Perma-Pipe International Holdings, Inc. (filed as MFRI, Inc.) — 10-K summary
Reporting period: Fiscal year ended January 31, 2016 (called fiscal 2015 in the filing). The registrant is identified in this filing as MFRI, Inc.; Perma-Pipe was its continuing piping systems business.
Business context and strategic changes
At year-end, the continuing business was Piping Systems: engineered and manufactured specialty piping and leak-detection systems. On January 29, 2016, MFRI sold its Illinois and international filtration businesses. The remaining Virginia filtration business was classified as held for sale and was still operating at year-end. The company said the divestitures were intended to refocus resources on piping systems and reduce debt.
The filing reports $22.0 million of consideration for the Illinois and international filtration businesses, including $18.4 million of cash proceeds; $1.9 million was held in escrow until July 2017. MFRI also completed its acquisition of the remaining 51% of Bayou Perma-Pipe Canada on February 4, 2016, for approximately $9.6 million in cash and debt, subject to post-closing adjustments.
Financial results and liquidity
| Metric | FY ended Jan. 31, 2016 | Prior year |
|---|---|---|
| Continuing net sales (Piping Systems) | $122.7 million | $126.9 million |
| Gross profit / margin | $26.7 million / 21.8% | $30.8 million / 24.2% |
| Income from operations, consolidated | $2.9 million | $5.8 million |
| Income from continuing operations | $1.6 million; $0.22 per diluted share | $4.2 million; $0.58 per diluted share |
| Loss from discontinued operations, net of tax | $6.0 million | $4.4 million |
| Net loss | $4.4 million; $0.61 per share | $0.2 million; $0.02 per share |
| Cash from (used in) operations | ($2.9 million) | $3.5 million |
| Cash and cash equivalents at year-end | $16.6 million | $9.9 million |
| Total debt at year-end | $15.5 million | $18.5 million |
| Working capital | $30.3 million | $41.0 million |
| Backlog | $47.9 million | $30.7 million |
Continuing sales fell 3.3%, and gross margin declined as lower domestic oil-and-gas project volume and slower Saudi project activity reduced sales and utilization. The company recorded a $0.4 million excess-inventory reserve adjustment in continuing operations. The discontinued filtration business had $65.0 million of sales in fiscal 2015 and incurred a $6.5 million impairment charge related to the Virginia facility; the reported discontinued-operations loss also reflects the sale accounting.
Cash used in investing activities was $13.9 million, mainly reflecting divestiture proceeds, while capital expenditures were $6.5 million. Management estimated fiscal 2016 capital expenditures of $3.1 million. Year-end cash was predominantly held by foreign subsidiaries: $16.4 million abroad and $0.2 million in the U.S.; restricted cash of $2.3 million was reported separately. Most debt was current: $14.0 million of the $15.5 million total.
At January 31, 2016, the domestic revolving facility had $5.2 million drawn and $8.3 million available. Foreign facilities had $8.1 million drawn and $28.7 million available, with an additional $7.0 million of availability used for letters of credit. The company reported covenant compliance at year-end. It reduced the domestic facility’s borrowing limit from $25 million to $15 million on February 29, 2016.
Changes, outlook, risks, and unusual items
- Results versus prior year: Piping Systems operating income fell 17.3%; joint-venture income declined to $0.6 million from $2.0 million. Cash from operations turned negative. Backlog increased about 56% year over year, but orders may be canceled or delayed.
- Management actions and outlook: Corporate staff reorganization and expense reductions were expected to generate approximately $1.2 million of annualized savings. The filing provides no revenue or earnings guidance.
- Market and execution risks: Management cited sustained low oil and gas prices, delayed or canceled Middle East infrastructure projects, customer access to capital, large-project variability, international political and currency risks, and potentially slow collections. Two customers represented 46.4% of year-end receivables; as of April 1, 2016, those customers had paid 40.4% of those balances.
- Tax and accounting items: The effective tax rate on continuing operations was 45.7%, versus 41.9%, with a full valuation allowance against domestic deferred tax assets and tax effects from foreign earnings and dispositions. Prior-period financial statements were revised for immaterial inventory errors; the cumulative adjustment through January 31, 2015 was approximately $0.9 million.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving review of certain calculations and estimates, including an acquisition-related Form 8-K filing calculation and excess/obsolete inventory reserves. Management said the weaknesses did not cause material adjustments to the financial statements and described remediation steps, but had not yet fully remediated them.
- Audit and legal: The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness. The company reported no material pending litigation.
Key facts for investors to verify
- Completion, final proceeds, escrow release, and any remaining obligations from the filtration divestitures, including the planned Virginia business and property sales.
- Whether the estimated $1.2 million annual savings are achieved, and how the BPPC acquisition affects results, debt, and cash needs.
- Progress in remediating the material weaknesses and timeliness and accuracy of future SEC filings and inventory-reserve estimates.
- Collection of concentrated receivables, conversion of the higher backlog into revenue and cash, and liquidity available after letters of credit and facility changes.
- Exposure to continued weakness in oil and gas markets and Middle East project delays, as well as the location and accessibility of cash held outside the U.S.