10-Q 1 ppih20231031_10q.htm FORM 10-Q ppih20231031_10q.htm
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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, 2023

 

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

 

For the transition period from ________ to ________

 

Commission File No. 001-32530

 

Perma-Pipe International Holdings, Inc.

(Exact name of registrant as specified in its charter)

permapipelogo10q.jpg
 

Delaware

36-3922969

(State or other jurisdiction of incorporation or organization)

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

 

 

24900 Pitkin Road, Suite 309, Spring, Texas

77386

(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $.01 par value per sharePPIHThe 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, a 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 8, 2023, there were 8,063,501 shares of the registrant's common stock outstanding.

 

 

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-Q

 

For the fiscal quarter ended October 31, 2023

 

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, 2023 and 2022

2

 

Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended October 31, 2023 and 2022

3

 

Consolidated Balance Sheets as of October 31, 2023 (Unaudited) and January 31, 2023

4

 

Consolidated Statements of Stockholders' Equity (Unaudited) for the Three and Nine Months Ended October 31, 2023 and 2022

5

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended October 31, 2023 and 2022

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

26

 

 

 

Part II

Other Information

 

     
2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities 27
     

6.

Exhibits

27

 

 

 

Signatures

28

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

  

Three Months Ended October 31,

  

Nine Months Ended October 31,

 
  

2023

  

2022

  

2023

  

2022

 

Net sales

 $45,690  $37,903  $110,489  $106,128 

Cost of sales

  32,506   26,773   81,065   78,063 

Gross profit

  13,184   11,130   29,424   28,065 
                 

Operating expenses

                

General and administrative expenses

  5,674   5,284   16,417   16,180 

Selling expenses

  1,471   1,310   4,201   3,863 

Total operating expenses

  7,145   6,594   20,618   20,043 
                 

Income from operations

  6,039   4,536   8,806   8,022 
                 

Interest expense

  640   717   1,788   1,585 

Other expense

  (502)  (948)  (350)  (963)

Income before income taxes

  4,897   2,871   6,668   5,474 
                 

Income tax expense

  1,533   1,143   3,257   2,763 
                 

Net income

  3,364   1,728   3,411   2,711 

Less: Net income attributable to non-controlling interest

  1,429   -   1,577   - 

Net income attributable to common stock

 $1,935  $1,728  $1,834  $2,711 
                 

Weighted average common shares outstanding

                

Basic

  7,955   8,004   7,996   8,096 

Diluted

  8,021   8,146   8,106   8,238 
                 

Earnings per share attributable to common stock

                

Basic

 $0.24  $0.22  $0.23  $0.33 

Diluted

 $0.24  $0.21  $0.23  $0.33 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 (Unaudited)

 

   

Three Months Ended October 31,

   

Nine Months Ended October 31,

 
   

2023

   

2022

   

2023

   

2022

 

Net income

  $ 3,364     $ 1,728     $ 3,411     $ 2,711  
                                 

Other comprehensive income (loss)

                               

Foreign currency translation adjustments, net of tax

    (2,035 )     (2,735 )     (2,133 )     (4,122 )

Minimum pension liability adjustment, net of tax

    -       1,247       -       1,247  

Comprehensive income (loss)

  $ 1,329     $ 240     $ 1,278     $ (164 )

Less: Comprehensive income attributable to non-controlling interests

    1,429       -       1,577       -  

Total comprehensive (loss) income attributable to common stock

  $ (100 )   $ 240     $ (299 )   $ (164 )

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

  

October 31, 2023

  

January 31, 2023

 
   (Unaudited)     

ASSETS

        

Current assets

        

Cash and cash equivalents

 $6,021  $5,773 

Restricted cash

  1,387   1,020 

Trade accounts receivable, less allowance for credit losses of $574 at October 31, 2023 and $612 at January 31, 2023

  47,095   42,010 

Inventories

  16,052   14,738 

Prepaid expenses and other current assets

  7,316   7,357 

Unbilled accounts receivable

  14,320   11,634 

Costs and estimated earnings in excess of billings on uncompleted contracts

  2,462   3,126 

Total current assets

  94,653   85,658 

Long-term assets

        

Property, plant and equipment, net of accumulated depreciation

  35,851   26,518 

Operating lease right-of-use asset

  6,376   4,527 

Deferred tax assets

  639   696 

Goodwill

  2,152   2,227 

Other long-term assets

  4,534   3,340 

Total long-term assets

  49,552   37,308 

Total assets

 $144,205  $122,966 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Trade accounts payable

 $26,104  $14,754 

Accrued compensation and payroll taxes

  1,551   1,179 

Commissions and management incentives payable

  4,546   4,764 

Revolving line - North America

  6,702   4,387 

Current maturities of long-term debt

  7,132   6,227 

Customers' deposits

  3,220   1,951 

Operating lease liability short-term

  920   912 

Other accrued liabilities

  3,076   5,549 

Billings in excess of costs and estimated earnings on uncompleted contracts

  904   1,743 

Income taxes payable

  3,383   2,324 

Total current liabilities

  57,538   43,790 

Long-term liabilities

        

Long-term debt, less current maturities

  4,158   4,389 

Long-term finance obligation

  9,114   9,215 

Deferred compensation liabilities

  1,142   1,608 

Deferred tax liabilities

  976   909 

Operating lease liability long-term

  6,143   4,252 

Related party loan

  2,753   - 

Other long-term liabilities

  1,252   1,019 

Total long-term liabilities

  25,538   21,392 

Non-controlling interest

  4,156   - 

Stockholders' equity

        

Common stock, $.01 par value, authorized 50,000 shares; 7,951 issued and outstanding at October 31, 2023 and 8,004 at January 31, 2023

  80   80 

Additional paid-in capital

  62,991   62,562 

Treasury stock, 109 shares at October 31, 2023 and 3 shares at January 31, 2023

  (967)  (26)

Retained earnings

  3,451   1,617 

Accumulated other comprehensive loss

  (8,582)  (6,449)

Total stockholders' equity

  56,973   57,784 

Total liabilities and stockholders' equity

 $144,205  $122,966 

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except share data)

(Unaudited)

 

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Treasury Stock

  

Accumulated Other Comprehensive Loss

  

Total Stockholders' Equity

 

Total stockholders' equity at January 31, 2023

 $80  $62,562  $1,617  $(26) $(6,449) $57,784 
                         

Net loss

  -   -   (1,123)  -   -   (1,123)

Stock-based compensation expense

  -   229   -   -   -   229 

Foreign currency translation adjustment

  -   -   -   -   (437)  (437)

Total stockholders' equity at April 30, 2023

 $80  $62,791  $494  $(26) $(6,886) $56,453 
                         

Net income

  -   -   1,022   -   -   1,022 

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

  -   (274)  -   -   -   (274)

Repurchase of common stock

  1   -   -   (312)  -   (311)

Stock-based compensation expense

  -   245   -   -   -   245 

Foreign currency translation adjustment

  -   -   -   -   339   339 

Total stockholders' equity at July 31, 2023

 $81  $62,762  $1,516  $(338) $(6,547) $57,474 
                         

Net income

  -   -   1,935   -   -   1,935 

Repurchase of common stock

  (1)  -   -   (629)  -   (630)

Stock-based compensation expense

  -   229   -   -   -   229 

Foreign currency translation adjustment

  -   -   -   -   (2,035)  (2,035)

Total stockholders' equity at October 31, 2023

 $80  $62,991  $3,451  $(967) $(8,582) $56,973 

 

   

Common Stock

   

Additional Paid-in Capital

   

Accumulated Deficit

   

Treasury Stock

   

Accumulated Other Comprehensive Loss

   

Total Stockholders' Equity

 

Total stockholders' equity at January 31, 2022

  $ 82     $ 61,766     $ (2,295 )   $ (1,992 )   $ (3,104 )   $ 54,457  
                                                 

Net loss

    -       -       (885 )     -       -       (885 )

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

    -       16       -       -       -       16  

Stock-based compensation expense

    -       236       -       -       -       236  

Foreign currency translation adjustment

    -       -       -       -       (932 )     (932 )

Total stockholders' equity at April 30, 2022

  $ 82     $ 62,018     $ (3,180 )   $ (1,992 )   $ (4,036 )   $ 52,892  
                                                 

Net income

    -       -       1,868       -       -       1,868  

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

    -       (247 )     -       -       -       (247 )

Repurchase of common stock

    -       -       -       (43 )     -       (43 )

Retirement of treasury stock

    (2 )     -       (2,033 )     2,035       -       -  

Stock-based compensation expense

    -       284       -       -       -       284  

Foreign currency translation adjustment

    -       -       -       -       (455 )     (455 )

Total stockholders' equity at July 31, 2022

  $ 80     $ 62,055     $ (3,345 )   $ -     $ (4,491 )   $ 54,299  
                                                 

Net income

    -       -       1,728       -       -       1,728  

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

    -       9       -       -       -       9  

Stock-based compensation expense

    -       243       -       -       -       243  

Pension liability

    -       -       -       -       1,247       1,247  

Foreign currency translation adjustment

    -       -       -       -       (2,735 )     (2,735 )

Total stockholders' equity at October 31, 2022

  $ 80     $ 62,307     $ (1,617 )   $ -     $ (5,979 )   $ 54,791  

 

Shares

 

2023

   

2022

 

Balances at beginning of year

    8,007,002       8,151,754  

Treasury stock retired

    -       (4,887 )

Shares issued, net of shares used for tax withholding

    56,499       94,416  

Prior period adjustments

    -       (234,281 )

Balances at period end

    8,063,501       8,007,002  

 

See accompanying notes to consolidated financial statements.

 

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended October 31,

 
   

2023

   

2022

 

Operating activities

               

Net income

  $ 3,411     $ 2,711  

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

               

Depreciation and amortization

    2,774       2,781  

Deferred tax expense

    145       358  

Stock-based compensation expense

    686       763  

Non-cash pension termination expense

    -       813  

Provision on uncollectible accounts

    (37 )     20  

(Loss) gain from disposal of fixed assets

    (13 )     134  

Changes in operating assets and liabilities

               

Accounts receivable

    (5,377 )     (4,345 )

Inventories

    (1,426 )     (1,545 )

Costs and estimated earnings in excess of billings on uncompleted contracts

    (175 )     (3,086 )

Accounts payable

    9,346       513  

Accrued compensation and payroll taxes

    1,167       126  

Customers' deposits

    1,272       1,250  

Income taxes payable

    327       530  

Prepaid expenses and other current assets

    205       (785 )

Unbilled accounts receivable

    (2,776 )     (7,037 )

Other assets and liabilities

    (1,912 )     1,699  

Net cash provided by (used in) operating activities

    7,617       (5,100 )

Investing activities

               

Capital expenditures

    (8,204 )     (3,236 )

Proceeds from insurance recovery for property and equipment

    5       -  

Proceeds from sales of property and equipment

    -       117  

Net cash used in investing activities

    (8,199 )     (3,119 )

Financing activities

               

Proceeds from revolving credit lines

    120,467       62,778  

Payments of debt on revolving credit lines

    (117,419 )     (54,259 )

Payments of principal on finance obligation

    (84 )     (65 )

Payments of other debt

    (179 )     (198 )

Decrease in drafts payable

    (199 )     (130 )

Payments on finance lease obligations

    (176 )     (251 )

Repurchase of common stock

    (941 )     (43 )

Stock options exercised and taxes paid related to restricted shares vested

    (273 )     (222 )

Net cash provided by financing activities

    1,196       7,610  

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

    1       563  

Net increase (decrease) in cash, cash equivalents and restricted cash

    615       (46 )

Cash, cash equivalents and restricted cash - beginning of period

    6,793       9,771  

Cash, cash equivalents and restricted cash - end of period

  $ 7,408     $ 9,725  

Supplemental cash flow information

               

Cash interest paid

  $ 1,754     $ 1,505  

Cash income taxes paid

    2,546       2,107  

Fixed assets acquired from non affiliates - non-cash

  $ 4,357     $ -  

 

See accompanying notes to consolidated financial statements.

 

 

PERMA-PIPE INTERNATIONAL HOLDINGS, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

October 31, 2023

(In thousands, except per share data, or unless otherwise specified)

(Unaudited)

 

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. Certain 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, 2023 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 2023 and 2022 are for the fiscal year ending January 31, 2024 and for the fiscal year ended  January 31, 2023, respectively.

 

Significant New Accounting Policies

 

Refer to the Company's Annual Report on Form 10-K for the year ended January 31, 2023 as filed with the SEC on April 27, 2023 for discussion of the Company's significant accounting policies. During the nine months ended October 31, 2023, the following accounting policy was adopted: 

 

Current Expected Credit Loss

 

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The amended guidance requires the application of a current expected credit loss (“CECL”) model, which measures credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.  The Company adopted this guidance effective February 1, 2023, which was not material to the consolidated financial statements for the nine months ended October 31, 2023.

 

Subsequent Events

 

The Company has evaluated subsequent events through December 8, 2023, the date the financial statements were issued. Any material subsequent events that occurred during this time have been properly recognized and/or disclosed in these consolidated financial statements.

 

 

Note 2 - Business segment reporting

 

The Company is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company engineers, manufactures and sells pre-insulated specialty piping systems, and leak detection systems. Pre-insulated 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, (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines, and (iv) liquid and powder based anti-corrosion coatings applied both to the external and internal surfaces of steel pipe, including shapes like bends, reducers, tees, and other spools/fittings used in pipelines for the transportation of oil and gas products and potable water. 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 consist of geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition. In the United States, collateral is not generally required. In the United Arab Emirates ("U.A.E."), Saudi Arabia, Egypt and India, letters of credit are obtained for substantially all orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific contract and are stated at amounts due from customers net of any allowance for claims and credit losses. The allowance for credit losses is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management exercises 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 an amount is deemed uncollectible and all attempts to collect have been exhausted. The write-off is recorded against the allowance for credit losses. 

 

7

 

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $39.5 million as of October 31, 2023, with a remaining balance due in the amount of $2.4 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this amount, $1.6 million is classified in other long-term assets on the Company's consolidated balance sheets.

 

Regardless of the contractual due date for payment, the Company has been actively engaged in ongoing efforts to collect this outstanding balance. The Company continues to engage with the customer to ensure full payment of the open balances. In September 2023 and June 2022, a partial payment was received to settle $0.4 million and $0.9 million of the customer's outstanding balances, respectively. Further, the Company has been engaged by the customer to perform additional work in 2022 and 2023 under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against the remaining outstanding balances as of October 31, 2023. 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 uncollected amounts.

 

For the three months ended October 31, 2023one customer accounted for 14% of the Company's consolidated net sales, and during the same period in 2022no individual customer accounted for greater than 10% of the Company’s consolidated net sales. For the nine months ended October 31, 2023 and 2022no individual customer accounted for greater than 10% of the Company's consolidated net sales. 

 

As of  October 31, 2023 and January 31, 2023two customers accounted for 24% of the Company's accounts receivable, and one customer accounted for 12% of the Company's accounts receivable, respectively.

 

Note 4 - Revenue recognition 

 

The Company accounts for its revenues under Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers.

 

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 and Coating - Includes all bundled products in which the Company engineers and manufactures pre-insulated specialty piping systems mainly relating to the district heating and cooling and oil & gas markets.

 

 

2)

Products - Includes cables, leak detection products, heat trace products, 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 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 profit margin.

 

 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, 2023 and 2022 are as follows:

 

  

Three Months Ended October 31,

  

Nine Months Ended October 31,

 
  

2023

  

2022

  

2023

  

2022

 
  

Sales

  

% of Total

  

Sales

  

% of Total

  

Sales

  

% of Total

  

Sales

  

% of Total

 

Products

 $2,553   5% $4,363   12% $7,541   7% $11,144   10%
                                 

Specialty Piping Systems and Coating

                                

Revenue recognized under input method

  18,641   41%  12,593   33%  41,779   38%  35,918   34%

Revenue recognized under output method

  24,496   54%  20,947   55%  61,169   55%  59,066   56%

Total

 $45,690   100% $37,903   100% $110,489   100% $106,128   100%

 

The input method as noted in ASC 606-10-55-20 is used by certain operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the "over time" 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.  

 

8

 

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 milestone payments or receive 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 are made for estimated losses on uncompleted contracts in the contract liabilities account in the period in which such losses are determined.

 

Contract assets and liabilities

 

Contract assets represent revenue recognized in excess of amounts billed for 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 for 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 impact the period end balances in these accounts.

 

The following table shows the reconciliation of costs in excess of billings and billings in excess of costs: 

 

  

October 31, 2023

  

January 31, 2023

 

Costs incurred on uncompleted contracts

 $22,560  $18,342 

Estimated earnings

  11,916   9,370 

Earned revenue

  34,476   27,712 

Less billings to date

  32,918   26,329 

Costs in excess of billings, net

 $1,558  $1,383 

Balance sheet classification

        

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

 $2,462  $3,126 

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

  (904)  (1,743)

Costs in excess of billings, net

 $1,558  $1,383 

 

The Company anticipates that substantially all costs incurred on uncompleted contracts as of  October 31, 2023 will be billed and collected within one year, and all billings on uncompleted contracts as of  October 31, 2023 will be satisfied and collected within one year. 

 

Unbilled accounts receivable

 

The Company has recorded $14.3 million and $11.6 million of unbilled accounts receivable on the consolidated balance sheets as of October 31, 2023 and January 31, 2023, from revenues generated by certain of its subsidiaries. The Company has fulfilled all performance obligations and has recorded revenue under the respective contracts. The deliverables under these contracts have been accepted by the customer in accordance with the terms of the contract. The Company anticipates that substantially all of the amounts included in unbilled accounts receivable as of  October 31, 2023 will be billed within one year.

 

Practical expedients

 

Costs to obtain a contract are not considered to be incremental or material, and project duration generally does not span more than one year. Accordingly, the Company applies the practical expedient for these types of costs and as such, are expensed in the period incurred.

 

As the Company's contracts are generally 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.

 

9

 
 

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 U.A.E. 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 worldwide effective tax rates ("ETR") for the three months ended October 31, 2023 and 2022 were 31% and 40%, respectively. The change in the ETR is due primarily to the inability to recognize tax benefits due to losses incurred in the United States resulting in a full valuation allowance and due to changes in the mix of income and loss in various jurisdictions.

 

The Company expects that future distributions from foreign subsidiaries will not be subject to incremental U.S. federal tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested. The earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. The Company's liability was $0.9 million as of October 31, 2023 related to these taxes.

 

 

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. During  October 31, 2023, the Company performed a periodic assessment to determine whether there were any triggering events that may have occurred which could indicate that the carrying value of the Company's long-lived assets are not recoverable, and an impairment may exist. Based on this assessment, the Company did not identify any triggering events that would indicate that the carrying amounts may not be recoverable with respect to long-lived assets for the three and nine months ended October 31, 2023 and 2022. Accordingly, the Company did not proceed with performing an impairment test as a result of this periodic assessment. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.

 

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, 2023 and January 31, 2023 was attributable to the purchase of the remaining 50% interest in Perma-Pipe Canada, Ltd., which occurred in 2016.

 

The following table provides a reconciliation of changes in the carrying amount of goodwill:

 

  

January 31, 2023

  

Foreign exchange change effect

  

October 31, 2023

 

Goodwill

 $2,227  $(75) $2,152 

 

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 at the measurement date. During  October 31, 2023, the Company performed a periodic assessment to determine whether there were any triggering events that may have occurred which could indicate that more likely than not that the fair value of the reporting unit did not exceed its carrying value resulting in an impairment. Based on this assessment, the Company did not identify any triggering events that would indicate that the fair value is less than the carrying value of the reporting unit for the Three and Nine Months Ended October 31, 2023 and 2022. Accordingly, the Company did not proceed with performing an impairment test as a result of this periodic assessment. The Company will continue testing for impairment at least annually as of January 31, or as otherwise required by applicable accounting standards.

 

10

 
 

Note 7 - Stock-based compensation 

 

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, 2023 the Company had reserved a total of 250,448 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards.

 

The Company's prior incentive plans provided 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. The prior incentive plans authorized awards to officers, employees, consultants, and independent directors.

 

The Company's 2021 Omnibus Stock Incentive Plan dated  May 26, 2021 was approved by the Company's stockholders in  May 2021 ("2021 Plan"). The 2021 Plan will expire in  May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors. Grants were made to the Company's employees, officers and independent directors under the 2021 Plan, as described below.

 

Stock-based compensation expense

 

The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The Company recognized the following stock-based compensation expense for the periods presented:

 

  

Three Months Ended October 31,

  

Nine Months Ended October 31,

 
  

2023

  

2022

  

2023

  

2022

 

Restricted stock-based compensation expense

 $229  $243  $686  $763 

 

Stock options

 

The Company did not grant any stock options during the three or nine months ended October 31, 2023. The following table summarizes the Company's stock option activity:

 

  

Options

  

Weighted Average Exercise Price (Per share)

  

Weighted Average Remaining Contractual Term (In years)

  

Aggregate Intrinsic Value

 

Outstanding at January 31, 2023

  40  $10.85   1.1  $19 

Exercised

  (1)  6.85   -   2 

Expired or forfeited

  (17)  10.60   -   - 

Outstanding and exercisable at October 31, 2023

  22  $11.15   0.9  $1 

 

There was no vesting, expiration or forfeiture of previously unvested stock options during the nine months ended October 31, 2023. As of October 31, 2023, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.

 

11

 

Restricted stock

 

The following table summarizes the Company's restricted stock activity for the nine months ended  October 31, 2023:

 

  

Restricted Shares

  

Weighted Average Price (Per share)

  

Aggregate Intrinsic Value

 

Outstanding at January 31, 2023

  267  $8.55  $2,286 

Granted

  91   10.26     

Vested and issued

  (84)  8.43     

Forfeited or retired for taxes

  (47)  9.23     

Outstanding at October 31, 2023

  228  $9.35  $2,133 

 

As of October 31, 2023, there was $1.3 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 2.0 years.

 

Note 8 - Earnings per share

 

  

Three Months Ended October 31,

  

Nine Months Ended October 31,

 
  

2023

  

2022

  

2023

  

2022

 

Basic weighted average common shares outstanding at October 31, 2023

  7,955   8,004   7,996   8,096 

Dilutive effect of equity compensation plans

  66   142   110   142 

Weighted average common shares outstanding assuming full dilution

  8,021   8,146   8,106   8,238 
                 

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

  122   105   18   105 

Stock options and restricted stock with exercise prices or grant date prices below the average market prices

  66   142   170   142 
                 

Net income attributable to common stock

 $1,935  $1,728  $1,834  $2,711 
                 

Earnings per share attributable to common stock

                

Basic

 $0.24  $0.22  $0.23  $0.33 

Diluted

 $0.24  $0.21  $0.23  $0.33 

 

12

 
 

Note 9 - Debt

 

Debt totaled $27.2 million and $24.3 million at October 31, 2023 and January 31, 2023, 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 ("PNC"), as administrative agent and lender, providing for a three-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).

 

On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc. Each of the North American Loan Parties other than Perma-Pipe Canada, Inc. (collectively, the "Borrowers") is a borrower under the Renewed Senior Credit Facility.

 

The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate or the Secured Overnight Financing Rate (as defined in the Renewed Senior Credit Facility, "SOFR"), plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin, ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on SOFR borrowings is SOFR plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period, as well as an additional SOFR adjustment ranging from 0.10% to 0.25%, based on the term of the interest period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility. 

 

Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed 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 may not make capital expenditures in excess of $5.0 million annually, plus a limited carryover of any unused amounts. Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million. 

 

The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility of not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. As of October 31, 2023, the calculated ratio was less than 1.10 to 1.00. In order to cure any future breach of these covenants by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the North American Loan Parties' EBITDA, would result in compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of  October 31, 2023.

 

The Renewed 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 Renewed 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 Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.

 

As of October 31, 2023, the Company had borrowed an aggregate of $6.7 million at a rate of 10.0% and had $4.6 million available under the Renewed Senior Credit Facility. As of January 31, 2023, the Company had borrowed an aggregate of $4.4 million and had $9.9 million available under the Renewed Senior Credit Facility.  

 

13

 

Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale, the Company paid off the approximately $0.9 million mortgage note on the Property to its lender.  The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company leases back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.  

 

In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially the fair value of the underlying assets. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.1 million is recognized in current maturities of long-term debt and the long-term portion of $9.1 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of October 31, 2023. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

 

Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt and Saudi Arabia as discussed further below.

 

United Arab Emirates

 

The Company has a revolving line for 8.0 million U.A.E. Dirhams (approximately $2.2 million at October 31, 2023) from a bank in the U.A.E. As of October 31, 2023 the facility has an interest rate of approximately 9.0% and is set to expire in May 2024. The Company had borrowed an aggregate of $0.1 million and $0.6 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

The Company has a revolving line for 19.5 million U.A.E. Dirhams (approximately $5.3 million at October 31, 2023) from a bank in the U.A.E. As of October 31, 2023 the facility has an interest rate of approximately 9.0% and is set to expire in May 2024. The Company had borrowed an aggregate of $1.3 million and $1.1 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

Egypt

 

In June 2021, and as renewed or amended subsequently thereafter, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $3.2 million at October 31, 2023). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. As of October 31, 2023 the facility has an interest rate of approximately 8.0% and expired in June 2022. This credit arrangement was subsequently renewed in August 2022 with substantially the same terms and conditions, expect for the facility interest rate which increased to 20.8%, and expired in August 2023. The Company is in regular communication with the bank throughout the renewal process and the facility has continued without interruption or penalty. The Company had borrowed an aggregate of $1.6 million and $3.1 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company has made collections, the facility has decreased to a current amount of 8.9 million Egyptian Pounds (approximately $0.3 million at October 31, 2023). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 20.8% and, as of  November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $0.3 million outstanding as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets.                                       

 

Saudi Arabia

 

In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of 37.0 million Saudi Riyals (approximately $9.9 million at  October 31, 2023). This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary. The facility was renewed in May 2023, and the line was increased to 37.0 million Saudi Riyal (approximately $9.9 million at October 31, 2023). As of October 31, 2023, the facility has an interest rate of approximately 9.5% and is set to expire in May 2024. The Company had borrowed an aggregate of $3.8 million and $1.1 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

14

 

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 or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. As of October 31, 2023, the amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 million. 

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of October 31, 2023, with the exception of those arrangements that have expired and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On October 31, 2023, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of October 31, 2023, the Company's interest rates ranged from 8.0% to 20.8%, with a weighted average rate of 12.1%, and the Company had facility limits totaling $27.2 million under these credit arrangements. As of October 31, 2023$6.7 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of October 31, 2023, the Company had borrowed $9.5 million and had an additional $13.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of October 31, 2023 and January 31, 2023, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

 

Mortgages. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. As of October 31, 2023, the remaining balance on the mortgage in Canada is approximately CAD 6.1 million (approximately $4.4 million at October 31, 2023). The interest rate is variable, and was 9.1% at October 31, 2023. The principal balance is included as a component of long-term debt, less current maturities in the Company's consolidated balance sheets and is presented net of issuance costs of $0.1 million as of October 31, 2023 and January 31, 2023, respectively.

 

Note 10 - Leases

 

Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company built a facility. The initial annual payments were approximately 1.2 million U.A.E. Dirhams (approximately $0.3 million), inclusive of rent, escalation clauses, and other common charges contained in the agreement. Rent payments previously deferred until August 2022 have commenced, and the lease expires in August 2050. 

 

In March and December 2022, the Company served Notices of Termination to its lessor for the Company's lease of land and buildings in Fujairah in the U.A.E. The Company served the Notices of Termination in connection with the Company's intended relocation to a different facility in Abu Dhabi. The Company vacated portions of the leased space in December 2022 and expects to vacate the remaining space in 2023. The first Notice of Termination required that the Company pay an additional amount equal to three months' rent after that termination to enable the lessor to prepare the assets for lease by another party. As a result of the termination, the Company has recognized adjustments to the amounts recorded in the consolidated financial statements as of October 31, 2023. The termination resulted in decreases of $0.3 million, $4.0 million and $3.6 million to operating lease liability short-term, operating lease liability long-term and operating lease right-of-use asset, respectively, in the consolidated balance sheets as of October 31, 2023. The termination also resulted in a decrease in rent expense of $1.1 million in the consolidated statement of operations for the year ended January 31, 2023. 

 

Finance Leases. The Company has several significant operating lease agreements, with lease terms of one to thirty 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 right-of-use ("ROU") assets as the Company is not reasonably certain to exercise the options.  The Company does not have any arrangements where it acts as a lessor. 

 

At October 31, 2023, the Company had total operating lease liabilities of $7.1 million and operating ROU assets of $6.4 million, which are reflected in the consolidated balance sheets. At October 31, 2023, the Company also had total finance lease liabilities of $0.1 million included in current maturities of long-term debt, and total finance ROU assets of $0.5 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheets.

 

15

 

Supplemental balance sheet information related to leases is as follows: 

 

Operating and Finance leases:

 

October 31, 2023

  

January 31, 2023

 

Finance leases assets:

        

Property and Equipment - gross

 $940  $1,161 

Accumulated depreciation and amortization

  (482)  (700)

Property and Equipment - net

 $458  $461 
         

Finance lease liabilities:

        

Finance lease liability short-term

 $31  $164 

Total finance lease liabilities

 $117  $164 
         

Operating lease assets:

        

Operating lease ROU assets

 $6,376  $4,527 
         

Operating lease liabilities:

        

Operating lease liability short-term

 $920  $912 

Operating lease liability long-term

  6,143   4,252 

Total operating lease liabilities

 $7,063  $5,164 

 

Total lease costs consist of the following: 

 

   

Three Months Ended October 31,

  

Nine Months Ended October 31,

 

Lease costs

Consolidated Statements of Operations Classification

 

2023

  

2022

  

2023

  

2022

 

Finance Lease Costs

                 

Amortization of ROU assets

Cost of sales

 $37  $62  $121  $125 

Interest on lease liabilities

Interest expense

  3   8   7   18 

Operating lease costs

Cost of sales, SG&A expenses

  564   694   1,450   587 

Short-term lease costs (1)

Cost of sales, SG&A expenses

  99   13   350   72 

Sub-lease income

SG&A expenses

  (20)  (27)  (61)  (40)

Total Lease costs

 $683  $750  $1,867  $762 

 

(1) Includes variable lease costs, which are not material.

 

16

 

Supplemental cash flow information related to leases is as follows:

 

  Nine Months Ended October 31,
  

2023

  

2022

 

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

        

Financing cash outflows from finance leases

 $176  $251 

Operating cash outflows from finance leases

  7   24 

Operating cash outflows from operating leases

  1,399   1,377 
         

ROU liabilities obtained in exchange for new lease obligations:

        

Operating leases liabilities

 $3,615  $- 

 

  Nine Months Ended October 31,
  

2023

  

2022

 

ROU liabilities obtained in exchange for new lease obligations:

        

Finance leases liabilities

 $139  $- 

Operating leases liabilities

  3,615   - 

 

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

 

  

October 31, 2023

 

Weighted-average remaining lease terms (in years):

    

Finance leases

  3.3 

Operating leases

  14.9 
     

Weighted-average discount rates:

    

Finance leases

  10.2%

Operating leases

  8.9%

 

Maturities of lease liabilities as of October 31, 2023, are as follows:

 

  

Operating Leases

  

Finance Leases

 

For the three months ending January 31, 2024

 $565  $9 

For the year ending January 31, 2025

  1,515   37 

For the year ending January 31, 2026

  1,349   37 

For the year ending January 31, 2027

  1,326   37 

For the year ending January 31, 2028

  1,273   9 

For the year ending January 31, 2029

  947   - 

Thereafter

  7,465   - 

Total lease payments

 $14,440  $129 

Less: amount representing interest

  (7,377)  (12)

Total lease liabilities at October 31, 2023

 $7,063  $117 

 

Rent expense on operating leases, which is recorded on straight-line basis, was $0.7 million for the three months ended  October 31, 2023 and 2022, respectively.

 

Note 11 - Restricted cash

 

Restricted cash held by foreign subsidiaries is related to fixed deposits that also serve as security deposits and guarantees: 
 
  

October 31, 2023

  

January 31, 2023

 

Cash and cash equivalents

 $6,021  $5,773 

Restricted cash

  1,387   1,020 

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

 $7,408  $6,793 

 

17

 

 

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 lines 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

 

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

 

Note 14 - Treasury stock

 

The repurchase program approved on October 4, 2021 authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions, depending upon current market conditions and other factors. On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. During the three months ended  October 31, 2023 the Company used the remaining $0.6 million of the $1.0 million authorized to repurchase its outstanding shares of common stock.

 

The following table sets forth the repurchase activity with respect to the Company's shares of common stock during the three months ended October 31, 2023:

 

Period

 

Total number of shares purchased

  

Average price paid (per share)

  

Total number of shares purchased as part of publicly announced plans or programs

  

Approximate dollar value of shares that may yet be purchased under the plans or programs

 

August 1, 2023 - August 31, 2023

  62  $8.64   62  $91 

September 1, 2023 - September 30, 2023

  10   8.92   10   - 

October 1, 2023 - October 31, 2023

  -   -   -   - 

Total

  72       72     

 

On  July 26, 2022, the Company retired 239,168 shares of treasury stock previously repurchased under the stock repurchase program. The retirement was recorded as a reduction to common stock based on the par value of the shares, and the excess over par value was recorded as a decrease to retained earnings in accordance with ASC 505-30, Equity - Treasury Stock.

 

Note 15 - Noncontrolling interest

 

The Company has a controlling financial interest in a certain investment which is not considered a wholly owned subsidiary. Accordingly, there remains a minority portion of the equity interest that is owned by a third party. Pursuant to the applicable guidance contained in ASC 810, Consolidations, the balance sheets and operating activities of this investment is included in the Company's consolidated financial statements. The Company adjusts net income in the consolidated statements of operations to exclude the proportionate share of results that is attributable to non-controlling interest. Additionally, the Company presents the proportionate share that is attributable to redeemable non-controlling interest as temporary equity within the consolidated balance sheets. This mezzanine presentation is the result of the non-controlling interest being subject to a put option that is not solely within the Company's control and in connection with the equity shares of the business arrangement that is redeemable any time after five years following the date of incorporation. Further, the put option did not meet the definition of a derivative as a result of not containing a net settlement provision and the shares not being readily convertible to cash, thereby being considered embedded with respect to non-controlling interest. 

 

On June 1, 2023, the Company closed on its formation of the joint venture ("The JV Agreement") with Gulf Insulation Group ("GIG") a leading provider of pre-insulated piping systems, leak detection systems, and pipe fabrication, in which the Company acquired a 60% controlling interest in exchange for consideration of $2.7 million, consisting of land and equipment. The Company expects this collaborative business arrangement to result in expanding its market presence in Saudi Arabia, Kuwait, and Bahrain. Pursuant to the applicable guidance in ASC 805, Business Combinations and Noncontrolling Interests, the Company determined that the transaction did not meet the necessary conditions to be considered a business combination. As such, the assets transferred by the Company were recorded at historical cost, and no gain was recognized as a result of this exchange. Further, the other party to this business arrangement acquired a 40% non-controlling interest by contributing assets of approximately $2.7 million, mainly consisting of land and equipment. The non-controlling interest attributable to the other party was recorded at its estimated fair value as of the investment date, and no gain was recognized as a result of this exchange. In connection with the joint venture, the Company agreed to a promissory note in the principal amount $2.7 million payable to the related party contained in this agreement. The principal amount is presented within the note payable to GIG caption in the Company's consolidated balance sheets. 

 

Net income attributable to GIG was $1.4 million and $0.0 million for the three months ended October 31, 2023 and 2022, respectively. Net income attributable to GIG was $1.6 million and $0.0 million for the nine months ended October 31, 2023 and 2022, respectively. The proportionate share of net income was accounted for as a reduction in deriving net income attributable to common stock in the Company's consolidated statements of operations.

 

The Company had carrying amounts attributable to non-controlling interest of $4.2 million and $0.0 million recorded within temporary equity at  October 31, 2023 and January 31, 2023, respectively. There were no dividends or any other forms of distributions from non-controlling interest as of October 31, 2023 and January 31, 2023, respectively. 

 

Note 16 - 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 with respect to these matters, and its experience in contesting, litigating and settling other similar matters.

 

As of October 31, 2023, the Company is actively involved in certain legal proceedings that are ongoing and for which the ultimate outcome remains uncertain. For all other legal proceedings, the Company does not currently anticipate that the ultimate liability with respect to these matters will materially affect the Company's financial position, liquidity or future operations.

 

18

  
 

Item 2.

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

 

The statements contained in this 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. The Company's fiscal year ends on January 31. Years and balances described as 2023 and 2022 are for the fiscal year ending January 31, 2024 and the fiscal year ended January 31, 2023, respectively.

 

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 this MD&A have been rounded to the nearest percentage point. 

 

 

 

RESULTS OF OPERATIONS

 

The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on discrete projects, operating results can be significantly impacted 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,

 
   

2023

   

2022

    Change favorable (unfavorable)    

2023

   

2022

    Change favorable (unfavorable)  
   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

   

Amount

   

Percent of Net Sales

   

Amount

   

Percent of Net Sales

   

Amount

 

Net sales

  $ 45,690             $ 37,903             $ 7,787     $ 110,489             $ 106,128             $ 4,361  
                                                                                 

Gross profit

    13,184       29 %     11,130       29 %     2,054       29,424       27 %     28,065       26 %     1,359  
                                                                                 

General and administrative expenses

    5,674       12 %     5,284       14 %     (390 )     16,417       15 %     16,180       15 %     (237 )
                                                                                 

Selling expense

    1,471       3 %     1,310       3 %     (161 )     4,201       4 %     3,863       4 %     (338 )
                                                                                 

Interest expense

    640               717               77       1,788               1,585               (203 )
                                                                                 

Other expense

    (502 )             (948 )             446       (350 )             (963 )             613  
                                                                                 

Income before income taxes

    4,897               2,871               2,026       6,668               5,474               1,194  
                                                                                 

Income tax expense

    1,533               1,143               (390 )     3,257               2,763               (494 )
                                                                                 

Net income (loss)

    3,364               1,728               1,636       3,411               2,711               700  
                                                                                 

Less: Net income attributable to non-controlling interest

    1,429               -               (1,429 )     1,577               -               (1,577 )
                                                                                 

Net income (loss) attributable to common stock

    1,935               1,728               207       1,834               2,711               (877 )

 

 

 

 

Three months ended October 31, 2023 vs. Three months ended October 31, 2022

 

Net sales:

 

Net sales were $ 45.7 million and $ 37.9 million in the three months ended October 31, 2023 and 2022, respectively.  The  increase o f $7.8  million, or 21% , was a result of increased sales volumes in Saudi Arabia. 

 

Gross profit:

 

Gross profit was $13.2 million, or 29% of net sales, and $11.1 million, or 29% of net sales, in the three months ended October 31, 2023 and 2022, respectively. The increase of $2.1 million was primarily driven by increased sales volumes in Saudi Arabia.

 

General and administrative expenses:

 

General and administrative expenses were $5.7 million and $5.3 million in the three months ended October 31, 2023 and 2022, respectively. The increase of $0.4 million, or 8%, was due to higher payroll costs in the quarter.  

 

Selling expenses:

 

Selling expenses were $ 1.5 million and $ 1.3 million in the  three months ended October 31, 2023 and 2022, respectively.  The  increase of $ 0.2 million was consistent with prior quarter results.                                                                                                       

 

Interest expense:

 

Net interest expense remained consistent and was $0.6 million and $0.7 million in the three months ended October 31, 2023 and 2022, respectively.  

 

Other expense:

 

Other expense was $(0.5) million and $(0.9) million for the three months ended October 31, 2023 and 2022, respectively. The components of other expense were both related to the pension plan termination. 

 

Income tax expense:

 

The Company's worldwide effective tax rates ("ETR") were 31% and 40% in the three months ended October 31, 2023 and 2022, respectively. The change in the ETR is due primarily to the inability to recognize tax benefits due to losses incurred in the United States resulting in a full valuation allowance and due to changes in the mix of income and loss in various jurisdictions.

 

For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.

 

Net income attributable to common stock:

 

Net income attributable to common stock was $1.9 million and $1.7 million in the three months ended October 31, 2023 and 2022, respectively. The increase of $0.2 million was mainly due to increased sales activity in the quarter. 

 

 

Nine months ended October 31, 2023 vs. Nine months ended October 31, 2022

 

Net sales:

 

Net sales were $ 110.5  million and $ 106.1  million in the  nine months ended October 31, 2023 and 2022 , respectively.  The  increase of $ 4.4  million, or 4%  was a result of increased sales volumes in Saudi Arabia.

 

Gross profit:

 

Gross profit was $29.4 million, or 27% of net sales, and $28.1 million, or 26% of net sales, in the nine months ended October 31, 2023 and 2022, respectively. The increase of $1.3 million was driven by increased sales volumes in Saudi Arabia.

 

General and administrative expenses:

 

General and administrative expenses were $16.4 million and $16.2 million in the nine months ended October 31, 2023 and 2022, respectively. The increase of $0.2 million was consistent with prior year results. 

 

Selling expenses:

 

Selling expenses were $4.2 million and $3.9 million in the nine months ended October 31, 2023 and 2022, respectively. The increase of $0.3 million was driven by higher payroll expenses.     

   

Interest expense:

 

Net interest expense remained consistent and was $1.8 million and $1.6 million in the nine months ended October 31, 2023 and 2022, respectively.  The increase of $0.2 million was attributable to increases in interest rates and borrowing activity during the year.

 

Other expense:

 

Other expense was $(0.4) million and $(1.0) million for the nine months ended October 31, 2023 and 2022, respectively. The components of other expense were both related to the pension plan termination.                                                   

 

Income tax expense:

 

The Company's worldwide effective tax rates ("ETR") were 31% and 40% in the nine months ended October 31, 2023 and 2022, respectively. The change in the ETR is due primarily to the inability to recognize tax benefits due to losses incurred in the United States resulting in a full valuation allowance and due to changes in the mix of income and loss in various jurisdictions.

 

For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.

 

Net income attributable to common stock:

 

Net income (loss) attributable to common stock was $1.8 million and $2.7 million in the nine months ended October 31, 2023 and 2022, respectively.  The decrease of $0.9 million was mainly due to increased selling, general and administrative expenses as compared to the same period in 2022. 

 

 

Liquidity and capital resources

 

Cash and cash equivalents as of October 31, 2023 were $6.0 million compared to $5.8 million on January 31, 2023. On October 31, 2023, $0.1 million was held in the United States, and $5.9 million was held at the Company's foreign subsidiaries. The Company's working capital was $37.1 million on October 31, 2023 compared to $41.9 million on January 31, 2023. Of the working capital components, accounts receivable increased by $5.1 million and cash and cash equivalents increased by $0.2 million as the result of the movements discussed below. As of October 31, 2023, the Company had $4.6 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $13.7 million of borrowing capacity under its foreign revolving credit agreements. The Company had $6.7 million borrowed under the Renewed Senior Credit Facility and $9.5 million borrowed under its foreign revolving credit agreements at October 31, 2023.

 

Net cash provided by operating activities was $7.6 million and net cash used in operating activities was $5.1 million in the nine months ended October 31, 2023 and 2022, respectively. The increase of $12.7 million was due primarily attributable to decreases in unbilled accounts receivable, inventory and costs and estimated earnings in excess of billings on uncompleted contracts, partially offset by changes to accounts receivable and accounts payable. 

 

Net cash provided by (used in) operating activities in the nine months ended October 31, 2023 and 2022 was $8.2 million and $3.1 million, respectively. The increase of $5.1 million was due primarily to investments in the Middle East and Canada.

 

Net cash provided by financing activities in the nine months ended October 31, 2023 and 2022 was $1.2 million and $7.6 million, respectively. The main source of cash from financing activities during the nine months ended October 31, 2023 was net proceeds from borrowings of approximately $4.8 million under the Company's credit facilities, as compared to the nine months ended October 31, 2022, when net proceeds were approximately $11.3 million. Debt totaled $27.2 million and $24.3 million as of October 31, 2023 and January 31, 2023, respectively. See Note 9 - Debt, in the Notes to Consolidated Financial Statements for further discussion relating to this topic.

 

Treasury stock. On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. Share repurchases may be executed through open market or in privately negotiated transactions over the course of the 12 months following the Board of Directors authorization. See Note 14 - Treasury stock, for further discussion relating to this topic.

 

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 ("PNC"), as administrative agent and lender, providing for a three-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).

 

On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc. Each of the North American Loan Parties other than Perma-Pipe Canada, Inc. (collectively, the "Borrowers") is a borrower under the Renewed Senior Credit Facility.

 

The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate or the Secured Overnight Financing Rate (as defined in the Renewed Senior Credit Facility, "SOFR"), plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin, ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on SOFR borrowings is SOFR plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period, as well as an additional SOFR adjustment ranging from 0.10% to 0.25%, based on the term of the interest period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility. 

 

Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed 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 may not make capital expenditures in excess of $5.0 million annually, plus a limited carryover of any unused amounts. Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million.

 

The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility of not less than 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. As of October 31, 2023, the calculated ratio was less than 1.10 to 1.00. In order to cure any future breach of these covenants by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the North American Loan Parties' EBITDA, would result in compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of October 31, 2023.

 

 

The Renewed 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 Renewed 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 Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.
 
As of October 31, 2023, the Company had borrowed an aggregate of $6.7  million at a rate of 10.0%  and had $4.6  million available under the Renewed Senior Credit Facility. As of January 31, 2023, the Company had borrowed an aggregate of $4.4 million and had $9.9 million available under the Renewed Senior Credit Facility.
 
Revolving lines - foreign The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as discussed further below.

 

United Arab Emirates

 

The Company has a revolving line for 8.0 million U.A.E. Dirhams (approximately $2.2 million at October 31, 2023) from a bank in the U.A.E. As of October 31, 2023 the facility has an interest rate of approximately 9.0% and is set to expire in May 2024. The Company had borrowed an aggregate of $0.1 million and $0.6 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

The Company has a revolving line for 19.5 million U.A.E. Dirhams (approximately $5.3 million at October 31, 2023) from a bank in the U.A.E. As of October 31, 2023 the facility has an interest rate of approximately 9.0% and is set to expire in May 2024. The Company had borrowed an aggregate of $1.3 million and $1.1 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

Egypt

 

In June 2021, and as renewed or amended subsequently thereafter, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $3.2  million at October 31, 2023). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. As of October 31, 2023 the facility has an interest rate of approximately 8.0%  and expired in June 2022. This credit arrangement was subsequently renewed in August 2022 with substantially the same terms and conditions, expect for the facility interest rate which increased to 20.8%, and expired in August 2023. The Company is in regular communication with the bank throughout the renewal process and the facility has continued without interruption or penalty. The Company had borrowed an aggregate of $1.6 million and $3.1 million  as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company has made collections, the facility has decreased to a current amount of  8.9 million Egyptian Pounds (approximatel y $0.3  million at October 31, 2023). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 20.8%  and, as of November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $ 0.3 million outstanding  as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets.

 

Saudi Arabia

 

In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of 37.0 million Saudi Riyals (approximately $9.9 million at October 31, 2023). This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary. The facility was renewed in May 2023, and the line was increased to 37.0 million Saudi Riyal (approximately $9.9 million at October 31, 2023). As of October 31, 2023, the facility has an interest rate of approximately 9.5% and is set to expire in May 2024. The Company had borrowed an aggregate of $3.8 million and $1.1 million as of October 31, 2023 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. 

 

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 or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. As of October 31, 2023, the amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 million. 

 

 

The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of October 31, 2023, with the exception of those arrangements that have expired and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On October 31, 2023, interest rates were based on (i) the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum; (ii) either the Central Bank of Egypt corporate loan rate plus 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of October 31, 2023, the Company's interest rates ranged from 8.0% to 20.8%, with a weighted average rate of 12.1%, and the Company had facility limits totaling $27.2 million under these credit arrangements. As of October 31, 2023$6.7 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of October 31, 2023, the Company had borrowed $9.5 million and had an additional $13.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of October 31, 2023 and January 31, 2023, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

 

Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold the Property for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender.  The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a 15-year lease agreement (the “Lease Agreement”), whereby the Company leases back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.  

 

In accordance with ASC 842, Leases, this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially all of the fair value of the underlying asset. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.1 million is recognized in current maturities of long-term debt and the long-term portion of $9.1 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of October 31, 2023. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.

 

Accounts receivable: 

In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $39.5 million as of October 31, 2023, with a remaining balance due in the amount of $2.4 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this retention amount, $1.6 million is classified in a long-term receivable account.

 

Regardless of the contractual due date for payment, the Company has been actively engaged in ongoing efforts to collect the outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances. In September 2023 and June 2022, a partial payment was received to settle $0.4 million and $0.9 million of the customer's outstanding balances, respectively. Further, the Company has been engaged by the customer to perform additional work in 2023 and 2022 under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against the remaining outstanding balances as of October 31, 2023. 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 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, 2023 contained in the Company's latest 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, 2023. This evaluation included consideration of the controls, processes and procedures that are designed to ensure 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. Based on this evaluation, the certifying officers have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective because of the material weakness described below. 

 

Management has previously reported on a material weakness in the Company's internal control over financial reporting regarding the design and operating effectiveness of controls related to the existence of inventory during the fiscal year ended January 31, 2023. Specifically, the Company failed to appropriately perform cycle count procedures at one of the Company's operating facilities, resulting in a significant adjustment during the full physical inventory count at period end. Further, management review of the process and resulting adjustments on a periodic basis failed to identify the issue. These deficiencies led management to conclude that a material weakness existed with respect to the Company's internal control over financial reporting. The material weakness did not result in any material misstatements to the Company’s consolidated financial statements. As a result, at January 31, 2023, the Company's internal control over financial reporting was not effective. Subsequent to the fiscal year end, the Company has substantially executed on its plan to remediate the material weakness in internal control over financial reporting. As of  October 31, 2023, and on the date of this Quarterly Report on Form 10-Q, the Company's remediation plan is substantially complete, subject to testing the design and operating effectiveness of controls in connection with the annual audit. 

 

Notwithstanding the material weakness described above, the Company's management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the financial statements included in this Quarterly Report on Form 10-Q 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.

 

Changes in Internal Control over Financial Reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management identified a material weakness in the Company's internal control over financial reporting regarding the design and operating effectiveness of controls related to the existence of inventory during the fiscal year ended January 31, 2023. As a result of the material weakness identified, the Company has begun updating its internal control over financial reporting as discussed in its remediation plan updated below. 

 

Remediation Plan for the Material Weakness in Internal Control over Financial Reporting. To address the material weakness, the Company has implemented its remediation plan. Specifically, the Company has:

 

Hired additional personnel with significant experience in inventory management to oversee the process at the Lebanon, Tennessee facility;
Engaged outside consultants to assist in reviewing and updating policies, procedures and controls over inventory management;
Redesigned cycle count procedures to better identify higher value and more active inventory parts, as well as to include additional review of results prior to recording of any adjustments; and
Performed updates with respect to the Company's physical inventory and inventory management system.

 

The Company anticipates the actions described above and resulting improvements in controls will strengthen the Company's processes, procedures and controls related to inventory management and will address the related material weakness described above. However, the material weakness cannot be considered fully remediated until the remediation processes have been in operation for a period of time, are successfully tested and management concludes that these processes and controls are operating effectively. The Company will continue to monitor the effectiveness of its remediation measures in connection with its future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures, and management will make any changes to the design of the Company's plan and take such other actions deemed appropriate given the circumstances.

 

 

PART II OTHER INFORMATION

 

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 

The repurchase program approved on October 4, 2021 authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions, depending upon current market conditions and other factors. On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. During the three months ended October 31, 2023 the Company used the remaining $0.6 million of the $1.0 million authorized to repurchase its outstanding shares of common stock.

 

The following table sets forth the repurchase activity with respect to the Company's shares of common stock during the three months ended October 31, 2023:

 

Period

 

Total number of shares purchased

   

Average price paid (per share)

   

Total number of shares purchased as part of publicly announced plans or programs

   

Approximate dollar value of shares that may yet be purchased under the plans or programs

 

August 1, 2023 - August 31, 2023

    62     $ 8.64       62     $ 91  

September 1, 2023 - September 30, 2023

    10       8.92       10       -  

October 1, 2023 - October 31, 2023

    -       -       -       -  

Total

    72               72        

 

 

Item 6.

Exhibits

 

31.1

Rule 13a - 14(a)/15d - 14(a) Certifications
(1) Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Rule 13a - 14(a)/15d - 14(a) Certifications
(2) Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

Section 1350 Certifications (Chief Executive Officer and Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

101.INS

Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation

101.DEF

Inline XBRL Taxonomy Extension Definition

101.LAB

Inline XBRL Taxonomy Extension Labels

101.PRE

Inline XBRL Taxonomy Extension Presentation

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

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 7, 2023

By: /s/ David J. Mansfield

 

 

David J. Mansfield

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

Date:

December 7, 2023

By: /s/ Matthew E. Lewicki

 

 

Matthew E. Lewicki

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

28