 31 because of a material weakness in technical accounting controls over stock-based compensation. The error was corrected, and management described training, revised review procedures and an accounting-rules checklist as remediation steps; remediation had not yet been fully tested. Management nevertheless concluded the filed financial statements fairly present results in all material respects.
- The company reported no impairment of long-lived assets or goodwill. It expected the new revenue standard, planned for adoption in 2018, not to have a material financial-statement impact, while anticipating potentially significant process, recordkeeping and disclosure changes.
Important facts for investors to verify
- Whether the stock-based compensation control weakness has been remediated and tested, and whether any further corrections are required.
- Whether operating cash use, inventory growth and reliance on revolving borrowings remain manageable as the project backlog converts to sales and collections.
- How lower gross margins and customer/project mix affect profitability as revenue grows.
- Whether foreign-held cash is practically available for domestic needs and how foreign credit terms, guarantees and currency movements affect liquidity.
- Progress toward adoption of the revenue-recognition standard and any resulting changes to contract accounting or disclosures.