Perma-Pipe International Holdings, Inc. (identified in this filing as MFRI, Inc.) — Q1 FY2014 Summary
Reporting period: Three months ended April 30, 2013; comparative period ended April 30, 2012. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. The filing reports the issuer as MFRI, Inc.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $57.744 | $44.499 |
| Gross profit / gross margin | $13.132 / 22.7% | $6.832 / 15.4% |
| Operating income (loss) | $2.805 | $(2.297) |
| Continuing-operations income (loss), after tax | $1.962 | $(2.597) |
| Income from discontinued operations, net of tax | $9.119 | $0.541 |
| Net income (loss) | $11.081 | $(2.056) |
| Operating cash flow | $(12.938) | $(5.438) |
| Cash and cash equivalents, period end | $10.983 | $7.035 at Jan. 31, 2013 |
| Total debt, period end | $43.628 | $42.022 at Jan. 31, 2013 |
Operating expenses were $10.327 million, or 17.9% of sales, versus $9.129 million, or 20.5%, a year earlier. Net interest expense was $0.490 million versus $0.371 million. The filing does not provide a clear consolidated net-profit margin or free-cash-flow figure.
At April 30, working capital was approximately $40 million, compared with $35 million at January 31. Current assets were $101.679 million and current liabilities $61.532 million. The company had $1.517 million of restricted cash, including $0.8 million described as restricted under the domestic loan arrangement. Cash was primarily held at foreign subsidiaries; $3 million was held in the U.S.
Material changes and operating performance
- Sales rose 30% year over year. Piping Systems sales increased to $36.058 million from $19.744 million, chiefly due to Saudi Arabian activity and projects. Filtration Products sales fell to $18.633 million from $22.976 million, primarily reflecting weaker fabric-filter demand. Corporate and Other sales were $3.053 million versus $1.779 million.
- Piping Systems gross profit was $10.444 million versus $3.398 million; segment operating income was $5.380 million versus $0.155 million. Management cited higher production volumes at Saudi Arabian and UAE facilities. Segment results can fluctuate with project timing.
- Filtration Products gross profit declined to $2.275 million from $3.112 million, and the segment recorded an operating loss of $0.483 million versus operating income of $0.196 million. Management cited reduced demand and competitive conditions; workforce reductions and increased marketing were underway.
- Net income was substantially affected by the Thermal Care asset sale: the company recorded an $11.401 million pre-tax disposal gain. Discontinued-operations income was $9.119 million after $2.356 million of tax expense. Thermal Care contributed $7.449 million in sales in the quarter, compared with $8.229 million in the prior-year quarter.
Cash flow, debt, outlook, and risks
Operating cash use increased to $12.938 million, principally alongside a $14.534 million increase in receivables; Saudi Arabian receivables rose $11.4 million. Investing activities provided $14.558 million, including $14.998 million in net sale proceeds. Financing activities provided $3.245 million, with $40.813 million of borrowings and $38.877 million of repayments. The company said sale proceeds paid down part of its debt.
The April 30 sale of most domestic Thermal Care assets to an IPEG subsidiary generated $15 million in cash plus $1.1 million held in escrow until May 1, 2014. The buyer signed a three-year lease for the facilities. Effective May 1, 2013, industrial process cooling was no longer a reportable segment.
The secured revolving loan agreement matures November 30, 2016 and permits borrowing up to $38 million, subject to borrowing-base and other requirements. The company reported $9 million drawn and $10 million available under that facility, with a further $0.2 million of availability used primarily for letters of credit. It also reported $4.9 million drawn on UAE revolving lines at 6% and a Saudi Arabian Islamic credit line of $2.7 million at SIBOR plus 3.5%. The company was in compliance with loan covenants at quarter-end. The loan agreement restricts dividends and certain debt, liens and investments, and requires specified profitability and cash-flow levels.
Management provided no numerical forward guidance. It identified continued uncertainty about U.S. environmental regulations as a factor affecting filtration demand; piping revenue is subject to significant project and geographic timing swings. Forward-looking statements are subject to risks described in the company’s latest annual report. The company’s continuing-operations effective tax rate was 2.9%, affected by the mix of projected tax-free UAE earnings; management noted that it remained in a net-operating-loss carryforward position. Subsequent to quarter-end, the company decided to freeze pension benefit accruals for Winchester filtration hourly employees effective June 30, 2013, which it said would not materially affect the financial statements.
Disclosure controls were concluded effective as of April 30, 2013; the filing reported no material change in internal control over financial reporting during the quarter.
Key investor verification points
- Confirm the Thermal Care transaction’s final proceeds, escrow release conditions and any post-sale obligations; the $1.1 million escrow was not yet released at quarter-end.
- Assess receivables collection and working-capital needs, especially the sharp increase in Saudi Arabian receivables and the higher quarterly operating cash outflow.
- Verify borrowing-base availability, restricted cash access, debt maturities, interest exposure and continued compliance with loan covenants.
- Track Saudi and UAE project execution and the sustainability of higher Piping Systems volume and margins, alongside the timing-sensitive project pipeline.
- Monitor filtration demand, competitive pricing, workforce actions and the effects of regulatory uncertainty on fabric-filter orders.
- Review tax valuation allowances, NOL utilization and the tax treatment of the disposal gain; the filing notes that tax estimates depend on jurisdictional earnings mix and other judgments.