Company Quick10K Filing
Quick10K
Perma-Pipe
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$8.95 8 $71
10-K 2019-01-31 Annual: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-Q 2018-07-31 Quarter: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-K 2018-01-31 Annual: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-Q 2017-07-31 Quarter: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-K 2017-01-31 Annual: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-31 Annual: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-07-31 Quarter: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-Q 2014-07-31 Quarter: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-K 2014-01-31 Annual: 2014-01-31
8-K 2019-05-06 Amend Bylaw, Exhibits
8-K 2019-04-16 Earnings, Exhibits
8-K 2019-01-08 Officers, Other Events, Exhibits
8-K 2018-12-11 Earnings, Exhibits
8-K 2018-09-28 Officers, Other Events, Exhibits
8-K 2018-09-20 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-09-11 Earnings, Exhibits
8-K 2018-06-12 Earnings, Exhibits
8-K 2018-06-06 Shareholder Vote
8-K 2018-02-21 Amend Bylaw, Exhibits
MDLZ Mondelez 73,970
TTWO Take Two Interactive Software 11,560
SBSI Southside Bancshares 1,180
GURE Gulf Resources 59
ARPO Aerpio Pharmaceuticals 42
AMS American Shared Hospital Services 16
WWR Westwater Resources 7
MULTI Multi Solutions II 0
GAHC Global Arena Holding 0
EVGI Evergreen 0
PPIH 2019-01-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments - None.
Item 2. Properties
Item 3. Legal Proceedings - As of January 31, 2019, The Company Had No Material Pending Litigation.
Item 4. Mine Safety Disclosures - Not Applicable.
Part II
Item 5. Market for Registrant'S Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data - Not Applicable.
Item 7. Management'S Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable.
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None.
Item 9A. Controls and Procedures
Item 9B. Other Information - None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Note 1 - Business Information
Note 2 - Significant Accounting Policies
Note 4 - Retention
Note 5 - Revenue Recognition
Note 6 - Debt
Note 7 - Lease Information
Note 8 - Income Taxes
Note 9 - Retirement Plans
Note 10 - Stock-Based Compensation
Note 11 - Stock Rights
Note 12 - Interest Expense, Net
Item 16. Form 10-K Summary - None.
EX-21 ex_131655.htm
EX-23 ex_131656.htm
EX-24 ex_131657.htm
EX-31.1 ex_131658.htm
EX-31.2 ex_131659.htm
EX-32 ex_131660.htm

Perma-Pipe Earnings 2019-01-31

PPIH 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 ppih20190131_10k.htm FORM 10-K ppih20190131_10k.htm
 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2019

Commission File No. 0-18370

Perma-Pipe International Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

36-3922969

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

6410 W. Howard Street, Niles, Illinois

60714

(Address of principal executive offices)

(Zip Code)

(847) 966-1000  

 

 

 

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

Common Stock, $.01 par value per share

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.         Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.         Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐  No ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant (the exclusion of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant) was $68,544,111.75 based on the closing sale price of $9.05 per share as reported on the NASDAQ Global Market on July 31, 2018.

The number of shares of the registrant's common stock outstanding at April 10, 2019 was 7,883,522.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant's definitive proxy statement for its 2019 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after January 31, 2019, are incorporated by reference in Part III of this Form 10-K.

 

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-K

 

For the fiscal year ended January 31, 2019

TABLE OF CONTENTS

Item

Page

Part I

 

1.

Business

2

 

Products and Services

2

 

Employees

3

 

Executive Officers of the Registrant

4

1A.

Risk Factors

5

1B.

Unresolved Staff Comments

10

2.

Properties

10

3.

Legal Proceedings

10

4.

Mine Safety Disclosures

10

 

 

 

Part II

 

5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11

6.

Selected Financial Data

12

7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

12

7A.

Quantitative and Qualitative Disclosures About Market Risk

18

8.

Financial Statements and Supplementary Data

18

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

18

9A.

Controls and Procedures

19

9B.

Other Information

20

 

 

 

Part III

 

10.

Directors, Executive Officers and Corporate Governance

20

11.

Executive Compensation

20

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

20

13.

Certain Relationships and Related Transactions, and Director Independence

20

14.

Principal Accounting Fees and Services

21

 

 

 

Part IV

 

15.

Exhibits and Financial Statement Schedules

21

 

Report of Independent Registered Public Accounting Firm

22

16. Form 10-K Summary 54

 

Signatures

55

 

 

 

PART I

 

Cautionary Statements Regarding Forward Looking Information

 

Certain statements contained in this Annual Report on Form 10-K, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely," and "probable," or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 as amended ("Exchange Act") and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, the following:

 

 

the Company’s ability to effectively execute its strategic plan and achieve profitability and positive cash flows;

 

the impact of global economic weakness and volatility;

 

fluctuations in steel prices and the Company’s ability to offset increases in steel prices through price increases in its products;

 

the timing of orders for the Company’s products;

 

decreases in United States government spending on projects using the Company’s products, and challenges to the Company’s non-government customers’ liquidity and access to capital funds;

 

the Company’s ability to successfully negotiate progress-billing arrangements for its large contracts;

 

fluctuations in crude oil and natural gas prices;

 

risks and uncertainties related to the Company’s international business operations;

 

the Company’s ability to repay its debt and renew expiring international credit facilities;

 

aggressive pricing by existing competitors and the entrance of new competitors in the markets in which the Company operates;

 

the Company’s ability to purchase raw materials at favorable prices and to maintain beneficial relationships with its suppliers;

 

the Company’s ability to manufacture products free of latent defects and to recover from suppliers who may provide defective materials to the Company;

 

reductions or cancellations of orders included in the Company’s backlog;

 

the Company’s ability to attract and retain senior management and key personnel;

 

the Company’s ability to achieve the expected benefits of its growth initiatives;

  the Company's ability to interpret changes in tax regulations and legislation; 
 

reversals of previously recorded revenue and profits resulting from inaccurate estimates made in connection with the Company’s percentage-of-completion revenue recognition;

 

the Company’s failure to establish and maintain effective internal control over financial reporting; and

 

the impact of cybersecurity threats on the Company’s information technology systems.

 

 

Item 1. BUSINESS

 

Perma-Pipe International Holdings, Inc., collectively with its subsidiaries ("PPIH", "Company" or "Registrant"), is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company was incorporated in Delaware on October 12, 1993. The Company's common stock is reported under ticker symbol "PPIH". The Company's fiscal year ends on January 31. Years and balances described as 2018 and 2017 are for the fiscal years ended January 31, 2019 and 2018, respectively.

 

Products and services. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling ("DHC") piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.

 

The Company frequently engineers and custom fabricates to job site dimensions and incorporates provisions for thermal expansion due to cycling temperatures. This custom fabrication helps to minimize the amount of field labor required by the installation contractor. Most of the Company's piping systems are produced for underground installations and, therefore, require trenching, which is the responsibility of the general contractor, and completed by unaffiliated installation contractors.

 

The Company’s piping systems are typically sold as a part of large discrete projects, and both the domestic and Canadian customer demand varies by season. See "Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")."

 

Operating Facilities: The Company operates its business from the following locations:

 

Perma-Pipe, Inc.

Perma-Pipe Middle East FZC

Niles, IL

Fujairah, United Arab Emirates

New Iberia, LA

Perma-Pipe Saudi Arabia, LLC

Lebanon, TN

Dammam, Kingdom of Saudi Arabia

Perma-Pipe Canada, Ltd.

Perma-Pipe India Pvt. Ltd

Camrose, Alberta, Canada

Gandhidham, India

 

Customers and sales channels. The Company's customer base is industrially and geographically diverse. In the United States, the Company employs inside and outside sales managers who use and assist a network of independent manufacturers' representatives, none of whom sell products that are competitive with the Company's piping systems. The Company employs a direct sales force in Canada and in several countries in the Middle East to market and sell products and services. On a country by country basis, and where advantageous, an agent network is often used to assist in marketing and selling the Company's products and services.

 

On January 31, 2019 and January 31, 2018, no one customer accounted for more than 10% of the Company's net sales.

 

Three customers accounted for 42.0% and 34.9% of accounts receivable on January 31, 2019 and 2018, respectively.

 

Backlog. The Company’s backlog on January 31, 2019 was $61.0 million compared to $46.7 million on January 31, 2018, most of which is expected to be completed within the next 12 months. The Company defines backlog as the revenue value resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. If a customer cancels an order, the customer is normally responsible for all finished goods produced or shipped, all direct and indirect costs incurred and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenue.

 

Intellectual property. The Company owns patents covering its piping and electronic leak detection systems. The patents are not material to the Company either individually or in the aggregate because the Company believes its sales would not be materially reduced if patent protection were not available. The Company owns numerous trademarks connected with its piping and leak detection systems including the following U.S. trademarks: Perma-Pipe®, Chil-Gard®, Double Quik®, Escon-A®, FluidWatch®, Galva-Gard®, Polytherm®, Pal-AT®, LiquidWatch®, PalCom®, Xtru-therm®, Auto-Therm®, Multi-Therm®, Ultra-Therm®, Cryo-Gard®, Sleeve-Gard®, Electro-Gard® and Sulphur-Therm®. The Company also owns a number of trademarks throughout the world. Some of the Company's more significant trademarks include: Auto-Therm®, Cryo-Gard®, Electro-Gard®, Sleeve-Gard®, Permalert®, Pal-AT®, Perma-Pipe®, Polytherm®, Sulphur-Therm®, Ric-Wil®, and Xtru-therm®. 

 

 

Suppliers. The basic raw materials used in production are pipes and tubes made of carbon steel, steel alloys, copper, ductile iron, or polymers and various chemicals such as polyols, isocyanate, urethane resin, polyethylene and fiberglass, mostly purchased in bulk quantities. The Company believes there are currently adequate supplies and sources of availability of these needed raw materials. Steel prices began to rise in early 2018 and are expected to continue to rise in 2019. The Company expects normal seasonal price movement during 2019 with steel prices higher than average when compared to 2018. The Company has been updating its quoting system for the movements in steel prices and expects to recover these price differentials through price increases in its products.

 

The sensor cables used in the Company's leak detection and location systems are manufactured to the Company's specifications by companies regularly engaged in manufacturing such cables. The Company owns patents for some of the features of its sensor cables. The Company assembles the monitoring component of its leak detection and location systems from components purchased from many sources.

 

Competition. The piping systems market is highly competitive. The Company believes its principal competition consists of over 20 major competitors and more small competitors. The Company believes that quality, service, engineering design capabilities and support, a comprehensive product line, timely execution, plant location and price are key competitive factors. The Company also believes it has a more comprehensive product line than any competitor. 

 

Research and Development. The Company maintains a standalone research and development function and primarily focuses on activities and development to meet product specifications mandated by its customers and the industry.  

 

Government regulation. The demand for the Company's leak detection and location systems and secondary containment piping systems, which is a small percentage of the Company's total annual piping sales, is driven by federal and state environmental regulation with respect to hazardous waste. The U.S. Federal Resource Conservation and Recovery Act requires, in some cases, that the storage, handling and transportation of fluids through underground pipelines feature secondary containment and leak detection. The U.S. National Emission Standard for hydrocarbon airborne particulates requires reduction of airborne volatile organic compounds and fugitive emissions. Under this regulation, many major refineries are required to recover fugitive vapors and dispose of the recovered material in a process sewer system, which then becomes a hazardous secondary waste system that must be contained. Although there can be no assurances as to the ultimate effects of these governmental regulations, the Company believes such regulations may increase the demand for its piping systems products.

 

In the United States and Canada, federal government regulations require that all buried pipelines that cross state or provincial boundaries or the United States-Canada border, have an anti-corrosion coating system applied. The Company believes that this regulation has a positive effect on demand for its products due to the Company's unique expertise with respect to anti-corrosion coating.

 

Employees

 

As of January 31, 2019, the Company had approximately 193 employees working in the United States, of which approximately 74 were under two collective bargaining agreements, one expiring on March 31, 2022, and the other on April 30, 2020. There were approximately 508 employees working at the Company's international locations. The Company considers its relationship with its employees to be good.

 

 

Available Information

 

The Company files with and furnishes to the Securities and Exchange Commission ("SEC"), reports including annual meeting materials, Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments thereto. The Company maintains a website, www.permapipe.com, where these reports and related materials are available free of charge as soon as reasonably practicable after the Company electronically delivers such material to the SEC. The information on the Company's website is not part of this Annual Report on Form 10-K and is not incorporated into this or any other filings by the Company with the SEC.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The following table sets forth information regarding the executive officers of the Company as of April 1, 2019:

 

   

Executive officer of the

Name

Offices and Positions; Age

Company since

David J. Mansfield

Director, President and Chief Executive Officer; Age 58

2016

     

D. Bryan Norwood

Vice President and Chief Financial Officer; Age 63

2018

     

Wayne Bosch

Vice President, Chief Human Resources Officer; Age 62

2013

 

David J. Mansfield: President and Chief Executive Officer ("CEO") since November 2016. From 2015 to 2016, Mr. Mansfield served as Chief Financial Officer ("CFO") of Compressor Engineering Corp. & CECO Pipeline Services Co., which provides products and services to the gas transmission, midstream, gas processing, and petrochemical industries. In this position, he had overall responsibility for the group’s financial affairs, including the development and execution of turnaround plans and the successful negotiation of a corporate refinancing. From 2009 to 2014, Mr. Mansfield served as CFO and as Acting CEO of Pipestream, Inc., a venture capital-owned technology development company providing a suite of products to the oil and gas pipeline industry. From 1992 to 2009, Mr. Mansfield was employed with Bredero Shaw, the world’s largest provider of protective coatings for the oil and gas pipeline industry, most recently as Vice President Strategic Planning. During his tenure with Bredero Shaw, Mr. Mansfield served in numerous roles including Vice President Controller and Commercial General Manager, Europe, Africa & FSU, and played a key role in strategy development and merger and acquisition activities as the company grew from annual revenues of $100 million to over $900 million.

 

 

D. Bryan Norwood: Appointed Vice President and Chief Financial Officer in November 2018. From 2014 to 2018 Mr. Norwood served as CFO of API Perforating, LLC an oilfield service company providing stage perforation and wireline services.  From 2012 to 2014, Mr. Norwood served as CFO of Dupre’ Energy Services, LLC an oilfield service company offering multiple services lines.  From 2010 to 2012, Mr. Norwood was Vice President Finance for the Environmental Services Division of PSC, LLC a hazardous waste disposal company.  From 1992 to 2010, Mr. Norwood has held several senior leadership positions including CFO of Smith Equipment Rental and Services, LLC., a regional oilfield service provider, Vice President and Treasurer of Key Energy Services, Inc., an oilfield multi-service provider, and Corporate Controller and Vice President Finance-Americas with Bredero Shaw, a global pipe coating provider.

 

Wayne Bosch: Appointed Vice President and Chief Human Resources Officer in December 2013. From 2010 to 2012, Mr. Bosch was Vice President of Human Resources at Pactiv, a $4.0 billion global manufacturer and distributor of food packaging products. Prior to Pactiv, he led the human resource activities at the North American segment of Barilla America, a $6.3 billion global pasta, sauces and bakery manufacturer and was the Chief Human Resources Officer for water filtration leader Culligan International. Mr. Bosch's background spans the entire spectrum of human resources competencies, including mergers and acquisition and business integration, in start-up, turnaround and high-growth businesses. His scope also includes communications, legal, occupational health services, health safety environment, risk management, payroll, facilities and general administrative services.

 

Item 1A. RISK FACTORS

 

The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.

 

The Company has incurred net losses for its past two fiscal years and it may be unable to achieve profitability or positive cash flows in the future. The Company has experienced net losses for the past two fiscal years. Generating net income and positive cash flows in the future will depend on its ability to successfully complete and execute its strategic plan. There is no guarantee that the Company will be able to achieve profitability or positive cash flows in the future.The Company’s inability to successfully achieve profitability and positive cash flows may result in it experiencing a serious liquidity deficiency resulting in material adverse consequences that could threaten its viability.

 

Global economic weakness and volatility may adversely affect operating margins for the Company’s services and products. If the global economy experiences a severe and prolonged downturn, it could adversely impact the Company's business, directly or indirectly. Downturns in such general economic conditions can significantly affect the business of the Company's customers, which in turn affects demand, volume, pricing, and operating margins for the Company's services and products. A downturn in one or more of the Company's significant markets could have a material adverse effect on the Company's business, results of operations or financial condition. Because economic and market conditions vary within the Company's geographic regions, the Company's performance will also vary. In addition, the Company is exposed to fluctuations in currency exchange rates and commodity prices, including rising steel prices and surcharges.

 

Fluctuations in the availability of, and price of steel, may affect the Company's results of operations. The steel industry is highly cyclical in nature, and at times, pricing can be highly volatile due to a number of factors beyond the Company's control, including general economic conditions, import duties, other trade restrictions and currency exchange rates. This volatility may negatively impact market conditions thus reducing project activity.

 

Through a series of Presidential Proclamations pursuant to Section 232 of the Trade Expansion Act of 1962, as of the date of this filing, U.S. imports of certain steel products are subject to a 25 percent tariff (exceptions are Australia, Argentina, Brazil and South Korea), with retaliatory tariffs imposed by importing countries. The Company expects these actions to increase steel costs and decrease supply availability. We routinely insulate steel pipe for our Canadian customers, and these tariffs may lead to project delays or cancellations while they are in place.

 

 

The Company regularly updates its quoting system for the movements in steel prices, and intends to recover these price differentials through price increases in the Company's products, however, the Company may not always be successful. Any increase in steel prices that is not offset by an increase in the Company's prices could have an adverse effect on the Company's business, financial position, results of operations or cash flows. In addition, if the Company is unable to acquire timely steel supplies, it may need to decline bid and order opportunities, which could also have an adverse effect on the Company's business, financial position, results of operations or cash flows.

 

Delays in the timing of orders for the Company’s products may negatively impact the Company’s operating results. Since the Company's revenues are based on discrete projects, the Company's operating results in any reporting period could be negatively impacted as a result of large variations in the level of overall market demand or delays in the timing of project execution phases.

 

Decreases in government spending on projects using the Company’s products, and challenges to the Company’s non-government customers’ liquidity and availability of capital funds may adversely impact demand for the Company’s products. Uncertainty about economic market conditions poses risks that the Company's customers may postpone spending for capital improvement and maintenance projects in response to tighter credit markets or negative financial news, which could have a material negative effect on the demand for the Company's products. Decreases in U.S. federal and state spending on projects using the Company's products can have negative impact on sales volume from the Company's domestic facilities. Governmental spending on large infrastructure projects in the Gulf Cooperation Council ("GCC") countries vary and spending has in the past been curtailed or delayed as a result of reduced public spending budgets in countries which are dependent on oil and gas revenues and their respective price levels.

 

The Company may not be able to successfully negotiate progress-billing arrangements for its large contracts, which could adversely impact the Company’s working capital needs and credit risk. The Company sells systems and products under contracts that allow the Company to either bill upon the completion of certain agreed upon milestones, or upon actual shipment of the system or product. The Company attempts to negotiate progress-billing milestones on large contracts to help manage its working capital and to reduce the credit risk associated with these large contracts. Consequently, shifts in the billing terms of the contracts in the backlog from period to period can increase the Company's requirements for working capital and can increase its exposure to credit risk.

 

Crude oil and natural gas prices are volatile, and the substantial and extended decline in commodity prices has had, and may continue to have, a material and adverse effect on demand and pricing in the Company's business. Prices for crude oil and natural gas fluctuate widely. Among the factors that can or could cause these price fluctuations are:

 

 

the level of consumer demand;

 

domestic and worldwide supplies of crude oil and natural gas;

 

domestic and international drilling activity;

 

the actions of other crude oil exporting nations and the Organization of Petroleum Exporting Countries;

 

worldwide economic and political conditions, including political instability or armed conflict in oil and gas producing regions; and

 

the price and availability of, and demand for, competing energy sources, including alternative energy sources.

 

Generally, when the prices for crude oil and natural gas are higher, demand for the Company’s products increases and the Company is able to negotiate higher prices. On the other hand, when the prices of crude oil and natural gas are lower, demand for the Company’s products decreases and the Company is forced to compete with lower prices and other concessions. Volatility in these commodity prices can also result in circumstances where demand for the Company’s products is suddenly high, but the Company is unable to negotiate higher prices, thereby adversely impacting the Company’s margins and capacity to accept new projects at higher margins.

 

 

The Company may be unable to repay its debt or renew its expiring credit facilities. If there were an event of default under the Company's current revolving credit facilities, the lenders could cause all amounts outstanding with respect to that debt to be due and payable immediately. The Company cannot assure that its cash flow will be sufficient to fully repay amounts due under any of the financing arrangements, if accelerated upon an event of default, or, that the Company would be able to repay, refinance or restructure the payments under any such arrangements. Complying with the covenants under the Company's domestic and/or foreign revolving credit facilities may limit management's discretion by restricting options such as:

 

 

incurring additional debt;

 

entering into transactions with affiliates;

 

making investments or other restricted payments;

 

repurchase of Company's shares;

 

payment of dividends, capital returns, repayment of intercompany obligations and other forms of repatriation; and

 

creating liens.

 

The Company’ credit arrangements used by its Middle Eastern subsidiaries are renewed on an annual basis. In addition to these credit arrangements, the Company also obtains project financing in the Middle East on a project-by-project basis. While the Company believes that it will be able to renew its Middle East credit arrangements and will have continued access to individual project financing, there is no assurance that such arrangements will be renewed or made available in similar amounts or be on similar terms and conditions as the current arrangements, or that such individual project financing will be available for projects that the Company is interested in pursuing.

 

Any replacement credit arrangements outside of the United States may further limit the Company’s ability to repatriate funds from abroad. Repatriation of funds from certain countries may become limited based upon regulatory restrictions or economically unfeasible because of the taxation of funds when moved to another subsidiary or to the parent company. In addition, any refinancing, replacement or additional financing the Company may obtain could contain similar or more restrictive covenants than the Company is currently subject to. The Company’s ability to comply with any covenants may be adversely affected by general economic conditions, political decisions, industry conditions and other events beyond management’s control.

 

Aggressive pricing by existing competitors and the entrance of new competitors in the markets in which the Company operates could drive down the Company's profits and prohibit or slow the Company's growth. The Company's business is highly competitive. Some of the Company's competitors are larger and have more resources than the Company. Additionally, many of the Company's products are also subject to competition from alternative technologies and alternative products. In periods of declining demand, the Company's fixed cost structure may limit its ability to cut costs, which may be a competitive disadvantage compared to firms with more flexible cost structures, or may result in reduced operating margins and operating losses.

 

The Company may be unable to purchase raw materials at favorable prices, or maintain beneficial relationships with its suppliers, which could result in a shortage of supply, or increased pricing. To the extent the Company relies upon a single source for key components of several of its products, the Company believes there are alternate sources available for such components. However, there can be no assurance that the interruption of supplies of such components would not have an adverse effect on the financial condition of the Company and that the Company, if required to do so, would be able to negotiate agreements with alternative sources on acceptable terms.

 

The Company may be subject to claims for damages for defective products. The Company warrants its products to be free of certain defects. The Company has, from time to time, had claims alleging defects in its products. The Company cannot be certain it will not experience material product liability losses in the future or that it will not incur significant costs to defend such claims. While the Company currently has product liability insurance, the Company cannot be certain that its product liability insurance coverage will be adequate for liabilities that may be incurred in the future or that such coverage will continue to be available to the Company on commercially reasonable terms. Any claims relating to defective products that result in liabilities exceeding the Company's insurance coverage could have an adverse effect on the Company's business, financial position, results of operations or cash flows.

 

 

Product and service orders included in the Company’s backlog may be reduced or cancelled. The Company defines backlog as the revenue value resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. If a customer cancels an order, the customer is normally responsible for all finished goods produced or shipped, all direct and indirect costs incurred and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenue.

 

The Company may be unable to attract and retain its senior management and key personnel. The Company's ability to meet its strategic and financial goals will depend to a significant extent on the continued contributions of its senior management and key personnel. Future success will also depend in large part on the Company's ability to identify, attract, motivate, effectively utilize and retain highly qualified managerial, sales, marketing and technical personnel. The loss of senior management or other key personnel or the inability to identify, attract and retain qualified personnel in the future could make it more difficult to manage the Company's business and could adversely affect operations and financial results.

 

The Company may not be able to achieve the expected benefits from its growth initiatives. The Company's cyclical or general expansion may result in unanticipated adverse consequences, including significant strain on management, operations and financial systems as well as on the Company's ability to attract and retain competent employees. In the future, the Company may seek to grow its business by investing in new or existing facilities, making acquisitions, entering into partnerships and joint ventures, or constructing new facilities, which could entail a number of additional risks, including:

 

 

strain on working capital;

 

diversion of management's attention away from other activities, which could impair the operation of existing businesses;

 

failure to successfully integrate the acquired businesses or facilities into existing operations;

 

inability to maintain key pre-acquisition business relationships;

 

loss of key personnel of the acquired business or facility;

 

exposure to unanticipated liabilities; and

 

failure to realize efficiencies, synergies and cost savings.

 

As a result of these and other factors, including general economic risks, the Company may not be able to realize the expected benefits from future acquisitions, new facility developments, partnerships, joint ventures or other investments.

 

The Company's financial results could be adversely affected by changes in international regulations and other activities of U.S. and non-U.S. governmental agencies related to the Company’s international operations. International sales represent a significant portion of the Company's total sales. The Company's sales to foreign customers increased to 61.0% in 2018 from 59.5% in 2017. The Company's anticipated growth and profitability may require increasing current foreign sales volume and may necessitate further international expansion. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, other activities of U.S. and non-U.S. governments, agencies and similar organizations, and other factors. These factors include, but are not limited to, changes in a country's or region's economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales. In addition, these risks can include extraordinarily delayed collections of accounts receivable. Because the Company conducts a significant portion of its business activities in the Middle East, the political and economic events of the countries that comprise the GCC can have a material effect on the Company’s business.

 

 

Due to the international scope of the Company’s operations, it is subject to a complex system of commercial and trade regulations around the world. Recent years have seen an increase in the development and enforcement of laws regarding trade compliance anti-corruption, such as the U.S. Foreign Corrupt Practices Act and similar laws from other countries as well as new regulatory requirements regarding data privacy. The Company’s foreign subsidiaries are governed by laws, rules and business practices that differ from those of the U.S. If the activities of these entities do not comply with U.S. laws or business practices or the Company’s Code of Business Conduct, then violations of these laws may result in severe criminal or civil sanctions, which could disrupt the Company’s business, and result in an adverse effect on the Company’s reputation, business and results of operations or financial condition. The Company cannot predict the nature, scope or effect of future regulatory requirements to which its operations might be subject or the manner in which existing laws might be administered or interpreted.

 

The Company may be impacted by interpretations and changes in tax regulations and legislation which could adversely affect the Company's financial results. Tax interpretations, regulations and legislation in the various jurisdictions in which the Company operates are subject to measurement uncertainty and the interpretations can impact net income, income tax expense or recovery, and deferred income tax assets or liabilities.  Tax rules and regulations, including those relating to foreign jurisdictions, are subject to interpretation and require judgment by the Company that may be challenged by the applicable taxation authorities upon audit.  Although the Company believes its assumptions, judgements and estimates are reasonable, changes in tax laws or the Company's interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in the Company's consolidated financial statements.

 

The Company may not be able to recover costs and damages from vendors that supply defective materials. The Company may receive defective materials from its vendors that are incorporated into the Company's products during the manufacturing process. The cost to repair, remake or replace defective products could be greater than the amount that can be recovered from the vendor. Such excess costs could have an adverse effect on the Company's business, financial position, results of operations or cash flows.

 

The Company may be required to reverse previously recorded revenue and profits as a result of inaccurate estimates made in connection with the Company’s percentage-of-completion revenue recognition. The Company recognizes revenues under its stated revenue recognition policy except for sizable domestic complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" accounting method. This methodology allows revenue and profits to be recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date against the total amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost is recorded when the amounts are known or can be reasonably estimated. These revisions can occur at any time and could be material. On a historical basis, management believes that reasonably reliable estimates of the progress towards completion on long-term contracts have been made. However, given the uncertainties associated with these types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.

 

The Company’s failure to establish and maintain effective internal control over financial reporting could harm its business and financial results. The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that the Company would prevent or detect a misstatement of its financial statements or fraud.

 

 

The Company's information technology systems may be negatively affected by cybersecurity threats. The Company faces risks relating to cybersecurity attacks that could cause the loss of confidential information and other business disruptions. The Company relies extensively on computer systems to process transactions and manage its business, and its business is at risk from and may be impacted by cybersecurity attacks. These could include attempts to gain unauthorized access to data and computer systems. Attacks can be both individual and/ or highly organized attempts organized by very sophisticated hacking organizations. The Company employs a number of measures to prevent, detect and mitigate these threats, which include password encryption, frequent password change events, firewall detection systems, anti-virus software in-place and frequent backups; however, there is no guarantee such efforts will be successful in preventing a cyber-attack. A successful attack could disrupt and otherwise adversely affect the Company's reputation and results of operations, including through lawsuits by third-parties.

 

Item 1B. UNRESOLVED STAFF COMMENTS - None.

 

Item 2. PROPERTIES

 

Location

Leased or Owned

Size

Illinois

Leased production facilities and office space

31,650 square feet

Louisiana

Owned production facilities and leased land

30,000 square feet on approximately 5 acres

Tennessee

Owned production facilities and office space

131,800 square feet on approximately 23.5 acres

Texas Leased office space 2,100 square feet

Canada

Owned production facilities with office space on owned land, leased land and leased office space

102,980 square feet on approximately 158 acres

India

Leased production facilities, office space and land

33,700 square feet on approximately 1.2 acres

Kingdom of Saudi Arabia

Owned production facilities on leased land

89,000 square feet on approximately 11 acres

United Arab Emirates

Leased office space and production facilities on leased land

182,100 square feet on approximately 16.4 acres

 

For further information, see Note 7 - Lease information, in the Notes to Consolidated Financial Statements.

 

Item 3.

LEGAL PROCEEDINGS - As of January 31, 2019, the Company had no material pending litigation.

 

Item 4.

MINE SAFETY DISCLOSURES - Not applicable.

 

 

PART II

 

Item 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company's common stock is traded on the Nasdaq Global Market under the symbol "PPIH". 

 

As of April 3, 2019, there were approximately 60 stockholders of record and other additional stockholders for whom securities firms acted as nominees.

 

The Company has never declared or paid a cash dividend and does not anticipate paying any cash dividends on its common stock in the foreseeable future. Management presently intends to retain all available funds for the development of the Company's business and for use as working capital. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other relevant factors. For further information, see "Financing" in Item 7 and Note 6 - Debt, in the Notes to Consolidated Financial Statements.

 

The Company has not made any sale of unregistered securities during the preceding three years.

 

The Transfer Agent and Registrar for the Company's common stock is Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342 Brentwood, NY 11717, (877) 830-4936 or (720) 378-5591.

 

 

Item 6. SELECTED FINANCIAL DATA - Not applicable.

 

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely," and "probable," or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the headings Cautionary Statements Regarding Forward Looking Information and Item 1A. Risk Factors.

 

The Company is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company's website is www.permapipe.com. Since the Company's revenues are based on large discrete projects, the Company's operating results in any reporting period could be negatively impacted as a result of large variations in the level of overall market demand or delays in the timing of the specific project phases. 

 

The analysis presented below and discussed in more detail throughout the MD&A was organized to provide instructive information for understanding the Company's business. However, this MD&A should be read in conjunction with the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, including the notes thereto and the risk factors contained herein.

 

Consolidated Results of Operation:

 

                   

% Favorable

 

($ in thousands)

 

2018

   

2017

   

(Unfavorable)

 

Net sales

  $ 128,965     $ 105,248       22.5 %
                         

Gross profit

    23,339       11,742       98.8 %

Percentage of net sales

    18.1 %     11.2 %        
                         

General and administrative expenses

    15,357       16,214       5.3 %

Percentage of net sales

    11.9 %     15.4 %        
                         

Selling expense

    5,239       5,040       (3.9 %)

Percentage of net sales

    4.1 %     4.8 %        
                         

Interest expense, net

    1,122       697       (61.0 %)
                         
Income/(loss) from operations before income taxes     1,621       (10,209 )     N/A  

 

 

2018 Compared to 2017

 

Net sales:

 

Net sales were $129.0 million in 2018, an increase of 22.5% from $105.2 million in 2017. Higher revenues were driven by increased oil prices, favorable product mix and better sales and project execution, which resulted in increased sales in the Middle East, U.S. and Canadian markets. We also experienced higher demand for leak detection products.

 

Cost of sales and gross profit:

 

Gross profit increased to $23.3 million in 2018, an increase of 98.8% from 11.7 million in 2017. This increase is attributed to higher volumes, improved pricing and manufacturing efficiencies.  

 

General and administrative expenses:

 

General and administrative expenses were $15.4 million in 2018 compared to $16.2 million in 2017, an improvement of $0.9 million or 5.3%.

 

Excluding one-time charges in both periods, annually recurring general and administrative expenses were flat year over year at approximately $15.0 million.  The one-time charges include $1.2 million in 2017 for internal control review fees incurred in the Middle East region and $0.4 million in 2018 primarily related to the retirement cost of our prior CFO. 

 

Selling expenses:

 

Selling expenses increased to $5.2 million from $5.0 million. This increase is due to commission expense related to increased sales. 

 

 

 

Interest expense:

 

Interest expense increased to $1.1 million in 2018 from $0.7 million in 2017 due to higher borrowings and increased interest rates. 

 

Operating results from operations before income taxes:

 

Operating results from operations before income taxes improved to income of $1.6 million in 2018 compared to a loss of $10.2 million in 2017. The positive contributing factors were due to increased volumes from all geographic served markets, improved pricing and manufacturing efficiencies, and lower selling and general administration costs due to the one-time charge in 2017. 

 

Accounts receivable:

 

In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately $41.9 million. The Company completed all of its deliverables in 2015, and has since then collected approximately $37.5 million, with a remaining balance due in the amount of $4.4 million. Included in this balance is an amount of $3.7 million, which pertains to retention clauses within the agreements of our customer (contractor), and which become payable by the customer when this project is fully tested and commissioned. In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $3.5 million of this retention amount was reclassed to a long-term receivable account.

 

The Company has been engaged in ongoing active efforts to collect the outstanding amount, and has collected $0.7 million during fiscal year 2018, and another $0.3 million subsequent to January 31, 2019. The Company has also received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this amount as of January 31, 2019. However, if the Company’s efforts to collect on this account are not successful in fiscal 2019, then the Company may be required to recognize an allowance for all, or substantially all, of any such then uncollected amounts in the future.

 

Income taxes:

 

The Company's worldwide effective tax rates ("ETR") were 132.7% and 2.3% in 2018 and 2017, respectively. The change in the ETR from the prior year to the current year is largely due to the fact that the Company is in a positive operating income position in certain taxable jurisdictions. Additional factors include the tax benefit of a Canadian business combination which was realized in 2017, and the valuation allowance against the domestic deferred tax asset. Due to this, even relatively small changes to ordinary income will have a large impact to the ETR. The income tax expense in 2018 is $2.2 million, compared to income tax benefit of $0.2 million in 2017. The Company accrues taxes in various countries where they are generating income while applying a valuation allowance in the U.S. which attributes to the unusually large ETR. The Company remains in a net operating loss ("NOL") carryforward position.

 

The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21%, effective January 1, and created new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. Since the Company is a fiscal taxpayer, the Company was subject to a blended federal rate of 33.83% as of January 31, 2018. In addition, in 2017 the Company was subject to the one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. The Company is subject to a current and deferred federal tax rate of 21% as of January 31, 2019.

 

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018, as permitted by SAB 118. The accounting for the tax effects of the Tax Act was completed as of January 31, 2019, and the Company recorded a tax expense of less than $0.1 million related to the one-time transition tax.

 

For further information, see Note 8 - Income taxes, in the Notes to Consolidated Financial Statements.

 

 

Other

 

The Company has made a bid to provide insulation of pipes to the East Africa Crude Oil Pipeline ("EACOP") project. The EACOP project is a 1,450 Km (900 mile) long heavy crude oil pipeline from the Lake Albert Basin in Uganda to the Tanga port in Tanzania being developed by French oil company Total E&P, China National Offshore Oil Corporation and London-based Tullow Oil. The pipeline is 24 inches in diameter, and is electrically heat traced. Once completed, it will be the longest insulated and heat traced pipeline in the world. There can be no assurance that the Company will be successful in its bid for this project, and what the final terms of any such potential engagement will be until the bid is awarded.

 

Liquidity and capital resources

 

Cash and cash equivalents as of January 31, 2019 and 2018 were $ 10.2 million and $7.1 million, respectively. On January 31, 2019, $0.1 million was held in the U.S. and $10.1 million was held in the foreign subsidiaries. The Company's working capital was $25.9 million on January 31, 2019 compared to $23.1 million on January 31, 2018. Of the working capital components, cash increased $4.4 million as a result of utilization of existing inventory in support of increased revenues. Cash provided by operations was $5.0 million in 2018 compared to cash used in operations of $1.8 million in 2017. This improvement of $6.8 million is due to increased sales volume, combined with the use of existing inventory.

 

Net cash used in investing activities during 2018 and 2017 was $1.4 million and $2.4 million, respectively. 

 

Debt totaled $16.3 million on January 31, 2019. Net cash provided by financing activities in 2018 and 2017 was $1.1 million and $3.5 million, respectively. Since the Company generated cash from operations, the Company required less cash provided from financing activities. This was primarily due to increased cash generated from operations. For additional information, see Note 6 - Debt, in the Notes to Consolidated Financial Statements. Other long-term liabilities of $0.7 million were composed primarily of Uncertain Tax Position liability and deferred rent.

 

 

The following table summarizes the Company's estimated contractual obligations on January 31, 2019.

 

($ in thousands)

 

Year Ending January 31,

Contractual obligations

 

Total

 

2020

 

2021

 

2022

 

2023

 

2024

 

Thereafter

Revolving line North America (1)

  $ 8,890     $ 8,890     $ -     $ -     $ -     $ -     $ -  

Mortgages (2)

    11,432       751       737       721       706       692       7,825  

Revolving line foreign (3)

    89       89       -       -       -       -       -  

Subtotal

    20,411       9,730       737       721       706       692       7,825  

Capitalized lease obligations

    585       241       240       83       21       -       -  

Operating lease obligations (4)

    19,944       2,516       2,193       2,149       2,110       1,979       8,997  

Employment agreements (5)

    2,194       157       -       -       -       -       2,037  
Contractual obligations of discontinued operations (6)     137       137       -       -       -       -       -  

Uncertain tax position obligations (7)

    298       -       -       -       -       -       298  

Total

  $ 43,569     $ 12,781     $ 3,170     $ 2,953     $ 2,837     $ 2,671     $ 19,157  

 

Notes to contractual obligations table:

(1)

Interest obligations exclude floating rate interest on debt payable under the North American revolving line of credit. Based on the amount of such debt on January 31, 2019, and the weighted average interest rate of 6.43% on that debt, such interest was being incurred at an annual rate of approximately $0.7 million.

(2)

Scheduled maturities, including interest.

(3)

Scheduled maturities of foreign revolver line, including interest.

(4)

Minimum contractual amounts, assuming no changes in variable expenses.

(5)

Refer to the Exhibit Index for a description of compensation and separation plans.

(6)

Included payments for other liabilities included in discontinued operations.

(7)

Refer to Note 8 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the uncertain tax position obligations.

 

Financing

 

Revolving line North AmericaOn September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a new Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”), providing for a new three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”). The Senior Credit Facility replaced the Company’s then existing $15 million Credit and Security Agreement, dated September 24, 2014, among various subsidiaries of the Company and Bank of Montreal, as successor by assignment to BMO Harris Bank N.A., as amended (the “Prior Credit Agreement”). 

 

The Company initially used borrowings under the new Senior Credit Facility to pay off outstanding amounts under the Prior Credit Agreement (which totaled approximately USD $3,773,823 plus CAD 4,794,528) and cash collateralize a letter of credit (USD $154,500). The Company has used proceeds from the new Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs, and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin. The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility. Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally be payable in arrears on the last day of each interest period. Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility. The facility fee is payable quarterly in arrears. 

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3 million annually (plus a limited carryover of unused amounts). 

 

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve consolidated net income (excluding the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) before interest, taxes, depreciation, amortization and certain other adjustments (“EBITDA”) of at least $1,807,000 for the period from August 1, 2018 through October 31, 2018; (ii) the North America Loan Parties to achieve EBITDA of at least $2,462,000 for the period from August 1, 2018 through January 31, 2019; (iii) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00 for the nine-month period ending April 30, 2019 and for the quarter ending July 31, 2019 and each quarter end thereafter on a trailing four-quarter basis; and (iv) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 for the nine-month period ending October 31, 2018 and for the quarter ending January 31, 2019 and each quarter end thereafter on a trailing four-quarter basis. The Company was in compliance with this requirement as of January 31, 2019.

 

 

Revolving lines foreignThe Company also has credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On January 31, 2019, the Company was in compliance with the covenants under the credit arrangements. On January 31, 2019, interest rates were based on the EIBOR plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On January 31, 2019, the Company's interest rates ranged from 6.15% to 6.51%, with a weighted average rate of 6.51%, and the Company could borrow $9.1 million under these credit arrangements. On January 31, 2019, $7.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On January 31, 2019, the Company had borrowed $0.1 million, and had an additional $1.1 million available. The foreign revolving lines balances as of January 31, 2019 and 2018, were included as current maturities of long-term debt in the Company's consolidated balance sheets. The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. 

 

Critical accounting estimates and policies

 

The Company's significant accounting policies are discussed in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the Company as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known.

 

Revenue recognition. During 2018, and in accordance with Accounting Standards Update No. 2014-19, “Revenue from Contracts with Customers” (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services. See Note 5 - Revenue Recognition for more detail. During 2017, the Company recognized revenues, including shipping and handling charges billed to customers, when all the following criteria were met: (i) persuasive evidence of an arrangement existed, (ii) delivery had occurred or services have been rendered, (iii) the seller's price to the buyer was fixed or determinable, and (iv) collectability was reasonably assured.

 

Percentage of completion revenue recognition. All divisions recognize revenues under the above stated revenue recognition policy except for domestic complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" accounting method. Under this approach, income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project. The percentage of completion is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. Claims for additional compensation due to the Company are recognized in contract revenues when realization is probable and the amount can be reliably estimated.

 

 

 

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories.

 

Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses its deferred tax assets for realizability at each reporting period.

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is a significant benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

 

Equity-based compensation. Stock compensation expense for employee equity awards is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of option awards. Determining the fair value of stock options using the Black-Scholes model requires judgment.

 

Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable rates.

 

New accounting pronouncements. See Recent accounting pronouncements in Note 2 - Significant accounting policies, in the Notes to Consolidated Financial Statements.

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not applicable.

 

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The consolidated financial statements of the Company for each of the two years in the periods ended as of January 31, 2019 and 2018 and the notes thereto are set forth as an exhibit hereto.

 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - None.

 

 

Item 9A.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of January 31, 2019. Based upon the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective and operating to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, including its Chief Executive Officer and Chief Financial Officer, have further concluded that the financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company's financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under the Exchange Act, the Company's management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of its internal control over financial reporting as of the end of the last fiscal year. The framework on which such evaluation was based is contained in the report entitled Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

The Company's system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of January 31, 2019.

 

As previously reported, Management previously identified a material weakness in the Company's internal control over financial reporting that resulted from an accounting error identified by the Company during its preparation and review of the Company's financial statements for the fiscal quarter ended July 31, 2017 related to the Company's accounting for equity-based compensation costs. The Company implemented the following changes to address the material weakness, regarding the adjustment for equity awards that expired unexercised: 

 

 

 

 

Expanded the training of employees in financial technical accounting, reporting and disclosure-related positions;
 

Reinforced the importance of a strong control environment, to emphasize the technical requirements for controls that are designed, implemented and operating effectively and to set the appropriate expectations on internal controls through establishing the related policies and procedures;
 

Implemented a catalog of key accounting rules. In the review of any major journal entries for non-standard operational accounting matters, this catalog is being used as a checklist to validate that the required accounting treatment is applied and disclosures are made accordingly. Management has used, and will continue to use, this catalog to evaluate whether the accounting treatment follows the current rules in the catalog, and will then decide whether outside firm expertise is warranted in such a review;
 

Has validated and updated the catalog quarterly for any changes resulting from changed or newly pronounced accounting rules, and will continue to do so;
 

Reviewed the categories that are underlying the calculations related to stock-based compensation, and has revised procedures for the calculation and review of effects from vested, forfeited and expired options; and

  Implemented a robust and comprehensive equity compensation management and reporting software in the second quarter of 2018.

 

The Company considered the material weakness in the Company's internal control fully remediated as of October 31, 2018.

 

Item 9B.

OTHER INFORMATION - None.

 

PART III

 

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 2019 annual meeting of stockholders.

 

Information with respect to executive officers of the Company is included in Part I, Item 1, hereof under the caption "Executive Officers of the Registrant".

 

Item 11.

EXECUTIVE COMPENSATION

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 2019 annual meeting of stockholders.

 

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Equity Compensation Plan Information

 

The following table provides information regarding the number of shares of common stock that may be issued upon exercise of outstanding options, warrants and rights under the Company's equity compensation plans and the weighted average exercise price and number of shares of common stock remaining available for issuance under those plans as of January 31, 2019.

 

   

Number of shares to be

issued upon exercise

of outstanding options,

warrants and rights

   

Weighted-average exercise

price of outstanding options,

warrants and rights

   

Number of shares remaining

available for future grants

under equity compensation

plans (excluding shares

reflected in column (a))

 

Plan Category

 

(a)(1)

   

(b)(1)

   

(c)(2)

 

Equity compensation plans approved by stockholders

    217,875       $8.60       337,599  

 

(1) The amounts shown in columns (a) and (b) of the above table do not include 283,285 outstanding restricted stock granted under the Company's 2013 Omnibus Stock Incentive Plan as amended June 14, 2013 ("2013 Omnibus Plan") or the 2017 Omnibus Stock Incentive Plan as amended June 13, 2017 ("2017 Plan").

(2) Future grants will only be made out of the 2017 Plan

 

The other information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 2019 annual meeting of stockholders.

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 2019 annual meeting of stockholders.

 

 

Item 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information with respect to this item is incorporated herein by reference to the Company's definitive proxy statement for the 2019 annual meeting of stockholders.

 

PART IV

 

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

a.

List of documents filed as part of this report:

 

(1)

Financial Statements - Consolidated Financial Statements of the Company

Refer to Part II, Item 8 of this report.

 

(2)

Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

 

b.

Exhibits: The exhibits, as listed in the Exhibit Index included herein, are submitted as a separate section of this report.

 

c.

The response to this portion of Item 15 is submitted under 15a(2) above.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Shareholders

Perma-Pipe International Holdings, Inc.

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Perma-Pipe International Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of January 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended January 31, 2019, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended January 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2004.

 

Chicago, Illinois

April 16, 2019

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

Year ended January 31,

(In thousands, except per share data)

 

2019

 

2018

                 

Net sales

  $ 128,965     $ 105,248  

Cost of sales

    105,626       93,506  

Gross profit

    23,339       11,742  
                 

Operating expenses:

               

General and administrative expense

    15,357       16,214  

Selling expense

    5,239       5,040  

Total operating expenses

    20,596       21,254  
                 

Income/(loss) from operations

    2,743       (9,512 )
                 

Interest expense, net

    1,122       697  

Income/(loss) from operations before income taxes

    1,621       (10,209 )
                 

Income tax expense/(benefit)

    2,150       (233 )
                 

Net loss

  $ (529 )   $ (9,976 )
                 

Weighted average common shares outstanding

               

Basic and diluted

    7,812       7,680  
                 

Loss per share

               

Basic and diluted

  $ (0.07 )   $ (1.30 )

 

See accompanying Notes to Consolidated Financial Statements.

Note: Earnings per share calculations could be impacted by rounding.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

    Year ended January 31,

(In thousands)

 

2019

 

2018

                 

Net loss

  $ (529 )   $ (9,976 )
                 

Other comprehensive (loss)/income

               

Currency translation adjustments, net of tax

    (1,073 )     1,185  

Minimum pension liability adjustment, net of tax

    (341 )     165  
Realized/unrealized gain/(loss) on marketable security, net of tax           (92 )

Other comprehensive (loss)/income

    (1,414 )     1,258  
                 

Comprehensive loss

  $ (1,943 )   $ (8,718 )

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

   

January 31,

(In thousands, except per share data)

 

2019

 

2018

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 10,156     $ 7,084  

Restricted cash

    2,581       1,237  

Trade accounts receivable, less allowance for doubtful accounts of $536 on January 31, 2019 and $469 on January 31, 2018

    32,508       32,936  

Inventories

    12,289       16,856  

Prepaid expenses and other current assets

    3,773       2,703  

Costs and estimated earnings in excess of billings on uncompleted contracts

    1,653       1,502  

Total current assets

    62,960       62,318  

Property, plant and equipment, net of accumulated depreciation

    30,398       34,509  

Other assets

               

Deferred tax assets

    458       391  

Goodwill

    2,269       2,423  

Other assets

    6,120       4,943  

Total other assets

    8,847       7,757  

Total assets

  $ 102,205     $ 104,584  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Trade accounts payable

  $ 12,006     $ 14,186  

Commissions and management incentives payable

    1,866       787  

Accrued compensation and payroll taxes

    1,544       1,580  

Revolving line North America

    8,890       7,273  

Current maturities of long-term debt

    640       753  

Customers' deposits

    3,708       5,236  

Liabilities of discontinued operations

          137  

Outside commission liability

    1,743       1,800  

Other accrued liabilities

    3,856       4,122  

Billings in excess of costs and estimated earnings on uncompleted contracts

    1,569       1,967  

Income tax payable

    1,266       1,339  

Total current liabilities

    37,088       39,180  

Long-term liabilities

               

Long-term debt, less current maturities

    6,751       7,728  

Deferred compensation liabilities

    3,883       4,098  

Deferred tax liabilities

    1,435       1,242  

Other long-term liabilities

    688       524  

Total long-term liabilities

    12,757       13,592  

Stockholders' equity

               

Common stock, $.01 par value, authorized 50,000 shares; 7,854 issued and outstanding January 31, 2019 and 7,717 issued and outstanding January 31, 2018

    79       77  

Additional paid-in capital

    58,793       56,304  

Accumulated deficit retained earnings

    (3,632 )     (3,103 )

Accumulated other comprehensive loss

    (2,880 )     (1,466 )

Total stockholders' equity

    52,360       51,812  

Total liabilities and stockholders' equity

  $ 102,205     $ 104,584  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

                           

Retained Earnings

 

Accumulated

 

Total

   

Common

 

Additional

 

Treasury

 

(Accumulated

 

Other Comp.

 

Stockholders'

(In thousands, except share data)

 

Stock

 

Paid-in Capital

 

Stock

 

Deficit)

 

Income (Loss)

 

Equity

Total stockholders' equity on January 31, 2017

  $ 76     $ 55,358     $ (170 )   $ 6,873     $ (2,724 )   $ 59,413  
                                                 

Net loss

                            (9,976 )             (9,976 )

Common stock issued under stock plans, net of shares used for tax withholding

    1       (215 )     170                       (44 )

Stock-based compensation expense

            1,161                               1,161  

Pension liability adjustment

                                    165       165  

Marketable security

                                    (142 )     (142 )

Foreign currency translation adjustment

                                    1,141       1,141  

Tax expense on above items

                                    94       94  

Total stockholders' equity on January 31, 2018

  $ 77     $ 56,304     $ -     $ (3,103 )   $ (1,466 )   $ 51,812  
                                                 

Net loss

                            (529 )             (529 )

Common stock issued under stock plans, net of shares used for tax withholding

    2       1,324                               1,326  

Stock-based compensation expense

            1,165                               1,165  
Pension liability adjustment                                     (341 )     (341 )

Foreign currency translation adjustment

                                    (1,170 )     (1,170 )
Tax expense on above items                                     97       97  

Total stockholders' equity on January 31, 2019

  $ 79     $ 58,793     $ -     $ (3,632 )   $ (2,880 )   $ 52,360  

 

Common stock shares

 

2018

 

2017

Balance beginning of year

    7,716,542       7,595,509  

Treasury stock released

          26,753  

Shares issued

    137,780       94,280  

Balance end of year

    7,854,322       7,716,542  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year ended January 31,

(In thousands)

 

2019

 

2018

Operating activities

               

Net loss

  $ (529 )   $ (9,976 )

Adjustments to reconcile net loss to net cash flows provided by/ (used in) operating activities

               

Depreciation and amortization

    4,575       5,031  

Gain on disposal of subsidiary

          (166 )

Deferred tax benefit

    215       (958 )

Stock-based compensation expense

    1,165       1,447  

Provision on uncollectible accounts

    71       15  

Loss on disposal of fixed assets

    46       219  

Gain on sale of marketable securities

          (142 )

Changes in operating assets and liabilities

               

Accounts payable

    (3,576 )     4,551  

Accrued compensation and payroll taxes

    1,226       (1,780 )

Inventories

    4,360       (3,274 )

Customers' deposits

    (1,517 )     2,596  

Income taxes receivable and payable

    35       (75 )

Prepaid expenses and other current assets

    (700 )     (471 )

Accounts receivable

    (354 )     (1,076 )

Costs and estimated earnings in excess of billings on uncompleted contracts

    (547 )     1,455  

Other assets and liabilities

    508       762  

Net cash provided by/(used in) operating activities

    4,978       (1,842 )

Investing activities

               

Capital expenditures

    (1,361 )     (2,532 )

Proceeds from sale of marketable securities

          142  

Proceeds from sales of property and equipment

          1  

Net cash used in investing activities

    (1,361 )     (2,389 )

Financing activities

               

Proceeds from revolving lines

    64,736       40,485  

Payments of debt on revolving lines

    (62,759 )     (37,354 )

Debt issuance costs

    (946 )      

Payments of other debt

    (350 )     (211 )

Increase in drafts payable

    192       34  

Proceeds (payments) on capitalized lease obligations

    (250 )     546  

Release of treasury stock

          170  

Stock options exercised and taxes paid related to restricted shares vested

    511       (214 )

Net cash provided by financing activities

    1,134       3,456  

Effect of exchange rate changes on cash, cash equivalents and restricted cash

    (335 )     395  

Net decrease in cash, cash equivalents and restricted cash

    4,416       (380 )

Cash, cash equivalents and restricted cash - beginning of period

    8,321       8,701  

Cash, cash equivalents and restricted cash - end of period

  $ 12,737     $ 8,321  

Supplemental cash flow information

               

Interest paid

  $ 1,298     $ 804  

Income taxes paid

    1,731       1,080  

Fixed assets acquired under capital leases

          841  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED January 31, 2019 and 2018

(Tabular dollars in thousands, except per share data)

 

 

Note 1 - Business information

 

Perma-Pipe International Holdings, Inc. ("PPIH", the "Company", or the "Registrant") was incorporated in Delaware on October 12, 1993. The Company is engaged in the manufacture and sale of products in one distinct segment: Piping.

 

Fiscal year. The Company's fiscal year ends on January 31. Years and balances described as 2018 and 2017 are the fiscal years ended January 31, 2019 and 2018, respectively.

 

Nature of business. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling ("DHC") piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.

 

Geographic information. Net sales attributed to a geographic area are based on the destination of the product shipment. Sales to foreign customers was 61.0% in 2018 compared to 59.5% in 2017. Long-lived assets are based on the physical location of the assets and consist of property, plant and equipment used in the generation of revenues in the geographic area.

 

(In thousands)

 

2018

 

2017

Net sales

               

United States

  $ 50,319     $ 42,648  

Canada

    34,789       31,206  

Middle East

    35,117       26,322  

India

    3,755       1,317  

Other

    4,985       3,755  

Total net sales

  $ 128,965     $ 105,248  
                 

Property, plant and equipment, net of accumulated depreciation

               

United States

  $ 10,279     $ 11,307  

Canada

    11,862       13,868  

Middle East

    8,103       9,119  

India

    154       215  

Total

  $ 30,398     $ 34,509  

 

 

 

Note 2 - Significant accounting policies

 

Use of estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Revenue recognition. During 2018, and in accordance with Accounting Standards Update No. 2014-19, “Revenue from Contracts with Customers” (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services. See Note 5 - Revenue Recognition for more detail. During 2017, the Company recognized revenues, including shipping and handling charges billed to customers, when all the following criteria were met: (i) persuasive evidence of an arrangement existed, (ii) delivery had occurred or services have been rendered, (iii) the seller's price to the buyer was fixed or determinable, and (iv) collectability was reasonably assured.

 

Percentage of completion revenue recognition. All divisions recognize revenues under the above stated revenue recognition policy except for domestic complex contracts that require periodic recognition of income. For these contracts, the Company uses the "percentage of completion" accounting method. Under this approach, income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The choice of accounting method is made at the time the contract is received based on the expected length and complexity of the project. The percentage of completion is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. Claims for additional compensation due to the Company are recognized in contract revenues when realization is probable and the amount can be reliably estimated.

 

Shipping and handling. Shipping and handling costs are included in cost of sales, and the amounts invoiced to customers relating to shipping and handling are included in net sales.

 

Sales tax. Sales tax is reported on a net basis in the consolidated financial statements.

 

Operating cycle. The length of contracts vary, but are typically less than one year. The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion unless completion of such contracts extends significantly beyond one year.

 

Consolidation. The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been eliminated.

 

Translation of foreign currency. Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year-end. Revenues and expenses are translated at average weighted exchange rates prevailing during the year. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. The resulting translation adjustments are included in stockholders' equity as part of accumulated other comprehensive income (loss). The aggregated foreign exchange transaction loss recognized in the income statement was $0.1 million and $0.7 million for the years 2018 and 2017, respectively. 

 

Contingencies. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, tax, product liability and general liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes of these matters, and its experience in contesting, litigating and settling other similar matters. The Company does not currently anticipate the amount of any ultimate liability with respect to these matters will materially affect the Company's financial position, liquidity or future operations.

 

Cash and cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Cash and cash equivalents were $10.2 million and $7.1 million as of January 31, 2019 and 2018, respectively. On January 31, 2019, $0.1 million was held in the U.S. and $10.1 million was held in the foreign subsidiaries. On January 31, 2018, $0.7 million was held in the U.S. and $6.4 million was held in the foreign subsidiaries.

 

 

Accounts payable included drafts payable of $0.2 million and less than $0.1 million on January 31, 2019 and 2018, respectively.

 

Restricted cash. Restricted cash held in the U.S. on January 31, 2019 was $1.5 million, all of which is a cash collateral held by PNC Bank in relation to the new credit agreement. There was no restricted cash held in the U.S. on January 31, 2018. Restricted cash, held by foreign subsidiaries, was $1.1 million and $1.2 million as of January 31, 2019 and 2018, respectively. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.

 

(In thousands)

 

2018

 

2017

Cash and cash equivalents

  $ 10,156     $ 7,084  

Restricted cash

    2,581       1,237  

Cash, cash equivalents and restricted cash shown in the statement of cash flows

  $ 12,737     $ 8,321  

 

Accounts receivable. The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition, including the availability of credit insurance. In the U.S., collateral is not generally required. In the U.A.E. and Saudi Arabia, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. Standard payment terms are net 30 days. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write off is recorded against the allowance for doubtful accounts. 

 

One of the Company’s accounts receivable in the total amount of $5.4 million as of January 31, 2018 (inclusive of a retention receivable amount of $3.7 million, of which $3.5 million and 3.2 million were included in the balance of other long-term assets as of January 31, 2019 and January 31, 2018, due to the long-term nature of the receivables) has been outstanding for several years. The Company completed all of its deliverables in 2015, and has been engaged in ongoing active efforts to collect this outstanding amount. During fiscal year 2018, the Company received payments of approximately $0.7 million, which reduced the balance of this receivable to $4.7 million as of January 31, 2019. Subsequent to January 31, 2019, the Company received a further $0.3 million, thus reducing this balance to $4.4 million. As a result, the Company did not reserve any allowance against this receivable as of January 31, 2019. The Company continues to engage with the customer to ensure full payment of open balances, and has also received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. However, if the Company’s efforts to collect on this account are not successful in fiscal 2019, then the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

 

On January 31, 2019 and January 31, 2018, no one customer accounted for more than 10% of the Company's net sales.

Three customers accounted for 39.4% and 34.9% of accounts receivable on January 31, 2019 and 2018, respectively.

Concentration of credit risk. The Company maintains its U.S. cash in bank deposit accounts at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC"). Cash balances are below FDIC limits. The Company has not experienced any losses in such accounts.

The Company has a broad customer base doing business in all regions of the U.S. as well as other areas in the world.

 

 

Accumulated other comprehensive loss. Accumulated other comprehensive loss represents the change in equity from non-owner transactions and consisted of foreign currency translation, minimum pension liability and marketable securities.

 

(In thousands)

 

2018

 

2017

Equity adjustment foreign currency, gross

  $ (1,438 )   $ (268 )

Minimum pension liability, gross

    (1,648 )     (1,307 )

Marketable security, gross

           

Subtotal excluding tax effect

    (3,086 )     (1,575 )

Tax effect of foreign exchange currency

    91       (6 )

Tax effect of minimum pension liability

    115       115  

Tax effect of marketable security

           

Total accumulated other comprehensive loss

  $ (2,880 )   $ (1,466 )

 

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories.

 

(In thousands)

 

2018

 

2017

Raw materials

  $ 11,962     $ 17,166  

Work in process

    488       291  

Finished goods

    731       1,024  

Subtotal

    13,181       18,481  

Less allowance

    892       1,625  

Inventories

  $ 12,289     $ 16,856  

 

Long-lived assets. Property, plant and equipment are stated at cost. Interest is capitalized in connection with the construction of facilities and amortized over the asset's estimated useful life. Long-lived assets are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable. If such a review indicates impairment, the carrying amount of such assets is reduced to an estimated fair value.

 

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to 30 years. Leasehold improvements are depreciated over the remaining life of the lease or its useful life, whichever is shorter. Amortization of assets under capital leases is included in depreciation. Depreciation expense was approximately $4.5 million in 2018 and $4.9 million in 2017.

 

(In thousands)

 

2018

 

2017

Land, buildings and improvements

  $ 22,327     $ 22,796  

Machinery and equipment

    47,168       47,009  

Furniture, office equipment and computer systems

    4,335       4,504  

Transportation equipment

    3,311       3,490  

Subtotal

    77,141       77,799  

Less accumulated depreciation

    46,743       43,290  

Property, plant and equipment, net of accumulated depreciation

  $ 30,398     $ 34,509  

 

Impairment of long-lived assets. The Company evaluates long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. A factor considered important that could trigger an impairment review includes a year-to-date loss from operations. The Company reported income from operations in 2018, compared to losses from operations in 2017. An asset is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset is expected to generate. Based on the Company's review of the projected cash flows over the remaining useful lives of the assets, management had determined that there was no impairment of long-lived assets as of January 31, 2018. Since there was no triggering event in 2018, management has determined that there was no impairment of long-lived assets as of January 31, 2019.

 

 

Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of January 31, 2019 and 2018, is attributable to the purchase of Perma-Pipe Canada, Ltd. ("PPC"). 

 

           

Foreign exchange

       

(In thousands)

 

January 31, 2018

 

change effect

 

January 31, 2019

Goodwill

  $ 2,423     $ (154 )   $ 2,269  

 

The Company performs an impairment assessment of goodwill annually as of January 31, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. There was no impairment to goodwill during 2018 or 2017.

 

Other intangible assets with definite lives. The Company owns several patents including those covering features of its piping and electronic leak detection systems. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were $2.6 million as of January 31, 2019 and 2018. Accumulated amortization was approximately $2.5 million and $2.4 million as of January 31, 2019 and 2018. Future amortization over the next five years ending January 31 will be less than $0.1 million in the years 2019 to 2023 and less than $0.1 million thereafter. Amortization expense is expected to be recognized over the weighted-average period of 7.3 years.

 

Research and development. Research and development expenses consist of materials, salaries and related expenses of engineering personnel and outside services for product development projects. Research and development costs are expensed as incurred. Research and development expense was approximately $0.2 million and $0.3 million in 2018 and 2017, respectively.

 

Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses its deferred tax assets and liabilities for realizability at each reporting period.

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. For further information, see Note 8 - Income taxes in the Notes to Consolidated Financial Statements.

 

 

Net loss per common share. Earnings per share ("EPS") is computed by dividing net loss by the weighted average number of common shares outstanding (basic). The Company reported net losses in 2018 and 2017; therefore, the diluted loss per share was identical to the basic loss per share rather than assuming conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share. The dilutive shares are in the following table:

 

Basic weighted average number of common shares outstanding (in thousands)

 

2018

 

2017

Basic weighted average number of common shares outstanding

    7,812       7,680  

Dilutive effect of stock options and restricted stock units

           

Weighted average number of common shares outstanding assuming full dilution

    7,812       7,680  
                 

Stock options not included in the computation of diluted EPS of common stock because the option exercise prices exceeded the average market prices

    82       139  

Canceled options during the year

    (63 )     (131 )

Stock options with an exercise price below the average stock price

    136       219  

 

Equity-based compensation. The Company issues various types of stock-based awards to employees and directors: restricted stock, deferred stock and stock options. Non-cash compensation expense associated with restricted stock is based on the fair value of the common stock at the date of grant, and amortized using the straight line method over the vesting period. Compensation expense associated with deferred stock which is awarded to the Board of Directors (non-employee) is based upon the fair value of the common stock at the date of grant, and since the grant vests immediately it is expensed on the date of the grant. Stock compensation expense for stock options is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of option awards.

 

Segments. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker ("CODM") in making decisions regarding resource allocation and assessing performance The Company’s Chief Executive Officer is the CODM, and he uses a combination of several management reports, including the Company's financial information in determining how to allocate resources and assess performance. The Company has determined that it operates in one segment.

 

Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates.

 

Recent accounting pronouncements. In March 2017, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that changes the income statement presentation of the components of net periodic benefit cost related to defined benefit pension and other postretirement plans. The primary change under the new guidance is that only the service cost component of net periodic benefit cost should be included in operating income and is eligible for capitalization as an asset. The other components of net periodic benefit cost, such as interest cost, the expected return on assets, amortization of actuarial gains and losses and prior service cost, should be presented below operating income. The guidance is effective for the Company starting February 1, 2018 and was applied retrospectively to the presentation of net periodic benefit cost, and recorded in miscellaneous income and expense in 2017 and 2018. Since the plans have not incurred any service costs, there has been no need to capitalize any costs. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.

 

 

In October 2016, the FASB issued authoritative guidance requiring the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs rather than when transferred to a third party as required under the current guidance. The new guidance is effective for the Company beginning February 1, 2018, with early adoption permitted. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires entities to recognize assets and liabilities for most leases on their balance sheets. It also requires additional qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company will adopt the ASU effective February 1, 2019 using the alternative transition approach - a cumulative effect adjustment to retained earnings at that date, which is expected to be zero. The Company will avail itself of the practical expedients provided under the ASU and its subsequent amendments regarding identification of leases, lease classification, indirect costs, and the combination of lease and non-lease components. The Company expects to record a right-of-use asset and lease liability of approximately $10.0 million to $11.0 million at adoption. 

 

In May 2014, FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers ("Topic 606")", with several clarifying updates issued during 2016. This ASU was effective for the Company beginning February 1, 2018. The adoption of this ASU did not have a material impact on the Company's results of operations or financial position. Refer to Note 5 - Revenue recognition - for more detail.

 

The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on the consolidated financial statements.

 

 

 

Note 3 - Discontinued operations

 

The Company had a Filtration Products segment, which was sold in fiscal 2016, and was reported as discontinued operations in the consolidated financial statements for those corresponding years. Included in accrued expenses reported for January 31, 2018 is an amount of $0.1 million for warranty liability. Net cash used in discontinued operating activities during 2017 was less than $0.1 million. There were no expenses related to discontinued operations in fiscal 2018. 

 

 

Note 4 - Retention

 

A retention receivable is a portion of an outstanding receivable balance amount withheld by a customer until a contract is fully completed as specified in the contractual agreement. Retention receivables of $1.7 million and $2.4 million were included in the balance of trade accounts receivable as of January 31, 2019 and 2018, respectively. A retention receivable of $4.3 million and $3.2 million was included in the balance of other long-term assets as of January 31, 2019 and 2018 due to the long-term nature of the receivables. See Note 2 - Accounts receivable for further information regarding the future realization of these long-term balances.

 

 

Note 5 - Revenue recognition 

 

On February 1, 2018, the Company adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers," ("Topic 606"), using the modified retrospective method applied to contracts that were not completed as of that date. Under this methodology the effect, if any, of initially applying the new revenue standard was to be recorded as an adjustment to the opening balance of retained earnings, while periods prior to the adoption date were not to be adjusted and continue to be reported in accordance with the accounting policies in effect for those periods.

 

The Company conducted a complete and thorough analysis of each single element of the five-step model of Topic 606 and concluded that there was no material impact to the Company as a result of the adoption of the new standard. As such, the Company was not required to make a cumulative adjustment to the opening balances of retained earnings, contract assets or contract liabilities upon its initial application of the new revenue standard. 

 

Revenue from contracts with customers:

 

The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.

 

The Company’s standard revenue transactions are classified in to two main categories:

 

 

1)

Systems - which include all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. 

 

 

2)

Products - which include cables, leak detection products, heat trace products sold under the PermAlert brand name, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.

 

 

 

Table of Contents

 

In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:

 

 

1)

the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or

 

 

2)

the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company.

 

Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).

 

 

35

 

 

 

 

 

Table of Contents

 

A breakdown of the Company's revenues by revenue class for fiscal years 2018 and 2017 are as follows:

 

 

 

2018

 

2017

 

Sales

% to Total

 

Sales

% to Total

Products

13,576

11%

 

8,495

8%

           

Specialty Piping Systems and Coating

         

Revenue recognized under input method

40,525

31%

 

39,891

38%

Revenue recognized under output method

74,864

58%

 

56,862

54%

Total

128,965

100%

 

105,248

100%

 

The input method as noted in ASC 606-10-55-20 is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor, and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred.

 

The output method as noted in ASC 606-10-55-17 is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped. 

 

Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but does not recognize revenue until the performance obligations are satisfied under the methods discussed above.

 

Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.

 

Contract assets and liabilities:

 

Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.

 

 

 

Table of Contents

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of January 31, 2019 will be billed and collected within one year.

 

The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated. The Company expects to recognize the remaining balances as of January 31, 2019 within one year.

 

 

 

Contract Assets

Balance January 31, 2018

$1,502

Costs and gross profit recognized during the period for uncompleted contracts from the prior period

(6,458)

Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period

6,609

Closing Balance at January 31, 2019

1,653

   
 

Contract Liabilities

Balance January 31, 2018

$1,967

Revenue recognized during the period for uncompleted contracts from the prior period

(3,222)

New contracts entered into that are uncompleted at the end of the current period

2,824

Closing Balance at January 31, 2019

1,569

 

The following table shows the reconciliation of the cost in excess of billings:

 

(In thousands)

 

2018

   

2017

 

Costs incurred on uncompleted contracts

  $ 12,348     $ 11,955  

Estimated earnings

    7,430       6,336  

Earned revenue

    19,778       18,291  

Less billings to date

    19,694       18,756  

Costs in excess of billings, net

  $ 84     $ (465 )

Balance sheet classification

               

Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts

  $ 1,653     $ 1,502  

Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts

    (1,569 )     (1,967 )

Costs in excess of billings, net

  $ 84     $ (465 )


Practical expedients:

 

Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies practical expedient for these types of costs and as such are expensed in the period incurred.

 

As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.

 

 

 

Note 6 - Debt

 

(In thousands)

 

2018

 

2017

Revolving line North America

  $ 8,890     $ 7,273  

Mortgage notes

    6,961       7,723  

Revolving lines foreign

    84       123  

Capitalized lease obligations

    536       846  

Total debt

    16,471       15,965  

Unamortized debt issuance costs

    (181 )     (200 )

Less current maturities

    9,539       8,037  

Total long-term debt

  $ 6,751     $ 7,728  
                 

Current portion of long-term debt

  $ 9,539     $ 8,037  

Unamortized debt issuance costs

    (9 )     (11 )

Total short-term debt

  $ 9,530     $ 8,026  

 

The following table summarizes the Company's scheduled maturities on January 31:

 

(In thousands)

 

Total

 

2020

 

2021

 

2022

 

2023

 

2024

 

Thereafter

Revolving line North America

  $ 8,890     $ 8,890     $     $     $     $     $  

Mortgages

    6,961       355       361       366       372       378       5,129  

Revolving line foreign

    84       84                                

Capitalized lease obligations

    536       210       225       81       20              

Total

  $ 16,471     $ 9,539     $ 586     $ 447     $ 392     $ 378     $ 5,129  

 

Revolving line North AmericaOn September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a new Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”), providing for a new three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”). The Senior Credit Facility replaced the Company’s then existing $15 million Credit and Security Agreement, dated September 24, 2014, among various subsidiaries of the Company and Bank of Montreal, as successor by assignment to BMO Harris Bank N.A., as amended (the “Prior Credit Agreement”). 

 

The Company initially used borrowings under the new Senior Credit Facility to pay off outstanding amounts under the Prior Credit Agreement (which totaled approximately USD $3,773,823 plus CAD 4,794,528) and cash collateralize a letter of credit (USD $154,500). The Company has used proceeds from the new Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or LIBOR, plus, in each case, an applicable margin. The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility. Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally be payable in arrears on the last day of each interest period. Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility. The facility fee is payable quarterly in arrears. 

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3 million annually (plus a limited carryover of unused amounts). 

 

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve consolidated net income (excluding the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) before interest, taxes, depreciation, amortization and certain other adjustments (“EBITDA”) of at least $1,807,000 for the period from August 1, 2018 through October 31, 2018; (ii) the North America Loan Parties to achieve EBITDA of at least $2,462,000 for the period from August 1, 2018 through January 31, 2019; (iii) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00 for the nine-month period ending April 30, 2019 and for the quarter ending July 31, 2019 and each quarter end thereafter on a trailing four-quarter basis; and (iv) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 for the nine-month period ending October 31, 2018 and for the quarter ending January 31, 2019 and each quarter end thereafter on a trailing four-quarter basis. The Company was in compliance with this requirement as of January 31, 2019. 

 

As of January 31, 2019, the Company had borrowed an aggregate of $8.9 million at 8.0% and 6.0%, with a weighted average rate of 6.43%, and had $3.1 million available under the Senior Credit Facility.

 

 

Revolving lines foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends. On January 31, 2019, the Company was in compliance with the covenants under the credit arrangements. On January 31, 2019, interest rates were based on the EIBOR plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On January 31, 2019, the Company's interest rates ranged from 6.15% to 6.51%, with a weighted average rate of 6.51%, and the Company could borrow $9.1 million under these credit arrangements. On January 31, 2019, $7.9 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On January 31, 2019, the Company had borrowed $0.1 million, and had an additional $1.1 million available. The foreign revolving lines balances as of January 31, 2019 and 2018, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

 

The Company had a revolving line for 8.0 million Dirhams (approximately $2.2 million U.S. dollars at January 31, 2019) from a bank in the U.A.E. The loan had an interest rate of approximately 6.15% and expired on March 31, 2019. The Company is in current negotiations to renew and expand this facility.  

 

The Company has a revolving line for 25.0 million Dirhams (approximately $6.8 million U.S. dollars at January 31, 2019) from a bank in the U.A.E. The loan has an interest rate of approximately 6.51% and matures July 2019.

 

The Company’ credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis.

 

The Company guarantees the subsidiaries' debt including all foreign debt.

 

Mortgages. On July 28, 2016, the Company borrowed $8.0 million CAD (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, currently at 6.05%, with monthly payments of $38 thousand CAD (approximately $29 thousand) for interest; and monthly payments of $27 thousand CAD (approximately $21 thousand) for principal. Principal payments began January 2018.

 

On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.

 

Capital leases. On October 20, 2017, the Company obtained a capital lease for $0.18 million CAD (approximately $0.1 million at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 4.0% per annum with monthly principal and interest payments of $3 thousand, and these leases mature on September 29, 2022.

 

On May 5, 2017, the Company obtained two capital leases for a total of $0.94 million CAD (approximately $0.7 million USD at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for these capital leases is 7.8% per annum with monthly principal and interest payments of $9 thousand, and these leases mature on April 30, 2021.

 

 

On August 5, 2016, the Company obtained a capital lease for 0.6 million Indian Rupees (approximately $8 thousand U.S. dollars at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for this capital lease is 15.6% per annum with monthly principal and interest payments of less than a thousand dollars, and the lease matures on July 5, 2019.

 

 

Note 7 - Lease information

 

Property under capitalized leases (in thousands)

 

2018

 

2017

Machinery and equipment

  $ 855     $ 1,729  

Transportation equipment

    8       9  

Subtotal

    863       1,738  

Less accumulated amortization

    355       699  

Total

  $ 508     $ 1,039  

 

The Company has several significant operating lease agreements as follows:

 

 

Office Space of approximately 31,650 square feet in Niles, IL is leased until October, 2023.

 

Five acres of land in Louisiana is leased through March, 2022.

 

Thirty acres of land in Canada. Ten acres leased through October, 2019, and twenty acres leased through December, 2022.

 

Nine acres of land in the Kingdom of Saudi Arabia is leased through April, 2030.

 

Production facilities in the U.A.E. of approximately 80,200 square feet on approximately 107,600 square feet of land is leased until June, 2030.

 

Office space of approximately 21,500 square feet and open land for production facilities of approximately 423,000 square feet in the U.A.E. is leased until July, 2032.

 

Production facilities in the U.A.E. of approximately 78,100 square feet is leased until December, 2032.

 

The Company had leased one of its administrative offices in the U.A.E. from a partnership in which a former employee of the Company was a partner. The Company ended this lease arrangement in 2017 and paid total rent of $0.2 million to the partnership in 2017. No payments were made in 2018. Lease payments were based on prevailing market rates.

 

 

On January 31, 2019, future minimum annual rental commitments under non-cancelable lease obligations were as follows:

 

(In thousands)

 

Operating Leases

 

Capital Leases

2019

  $ 2,516     $ 241  

2020

    2,193       240  

2021

    2,149       82  

2022

    2,110       21  

2023

    1,979        

Thereafter

    8,997        

Subtotal

    19,944       584  

Less Amount representing interest

          (48 )

Future minimum lease payments

  $ 19,944     $ 536  

 

Rental expense for operating leases was $2.6 million and $2.9 million in 2018 and 2017, respectively.

 

 

Note 8 - Income taxes

 

Income/(loss) from continuing operations before income taxes (in thousands)

 

2018

 

2017

Domestic

  $ (2,331 )   $ (7,924 )

Foreign

    3,952       (2,285 )

Total

  $ 1,621     $ (10,209 )

 

 

Components of income tax expense/(benefit) (in thousands)

 

2018

 

2017

Current

               

Federal

  $ 48     $  

Foreign

    1,695       697  

State and other

    196       28  

Total current income tax expense (benefit)

    1,939       725  

Deferred

               

Federal

          (33 )

Foreign

    211       (925 )

State and other

           

Total deferred income tax benefit

    211       (958 )

Total income tax expense/(benefit)

  $ 2,150     $ (233 )

 

The U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduced significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion anti-abuse tax, respectively. Since the Company is a fiscal taxpayer, the Company was subject to a blended federal rate of 33.83% as of January 31, 2018. In addition, in 2017 the Company was subject to the onetime transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. The Company is subject to a current and deferred federal tax rate of 21% as of January 31, 2019.

 

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company has made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of January 31, 2018, as permitted by SAB 118. The accounting for the tax effects of the Tax Act have been completed as of January 31, 2019, and the Company recorded a tax expense of less than $0.1 million related to the one-time transition tax.

 

 

One-time transition tax

 

The 2017 provisional estimate of the aggregate deferred foreign income inclusion of $23.2 million was adjusted to $22.2 million during 2018. At the time the provisional estimate was prepared, the Company expected to offset the inclusion with Net Operating Losses ("NOLs"). However, when preparing the tax return for the period the Company elected to claim foreign tax credits against the transition tax to preserve the NOLs. The net impact to the deferred balances was an increase in the NOL Deferred Tax Asset ("DTA") of $4.9 million and a decrease in the foreign tax credit DTA of $7.4 million. The changes in balances were offset by valuation allowances and did not impact tax expense. The transition tax of $7.5 million was mostly offset by the use of foreign tax credit carryforwards, resulting in a net tax expense of less than $0.1 million. There was no tax impact on the related adjustments to the deferred balances due to the Company applying a valuation allowance against the net deferred balances. 

 

As a result of the onetime transition tax, the Company estimates that distributions from foreign subsidiaries will no longer be subject to U.S. tax. Earnings in the Company's subsidiaries in Canada, and Denmark, are not permanently reinvested, and earnings in the India subsidiary are partially permanently reinvested. The earnings will be subject to tax in their local jurisdiction, and the impact of the India dividend distribution tax and Canadian withholding taxes will be considered. As such, the Company has accrued a liability of $0.4 million in 2018 related to these taxes.

 

U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. The Company intends to permanently reinvest the undistributed earnings of the Middle Eastern subsidiaries. The Middle Eastern subsidiaries have unremitted earnings of $26.3 million as of January 31, 2019, all of which has been subject to the transition tax in the U.S. Unremitted earnings of $18.7 million in the United Arab Emirates would not be subject to withholding tax in the event of a distribution, $7.5 million of unremitted earnings in Saudi Arabia would be subject to withholding tax of $1.5 million, and the $4.6 million of earnings permanently reinvested in India would be subject to dividend distribution tax of $0.9 million.

 

Deferred tax effects

 

As a result of the Tax Act, in 2017, the Company revalued deferred balances to a tax rate of 21% as of the date of enactment, which resulted in a tax expense of $2.2 million and tax benefit of $0.4 million related to a reduction in the federal benefit of state taxes. This tax expense was fully offset by a valuation allowance, therefore, there was no impact to the income statement. 

 

Global intangible low taxed income ("GILTI") 

 

Beginning for tax years starting after December 31, 2017, the Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder. The Company has elected to account for the tax effects of these provisions in the period that is subject to such tax and the impact is reflected in the Company’s full year provision. However, the inclusion of $2.1 million during the period does not result in additional tax expense since the Company has NOL carryforwards and a valuation allowance applied against the net domestic deferred tax assets.

 

 

 

The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 21% in 2018 and 33.83% in 2017 was as follows:

 

 

(In thousands)

 

2018

 

2017

Tax benefit at federal statutory rate

  $ 340     $ (3,459 )

Federal rate change

          2,243  

State benefit, net of federal income tax effect

    145       (440 )

Excess income tax on share-based compensation

          (183 )

Domestic valuation allowance

    (2,612 )     (1,206 )
Domestic return to provision related to the 2017 transition tax     2,617