Perma-Pipe International Holdings, Inc. (then MFRI, Inc.) — Q1 FY2016 10-Q
Reporting period: Three months ended April 30, 2016. The company’s fiscal year ends January 31. The business reported as continuing operations is Piping Systems; the Filtration Products businesses are presented as discontinued operations.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Continuing net sales | $23.1 million | $20.3 million |
| Gross profit / margin | $2.0 million / 9% | $2.4 million / 12% |
| Operating loss | $4.5 million | $3.6 million |
| Loss from continuing operations | $6.1 million | $3.4 million |
| Net loss, including discontinued operations | $6.3 million | $4.7 million |
| Basic and diluted loss per share | $0.86 | $0.64 |
| Cash provided by (used in) operations | $7.1 million | $(0.8) million |
At April 30, cash and cash equivalents were $12.9 million, versus $16.6 million at January 31; working capital was $22.6 million, down from $30.3 million. Reported debt was $15.3 million, a net decrease of $0.2 million during the quarter. The domestic revolver had $7.2 million drawn and $5.6 million available; foreign facilities had $1.7 million drawn and $34.7 million unused. The company reported compliance with its debt covenants. Cash from operations benefited from working-capital movements, including lower receivables and inventory.
Material changes and notable items
- Continuing sales grew 14%, including $2.1 million from the Canadian facility acquired during the quarter. U.S. and India projects offset lower Middle East sales.
- Gross margin fell to 9% from 12%, reflecting Middle East pricing pressure, a $0.2 million excess-inventory reserve adjustment, and relatively low utilization at the acquired Canadian operation.
- The February 4 acquisition of the remaining 51% of Bayou Perma-Pipe Canada (BPPC) cost approximately $9.6 million in cash and debt at closing. A $1.6 million non-cash loss was recognized to remeasure the previously held 49% interest; preliminary goodwill was $2.7 million. Purchase accounting remained incomplete.
- Filtration businesses were sold in January for $22.0 million, including $18.4 million cash proceeds; $0.5 million was held in escrow. The remaining domestic fabric-filter business was still operating while its assets were being liquidated. Discontinued operations generated a $0.2 million net loss in the quarter, compared with a $1.3 million loss a year earlier.
- Subsequent to quarter-end, the former headquarters and the Bolingbrook filtration facility were sold for $4.4 million and $7.1 million, respectively; net cash proceeds after expenses and mortgage payoffs were approximately $0.4 million and $1.9 million.
Outlook, risks and controls
No specific earnings or revenue guidance was provided. Management said cash, operating cash flow and available borrowing capacity should be sufficient for anticipated operating, working-capital and capital-spending needs for at least the next 12 months. Management cited oil-price-driven demand weakness in North American oil and gas, pricing pressure, uncertain Middle East conditions, and the project-based business’s exposure to uneven demand. One customer represented 15% of quarterly consolidated sales; two customers represented 28% of receivables at quarter-end.
Management concluded disclosure controls were not effective because of previously reported material weaknesses in period-end review of certain calculations and estimates, including an error in estimating excess and obsolete inventory reserves and a failure to timely file a Form 8-K. Remediation measures were implemented but had not operated long enough to assess effectiveness; management expected full remediation by July 31, 2016. Management nevertheless stated the financial statements fairly presented the company’s financial position and results in all material respects.
The filing’s cover-page response marks “No” to whether all required Exchange Act reports had been filed during the preceding 12 months. This is an item to verify. The report was signed June 10, 2016.
Facts investors should verify
- Whether the reported “No” filing-status response reflects a delinquent required report and whether any filing consequences remain.
- BPPC’s final purchase-price allocation, post-closing adjustments, operating performance and utilization.
- Progress and effectiveness of controls remediation, particularly inventory-reserve estimates and period-end review procedures.
- Cash availability and facility borrowing-base/covenant capacity, including the geographic location of cash; only $0.2 million of cash was held in the U.S.
- Remaining discontinued-operation assets and liabilities, liquidation progress, and collection of the $0.5 million sale escrow when due.