Perma-Pipe International Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended July 31, 2018. The company manufactures specialty piping, coating, and leak-detection systems in one reportable segment. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended July 31, 2018 | Six months ended July 31, 2018 |
|---|---|---|
| Net sales | $32.3 million; up 20% year over year | $61.2 million; up 22% |
| Gross profit / margin | $5.9 million / 18%, versus $3.1 million / 11% | $10.1 million / 17%, versus $4.8 million / 10% |
| Operating income (loss) | $0.6 million, versus a $2.1 million loss | $0.3 million loss, versus a $5.9 million loss |
| Net loss / diluted loss per share | $0.3 million / $0.04, versus $1.7 million / $0.22 | $1.4 million / $0.18, versus $5.2 million / $0.68 |
| Net interest expense | $0.3 million, up from $0.2 million | $0.6 million, up from $0.3 million |
For the quarter, higher sales in Canada, the Middle East, and India contributed to growth; for the six-month period, management cited increased sales in the Middle East and India. Improved volume and margins drove gross-profit gains. Year-to-date operating expenses declined modestly, while higher borrowings and interest rates increased interest expense. Income-tax expense was $0.6 million in the quarter and $0.6 million year to date, contributing to net losses despite quarterly pretax income. The reported effective tax rates were 176% for the quarter and negative 74% year to date.
At July 31, cash and cash equivalents were $5.2 million and restricted cash was $1.1 million, compared with combined cash and restricted cash of $8.3 million at January 31. Working capital was $24.0 million, versus $23.1 million. Six-month operating cash flow was negative $3.5 million; capital expenditures were $0.6 million. Total debt was $17.2 million, up $1.4 million from fiscal year-end. Current assets were $56.5 million and current liabilities were $32.5 million.
Material changes and notable items
- Revenue and gross margin improved substantially versus the prior-year quarter and six-month period, but the company remained loss-making year to date.
- Customer deposits and trade payables declined from January 31; revolving-line borrowings and current maturities of long-term debt increased.
- The company adopted ASC 606 on February 1, 2018, using the modified retrospective method; it reported no material impact and no opening retained-earnings adjustment.
- Foreign-currency translation reduced other comprehensive income by $1.0 million for the six months.
Liquidity, outlook, and risks
- The North American revolving credit agreement, with a $15 million combined U.S./Canada limit, was due to mature September 25, 2018. At July 31, $8.4 million was borrowed, $0.9 million was available, and $0.2 million of availability supported letters of credit. The company reported covenant compliance at July 31, following amendments and waivers.
- On August 31, 2018, the company signed a commitment letter for an $18 million senior secured replacement facility and was working to finalize the agreement before the existing facility expired. Completion was not assured in the filing.
- Management provided no quantified earnings or revenue guidance. It cautioned that large discrete projects can cause significant period-to-period fluctuations in results.
- A Middle East project receivable stood at $4.9 million, including $3.7 million of retention amounts; $3.2 million was classified as long-term. The company received approximately $0.5 million in the quarter and recorded no allowance, but warned it could reserve all or substantially all of the remaining uncollected balance if collection efforts were unsuccessful in fiscal 2018.
- The company had bid to provide pipe insulation for the East Africa Crude Oil Pipeline project; award, terms, and timing were uncertain.
- A previously reported material weakness in internal control over financial reporting related to stock-based compensation remained unremediated as of the filing. Remediation steps had been taken, but testing was ongoing; management expected remediation by fiscal year-end.
Important facts for investors to verify
- Whether the $18 million replacement credit facility was finalized before the existing facility expired, and its terms, covenants, and availability.
- Collections on the $4.9 million aged receivable and whether an allowance was subsequently recorded.
- Whether internal-control remediation was completed and tested successfully.
- Whether improved sales and gross margins continued, given project concentration and the company’s ongoing year-to-date loss and negative operating cash flow.