Perma-Pipe International Holdings, Inc. (filed as MFRI, Inc.) — Q3 2015 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 31, 2015. The company manufactures specialty piping and leak-detection systems (Piping Systems) and industrial filtration products (Filtration Products).
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $66.3 million | $43.8 million | $144.1 million | $156.7 million |
| Gross profit | $17.0 million | $6.7 million | $26.7 million | $33.3 million |
| Gross margin | 25.6% | 15.3% | 18.5% | 21.2% |
| Operating income (loss) | $7.4 million | ($1.2 million) | $0.1 million | $6.3 million |
| Net income (loss) | $6.1 million | ($0.4 million) | ($0.9 million) | $4.8 million |
| Diluted earnings (loss) per share | $0.83 | ($0.05) | ($0.13) | $0.66 |
- Quarterly improvement: Sales rose 51%, led by Piping Systems, whose sales increased 77% to $47.0 million. Filtration Products sales rose 12% to $19.4 million. Management attributed the stronger gross profit and return to quarterly profitability mainly to higher Piping Systems volume.
- Nine-month decline: Sales fell 8.1%, with Piping Systems down 10% to $92.4 million and Filtration Products down 4% to $51.7 million. Lower Piping Systems volume reduced gross profit; Filtration sales were also affected by approximately $2.0 million of unfavorable currency effects and lower domestic filter-bag volume.
- Cash flow: Operating activities used $9.8 million in the first nine months, versus $5.1 million provided in the prior-year period. Receivables and inventory increased $17.8 million and $5.7 million, respectively, as sales expanded. Investing activities used $4.1 million, including $6.0 million of capital expenditures. Financing activities provided $14.0 million; cash ended at $10.9 million, up from $10.5 million at fiscal year-end.
- Liquidity and debt: Working capital was $28.3 million, down from $35.9 million at January 31, 2015. Debt totaled $44.0 million, up $14.3 million since fiscal year-end, primarily to fund working capital. Domestic revolver borrowings were $18.7 million, with $6.0 million available; foreign borrowings were $10.6 million, with $24.2 million unused. The company reported covenant compliance and said cash, operating cash flow, and borrowing capacity should cover expected needs for at least 12 months.
- Tax and margins: Nine-month pretax income from continuing operations was $0.2 million, while income tax expense was $1.1 million; the reported effective tax rate was 713.2%. Management cited a domestic loss without a tax benefit because of a valuation allowance, a greater share of foreign income taxed at 25%, and the small pretax-profit base.
Outlook, risks and notable items
- Management expected full-year capital expenditures of $7.9 million, reduced from the $18.7 million budget at January 31, 2015, because Middle East facility expansion was not needed that year and other projects were delayed. The filing provides no specific sales or earnings guidance.
- Piping Systems revenue depends on large discrete projects and can fluctuate substantially by geography and reporting period. Nine-month segment results reflected project timing and lower domestic oil-and-gas and Middle East volumes; the Q3 rebound reflected higher project volume.
- Filtration Products continued geographic expansion, including sales from a new Middle East factory; startup costs partly offset cost savings. Currency movements and customer mix remain relevant to performance.
- One Piping Systems customer represented 17% of accounts receivable at October 31, 2015. The company also reported its headquarters and an idle Illinois facility as held for sale, with no impairment indicated.
- The company had repurchased 45,000 shares under a board-authorized $2 million program. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Q3 Piping Systems volume and margins are sustainable given project timing and the weaker nine-month trend.
- Whether working-capital growth, operating cash outflows, and the $14.3 million debt increase ease as sales convert to cash.
- The drivers and recoverability of the unusually high reported effective tax rate and domestic deferred-tax valuation allowance.
- The outlook for Filtration Products margins, including Middle East facility startup costs and foreign-exchange effects.
- Progress on the held-for-sale properties, capital spending plans, and remaining share-repurchase authorization.