Company Quick10K Filing
Perma-Pipe
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 8 $73
10-Q 2019-12-10 Quarter: 2019-10-31
10-Q 2019-09-10 Quarter: 2019-07-22
10-Q 2019-06-11 Quarter: 2019-04-30
10-K 2019-04-16 Annual: 2019-01-31
10-Q 2018-12-11 Quarter: 2018-10-31
10-Q 2018-09-11 Quarter: 2018-07-31
10-Q 2018-06-12 Quarter: 2018-04-30
10-K 2018-04-19 Annual: 2018-01-31
10-Q 2017-12-15 Quarter: 2017-10-31
10-Q 2017-09-19 Quarter: 2017-07-31
10-Q 2017-06-13 Quarter: 2017-04-30
10-K 2017-04-14 Annual: 2017-01-31
10-Q 2016-12-13 Quarter: 2016-10-31
10-Q 2016-09-09 Quarter: 2016-07-31
10-Q 2016-06-10 Quarter: 2016-04-30
10-K 2016-04-28 Annual: 2016-01-31
10-Q 2015-12-08 Quarter: 2015-10-31
10-Q 2015-09-18 Quarter: 2015-07-31
10-Q 2015-06-12 Quarter: 2015-04-30
10-K 2015-04-16 Annual: 2015-01-31
10-Q 2014-12-09 Quarter: 2014-10-31
10-Q 2014-09-09 Quarter: 2014-07-31
10-Q 2014-06-10 Quarter: 2014-04-30
10-K 2014-04-15 Annual: 2014-01-31
10-Q 2013-12-09 Quarter: 2013-10-31
10-Q 2013-09-12 Quarter: 2013-07-31
10-Q 2013-06-11 Quarter: 2013-04-30
10-K 2013-05-02 Annual: 2013-01-31
10-Q 2012-12-07 Quarter: 2012-10-31
10-Q 2012-09-20 Quarter: 2012-07-31
10-Q 2012-06-11 Quarter: 2012-04-30
10-K 2012-05-01 Annual: 2012-01-31
10-Q 2011-12-12 Quarter: 2011-10-31
10-Q 2011-09-14 Quarter: 2011-07-31
10-Q 2011-06-13 Quarter: 2011-04-30
10-K 2011-04-14 Annual: 2011-01-31
10-Q 2010-12-10 Quarter: 2010-10-31
10-Q 2010-09-09 Quarter: 2010-07-31
10-Q 2010-06-11 Quarter: 2010-04-30
10-K 2010-04-19 Annual: 2010-04-16
8-K 2019-12-10 Earnings, Exhibits
8-K 2019-09-15 Leave Agreement, Shareholder Rights, Exhibits
8-K 2019-09-10 Earnings, Exhibits
8-K 2019-06-20 Shareholder Vote
8-K 2019-06-11 Earnings, Exhibits
8-K 2019-05-06 Amend Bylaw, Exhibits
8-K 2019-04-16 Earnings, Exhibits
8-K 2019-03-07 Other Events, 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
PPIH 2019-10-31
Part I Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Business Segment Reporting
Note 3 - Accounts Receivable
Note 4 - Revenue Recognition
Note 5 - Income Taxes
Note 6 - Impairment of Long-Lived Assets
Note 7 - Stock-Based Compensation
Note 8 - Earnings per Share
Note 9 - Debt
Note 10 - Leases
Note 11 - Restricted Cash
Note 12 - Fair Value
Note 13 - Recent Accounting Pronouncements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Item 4. Controls and Procedures
Part II Other Information
Item 6. Exhibits
EX-31.1 ex_163918.htm
EX-31.2 ex_163919.htm
EX-32 ex_163920.htm

Perma-Pipe Earnings 2019-10-31

PPIH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
DCI 6,434 2,143 1,240 2,845 948 267 476 6,891 33% 14.5 12%
CECE 326 392 209 349 114 -5 25 371 33% 15.0 -1%
HBIO 76 166 86 120 67 -0 14 124 55% 9.1 -0%
NWHM 73 673 434 670 66 -14 -12 399 10% -33.1 -2%
PPIH 73 115 59 129 28 3 10 70 21% 7.1 3%
RAIL 70 338 173 309 -9 -62 -48 -0 -3% 0.0 -18%
CAAS 66 671 362 355 56 7 31 -23 16% -0.7 1%
SORL 65 773 552 391 131 14 56 48 33% 0.9 2%
FTEK 33 44 12 51 19 -0 -0 18 38% -72.1 -1%

10-Q 1 ppih20191031_10q.htm FORM 10-Q ppih20181031_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended October 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 Trading Symbol(s) Name of each exchange on which registered
Common Stock, $.01 par value per share PPIH The NASDAQ Stock Market LLC

 

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 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 Exchange Act). Yes ☐  No ☒

 

On December 5, 2019, there were 8,041,806 shares of the registrant's common stock outstanding.

 

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-Q

 

For the fiscal quarter ended October 31, 2019

 

TABLE OF CONTENTS

 

Item

 

Page

 

 

 

Part I

Financial Information

 

 

 

 

1.

Financial Statements

 

 

Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended October 31, 2019 and 2018

2

 

Consolidated Statements of Comprehensive Income/(Loss) (Unaudited) for the Three and Nine Months Ended October 31, 2019 and 2018

3

 

Consolidated Balance Sheets as of October 31, 2019 (Unaudited) and January 31, 2019

4

 

Consolidated Statements of Stockholders' Equity as of October 31, 2019 (Unaudited) and January 31, 2019

5

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 31, 2019 and 2018

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

2.

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

19

 

 

 

4.

Controls and Procedures

24

 

 

 

Part II

Other Information

 

 

 

 

6.

Exhibits

25

 

 

 

Signatures

26

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share data)

 

   

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2019

   

2018

   

2019

   

2018

 

Net sales

  $ 34,457     $ 32,806     $ 95,400     $ 94,020  

Cost of sales

    26,814       25,923       73,382       77,019  

Gross profit

    7,643       6,883       22,018       17,001  
                                 

Operating expenses

                               

General and administrative expenses

    4,541       4,247       13,556       12,153  

Selling expenses

    1,354       1,554       4,030       4,017  

Total operating expenses

    5,895       5,801       17,586       16,170  
                                 

Income from operations

    1,748       1,082       4,432       831  
                                 

Interest expense, net

    194       280       612       830  

Income from operations before income taxes

    1,554       802       3,820       1  
                                 

Income tax expense

    1,699       934       1,747       1,525  
                                 

Net (loss)/income

  $ (145 )   $ (132 )   $ 2,073     $ (1,524 )
                                 

Weighted average common shares outstanding

                               
Basic     8,037       7,877       7,970       7,806  

Diluted

    8,037       7,877       8,047       7,806  
                                 

(Loss)/income per share

                               
Basic     (0.02 )     (0.02 )     0.26       (0.20 )

Diluted

    (0.02 )     (0.02 )     0.26       (0.20 )

 

See accompanying notes to consolidated financial statements.

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

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)

(In thousands)

 

   

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2019

   

2018

   

2019

   

2018

 

Net (loss)/income

  $ (145 )   $ (132 )   $ 2,073     $ (1,524 )
                                 

Other comprehensive income/(loss)

                               

Foreign currency translation adjustments, net of tax

    12       (551 )     53       (1,538 )

Other comprehensive income/(loss)

    12       (551 )     53       (1,538 )
                                 

Comprehensive (loss)/income

  $ (133 )   $ (683 )   $ 2,126     $ (3,062 )

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share data)

 

   

October 31, 2019

   

January 31, 2019

 

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 12,221     $ 10,156  

Restricted cash

    1,138       2,581  

Trade accounts receivable, less allowance for doubtful accounts of $355 at October 31, 2019 and $536 at January 31, 2019

    28,235       32,508  

Inventories, net

    16,270       12,289  

Prepaid expenses and other current assets

    3,620       3,773  

Contract assets

    4,363       1,653  

Total current assets

    65,847       62,960  

Property, plant and equipment, net of accumulated depreciation

    29,357       30,398  

Other assets

               

Operating lease right-of-use asset

    11,717       -  

Deferred tax assets - long-term

    747       458  

Goodwill

    2,264       2,269  

Other assets

    7,518       6,120  

Total other assets

    22,246       8,847  

Total assets

  $ 117,450     $ 102,205  

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities

               

Trade accounts payable

  $ 12,735     $ 12,006  

Accrued compensation and payroll taxes

    1,675       1,544  

Commissions and management incentives payable

    1,600       1,866  

Revolving line North America

    7,758       8,890  

Current maturities of long-term debt

    1,644       640  

Customers' deposits

    3,005       3,708  

Outside commissions payable

    2,185       1,743  

Contract liability

    1,351       1,569  

Operating lease liability short-term

    1,130       -  

Other accrued liabilities

    3,234       3,856  

Income taxes payable

    1,352       1,266  

Total current liabilities

    37,669       37,088  

Long-term liabilities

               

Long-term debt, less current maturities

    6,931       6,751  

Deferred compensation liabilities

    3,731       3,883  

Deferred tax liabilities long-term

    1,434       1,435  

Operating lease liability long-term

    10,617       -  

Other long-term liabilities

    1,620       688  

Total long-term liabilities

    24,333       12,757  

Stockholders' equity

               

Common stock, $.01 par value, authorized 50,000 shares; 8,042 issued and outstanding at October 31, 2019 and 7,854 issued and outstanding at January 31, 2019

    80       79  

Additional paid-in capital

    59,754       58,793  

Accumulated deficit

    (1,559 )     (3,632 )

Accumulated other comprehensive loss

    (2,827 )     (2,880 )

Total stockholders' equity

    55,448       52,360  

Total liabilities and stockholders' equity

  $ 117,450     $ 102,205  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands, except share data)

 

    Common Stock     Additional Paid-in Capital     Accumulated Deficit     Accumulated Other Comprehensive Loss     Total Stockholders' Equity  

Total stockholders' equity at January 31, 2019

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

Net loss

                    (1,502 )             (1,502 )

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

            79                       79  

Stock-based compensation expense

            154                       154  

Foreign currency translation adjustment

                            (317 )     (317 )
Total stockholders' equity at April 30, 2019   $ 79     $ 59,026     $ (5,134 )   $ (3,197 )   $ 50,774  
                                         
Net income                     3,720               3,720  
Common stock issued under stock plans, net of shares used for tax withholding     1       43                       44  
Stock-based compensation expense             406                       406  
Foreign currency translation adjustment                             358       358  
Total stockholders' equity at July 31, 2019   $ 80     $ 59,475     $ (1,414 )   $ (2,839 )   $ 55,302  
                                         
Net loss                     (145 )             (145 )
Common stock issued under stock plans, net of shares used for tax withholding             53                       53  
Stock-based compensation expense             226                       226  
Foreign currency translation adjustment                             12       12  

Total stockholders' equity at October 31, 2019

  $ 80     $ 59,754     $ (1,559 )   $ (2,827 )   $ 55,448  

 

 

 

Shares

 

2019

   

2018

 

Balances at beginning of year

    7,854,322       7,716,542  

Shares issued

    187,359       137,780  

Balances at period end

    8,041,681       7,854,322  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(In thousands)

 

Nine Months Ended October 31,

 
   

2019

   

2018

 

Operating activities

               

Net income/(loss)

  $ 2,073     $ (1,524 )

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

               

Depreciation and amortization

    3,349       3,482  

Deferred tax (income)/expense

    (288 )     346  

Equity-based compensation expense

    786       999  

Loss on disposal of fixed assets

    154       46  

Provision on uncollectible accounts

    49       14  

Changes in operating assets and liabilities

               

Accounts receivable

    2,960       (165 )

Inventories

    (3,980 )     2,269  

Contract assets and contract liabilities

    (2,929 )     (1,221 )

Accounts payable

    525       (5,460 )

Accrued compensation and payroll taxes

    (199 )     1,468  

Customers' deposits

    (704 )     (1,194 )

Income taxes receivable and payable

    80       54  

Prepaid expenses and other current assets

    1,523       (801 )

Other assets and liabilities

    (601 )     1,061  

Net cash provided by/(used in) operating activities

    2,798       (626 )

Investing activities

               

Capital expenditures

    (1,423 )     (885 )

Net cash used in investing activities

    (1,423 )     (885 )

Financing activities

               

Proceeds from revolving lines

    61,281       42,201  

Payments of debt on revolving lines of credit

    (61,613 )     (35,152 )
Debt issuance costs     -       (930 )

Payments of other debt

    (276 )     (266 )

Decrease in drafts payable

    (162 )     (20 )

Payments on finance lease obligations

    (185 )     (205 )

Stock options exercised and restricted shares retired for tax

    176       249  

Net cash provided by/(used in) financing activities

    (779 )     5,877  

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

    26       (569 )

Net increase in cash, cash equivalents and restricted cash

    622       3,797  

Cash, cash equivalents and restricted cash - beginning of period

    12,737       8,321  

Cash, cash equivalents and restricted cash - end of period

  $ 13,359     $ 12,118  

Supplemental cash flow information

               

Interest paid

  $ 609     $ 917  

Income taxes paid

    1,961       1,118  
Fixed assets acquired under capital leases - non-cash     848       -  

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

October 31, 2019

(Tabular amounts presented in thousands, except per share amounts)

 

 

Note 1 - Basis of presentation

 

The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2019 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2019 and 2018 are for the three and nine months ended October 31, 2019 and 2018, and for the fiscal years ended January 31, 2020 and 2019, respectively.

 

 

Note 2 - Business segment reporting

 

The Company is engaged in the manufacture and sale of products in one segment: Piping Systems. 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 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.

 

 

Note 3 - 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 United Arab Emirates 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. 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 $4.7 million as of January 31, 2019 has been outstanding for several years. Included in this balance is a retention receivable amount of $3.7 million, of which, due to the long-term nature of the receivable, $3.5 million was included in the balance of other long-term assets as of October 31, 2019 and January 31, 2019.The Company completed all of its deliverables in 2015 under the related contract, and has been engaged in ongoing active efforts to collect this outstanding amount. During the first nine months of fiscal 2019 the Company received $0.5 million, thus reducing this balance to $4.2 million as of October 31, 2019. As a result, the Company did not reserve any allowance against this receivable as of October 31, 2019. The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2019 has 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, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

 

For the three months ended October 31, 2019one individual customer accounted for 16% of the Company’s consolidated net sales, and during the same period in 2018, no individual customer accounted for more than 10% of the Company's consolidated net sales. For the nine months ended October 31, 2019, one customer accounted for 11% of the Company’s consolidated net sales, and during the same period in 2018, no individual customer accounted for more than 10% of the Company's consolidated net sales.

 

At October 31, 2019 and January 31, 2019three customers collectively accounted for 29.8% and 39.4% of the Company's accounts receivable, respectively. 

 

7

 

 

 

Note 4 - Revenue recognition 

 

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 into two main categories:

 

 

1)

Systems - which include all bundled products in which the Company 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.

 

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).

 

A breakdown of the Company's revenues by revenue class for the three and nine months ended October 31, 2019 and 2018 are as follows:

 

   

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2019

   

2018

   

2019

   

2018

 
   

Sales

   

% to Total

   

Sales

   

% to Total

   

Sales

   

% to Total

   

Sales

   

% to Total

 

Products

  $ 2,448       7 %   $ 4,439       14 %   $ 13,205       14 %   $ 9,447       10 %
                                                                 

Specialty Piping Systems and Coating

                                                               

Revenue recognized under input method

    14,363       42 %     11,869       36 %     38,601       40 %     32,778       35 %

Revenue recognized under output method

    17,646       51 %     16,498       50 %     43,594       46 %     51,795       55 %

Total

  $ 34,457       100 %   $ 32,806       100 %   $ 95,400       100 %   $ 94,020       100 %

 

8

 

 

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 do 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.

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of October 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 October 31, 2019 within one year.

 

   

Contract Assets

 

Balance January 31, 2019

  $ 1,653  

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

    (1,038 )

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

    1,368  
Closing Balance at April 30, 2019   $ 1,983  
Costs and gross profit recognized during the period for uncompleted contracts from the prior period     (1,509 )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period     3,000  

Closing Balance at July 31, 2019

  $ 3,474  
Costs and gross profit recognized during the period for uncompleted contracts from the prior period     (1,799 )
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period     2,688  
Closing Balance at October 31, 2019   $ 4,363  

 

   

Contract Liabilities

 

Balance January 31, 2019

  $ 1,569  

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

    (444 )

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

    721  
Closing Balance at April 30, 2019   $ 1,846  
Revenue recognized during the period for uncompleted contracts from the prior period     (1,250 )
New contracts entered into that are uncompleted at the end of the current period     545  

Closing Balance at July 31, 2019

  $ 1,141  
Revenue recognized during the period for uncompleted contracts from the prior period     (774 )
New contracts entered into that are uncompleted at the end of the current period     984  
Closing Balance at October 31, 2019   $ 1,351  

 

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 5 - Income taxes 

 

The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections. 

 

The Company's effective tax rate ("ETR") from operations for the third quarter and year-to-date in fiscal 2019 was 109.3% and 45.7% compared to 116.3% and 122,166.4% during the respective prior year periods. The change in the ETR from the prior year quarter to the current year quarter is largely due to changes in the mix of income and loss in various jurisdictions. Additionally, the Company was near break-even in the prior year which resulted in a large impact on the overall rate. In the prior year the Company was accruing taxes in jurisdictions where it was generating income, while applying a valuation allowance in the U.S., which attributed to the unusually large ETR for that quarter.

 

The amount of unrecognized tax benefits, including interest and penalties at October 31, 2019, recorded in other long-term liabilities was $0.1 million, all of which would impact the Company’s ETR if recognized. 

 

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. The Tax Act reduced the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018 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 ("GILTI") and the base erosion anti-abuse tax, respectively. The Company currently projects a GILTI inclusion for fiscal 2019, but there is no impact on tax expense due to its offset by loss carryovers with a full valuation allowance applied against it. 

 

 

Note 6 - Impairment of long-lived assets

 

The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards. There was no impairment of long-lived assets for the three and nine months ended October 31, 2019 and 2018.

 

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 October 31, 2019 and January 31, 2019 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.

 

   

January 31, 2019

   

Foreign exchange change effect

   

October 31, 2019

 

Goodwill

  $ 2,269     $ (5 )   $ 2,264  

 

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 or intangible asset. 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 of goodwill for the three and nine months ended October 31, 2019 and 2018.

 

 

 

Note 7 - Stock-based compensation 

 

The Company’s 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ("2017 Plan"), is the only incentive stock plan under which new equity incentive awards may be granted.

 

The Company has prior incentive plans under which previously granted awards remain outstanding, but under which no new awards may be granted. At October 31, 2019 the Company had reserved a total of 694,989 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards, and shares for new grants or issuances pursuant to the 2017 Plan.

 

While the 2017 Plan provides for the grant of deferred shares, non-qualified stock options, incentive stock options, restricted shares, restricted stock units, and performance-based restricted stock units intended to qualify under section 422 of the Internal Revenue Code, to date the Company has issued only restricted shares and restricted stock units under the 2017 Plan and currently intends to continue this practice. The 2017 Plan authorizes awards to officers, employees, consultants and independent directors.

 

The Company has stock-based compensation awards that can be granted to eligible employees, officers or independent directors. The following is the stock-based compensation expense:

 

   

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2019

   

2018

   

2019

   

2018

 

Stock-based compensation expense

  $ 2     $ 5     $ 10     $ 28  

Restricted stock-based compensation expense

    224       283       776       971  

Total stock-based compensation expense

  $ 226     $ 288     $ 786     $ 999  

 

Stock Options

 

The Company did not grant any stock options during the three or nine months ended October 31, 2019. The following tables summarizes the Company's stock option activity:

 

Option activity

  No. of Shares Underlying Options     Weighted Average Exercise Price     Weighted Average Remaining Contractual Term     Aggregate Intrinsic Value  

Outstanding (unvested) at January 31, 2019

    218     $ 8.60       3.8     $ 257  

Exercised

    (47 )     6.87               100  

Expired or forfeited

    (26 )     7.07                  

Outstanding at October 31, 2019

    145       9.03       3.4       167  
                                 

Exercisable at October 31, 2019

    143     $ 9.07       3.3     $ 163  

 

The Company received approximately $0.3 million during the nine months ended October 31, 2019 for stock options exercised. 

 

Unvested option activity

  No. of Shares Underlying Options     Weighted Average Grant Date Fair Value     Aggregate Intrinsic Value  

Outstanding (unvested) at January 31, 2019

    11     $ 7.00     $ 19  

Vested

    (7 )                

Expired or forfeited

    (2 )     7.07          

Outstanding at October 31, 2019

    2     $ 7.33     $ 5  

 

 

As of October 31, 2019, there was less than $0.1 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a weighted average period of 0.6 years.

 

Restricted stock

 

The following table summarizes the Company's restricted stock activity for the first nine months of fiscal 2019:

 

Restricted stock activity

  Restricted Shares     Weighted Average Grant Price Per Share     Aggregate Intrinsic Value  

Outstanding (unvested) at January 31, 2019

    283     $ 8.74     $ 2,476  

Granted

    152       9.09          
Vested and issued     (52 )     8.86          

Forfeited or retired for taxes

    (24 )     8.68          

Outstanding (unvested) at October 31, 2019

    359     $ 8.98     $ 3,229  

 

As of October 31, 2019, there was $1.7 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 2.3 years.

 

 

Note 8 - Earnings per share

 

 

   

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2019

   

2018

   

2019

   

2018

 

Basic weighted average common shares outstanding

    8,037       7,877       7,970       7,806  

Dilutive effect of equity compensation plans

                77        

Weighted average common shares outstanding assuming full dilution

    8,037       7,877       8,047       7,806  
                                 

Stock options not included in the computation of diluted earnings per share of common stock because the option exercise prices exceeded the average market prices of the common shares

    68       176       68       176  

Stock options with an exercise price below the average market price

    77       91       77       91  

 

 

 

Note 9 - Debt

 

Debt totaled $16.3 million at October 31, 2019 and January 31, 2019, respectively.

 

Revolving lines 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 Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”), providing for a 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 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 a cash collateralized letter of credit (USD $154,500). The Company has used proceeds from the 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 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 the assets 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 $3.0 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 a ratio of their 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 (ii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of their 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 each quarter end on a trailing four-quarter basis. The Company was in compliance with these requirements as of October 31, 2019

 

The Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Senior Credit Facility will automatically become immediately due and payable. Borrowings under the Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate while a bankruptcy event of default exists or, upon the lenders’ request, during the continuance of any other event of default.

 

 

As of October 31, 2019, the Company had borrowed an aggregate of $7.8 million at a rate of 7.75%, 5.80%, and 5.94% resulting in a weighted average rate of 6.01% and had $4.9 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 October 31, 2019 the Company was in compliance with the covenants under the credit arrangements. On October 31, 2019, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On October 31, 2019, the Company's interest rates ranged from 5.4% to 5.9%, with a weighted average rate of 5.74%, and the Company could borrow $9.0 million under these credit arrangements. On October 31, 2019$5.2 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On October 31, 2019, the Company had borrowed $0.9 million, and had an additional $2.9 million of borrowing remaining available. The foreign revolving lines balances as of October 31, 2019 and January 31, 2019, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

Mortgages. On July 28, 2016, the Company borrowed CAD 8.0 million (approximately USD $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's 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 CAD 37 thousand (approximately USD $28 thousand) for interest; and monthly payments of CAD 27 thousand (approximately USD $20 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%.

 

 

 

Note 10 - Leases

 

Effective February 1, 2019, the Company accounts for its leases under ASC 842, Leases.  Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities short-term, and operating lease liabilities long-term in the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term debt, and long-term debt less current maturities in the Company's consolidated balance sheets. 

 

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate.  Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term.  For operating leases, interest on the lease liability and the amortization of the ROU asset result in straight-line rent expense over the lease term.  For finance leases, interest on the lease liability and the amortization of the ROU asset results in front-loaded expense over the lease term.  Variable lease expenses are recorded when incurred. ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.

 

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.

 

In calculating the ROU asset and lease liability, the Company elects to combine lease and non-lease components.  The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term. 

 

The Company continues to account for leases in the prior period financial statements under ASC Topic 840.

 

Finance Leases. In 2017, the Company obtained three finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases range from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature between April 2021 to September 2022.

 

In 2019, the Company obtained two finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023. 

 

In August 2016, the Company obtained a finance lease for 0.6 million Indian Rupees (approximately USD $8 thousand at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for this finance lease was 15.6% per annum with monthly principal and interest payments of less than USD $1 thousand. This lease expired in July 2019. 

 

The Company has several significant operating lease agreements, with lease terms of one to 14 years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees.  Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and ROU assets as the Company is not reasonably certain to exercise the options.  Variable expenses generally represent the Company’s share of the landlord’s operating expenses.  The Company does not have any arrangements where it acts as a lessor, other than one sub-lease arrangement. 

 

At October 31, 2019, the Company had operating lease liabilities of $11.7 million and operating ROU assets of $11.7 million, which are reflected in the consolidated balance sheet. At October 31, 2019, the Company also had finance lease liabilities of $1.2 million included in current maturities of long-term debt and long-term debt less current maturities, and finance ROU assets of $1.2 milliowhich were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheet.

 

15

 

 

Supplemental balance sheet information related to leases is as follows: 

 

Operating and Finance leases:

 

October 31, 2019

 

Finance leases assets:

       

Property and Equipment - gross

  $ 1,704  

Accumulated depreciation and amortization

    (502 )

Property and Equipment - net

  $ 1,202  
         

Finance lease liabilities:

       

Finance lease liability short-term

  $ 411  

Finance lease liability long-term

    788  

Total finance lease liabilities

  $ 1,199  
         

Operating lease assets:

       

Operating lease ROU assets

  $ 11,717  
         

Operating lease liabilities:

       

Operating lease liability short-term

  $ 1,130  

Operating lease liability long-term

    10,617  

Total operating lease liabilities

  $ 11,747  

 

Total lease costs consist of the following: 

 

Lease costs

Consolidated Statements of Operations Classification

 

Three Months Ended October 31, 2019

   

Nine Months Ended October 31, 2019

 

Finance Lease Costs

                 

Amortization of ROU assets

Cost of sales

  $ 53     $ 155  

Interest on lease liabilities

Interest expense

    18       36  

Operating lease costs

Cost of sales, SG&A expenses

    579       1,716  

Short-term lease costs (1)

Cost of sales, SG&A expenses

    140       401  

Sub-lease income

SG&A expenses

    (20 )     (61 )

Total Lease costs

  $ 770     $ 2,247  

 

(1) Includes variable lease costs, which are immaterial

 

16

 

 

Supplemental cash flow information related to leases is as follows:

 

   

Nine Months Ended October 31, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Financing cash flows from finance leases

  $ 185  

Operating cash flows from finance leases

    36  

Operating cash flows from operating leases

    1,732  

 

   

Three Months Ended October 31, 2019

 

ROU Assets obtained in exchange for new lease obligations:

       

Finance leases liabilities

  $ 850  

Operating leases liabilities

    584  

 

Weighted-average lease terms and discount rates are as follows: 

 

   

October 31, 2019

 

Weighted-average remaining lease terms (in years):

       

Finance leases

    3.2  

Operating leases

    9.0  
         

Weighted-average discount rates:

       

Finance leases

    7.7 %

Operating leases

    8.3 %

 

Maturities of lease liabilities as of October 31, 2019, are as follows:

 

Year:

 

Operating Leases

   

Finance Leases

 

For the three months ended January 31, 2020

  $ 569     $ 122  

For the year ended January 31, 2021

    2,313       488  

For the year ended January 31, 2022

    2,213       332  

For the year ended January 31, 2023

    2,146       270  

For the year ended January 31, 2024

    1,967       145  

For the year ended January 31, 2025

    1,252       -  
                 

Thereafter

    6,656       -  

Total lease payments

    17,116       1,357  

Less: amount representing interest

    (5,369 )     (158 )

Total lease liabilities at October 31, 2019

  $ 11,747     $ 1,199  

 

Rent expense on operating leases, which is recorded on straight-line basis, was $0.7 million for the three months ended October 31, 2019 and 2018, and $2.0 million for the nine months ended October 31, 2019 and 2018, respectively. 

17

 

 

 

Note 11 - Restricted cash

 

Restricted cash held by foreign subsidiaries was $1.1 million for both October 31, 2019 and January 31, 2019 and is related to fixed deposits that also serve as security deposits and guarantees. 

 

   

Nine Months Ended October 31,

 
   

2019

   

2018

 

Cash and cash equivalents

  $ 12,221     $ 9,582  

Restricted cash

    1,138       2,536  

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

  $ 13,359     $ 12,118  

 

 

Note 12 - Fair value

 

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.

 

 

Note 13 - Recent accounting pronouncements

 

In February 2016, the FASB issued Accounting Standard Update ("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 adoption of this ASU using the alternative transition approach resulted in the recognition of operating lease ROU assets, net of deferred rent of $10.7 million and lease liability for operating leases of $11.0 million as of February 1, 2019. The Company accounts for existing finance lease assets and liabilities in the same way under the new standard.  Adoption of this ASU did not have an effect on retained earnings. The Company availed itself of the practical expedients provided under this ASU and its subsequent amendments regarding identification of leases, lease classification, indirect costs and the combination of lease and non-lease components. The Company continues to account for leases in the prior period financials statements under ASC Topic 840.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. A recently adopted amendment has delayed the effective date until fiscal years beginning after December 15, 2022. The Company is currently evaluating this standard and the impact to the financial statements of the Company. 

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the disproportionate income tax effects of the Tax Act on items within accumulated other comprehensive income/(loss) to reinvested earnings. These disproportionate income tax effect items are referred to as "stranded tax effects." The amendments in this update only relate to the reclassification of the income tax effects of the Tax Reform Act. Other accounting guidance that requires the effect of changes in tax laws or rates to be included in net income from continuing operations is not affected by this update. The Company adopted ASU 2018-02 effective February 1, 2019 and has elected to not reclassify any amounts to retained earnings. Under the Company's existing policy, any existing stranded tax effects will be eliminated when the underlying circumstances upon which it was premised cease to exist.   

 

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

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")

 

The statements contained under the caption MD&A and other information contained elsewhere in this quarterly report, 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, 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 heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K. 

 

This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in the MD&A have been rounded to the nearest percentage point, and may not exactly correspond to the comparative data presented.

 

RESULTS OF OPERATIONS

 

The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results could be significantly impacted in the future as a result of large variations in the level of project activity in reporting periods.

 

 

 

($ in thousands)

 

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2019

   

2018

   

Change favorable/(unfavorable)

   

2019

   

2018

   

Change favorable/(unfavorable)

 
   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent

 

Net sales

  $ 34,457             $ 32,806             $ 1,651       5 %   $ 95,400             $ 94,020             $ 1,380       1 %
                                                                                                 

Gross profit

    7,643       22 %     6,883       21 %     760       11 %     22,018       23 %     17,001       18 %     5,017       30 %
                                                                                                 

General and administrative expenses

    4,541       13 %     4,247       13 %     (294 )     (7 )%     13,556       14 %     12,153       13 %     (1,403 )     (12 )%
                                                                                                 

Selling expense

    1,354       4 %     1,554       5 %     200       13 %     4,030       4 %     4,017       4 %     (13 )     (0 )%
                                                                                                 

Interest expense, net

    194               280               86       31 %     612               830               218       26 %
                                                                                                 

Income/(loss) from operations before income taxes

    1,554               802               752               3,820               1               3,819          

 

Three months ended October 31, 2019 ("current quarter") vs. Three months ended October 31, 2018 ("prior year quarter")

 

Net sales:

 

Net sales increased $1.7 million to $34.5 million in the current quarter, from $32.8 million in the prior year quarter. Higher revenues resulted from the Middle East region partially offset by lower revenue in North America, primarily driven by a temporary weakness in our Canadian operations. 

 

Cost of sales and gross profit:

 

Gross profit increased to $7.6 million, or 22% of net sales, in the current quarter from $6.9 million, or 21% of net sales, in the prior year quarter. This 11% increase in gross profit was driven by improved pricing, product mix and cost reduction initiatives. The cost reduction initiatives include sourcing raw material at favorable prices and focusing efforts on quality improvements. 

 

General and administrative expenses:

 

General and administrative expenses increased to $4.5 million in the current quarter, compared to $4.2 million in the prior year quarter. This increase of $0.3 million was primarily due to costs related to realignment of head office functions. 

 

Selling expenses:

 

Selling expenses reduced to $1.4 million in the current quarter, compared to $1.6 million in the prior year quarter. This decrease was due to a new sales compensation program.

 

Interest expense:

 

Net interest expense decreased to $0.2 million in the current quarter from $0.3 million in the prior year quarter due to lower borrowings. 

 

19

 

 

Income from operations before income taxes:

Income from operations before income taxes increased by $0.8 million to $1.6 million in the current quarter from $0.8 million in the prior year quarter. This increase was due to increased revenue and improved margins.  

Nine months ended October 31, 2019 ("year-to-date") vs. Nine months ended October 31, 2018 ("prior year year-to-date")

Net sales:

Net sales increased $1.4 million to $95.4 million in the current year-to-date, from $94.0 million in the prior year year-to-date. The overall revenue increase resulted from higher revenues in the Middle East region and the Company's leak detection systems, partially offset by lower revenues of the Company's traditional coating revenues in North America, primarily driven by a temporary weakness in our Canadian operations.      

Cost of sales and gross profit:

Gross profit increased to $22.0 million, or 23% of net sales, in the current year-to-date from $17.0 million, or 18% of net sales, in the prior year year-to-date. This 30% increase in gross profit was driven by improved pricing, product mix and cost reduction initiatives. The cost reduction initiatives include sourcing raw material at favorable prices and focusing efforts on quality improvements. 

General and administrative expenses:

General and administrative expenses increased to $13.6 million in the current year-to-date, compared to $12.2 million in the prior year year-to-date. This was due to increased compensation expenses and loss on disposal of an asset, partially offset by collection of a previously reserved bad debt.

Selling expenses:

Selling expenses remained relatively flat at $4.0 million in the current year-to-date, compared to $4.0 million in the prior year year-to-date.

Interest expense:

Net interest expense decreased to $0.6 million in the current year-to-date from $0.8 million in the prior year year-to-date due to lower borrowings. 

Income/(loss) from operations before income taxes:

Income from operations before income taxes increased $3.8 million in the current year-to-date from less than $0.1 million in the prior year year-to-date. This increase was due to increased revenue and improved margins.

 

20

 

 

Income taxes: 

 

The Company's effective tax rate ("ETR") from operations for the third quarter and year-to-date 2019 was 109.3% and 45.7% compared to 116.3% and 122,166.4% during the respective prior year periods in 2018. The change in the ETR from the prior year quarter to the current year quarter was largely due to changes in the mix of income and loss in various jurisdictions. Additionally, the Company was near break-even in the prior year which resulted in a large impact on the overall rate. In the prior year, the Company was accruing taxes in jurisdictions where they were generating income, while applying a valuation allowance in the U.S., which attributed to the unusually large ETR for that quarter. For additional information, see "Notes to Consolidated Financial Statements, Note 5 Income taxes".

 

Other 

 

In February 2017, the Company 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 Total E&P, a French oil company, China National Offshore Oil Corporation and Tullow Oil, a London-based oil company (collectively, the "EACOP Project Entities"). 

 

On September 3, 2019, the Company received notice that the EACOP project had been suspended.  According to news reports, the EACOP Project Entities have not reached an ownership agreement as tax negotiations have stalled.  As a consequence, the EACOP project has been suspended while the project’s partners and the Ugandan government continue to pursue a potential agreement.

 

Liquidity and capital resources

 

Cash and cash equivalents as of October 31, 2019 were $12.2 million compared to $10.2 million on January 31, 2019. On October 31, 2019, $0.4 million was held in the U.S., and $11.8 million was held at the Company's foreign subsidiaries. From time to time, the Company repatriates cash held at certain of its foreign subsidiaries as needed to help fund the Company's working capital needs. The Company's working capital was $28.2 million on October 31, 2019 compared to $25.9 million on January 31, 2019, due to cash flows from operations.

 

Cash provided by operating activities year-to-date was $2.8 million, and cash used in operating activities for the prior year year-to-date was $0.6 million. This improvement was primarily due to the Company being in a net income position year-to-date compared to a loss position during the prior year year-to-date. Net cash used in investing activities year-to-date and prior year year-to-date was $1.4 million and $0.9 million, respectively. This was due to an increase in investments in fixed assets needed for the operation of the business.

 

Net cash used in financing activities year-to-date was $0.8 million, and cash provided by financing activities for the prior year year-to-date was $5.9 million. The primary reason for this change is that during the prior year year-to-date our borrowings exceeded our repayments under our revolving credit facility by approximately $7.0 million, whereas year-to-date, repayments exceeded borrowings by approximately $0.3 million. Debt totaled $16.3 million on October 31, 2019  and January 31, 2019, respectively. For additional information, see "Notes to Consolidated Financial Statements, Note 9 Debt".

 

 

On 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 Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”), providing for a three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”). 

 

The Company has used proceeds from the Senior Credit Facility to pay outstanding amounts under a prior credit facility, a cash collateralized letter of credit, and 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 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 assets 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 $3.0 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 a ratio of their 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 (ii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of their 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 each quarter end on a trailing four-quarter basis. The Company was in compliance with these requirements as of October 31, 2019.

 

 

The Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Senior Credit Facility will automatically become immediately due and payable. Borrowings under the Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate while a bankruptcy event of default exists or, upon the lenders’ request, during the continuance of any other event of default.

 

As of October 31, 2019, the Company had borrowed an aggregate of $7.8 million at a rate of 7.75%, 5.80%, and 5.94% resulting in a weighted average rate of 6.01%. The Company had $4.9 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 October 31, 2019, the Company was in compliance with all of its covenants. On October 31, 2019, interest rates were based on the Emirates Inter Bank Offered Rate (EIBOR) plus 3.5% per annum, with a minimum interest rate of 4.5% per annum. On October 31, 2019, the Company's interest rates ranged from 5.4% to 5.9%, with a weighted average rate of 5.74%, and the Company could borrow $9.0 million under these credit arrangements. On October 31, 2019$5.2 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On October 31, 2019, the Company had borrowed $0.9 million, and had an additional $2.9 million available. The foreign revolving lines balances as of October 31, 2019 and January 31, 2019, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

Mortgages. On July 28, 2016, the Company borrowed CAD 8.0 million (approximately USD $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 CAD 37 thousand (approximately USD $28 thousand) for interest; and monthly payments of CAD 27 thousand (approximately USD $20 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%.

Finance Leases. In 2017, the Company obtained three finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature from April 30, 2021 to September 29, 2022.

In 2019, the Company obtained two finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023. 

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 $37.7 million as of October 31, 2019, with a remaining balance due in the amount of $4.2 million. Included in this balance is an amount of $3.7 million, which pertains to retention clauses within the agreements of the Company's 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 reclassified to a long-term receivable account.

 

The Company has been engaged in ongoing active efforts to collect the outstanding amount, and collected $0.5 million during the nine months ended October 31, 2019. During fiscal 2019, the Company has 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 October 31, 2019. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2019 contained in the Company's most recent Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates.

 

 

Item 4.

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 October 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 Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

 

Changes in Internal Controls

 

There were no changes in our internal control over financial reporting during our most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

PART II OTHER INFORMATION

 

Item 6.

Exhibits

 

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

    Perma-Pipe International Holdings, Inc.
     
     

Date:

December 10, 2019

/s/ David J. Mansfield

 

 

David J. Mansfield

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:

December 10, 2019

/s/ D. Bryan Norwood

 

 

D. Bryan Norwood

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

26