Perma-Pipe International Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 30, 2017; comparisons are with the three months ended April 30, 2016. The company, renamed from MFRI, Inc. effective March 20, 2017, reported one segment: Piping Systems.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $23.5 million | $23.1 million |
| Gross profit / gross margin | $1.8 million / 8% | $2.0 million / 9% |
| Operating loss | $3.8 million | $4.5 million |
| Net loss | $3.5 million | $6.3 million |
| Basic and diluted loss per share | $0.46 | $0.86 |
| Net cash from (used in) operating activities | ($1.0 million) | $3.8 million |
Net interest expense was $157,000, down from $226,000. Cash and cash equivalents were $9.1 million at April 30, 2017, with another $1.1 million restricted; working capital was $25.4 million. Total debt was $13.1 million, up $1.3 million from January 31, 2017. Stockholders’ equity was $56.4 million.
The cash-flow statement reports $1.9 million of net cash provided by financing activities and $266,000 used in investing activities. Cash, cash equivalents and restricted cash ended the quarter at $10.2 million.
Changes and management commentary
- Sales increased 2%, as higher volumes—especially in Canada—more than offset weaker Middle Eastern demand for insulated pipe used in infrastructure projects.
- Gross margin declined to 8% from 9%. Management attributed the pressure to increasingly competitive bidding in weak-demand markets; lower plant expenses partly mitigated the effect.
- Operating expenses fell: segment general and administrative expense declined 16%, and corporate expense also decreased, primarily due to lower staffing and management changes.
- The smaller year-over-year net loss also reflects the absence of the prior-year $1.6 million noncash loss on consolidation of the Canadian joint venture and the prior-year discontinued-operations loss. No discontinued-operations loss was reported in Q1 2017.
Outlook, risks and notable items
The filing provides no specific earnings or revenue guidance. Management believed available cash, operating cash flows and borrowing capacity would be sufficient for operations, working capital and capital spending for at least 12 months. The company used $1.0 million of operating cash during the quarter, and $8.9 million of its cash was held at foreign subsidiaries and designated for foreign operations.
North American revolving-credit borrowings were $5.8 million, with $4.2 million available; foreign facilities had no borrowings and $19.1 million of unused availability after letters of credit. The company reported compliance with applicable credit covenants. The North American agreement matures September 24, 2018, and includes a subjective acceleration clause. Other risks include project-driven demand variability, competitive bids and margin pressure, customer concentration (one customer represented 11% of quarterly sales and 28% of receivables at quarter-end), and uncertainty in tax estimates and foreign income activity. Management reported no impairment of long-lived assets or goodwill. Disclosure controls were deemed effective, with no material change in internal control reported.
Unusual item: segment G&A included $0.4 million of foreign-exchange losses realized on repayment of intercompany loans. The company also disclosed $0.2 million of unrecognized tax benefits; the IRS concluded its audit of fiscal 2015 without changes to reported tax.
Important facts for investors to verify
- Whether weak Middle Eastern demand and competitive project bidding continue to pressure sales, intake margins and gross margin.
- Whether operating cash flow improves, given the quarterly cash use and increased inventory and contract costs in excess of billings.
- Availability and terms of borrowing capacity, covenant compliance, and the impact of the subjective acceleration clause.
- Concentration and collectability risk associated with one customer representing 28% of receivables.
- Access to foreign-held cash and the assumptions underlying management’s 12-month liquidity assessment.