Perma-Pipe International Holdings, Inc. (filed as MFRI, Inc.) — Q1 2015 Form 10-Q
Business context and period. The filing covers the three months ended April 30, 2015; the company’s fiscal year ends January 31. Its two reportable segments are Piping Systems and Filtration Products. The interim financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $37.7 million | $59.5 million |
| Gross profit / margin | $4.0 million / 10.7% | $16.0 million / 26.9% |
| Operating income (loss) | ($4.8 million) | $5.7 million |
| Net income (loss) | ($4.7 million), or ($0.64) per diluted share | $3.8 million, or $0.52 per diluted share |
| Net cash used in operating activities | $0.8 million | $1.3 million |
- Segments: Piping Systems sales were $20.3 million, down 52%, with a $1.4 million operating loss versus $8.0 million operating income a year earlier. Filtration Products sales were $17.4 million, up 1%; its operating loss widened to $1.2 million from $0.5 million.
- Cash and working capital: Cash and cash equivalents were $10.7 million at April 30, including $10.3 million held at foreign subsidiaries. Working capital was $26.0 million, compared with $35.9 million at January 31.
- Debt and credit: Total debt was $29.4 million, down $0.2 million from January 31. The domestic revolver had $12.0 million outstanding and $6.5 million available; foreign credit arrangements had $1.5 million outstanding and $25.6 million unused. The filing reports a debt-to-equity ratio of 0.43.
- Other cash flows: Investing activities used $1.7 million, including $2.0 million of capital expenditures; financing activities provided $2.4 million. Cash increased $0.2 million during the quarter.
Changes, outlook, and risks
- Sales fell 37%, principally because Piping Systems had lower volume in Saudi Arabia and the U.A.E. and fewer domestic oil and gas projects. Gross margin also declined, reflecting lower Piping Systems volume, Filtration Products customer mix, and startup costs at a new U.A.E. facility. Operating expenses decreased to $8.8 million from $10.3 million, but did not offset the gross-profit decline.
- Management attributed the negative 0.6% effective tax rate to the mix of income in lower-tax jurisdictions, including projected U.A.E. income, and a full valuation allowance against domestic deferred tax assets. The company remained in an NOL carryforward position.
- The domestic credit agreement required specified borrowing-base availability. At April 30, the company was not in compliance with the availability level for the period ended March 31; the filing says this was not a covenant violation, but the lender could require domestic receipts to be directed to an account used only to service the revolver. An April 30 amendment added 90% of the cash surrender value of assigned life insurance policies to the borrowing base.
- The company said operating results in Piping Systems can fluctuate substantially because business depends on large discrete projects. One Piping Systems customer represented 28% of accounts receivable at April 30. No customer represented 10% of quarterly sales in 2015; one customer represented 21% in the prior-year quarter.
- The company reported no specific financial guidance. It said it continued to expand Filtration Products’ geographic coverage and pursue margin improvement through expense controls. A $2 million share repurchase authorization was approved in February; 45,000 shares were repurchased for approximately $290,000 during the quarter.
- A $1.9 million loan against certain life insurance policies was obtained April 1 and repaid in May 2015. The deferred compensation plan had been terminated in 2014, with remaining participant funds and company stock to be distributed by April 2016.
Important facts for investors to verify
- How lower project volume, customer mix, and U.A.E. facility startup costs affect sales recovery and margins in subsequent quarters.
- The status of domestic borrowing-base availability, lender rights, and compliance with the credit agreement’s financial requirements.
- Cash availability and liquidity, including the concentration of cash at foreign subsidiaries and reliance on revolver borrowings to fund operations.
- Whether the large accounts-receivable exposure to one Piping Systems customer changes, and whether the tax valuation allowance or effective tax rate shifts.
- The pace and remaining capacity of the share repurchase program and distributions under the terminated deferred compensation plan.