Business context and reporting period
This unaudited Form 10-Q is for MFRI, Inc. and subsidiaries, for the fiscal quarter and six months ended July 31, 2014. The filing identifies the registrant as MFRI, Inc.; it does not identify the registrant as Perma-Pipe International Holdings, Inc. The company reported Piping Systems and Filtration Products segments.
Financial performance
| Metric | Three months ended July 31, 2014 | Comparable 2013 period | Six months ended July 31, 2014 | Comparable 2013 period |
|---|---|---|---|---|
| Net sales | $53.4 million | $60.8 million | $112.9 million | $115.5 million |
| Gross profit | $10.5 million | $13.4 million | $26.5 million | $26.2 million |
| Income from operations | $1.8 million | $4.8 million | $7.5 million | $7.3 million |
| Income from continuing operations | $1.5 million | $4.5 million | $5.7 million | $6.2 million |
| Net income | $1.4 million | $4.4 million | $5.2 million | $15.5 million |
| Diluted EPS | $0.18 | $0.62 | $0.71 | $2.22 |
Quarterly gross margin was approximately 19.8%, versus 22.1% a year earlier; six-month gross margin was approximately 23.5%, versus 22.6%. Operating margin was approximately 3.4% for the quarter and 6.6% year to date, compared with 7.8% and 6.3%, respectively. These percentages are calculated from reported figures.
Material changes and management commentary
- Second-quarter sales fell 12%, chiefly because Piping Systems sales declined 22% as activity weakened in Saudi Arabia and the UAE. Domestic oil and gas projects partly offset the decline. Filtration Products sales rose 13% on a large domestic OEM order.
- Quarterly profit fell as lower Piping Systems volume and margin, along with weaker Filtration Products margin, outweighed relatively steady operating expenses. Year-to-date operating income improved modestly; management cited stronger gross margin, profitable Canadian joint-venture results, and lower interest expense.
- Year-to-date net income was far below 2013 largely because the prior-year period included a gain from the sale of Thermal Care assets. The 2014 six-month discontinued-operations loss was $0.5 million, including tax expense related to the sale of the remaining Denmark business.
- Management said it is expanding Filtration Products’ geographic coverage and pursuing expense controls and manufacturing-cost reductions. The filing provides no earnings or revenue guidance.
Cash flow, liquidity, and debt
Cash and cash equivalents were $15.0 million at July 31, 2014, up from $13.4 million at January 31; $14.7 million was held at foreign subsidiaries. Working capital was $61.4 million, versus $47.6 million at fiscal year-end. Operating cash flow was negative $2.8 million for the six months, improving from negative $12.3 million in the prior-year period. Investing cash outflow was $2.4 million, including $2.4 million of capital expenditures; financing provided $6.6 million.
Total debt was $36.9 million, up $5.1 million since January 31. The company reported a debt-to-equity ratio of 0.45. Its domestic revolving facility matures November 30, 2016; $15.7 million was drawn and $7.0 million remained available, with additional availability used for letters of credit. Foreign facilities had $3.2 million drawn and $29.5 million unused. The company said it was in compliance with applicable debt covenants. The domestic facility restricts dividends and certain debt, liens, and investments, and requires specified profitability and cash-flow levels.
Risks, contingencies, and unusual items
- Piping Systems revenue is based on large discrete projects and can fluctuate materially by geography and reporting period. The filing cites lower Saudi Arabian and UAE volumes.
- One Piping Systems customer represented 14% of six-month sales and 28% of accounts receivable at July 31, 2014, creating customer concentration exposure.
- Most cash was held outside the United States; management said it did not expect to repatriate foreign subsidiary investments. Domestic operations rely on draws under the revolving credit line.
- Tax expense is affected by earnings mix across jurisdictions and a full valuation allowance against domestic deferred tax assets. Management’s tax estimates and deferred-tax-asset recoverability involve uncertainty. The IRS completed audits of fiscal 2012 and 2013 without changes to reported tax.
- Management warned that forward-looking results are subject to risks described in the company’s latest Form 10-K. No specific new contingency amount is provided in this filing.
Key facts for investors to verify
- Confirm the issuer’s identity and relationship, if any, to Perma-Pipe International Holdings, Inc.; this filing names MFRI, Inc.
- Track Piping Systems project volumes in Saudi Arabia and the UAE, and the contribution of domestic oil and gas projects.
- Assess the large OEM order’s contribution to Filtration Products sales and margins, alongside segment expense growth.
- Monitor operating cash generation, foreign-held cash, debt balances, and borrowing-base availability under the domestic facility.
- Separate continuing-operations performance from prior-year discontinued-operation sale gains when comparing earnings.