Business context and reporting period
This Form 10-Q is for MFRI, Inc. and subsidiaries, for the quarter and nine months ended October 31, 2013 (fiscal year ending January 31). The filing identifies the registrant as MFRI, Inc., not Perma-Pipe International Holdings, Inc.; investors should verify the issuer identity and any subsequent name change.
The continuing businesses are Piping Systems, which makes specialty piping and leak-detection systems, and Filtration Products, which makes industrial filtration products. Industrial process cooling ceased to be a reportable segment, and businesses designated for sale are presented as discontinued operations.
Financial highlights
| Metric | Three months ended October 31, 2013 | Nine months ended October 31, 2013 |
|---|---|---|
| Revenue | $58.0 million, up 23% year over year | $173.5 million, up 31% |
| Gross profit | $16.9 million, versus $8.7 million | $43.0 million, versus $22.6 million |
| Operating income (loss) | $6.4 million, versus $0.2 million | $14.1 million, versus a $2.8 million loss |
| Net income (loss) | $7.4 million, versus $0.5 million | $22.9 million, versus a $3.0 million loss |
| Diluted earnings (loss) per share | $1.03, versus $0.07 | $3.25, versus a $0.43 loss |
Continuing-operations income was $6.8 million for the quarter and $13.4 million year to date. Discontinued operations contributed $0.6 million and $9.5 million, respectively, to net income; the nine-month discontinued-operations result included an $11.7 million pretax disposal gain. Thus, total net income substantially reflects asset-sale proceeds and gains as well as operating performance.
Quarterly gross margin was approximately 29% (16.9/58.0), compared with approximately 18% a year earlier. Nine-month gross margin was approximately 25%, compared with approximately 17%. Piping Systems reported nine-month gross margin of 29%, up from 21%; Filtration Products reported 14.1%, up from 13.2%.
Cash, debt and liquidity
- Cash and cash equivalents were $10.5 million at October 31, 2013, versus $7.0 million at January 31; restricted cash was an additional $2.4 million. Working capital was approximately $54 million, versus $35 million.
- Operating cash flow was negative $10.2 million for the nine months, compared with negative $1.6 million a year earlier. The principal cash use included a $24.0 million increase in accounts receivable, attributed largely to higher Saudi Arabian Piping Systems sales.
- Investing activities provided $13.4 million, including $15.3 million of net proceeds from discontinued-operation sales. Financing activities used $0.3 million. Cash increased $3.5 million over the period.
- Total debt was $40.9 million, down $1.1 million from fiscal year-end. The amended $25 million revolving facility matures November 30, 2016; approximately $8.7 million was available, with $0.3 million of availability supporting letters of credit. Foreign facilities had $9.0 million borrowed and $17.4 million unused.
- The company reported compliance with its debt covenants. The domestic facility restricts dividends and certain debt, liens and investments, and requires specified profitability and cash-flow levels. Domestic receipts are deposited in a restricted account used to pay facility debt.
Material changes and management commentary
- Piping Systems drove growth: quarterly sales increased 60% to $42.3 million and nine-month sales increased 76% to $121.8 million. Management cited major Saudi Arabian and UAE projects, including Mecca’s Grand Mosque expansion and the King Abdul-Aziz International Airport project, as well as domestic oil-and-gas activity. Project timing can cause substantial period-to-period revenue swings.
- Filtration Products sales declined 24% for the quarter and 18% year to date, primarily because of weaker domestic demand for fabric filter bags and a market shift toward cartridge filters. The company reduced staffing and manufacturing costs and continued margin and expense-control efforts.
- Management expected fourth-quarter revenue to be lower than third-quarter revenue, as orders were expected to be filled at a more moderate pace after unusually fast recent quarters.
- MFRI sold most domestic Thermal Care assets in April 2013 for $15 million cash plus $1.1 million held in escrow until May 1, 2014, and sold substantially all HVAC assets in June. In October it decided to sell its remaining industrial process business. These activities are reported as discontinued operations.
- Incentive compensation increased with improved results. Filtration Products’ year-to-date operating expenses also included a one-time pension expense related to freezing its defined-benefit plan.
Taxes, risks and controls
The nine-month effective tax rate from continuing operations was negative 0.7%, affected by a $0.7 million release of the valuation allowance on Saudi Arabian deferred tax assets and domestic intra-period tax allocation. Management said it remained in a net operating loss carryforward position. The IRS began auditing fiscal 2012 in the third quarter; certain older federal and state years are also subject to adjustment up to available research tax credits. Tax estimates depend on jurisdictional income, deferred-tax-asset recoverability and future profitability.
Management cautioned that actual results may differ from forward-looking statements because of business and market risks. It highlighted the variability of large Piping Systems projects and weaker demand and product-mix pressures in Filtration Products. The company stated that disclosure controls were effective as of October 31, 2013, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing’s issuer identity: the document names MFRI, Inc., while the request names Perma-Pipe International Holdings, Inc.
- Separate continuing operating results from discontinued-operation income and the $11.7 million pretax disposal gain when assessing earnings quality.
- Track collections and working-capital needs, particularly the sharp receivables increase and negative operating cash flow.
- Monitor the expected fourth-quarter revenue moderation, project concentration and execution in the Middle East, and ongoing Filtration Products demand and restructuring.
- Review debt availability, covenant requirements, restricted cash, and the timing and terms of the escrowed sale payment.