Business context and reporting period
Registrant: MFRI, Inc. (the filing’s registrant name; now identified in the request as Perma-Pipe International Holdings, Inc.). This Form 10-Q covers the quarter and nine months ended October 31, 2016. The continuing business is one reportable segment, Piping Systems, serving oil and gas, district heating and cooling, and other infrastructure markets. Filtration operations are reported as discontinued operations following their sale.
Financial performance
| Metric | Three months ended October 31, 2016 | Nine months ended October 31, 2016 |
|---|---|---|
| Net sales | $25.3 million, down 46% year over year | $71.2 million, down 23% |
| Gross profit / margin | $3.7 million / 15%, versus $14.3 million / 30% | $8.7 million / 12%, versus $19.8 million / 21% |
| Operating income (loss) | $(1.0) million, versus $7.5 million | $(7.4) million, versus $1.4 million |
| Continuing-operations income (loss), net | $(3.6) million, versus $6.5 million | $(10.5) million, versus $0.8 million |
| Net income (loss), including discontinued operations | $(3.8) million, versus $6.1 million | $(9.6) million, versus $(0.9) million |
| Basic and diluted EPS | $(0.50), versus $0.84 basic and $0.83 diluted | $(1.29), versus $(0.13) |
Cash flow and liquidity: Nine-month operating cash flow was a use of $4.8 million, improving from a use of $9.8 million. Investing activities provided $9.6 million, including proceeds from asset sales; financing activities used $12.2 million. Cash was $9.0 million at October 31, down from $16.6 million at January 31. Working capital was $29.1 million, versus $31.8 million.
Debt: Total debt was reported at $14.1 million, down $1.4 million from fiscal year-end. The company was in compliance with its credit covenants. It reported $6.2 million available under its North American revolver and $19.4 million of unused foreign-line capacity after letters of credit. Management said cash, operating cash flow and available borrowing capacity should fund operations, working capital and capital spending for at least 12 months.
Material changes, outlook and risks
- Management attributed lower sales to weak oil and gas investment amid low oil prices, competitive bidding, reduced infrastructure spending, and economic weakness in the Gulf Cooperation Council region, including Saudi Arabia. Lower production volume and unfavorable mix pressured margins and fixed-cost absorption.
- In February 2016, MFRI acquired the remaining 51% of Bayou Perma-Pipe Canada (BPPC), consolidating its previously held 49% interest. The preliminary purchase accounting includes $2.5 million of goodwill; the acquisition generated a one-time, non-cash $1.6 million remeasurement loss. Acquisition-related professional costs were $0.2 million.
- Year-to-date results also included a $0.8 million legal settlement accrual and $0.3 million of severance expense. The company paid $5.0 million year-to-date under terminated deferred-compensation plans.
- Filtration-business sales and facility disposals affected discontinued-operations results. The quarter included a $2.2 million loss on disposal, partly offset by discontinued-operations income; year-to-date discontinued operations reported $0.9 million of net income.
- Continuing-operations tax expense was $2.4 million in the quarter despite a pretax loss; the reported quarterly effective tax rate was negative 209.8%. Management cited projected losses, including losses in the UAE that receive no tax benefit, as well as acquisition and intraperiod tax-allocation effects.
- No specific financial guidance was provided. Management cautioned that large project timing and market-demand variations can affect results. Two customers represented 25% of accounts receivable at quarter-end. The company reported no long-lived-asset impairment as of October 31, 2016.
- Disclosure controls were assessed as effective at October 31, 2016. Management said the previously disclosed delinquent filing status had been cured during the quarter.
Important facts for investors to verify
- Whether demand and project awards in oil and gas and district heating/cooling markets recover, and whether pricing and gross margins stabilize.
- BPPC’s post-acquisition performance and the completion of its preliminary purchase accounting, including goodwill valuation.
- Cash burn, working-capital requirements, facility availability, and continued compliance with lender covenants.
- The drivers of the unusually high quarterly tax expense and the treatment of losses in foreign jurisdictions.
- Final proceeds and any remaining obligations or contingencies related to the Filtration business and facility sales.