Perma-Pipe International Holdings, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 31, 2017 (the filing’s “2016”); comparisons are to the year ended January 31, 2016. The company now reports one segment, Piping Systems, following the sale of its Filtration businesses. The company name changed from MFRI, Inc. effective March 20, 2017, and its Nasdaq ticker changed to PPIH on March 21, 2017.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $98.8 million | $122.7 million |
| Gross profit | $11.7 million | $26.7 million |
| Operating loss | $10.8 million | Operating income of $2.9 million |
| Loss from continuing operations | $12.4 million | Income of $1.6 million |
| Net loss | $11.7 million; $1.56 per share | $4.4 million; $0.61 per share |
| Cash used in operating activities | $4.2 million | $2.9 million |
| Cash and cash equivalents at year-end | $7.6 million | $16.6 million |
| Working capital at year-end | $27.8 million | $31.8 million |
| Total debt at year-end | $11.9 million | $15.5 million |
- Sales declined 19.4%. Gross margin fell to approximately 11.8% from 21.8%, reflecting lower volumes, reduced manufacturing-cost absorption and pricing pressure, particularly in the Middle East.
- Cash provided by investing activities was $10.2 million, mainly reflecting proceeds from filtration-business and property sales, partly offset by $4.7 million of net cash used to acquire the remaining interest in Perma-Pipe Canada. Cash used in financing was $14.9 million.
- Cash included $7.4 million held in foreign subsidiaries and $0.2 million in the U.S. Restricted cash was an additional $1.1 million.
- The North American revolving facility had $3.8 million drawn and $5.8 million available; foreign credit arrangements had $0.3 million drawn and $20.8 million available, with additional availability supporting letters of credit. The company reported compliance with applicable covenants.
Material changes and notable items
- Demand weakened amid low oil and gas prices, restrained U.S. public infrastructure spending and delays to Gulf Cooperation Council infrastructure projects. International operations generated about 55.1% of FY2016 revenue, compared with 48.4% in FY2015.
- The company acquired the remaining 51% of Perma-Pipe Canada on February 4, 2016, becoming its sole owner. The acquisition generated $2.3 million of goodwill and a one-time, non-cash $1.6 million loss on remeasurement of the previously held interest.
- Filtration businesses were sold in January 2016; remaining filtration facilities were sold during FY2016. Discontinued operations produced $0.7 million of income after tax, versus a $6.0 million loss in FY2015. This limits direct comparison of the reported business mix across years.
- Corporate staff and senior leadership were reorganized. Management estimated approximately $1.2 million in annualized savings from the organizational changes; executive hiring and separation costs included $1.1 million in the fourth quarter. General and administrative expense also included a $0.8 million legal settlement.
- Backlog was $44.6 million at January 31, 2017, down from $47.9 million a year earlier. Orders may be canceled or modified.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management stated it believed cash, operating cash flow and available revolving capacity would fund anticipated operations, working capital and capital spending for at least the next 12 months. Estimated FY2017 capital expenditures were approximately $3.5 million.
- Management identified project timing and demand variability, persistent low commodity prices, customer capital-spending decisions, foreign-market and currency exposure, and delayed international collections as significant risks. A more concentrated, piping-only business may be more exposed to these market factors.
- Domestic complex contracts use percentage-of-completion accounting. Changes in estimated costs or project performance can cause revisions to previously recognized revenue and profit.
- Two customers represented 33.2% of year-end receivables; by April 1, 2017, those customers had paid 35.4% of the amounts outstanding at year-end. This warrants attention to subsequent collections and credit exposure.
- The company reported no material pending litigation. Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The independent auditor gave an unqualified opinion on the financial statements.
- A February 2017 consortium bid for the East Africa Crude Oil Pipeline was a potential opportunity, not a contracted award; the filing states there is no assurance the company will win or on what terms.
Key facts for investors to verify
- Whether sales, margins and backlog stabilize or recover, and the extent to which project delays and oil-and-gas market conditions continue to affect demand.
- Cash conversion, working-capital needs and collections from the concentrated year-end receivables, including the status of amounts unpaid as of April 1, 2017.
- Availability and renewal terms of credit facilities, covenant headroom, and the effect of debt maturities and foreign-fund restrictions on liquidity.
- Realization of the estimated $1.2 million annualized savings and the operating performance of the acquired Canadian business.
- Subsequent developments on the East Africa pipeline bid and other prospective projects; the filing provides no award or quantified revenue outlook.