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, 2020.
Commission File No. 001-32530
Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
36-3922969 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
6410 W. Howard Street, Niles, Illinois |
60714 |
(Address of principal executive offices) |
(Zip Code) |
(847) 966-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value per share | PPIH | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On December 18, 2020, there were 8,164,989 shares of the registrant's common stock outstanding.
Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended October 31, 2020
Financial Statements |
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net sales |
$ | 20,294 | $ | 34,457 | $ | 63,399 | $ | 95,400 | ||||||||
Cost of sales |
17,356 | 26,814 | 54,630 | 73,382 | ||||||||||||
Gross profit |
2,938 | 7,643 | 8,769 | 22,018 | ||||||||||||
Operating expenses |
||||||||||||||||
General and administrative expenses |
4,528 | 4,636 | 13,320 | 13,907 | ||||||||||||
Selling expenses |
1,174 | 1,354 | 4,153 | 4,030 | ||||||||||||
Total operating expenses |
5,702 | 5,990 | 17,473 | 17,937 | ||||||||||||
Income/(loss) from operations |
(2,764 | ) | 1,653 | (8,704 | ) | 4,081 | ||||||||||
Interest expense, net |
107 | 194 | 411 | 612 | ||||||||||||
Other income/(expense) | (2 | ) | 95 | 3,672 | 351 | |||||||||||
Income/(loss) from operations before income taxes |
(2,873 | ) | 1,554 | (5,443 | ) | 3,820 | ||||||||||
Income tax (benefit)/expense |
(23 | ) | 1,699 | (339 | ) | 1,747 | ||||||||||
Net income/(loss) |
$ | (2,850 | ) | $ | (145 | ) | $ | (5,104 | ) | $ | 2,073 | |||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
8,165 | 8,037 | 8,113 | 7,970 | ||||||||||||
Diluted |
8,165 | 8,037 | 8,113 | 8,272 | ||||||||||||
Income/(loss) per share |
||||||||||||||||
Basic |
(0.35 | ) | (0.02 | ) | (0.63 | ) | 0.26 | |||||||||
Diluted |
(0.35 | ) | (0.02 | ) | (0.63 | ) | 0.25 |
See accompanying notes to consolidated financial statements.
Note: Earnings per share calculations could be impacted by rounding.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)
(In thousands)
Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net income/(loss) |
$ | (2,850 | ) | $ | (145 | ) | $ | (5,104 | ) | $ | 2,073 | |||||
Other comprehensive income/(loss) |
||||||||||||||||
Foreign currency translation adjustments, net of tax |
110 | 12 | (104 | ) | 53 | |||||||||||
Other comprehensive income/(loss) |
110 | 12 | (104 | ) | 53 | |||||||||||
Comprehensive income/(loss) |
$ | (2,740 | ) | $ | (133 | ) | $ | (5,208 | ) | $ | 2,126 |
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
October 31, 2020 |
January 31, 2020 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 6,593 | $ | 13,371 | ||||
Restricted cash |
1,154 | 1,287 | ||||||
Trade accounts receivable, less allowance for doubtful accounts of $411 at October 31, 2020 and $407 at January 31, 2020 |
26,441 | 29,402 | ||||||
Inventories, net |
12,094 | 14,498 | ||||||
Prepaid expenses and other current assets |
5,022 | 3,531 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts |
1,362 | 2,166 | ||||||
Total current assets |
52,666 | 64,255 | ||||||
Property, plant and equipment, net of accumulated depreciation |
26,958 | 28,629 | ||||||
Other assets |
||||||||
Operating lease right-of-use asset |
13,762 | 11,475 | ||||||
Deferred tax assets |
604 | 293 | ||||||
Goodwill |
2,237 | 2,254 | ||||||
Other assets |
3,532 | 5,319 | ||||||
Total other assets |
20,135 | 19,341 | ||||||
Total assets |
$ | 99,759 | $ | 112,225 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
Current liabilities |
||||||||
Trade accounts payable |
$ | 7,905 | $ | 9,577 | ||||
Accrued compensation and payroll taxes |
1,760 | 1,190 | ||||||
Commissions and management incentives payable |
322 | 1,759 | ||||||
Revolving line - North America |
1,803 | 8,577 | ||||||
Current maturities of long-term debt |
1,732 | 1,458 | ||||||
Customers' deposits |
2,098 | 2,202 | ||||||
Outside commission liability |
1,661 | 1,755 | ||||||
Operating lease liability short-term |
1,408 | 1,040 | ||||||
Other accrued liabilities |
3,002 | 3,444 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts |
672 | 1,173 | ||||||
Income taxes payable |
1,000 | 664 | ||||||
Total current liabilities |
23,363 | 32,839 | ||||||
Long-term liabilities |
||||||||
Long-term debt, less current maturities |
6,194 | 6,717 | ||||||
Deferred compensation liabilities |
4,487 | 4,199 | ||||||
Deferred tax liabilities |
583 | 1,052 | ||||||
Operating lease liability long-term |
13,477 | 11,214 | ||||||
Other long-term liabilities |
661 | 575 | ||||||
Total long-term liabilities |
25,402 | 23,757 | ||||||
Stockholders' equity |
||||||||
Common stock, $.01 par value, authorized 50,000 shares; 8,165 issued and outstanding at October 31, 2020 and 8,048 issued and outstanding at January 31, 2020 |
82 | 80 | ||||||
Additional paid-in capital |
60,595 | 60,024 | ||||||
Accumulated deficit |
(5,819 | ) | (715 | ) | ||||
Accumulated other comprehensive loss |
(3,864 | ) | (3,760 | ) | ||||
Total stockholders' equity |
50,994 | 55,629 | ||||||
Total liabilities and stockholders' equity |
$ | 99,759 | $ | 112,225 |
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands, except share data)
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Total Stockholders' Equity |
||||||||||||||||
Revised total stockholders' equity at January 31, 2019 |
$ | 79 | $ | 58,793 | $ | (4,291 | ) | $ | (2,880 | ) | $ | 51,701 | ||||||||
Net loss | - | - | (1,502 | ) | - | (1,502 | ) | |||||||||||||
Common stock issued under stock plans, net of shares used for tax withholding | - | 79 | - | - | 79 | |||||||||||||||
Stock-based compensation expense | - | 154 | - | - | 154 | |||||||||||||||
Foreign currency translation adjustment | - | - | - | (317 | ) | (317 | ) | |||||||||||||
Total stockholders' equity at April 30, 2019 |
$ | 79 | $ | 59,026 | $ | (5,793 | ) | $ | (3,197 | ) | $ | 50,115 | ||||||||
Net income | - | - | 3,720 | - | 3,720 | |||||||||||||||
Common stock issued under stock plans, net of shares used for tax withholding | 1 | 43 | - | - | 44 | |||||||||||||||
Stock-based compensation expense | - | 406 | - | - | 406 | |||||||||||||||
Foreign currency translation adjustment | - | - | - | 358 | 358 | |||||||||||||||
Total stockholders' equity at July 31, 2019 | $ | 80 | $ | 59,475 | $ | (2,073 | ) | $ | (2,839 | ) | $ | 54,643 | ||||||||
Net loss | - | - | (145 | ) | - | (145 | ) | |||||||||||||
Common stock issued under stock plans, net of shares used for tax withholding | - | 53 | - | - | 53 | |||||||||||||||
Stock-based compensation expense | - | 226 | - | - | 226 | |||||||||||||||
Foreign currency translation adjustment | - | - | - | 12 | 12 | |||||||||||||||
Total stockholders' equity at October 31, 2019 | $ | 80 | $ | 59,754 | $ | (2,218 | ) | $ | (2,827 | ) | $ | 54,789 |
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||
Total stockholders' equity at January 31, 2020 |
$ | 80 | $ | 60,024 | $ | (715 | ) | $ | (3,760 | ) | $ | 55,629 | ||||||||
Net loss | - | - | (2,521 | ) | - | (2,521 | ) | |||||||||||||
Stock-based compensation expense | - | 219 | - | - | 219 | |||||||||||||||
Foreign currency translation adjustment | - | - | - | (367 | ) | (367 | ) | |||||||||||||
Total stockholders' equity at April 30, 2020 | $ | 80 | $ | 60,243 | $ | (3,236 | ) | $ | (4,127 | ) | $ | 52,960 | ||||||||
Net income | - | - | 267 | - | 267 | |||||||||||||||
Common stock issued under stock plans, net of shares used for tax withholding | 2 | (193 | ) | - | - | (191 | ) | |||||||||||||
Stock-based compensation expense | - | 260 | - | - | 260 | |||||||||||||||
Foreign currency translation adjustment | - | - | - | 153 | 153 | |||||||||||||||
Total stockholders' equity at July 31, 2020 | $ | 82 | $ | 60,310 | $ | (2,969 | ) | $ | (3,974 | ) | $ | 53,449 | ||||||||
Net loss | - | - | (2,850 | ) | - | (2,850 | ) | |||||||||||||
Stock-based compensation expense | - | 285 | - | - | 285 | |||||||||||||||
Foreign currency translation adjustment | - | - | - | 110 | 110 | |||||||||||||||
Total stockholders' equity at October 31, 2020 | $ | 82 | $ | 60,595 | $ | (5,819 | ) | $ | (3,864 | ) | $ | 50,994 |
Shares |
2020 |
2019 |
||||||
Balances at beginning of year |
8,048,006 | 7,854,322 | ||||||
Shares issued |
116,983 | 193,684 | ||||||
Balances at period end |
8,164,989 | 8,048,006 |
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) |
Nine Months Ended October 31, |
|||||||
2020 |
2019 |
|||||||
Operating activities |
||||||||
Net income/(loss) |
$ | (5,104 | ) | $ | 2,073 | |||
Adjustments to reconcile net income/(loss) to net cash flows provided by operating activities |
||||||||
Depreciation and amortization |
3,616 | 3,349 | ||||||
Deferred tax benefit |
(763 | ) | (288 | ) | ||||
Equity-based compensation expense |
764 | 786 | ||||||
(Gain)/loss on disposal of fixed assets |
(2 | ) | 154 | |||||
Provision on uncollectible accounts |
6 | 49 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
1,226 | 2,960 | ||||||
Inventories |
2,383 | (3,980 | ) | |||||
Contract assets and contract liabilities |
302 | (2,929 | ) | |||||
Accounts payable |
(1,606 | ) | 525 | |||||
Accrued compensation and payroll taxes |
(1,087 | ) | (199 | ) | ||||
Customers' deposits |
(107 | ) | (704 | ) | ||||
Income taxes receivable and payable |
102 | 80 | ||||||
Prepaid expenses and other current assets |
(1,518 | ) | 1,523 | |||||
Other assets and liabilities |
3,757 | (601 | ) | |||||
Net cash provided by operating activities |
1,969 | 2,798 | ||||||
Investing activities |
||||||||
Capital expenditures |
(1,633 | ) | (1,423 | ) | ||||
Proceeds from sales of property and equipment | 2 | - | ||||||
Net cash used in investing activities |
(1,631 | ) | (1,423 | ) | ||||
Financing activities |
||||||||
Proceeds from revolving lines |
36,563 | 61,281 | ||||||
Payments of debt on revolving lines of credit |
(42,988 | ) | (61,613 | ) | ||||
Proceeds from term loan | 19 | - | ||||||
Payments of other debt |
(269 | ) | (276 | ) | ||||
Decrease in drafts payable |
(49 | ) | (162 | ) | ||||
Payments on finance lease obligations |
(310 | ) | (185 | ) | ||||
Stock options exercised and restricted shares retired for tax |
(192 | ) | 176 | |||||
Net cash used in financing activities |
(7,226 | ) | (779 | ) | ||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
(23 | ) | 26 | |||||
Net increase/(decrease) in cash, cash equivalents and restricted cash |
(6,911 | ) | 622 | |||||
Cash, cash equivalents and restricted cash - beginning of period |
14,658 | 12,737 | ||||||
Cash, cash equivalents and restricted cash - end of period |
$ | 7,747 | $ | 13,359 | ||||
Supplemental cash flow information |
||||||||
Interest paid |
$ | 421 | $ | 609 | ||||
Income taxes paid |
83 | 1,961 | ||||||
Fixed assets acquired under capital leases - non-cash | - | 848 |
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Tabular amounts presented in thousands, except per share amounts)
Note 1 - Basis of presentation
The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2020 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 2020 and 2019 are for the three and nine months ended October 31, 2020 and 2019, and for the fiscal years ended January 31, 2021 and 2020, respectively.
Note 2 - Business segment reporting
The Company is engaged in the manufacture and sale of products in one segment: Piping Systems. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.
Note 3 - Accounts receivable
The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition, including the availability of credit insurance. In the U.S., collateral is not generally required. In the United Arab Emirates and Saudi Arabia, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write-off is recorded against the allowance for doubtful accounts.
One of the Company’s accounts receivable in the total amount of $3.9 million and $4.1 million as of October 31, 2020 and January 31, 2020, respectively, has been outstanding for several years. Included in this balance is a retention receivable that is payable upon the commissioning of the system in the amount of $3.4 million, of which, due to the long-term nature of the receivable, $1.6 million and $2.1 million were included in the balance of other long-term assets as of October 31, 2020 and January 31, 2020, respectively. The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer. Nevertheless, the Company has been engaged in ongoing active efforts to collect this outstanding amount. During the first quarter of 2020, the Company certified invoices of $0.5 million in the process of collection. During the third quarter of 2020, the Company received approximately $0.2 million from the customer and additional receipts are expected in the fourth quarter of 2020 and in 2021. The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2019 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this receivable as of October 31, 2020. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.
For the three months ended October 31, 2020, no individual customer accounted for 10% of the Company’s consolidated net sales, and during the same period in 2019, one individual customer accounted for 16% of the Company's consolidated net sales. For the nine months ended October 31, 2020, no individual customer accounted for more than 10% of the Company's consolidated net sales, and during the same period in 2019, one individual customer accounted for 11% of the Company's consolidated net sales.
At October 31, 2020 and January 31, 2020, one customer accounted for 10.1% and 13.3% of the Company's accounts receivable, respectively.
Note 4 - Revenue recognition
Revenue from contracts with customers:
The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.
The Company’s standard revenue transactions are classified into two main categories:
1) |
Systems - which include all bundled products in which the Company designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. |
2) |
Products - which include cables, leak detection products, heat trace products sold under the PermAlert brand name, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract. |
In accordance with Accounting Standards Codification ("ASC") 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:
|
1) |
the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or |
|
2) |
the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company. |
Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).
A breakdown of the Company's revenues by revenue class for the three and nine months ended October 31, 2020 and 2019 are as follows:
Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||||||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
Sales |
% to Total |
Sales |
% to Total |
Sales |
% to Total |
Sales |
% to Total |
|||||||||||||||||||||||||
Products |
$ | 2,435 | 12 | % | $ | 2,448 | 7 | % | $ | 8,603 | 14 | % | $ | 13,205 | 14 | % | ||||||||||||||||
Specialty Piping Systems and Coating |
||||||||||||||||||||||||||||||||
Revenue recognized under input method |
8,252 | 41 | % | 14,363 | 42 | % | 26,597 | 42 | % | 38,601 | 40 | % | ||||||||||||||||||||
Revenue recognized under output method |
9,607 | 47 | % | 17,646 | 51 | % | 28,199 | 44 | % | 43,594 | 46 | % | ||||||||||||||||||||
Total |
$ | 20,294 | 100 | % | $ | 34,457 | 100 | % | $ | 63,399 | 100 | % | $ | 95,400 | 100 | % |
The input method, as noted in ASC 606-10-55-20, is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred.
The output method, as noted in ASC 606-10-55-17, is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped.
Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but do not recognize revenue until the performance obligations are satisfied under the methods discussed above.
Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.
Contract assets and liabilities:
Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.
The Company anticipates that substantially all costs incurred for uncompleted contracts as of October 31, 2020 will be billed and collected within one year.
During the three months ended October 31, 2020, one of the Company's customers in Qatar made a call on a performance bond held to secure one of the Company's contracts. The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract. The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract. This expense was offset by funds received under the CEWS program in Canada. The Company has recorded the expense related to the encashment of approximately $0.6 million in other income/(expense) in the consolidated statements of operations.
The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated. In addition to these amounts, the Company has recorded $1.4 million of unbilled receivables from its subsidiaries in the Middle East in prepaid expenses and other current assets on its consolidated balance sheet as of October 31, 2020.
Contract Assets |
||||
Balance January 31, 2019 | $ | 1,653 | ||
Costs and gross profit recognized during the period for uncompleted contracts from the prior period |
(1,038 | ) | ||
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period |
1,368 | |||
Closing Balance at April 30, 2019 | $ | 1,983 | ||
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (1,509 | ) | ||
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 3,000 | |||
Closing Balance at July 31, 2019 | $ | 3,474 | ||
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (1,799 | ) | ||
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 2,688 | |||
Closing Balance at October 31, 2019 | $ | 4,363 | ||
Balance January 31, 2020 |
$ | 2,166 | ||
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (2,896 | ) | ||
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 3,630 | |||
Closing Balance at April 30, 2020 | $ | 2,900 | ||
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (1,743 | ) | ||
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 593 | |||
Closing Balance at July 31, 2020 | $ | 1,750 | ||
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (930 | ) | ||
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 542 | |||
Closing Balance at October 31, 2020 | $ | 1,362 |
Contract Liabilities |
||||
Balance January 31, 2019 | $ | 1,569 | ||
Revenue recognized during the period for uncompleted contracts from the prior period |
(444 | ) | ||
New contracts entered into that are uncompleted at the end of the current period |
721 | |||
Closing Balance at April 30, 2019 | $ | 1,846 | ||
Revenue recognized during the period for uncompleted contracts from the prior period | (1,250 | ) | ||
New contracts entered into that are uncompleted at the end of the current period | 545 | |||
Closing Balance at July 31, 2019 | $ | 1,141 | ||
Revenue recognized during the period for uncompleted contracts from the prior period | (774 | ) | ||
New contracts entered into that are uncompleted at the end of the current period | 984 | |||
Closing Balance at October 31, 2019 | $ | 1,351 | ||
Balance January 31, 2020 |
$ | 1,173 | ||
Revenue recognized during the period for uncompleted contracts from the prior period | (17 | ) | ||
New contracts entered into that are uncompleted at the end of the current period | (95 | ) | ||
Closing Balance at April 30, 2020 | $ | 1,061 | ||
Revenue recognized during the period for uncompleted contracts from the prior period | 631 | |||
New contracts entered into that are uncompleted at the end of the current period | (925 | ) | ||
Closing Balance at July 31, 2020 | $ | 767 | ||
Revenue recognized during the period for uncompleted contracts from the prior period | 104 | |||
New contracts entered into that are uncompleted at the end of the current period | (199 | ) | ||
Closing Balance at October 31, 2020 | $ | 672 |
Practical expedients:
Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies the practical expedient for these types of costs and as such are expensed in the period incurred.
As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.
Note 5 - Income taxes
The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
The Company's effective tax rate ("ETR") from operations in the third quarter and year-to-date in fiscal 2020 was 0.8% and 6.2% compared to 127.8% and 48.6% during the respective prior year periods. The change in the ETR from the prior year quarter to the current year quarter is largely due to the impact of tax rates in various jurisdictions and the changing mix of taxable income and loss in those jurisdictions.
The amount of unrecognized tax benefits, including interest and penalties at October 31, 2020, recorded in other long-term liabilities was $0.1 million, all of which would impact the Company’s ETR if recognized.
On March 7, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (H.R. 748) (the "CARES Act"). Among the changes to the U.S. federal income tax rules, the CARES Act restored net operating loss carryback rules that were eliminated by the U.S. Tax Cuts and Jobs Act ("Tax Act"), restored 100% bonus depreciation for qualified improvement property, modified the limit on the deduction for net interest expense and accelerated the timeframe for refunds of alternative minimum tax credits. With consideration to these changes to federal income tax rules, there is no net impact to the Company's deferred taxes due to the full valuation allowance. The Company will continue to evaluate the effects of the CARES Act as additional legislative guidance becomes available.
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. At October 31, 2020, the Company performed a qualitative analysis assessment to determine if it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values. The Company assessed three asset groups as part of this analysis: United States, Canada and Middle East. The qualitative assessment indicated that it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values for the United States and Middle East asset groups. However, triggering events were identified related to the Company's Canada asset group, indicating potential impairment of the asset group's long-lived assets. Therefore, the Company performed a quantitative assessment to determine any potential impairment. After completion of this additional assessment, it was determined that there was no impairment of the Company's long-lived assets for the three and nine months ended October 31, 2020 and 2019. 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, 2020 and January 31, 2020 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.
January 31, 2020 |
Foreign exchange change effect |
October 31, 2020 |
||||||||||
Goodwill |
$ | 2,254 | $ | (17 | ) | $ | 2,237 |
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 October 31, 2020, the Company elected to perform a Step 0 qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's goodwill exceeded its carrying value. The qualitative assessment identified triggering events that indicated potential impairment of the Company's goodwill. Therefore, the Company proceeded to complete the Step 1 analysis to determine any potential impairment. The Step 1 analysis involved a quantitative fair valuation of the reporting unit associated with the Company's goodwill, including a market approach, transaction approach and discounted cash flow analysis. After completion of the Step 1 analysis, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment for the three and nine months ended October 31, 2020 and 2019, however there can be no assurance that a future impairment charge will not be required.
Note 7 - Stock-based compensation
The Company’s 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ("2017 Plan"), expired in June 2020. Prior to the 2017 Plan's expiration, grants were made to the Company's employees, officers and independent directors, as described below.
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, 2020 the Company had reserved a total of 529,570 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards.
While the 2017 Plan 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 Company issued only restricted shares and restricted stock units under the 2017 Plan. The 2017 Plan authorized awards to officers, employees, consultants and independent directors.
The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The following were the Company's stock-based compensation expenses for the periods presented:
Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Stock-based compensation expense |
$ | - | $ | 2 | $ | 3 | $ | 10 | ||||||||
Restricted stock-based compensation expense |
285 | 224 | 761 | 776 | ||||||||||||
Total stock-based compensation expense |
$ | 285 | $ | 226 | $ | 764 | $ | 786 |
Stock Options
The Company did not grant any stock options during the three or nine months ended October 31, 2020. The following tables summarizes the Company's stock option activity:
Option activity |
No. of Shares Underlying Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
Outstanding at January 31, 2020 |
132 | $ | 8.98 | 3.2 | $ | 160 | ||||||||||
Expired or forfeited | (18 | ) | - | - | - | |||||||||||
Outstanding at October 31, 2020 |
114 | 9.20 | 2.6 | - | ||||||||||||
Exercisable at October 31, 2020 |
114 | $ | 9.20 | 2.6 | $ | - |
No stock options were exercised during the nine months ended October 31, 2020.
Unvested option activity |
No. of Shares Underlying Options | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value | |||||||||
Outstanding at January 31, 2020 |
3 | $ | 7.33 | $ | 4 | |||||||
Vested | (3 | ) | - | - | ||||||||
Expired or forfeited | - | - | - | |||||||||
Outstanding at October 31, 2020 |
- | $ | - | $ | - |
As of October 31, 2020, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.
Restricted stock
The following table summarizes the Company's restricted stock activity for the nine months ended October 31, 2020:
Restricted stock activity |
Restricted Shares | Weighted Average Grant Price Per Share | Aggregate Intrinsic Value | |||||||||
Outstanding at January 31, 2020 |
321 | $ | 8.89 | $ | 2,857 | |||||||
Granted |
156 | 5.88 | ||||||||||
Vested and issued | (63 | ) | 8.96 | |||||||||
Forfeited or retired for taxes |
(38 | ) | 8.20 | |||||||||
Outstanding at October 31, 2020 |
376 | $ | 7.61 | $ | 2,857 |
As of October 31, 2020, there was $1.6 million of unrecognized compensation expense related to unvested restricted stock granted under the 2017 Plan. That cost is expected to be recognized over a weighted average period of 1.9 years.
Note 8 - Income/(loss) per share
Three Months Ended October 31, |
Nine Months Ended October 31, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Basic weighted average common shares outstanding |
8,165 | 8,037 | 8,113 | 7,970 | ||||||||||||
Dilutive effect of equity compensation plans |
- | - | - | 302 | ||||||||||||
Weighted average common shares outstanding assuming full dilution |
8,165 | 8,037 | 8,113 | 8,272 | ||||||||||||
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 |
227 | 83 | 223 | 68 | ||||||||||||
Stock options and restricted stock with exercise prices or grant date prices below the average market prices |
165 | 287 | 169 | 302 |
Note 9 - Debt
Debt totaled $9.7 million and $16.9 million at October 31, 2020 and January 31, 2020, respectively.
Paycheck Protection Program Loan. On May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program.
Guidance from the American Institute of Certified Public Accountants' ("AICPA") Technical Question and Answer Section 3200.18 states that if a company expects to meet the PPP’s eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standards ("IAS") 20 - Accounting for Government Grants and Disclosure of Government Assistance to account for the PPP loan. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided. Therefore, the Company has recognized the earnings impact on a systematic basis over the periods in which the Company recognized as expenses the related costs for which the grants were intended to compensate. We noted that all of these expenses, and thus the related earnings impact, were incurred during the nine months ended October 31, 2020.
The IAS 20 guidance allows for recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected the former option, to make a more clear distinction in its financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness. As such, we have recognized the proceeds in earnings during the nine months ended October 31, 2020. The amounts are recognized in other income in the consolidated statements of operations.
Revolving lines - North America. On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("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”).
The Company has used proceeds from the Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin. The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility. Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period. Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility. The facility fee is payable quarterly in arrears.
Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of the assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).
The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) ("fixed charge coverage ratio") to be not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis; and (ii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a fixed charge coverage ratio of not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis.
Due to project delays as a result of the COVID-19 pandemic, as of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four-quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries.
On December 18, 2020, the Company entered into the First Amendment and Waiver to the Revolving Credit and Security Agreement (“Amendment and Waiver”) with PNC, which (i) reflected PNC’s waiver of the Company’s failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company’s Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenants requirements under the Credit Agreement as described below. Additionally, the Company was also required to have received, and applied to reduce the outstanding balance under the Credit Agreement, $1 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the United Arab Emirates. The transfer and repayment occurred on December 17, 2020 and did not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries. The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.2 million. The Amendment and Waiver also eliminates the Company’s ability to make LIBOR borrowings and reduces the overall availability by $2.0 million until maturity.
The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are (i) 1.25 to 1.00 for the six-month period ending April 30, 2021 and (ii) 1.25 to 1.00 for the nine-month period ending July 31, 2021. The amended fixed charge coverage ratio requirements for the North American Loan Parties under the Amendment and Waiver are (i) 1.10 to 1.00 for the three-month period ending January 31, 2021; (ii) 1.10 to 1.00 for the six-month period ending April 30, 2021; and (iii) 1.10 to 1.00 for the nine-month period ending July 31, 2021. In order to cure any future breach of the fixed charge coverage ratio covenant 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 Credit Agreement in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in pro forma compliance with the covenant. As of October 31, 2020, the Company’s foreign subsidiaries that are not a party to the Credit Agreement had approximately $6.2 million of cash available to satisfy a future potential repatriation cure of any potential future breach of the fixed charge coverage ratio covenant. Any cash required to cure future covenant defaults would be repatriated through the Company’s subsidiaries in the United Arab Emirates, Saudi Arabia, Egypt and/or India. The Company estimates that it may need to repatriate cash of up to $1.3 million in the next six months. Most of this cash could be repatriated without any tax consequences, however, some repatriation would require payment of withholding taxes. The Company does not anticipate any material tax impacts of any potential future repatriation.
The Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued based on the following:
● |
The Company’s execution of the Amendment and Waiver described above, |
● |
The Company’s ability to repatriate cash from its foreign subsidiaries to cure any future covenant defaults without any material cost or tax consequences, |
● |
The Company expects an increase in business activity and cash flow from operations over the remaining term of the Amendment and Waiver, |
● |
Management expects to be able to borrow within the reduced availability parameters noted above, and |
● |
The Company’s planned capital expenditures have some flexibility in the timing of the spend, allowing the Company to defer cash spending if necessary to aid compliance with loan covenants in the future. |
As of October 31, 2020, the Company had borrowed an aggregate of $1.8 million at rates of 6.25% and 4.15% resulting in a weighted average rate of 5.09% and had $5.8 million available under the
Senior Credit Facility, before application of the $2.0 million availability block noted above in connection with the Amendment and Waiver.
Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the United Arab Emirates (the "U.A.E.") and Egypt as discussed further below.
The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at October 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 3.7% and was originally set to expire in November 2020, however, the expiration has been extended to December 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.
The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at October 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 4.2% and was originally set to expire in July 2020, however, the expiration has been extended to December 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.
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.
In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.7 million at October 31, 2020). 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 establishes a maximum leverage ratio allowable and restricts the Company's Egyptian subsidiary's ability to undertake any additional debt. The facility has an interest rate of approximately 11.6% and was originally set to expire in June 2020, however, the expiration was extended to January 2021 due to the global pandemic and inability to finalize renewal documentation prior to that time.
The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. The Company guarantees the subsidiaries' debt including all foreign debt.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of October 31, 2020. On October 31, 2020, interest rates were based on the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.0% to 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E. credit arrangements and based on the Central Bank of Egypt corridor rate plus 1.5% per annum for the Egypt credit arrangement. Based on these base rates, as of October 31, 2020, the Company's interest rates ranged from 3.7% to 11.6%, with a weighted average rate of 3.88%, and the Company could borrow $20.2 million under these credit arrangements. As of October 31, 2020, $4.5 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, 2020, the Company had borrowed $1.0 million, and had an additional $14.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of October 31, 2020 and January 31, 2020, were included as current maturities of long-term debt in the Company's consolidated balance sheets.
Mortgages. On July 28, 2016, the Company borrowed CAD 8.0 million (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, and was 4.55% at October 31, 2020. Principal payments began in January 2018.
On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.
Note 10 - Leases
Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company intends to build a facility. The annual payments are initially expected to be approximately 1.2 million Dirhams (approximately $0.3 million at October 31, 2020), inclusive of rent and common charges, with escalation clauses in the agreement. Rent payments are deferred until August 2022. The lease expires in August 2050.
Finance Leases. In 2019, the Company obtained two finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023. In 2017, the Company obtained three finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases range from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature between April 2021 to September 2022.
In August 2016, the Company obtained a finance lease for 0.6 million Indian Rupees (approximately $8 thousand at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for this finance lease was 15.6% per annum with monthly principal and interest payments of less than $1 thousand. This lease expired in July 2019.
The Company has several significant operating lease agreements, with lease terms of one to 14 years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right-of-use ("ROU") assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company’s share of the landlord’s operating expenses. The Company does not have any arrangements where it acts as a lessor, other than one sub-lease arrangement.
At October 31, 2020, the Company had total operating lease liabilities of $14.9 million and total operating ROU assets of $13.8 million, which are reflected in the consolidated balance sheet. At October 31, 2020, the Company also had total finance lease liabilities of $0.8 million included in current maturities of long-term debt and long-term debt less current maturities, and total finance ROU assets of $1.0 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheet.
Supplemental balance sheet information related to leases is as follows:
Operating and Finance leases: |
October 31, 2020 |
January 31, 2020 |
||||||
Finance leases assets: |
||||||||
Property and Equipment - gross |
$ | 1,683 | $ | 1,696 | ||||
Accumulated depreciation and amortization |
(700 | ) | (551 | ) | ||||
Property and Equipment - net |
$ | 983 | $ | 1,145 | ||||
Finance lease liabilities: |
||||||||
Finance lease liability short-term |
$ | 333 | $ | 417 | ||||
Finance lease liability long-term |
446 | 677 | ||||||
Total finance lease liabilities |
$ | 779 | $ | 1,094 | ||||
Operating lease assets: |
||||||||
Operating lease ROU assets |
$ | 13,762 | $ | 11,475 | ||||
Operating lease liabilities: |
||||||||
Operating lease liability short-term |
$ | 1,408 | $ | 1,040 | ||||
Operating lease liability long-term |
13,477 | 11,214 | ||||||
Total operating lease liabilities |
$ | 14,885 | $ | 12,254 |
Total lease costs consist of the following:
Lease costs |
Consolidated Statements of Operations Classification |
Three Months Ended October 31, 2020 |
Three Months Ended October 31, 2019 |
Nine Months Ended October 31, 2020 |
Nine Months Ended October 31, 2019 |
||||||||||||
Finance Lease Costs |
|||||||||||||||||
Amortization of ROU assets |
Cost of sales |
$ | 50 | $ | 53 | $ | 151 | $ | 155 | ||||||||
Interest on lease liabilities |
Interest expense |
17 | 18 | 54 | 36 | ||||||||||||
Operating lease costs |
Cost of sales, SG&A expenses |
682 | 579 | 1,904 | 1,716 | ||||||||||||
Short-term lease costs (1) |
Cost of sales, SG&A expenses |
53 | 140 | 289 | 401 | ||||||||||||
Sub-lease income |
SG&A expenses |
(21 | ) | (20 | ) | (61 | ) | (61 | ) | ||||||||
Total Lease costs |
$ | 781 | $ | 770 | $ | 2,337 | $ | 2,247 |
(1) Includes variable lease costs, which are immaterial
Supplemental cash flow information related to leases is as follows:
Nine Months Ended October 31, 2020 |
Nine Months Ended October 31, 2019 |
|||||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
Financing cash flows from finance leases |
$ | 310 | $ | 185 | ||||
Operating cash flows from finance leases |
54 | 17 | ||||||
Operating cash flows from operating leases |
1,713 | 1,127 |
Nine Months Ended October 31, 2020 |
||||
ROU Assets obtained in exchange for new lease obligations: |
||||
Finance leases liabilities |
$ | - | ||
Operating leases liabilities |
3,255 |
Weighted-average lease terms and discount rates are as follows:
October 31, 2020 |
||||
Weighted-average remaining lease terms (in years): |
||||
Finance leases |
2.5 | |||
Operating leases |
12.9 | |||
Weighted-average discount rates: |
||||
Finance leases |
7.7 | % | ||
Operating leases |
7.9 | % |
Maturities of lease liabilities as of October 31, 2020, are as follows:
Year: |
Operating Leases |
Finance Leases |
||||||
For the three months ended January 31, 2021 |
$ | 630 | $ | 121 | ||||
For the year ended January 31, 2022 |
2,360 | 328 | ||||||
For the year ended January 31, 2023 |
2,406 | 266 | ||||||
For the year ended January 31, 2024 |
2,392 | 143 | ||||||
For the year ended January 31, 2025 |
1,662 | - | ||||||
For the year ended January 31, 2026 |
1,475 | - | ||||||
Thereafter |
14,339 | - | ||||||
Total lease payments |
25,264 | 858 | ||||||
Less: amount representing interest |
(10,379 | ) | (79 | ) | ||||
Total lease liabilities at October 31, 2020 |
$ | 14,885 | $ | 779 |
Rent expense on operating leases, which is recorded on straight-line basis, was $0.7 million and $0.7 million for the three months ended October 31, 2020 and 2019, and $2.2 million and $2.0 million for the nine months ended October 31, 2020 and 2019, respectively.
Note 11 - Restricted cash
Restricted cash held by foreign subsidiaries was $1.2 million and $1.1 million as of October 31, 2020 and 2019, respectively, and is related to fixed deposits that also serve as security deposits and guarantees.
October 31, 2020 |
October 31, 2019 |
|||||||
Cash and cash equivalents |
$ | 6,593 | $ | 12,221 | ||||
Restricted cash |
1,154 | 1,138 | ||||||
Cash, cash equivalents and restricted cash shown in the statement of cash flows |
$ | 7,747 | $ | 13,359 |
Note 12 - Fair value
The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates.
Note 13 - Recent accounting pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848), which provides guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by the scheduled discontinuation of LIBOR on December 31, 2021. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The ASU provides the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic. This ASU is effective for all entities; however, application of the guidance is optional, is only available in certain situations and is only available for companies to apply from March 12, 2020 until December 31, 2022. The Company's Senior Credit Facility which matures on September 20, 2021 bears interest using an alternate base rate or LIBOR plus an applicable margin. Based on the maturity of the Senior Credit Facility prior to the discontinuation of LIBOR, the Company does not expect a material impact from the adoption of this standard on the financial statements of the Company.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this standard and the impact to the financial statements of the Company.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), which removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of existing disclosures and adds disclosure requirements identified as relevant. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company will adopt this standard in its Annual Report on Form 10-K footnote disclosures for the year ended January 31, 2021 and does not expect a material impact on the financial statements of the Company.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. A recently adopted amendment has delayed the effective date until fiscal years beginning after December 15, 2022. The Company is currently evaluating this standard and the impact to the financial statements of the Company.
The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on its consolidated financial statements or related disclosures.
Note 14 - Subsequent events
As described in more detail in Note 9 - Debt, on December 18, 2020, the Company entered into the Amendment and Waiver with PNC, which (i) reflected PNC's waiver of the Company's failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company's Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenant requirements under the Credit Agreement.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") |
The statements contained under the caption MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K.
This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in the MD&A have been rounded to the nearest percentage point, and may not exactly correspond to the comparative data presented.
COVID-19 and Depressed Oil and Gas Market Impact
In late 2019, an outbreak of novel coronavirus (also known as "COVID-19") began. The virus was recognized as a pandemic by the World Health Organization on March 11, 2020. In response to the rapid spread of the virus, national and local governments have instituted varying levels of actions to contain the virus's spread.
As of the date of filing this Form 10-Q, all of the Company’s plants are operating and, to date, the Company's global supply chains have not been materially affected by the global pandemic. Due to the unprecedented actions taken to stem the spread of the virus and the uncertainty of the duration and impact of additional actions that may be required, the resulting future disruptions to the Company’s operations are uncertain.
In response to the extraordinary steps taken to combat the spread of COVID-19 and the impact of decreased oil prices, the Company has updated its forecasts more frequently during this period to determine the continuing financial impact of these events on the Company’s results of operations, financial condition and liquidity. The resulting actions from these reforecasts included reducing planned capital expenditures, non-essential operating expenses and headcount reductions. Due to project delays as a result of COVID-19, as of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four-quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries. Based on the actions taken by the Company and expected future results, the Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued. See further discussion below and in Note 9 - Debt.
On May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided. Under the current provisions of the CARES Act, any recipient of a PPP loan may be subject to an audit to confirm it qualifies for the loan and that the proceeds were used for qualified expenses as prescribed by the program rules.
Based on the facts and circumstances of the Company's PPP loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the nine months ended October 31, 2020. The amounts are recognized in other income in the consolidated statements of operations. The Company has submitted its application and documentation for forgiveness to its bank and it is in the review process prior to being submitted to the SBA.
Beginning in April 2020, the Company's subsidiary, Perma-Pipe Canada, Ltd. ("PPCA"), applied for relief in the form of grants from the Canadian government under the Canadian Emergency Wage Subsidy ("CEWS") program. Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month. PPCA was approved for and received approximately $1.1 million in grants under the program during the nine months ended October 31, 2020. The CEWS program is scheduled to continue through June 2021. PPCA plans to apply for additional grants under the program, however there is no guarantee that PPCA will be granted any additional funds under the program. The CEWS proceeds are recognized in other income in the consolidated statements of operations.
The Company’s results of operations, financial condition, liquidity and cash flow in 2020 have been materially adversely affected by the COVID-19 pandemic and the current depressed market prices for oil and gas and will likely continue to be materially adversely affected, the extent to which remains unclear at this time. See Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K for additional information.
Table of Contents
RESULTS OF OPERATIONS
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results are significantly impacted as a result of large variations in the level of project activity in reporting periods.
($ in thousands) |
Three Months Ended October 31, |
Nine Months Ended October 31, |
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2020 |
2019 |
Change favorable/(unfavorable) |
2020 |
2019 |
Change favorable/(unfavorable) |
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Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
Percent |
Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
Percent |
|||||||||||||||||||||||||||||||||||||
Net sales |
$ | 20,294 | $ | 34,457 | $ | (14,163 | ) | (41 | %) | $ | 63,399 | $ | 95,400 | $ | (32,001 | ) | (34 | %) | ||||||||||||||||||||||||||||||
Gross profit |
2,938 | 14 | % | 7,643 | 22 | % | (4,705 | ) | (62 | %) | 8,769 | 14 | % | 22,018 | 23 | % | (13,249 | ) | (60 | %) | ||||||||||||||||||||||||||||
General and administrative expenses |
4,528 | 22 | % | 4,636 | 13 | % | 108 | 2 | % | 13,320 | 21 | % | 13,907 | 15 | % | 587 | 4 | % | ||||||||||||||||||||||||||||||
Selling expense |
1,174 | 6 | % | 1,354 | 4 | % | 180 | 13 | % | 4,153 | 7 | % | 4,030 | 4 | % | (123 | ) | (3 | %) | |||||||||||||||||||||||||||||
Interest expense, net |
107 | 194 | 87 | 45 | % | 411 | 612 | 201 | 33 | % | ||||||||||||||||||||||||||||||||||||||
Other income/(expense) |
(2 | ) | 95 | (97 | ) | (104 | %) | 3,672 | 351 | 3,321 | 946 | % | ||||||||||||||||||||||||||||||||||||
Income/(loss) from operations before income taxes |
(2,873 | ) | 1,554 | (4,427 | ) | (285 | %) | (5,443 | ) | 3,820 | (9,263 | ) | (242 | %) | ||||||||||||||||||||||||||||||||||
Income tax (benefit)/expense |
(23 | ) | 1,699 | 1,722 | (101 | %) | (339 | ) | 1,747 | 2,086 | 119 | % | ||||||||||||||||||||||||||||||||||||
Net income/(loss) |
(2,850 | ) | (145 | ) | (2,705 | ) | 1866 | % | (5,104 | ) | 2,073 | (7,177 | ) | (346 | %) |
Three months ended October 31, 2020 ("current quarter") vs. Three months ended October 31, 2019 ("prior year quarter")
Net sales:
Net sales were $20.3 million in the current quarter, a decrease of $14.2 million, or 41%, from $34.5 million in the prior year quarter. The decrease was a result of lower sales volumes in the Company's Canadian and offshore Gulf of Mexico businesses driven by the impact of lower oil prices, combined with a reduction in sales in the Company's U.S. and Middle East district heating and cooling businesses caused by project delays arising as a result of the COVID-19 pandemic.
Gross profit:
Gross profit decreased to $2.9 million, or 14% of net sales, in the current quarter from $7.6 million, or 22% of net sales, in the prior year quarter. This decrease was driven primarily by lower sales volumes.
General and administrative expenses:
General and administrative expenses decreased to $4.5 million in the current quarter from $4.6 million in the prior year quarter. This decrease was driven primarily by cost cutting measures enacted as a result of the COVID-19 pandemic.
Selling expenses:
Selling expenses decreased to $1.2 million in the current quarter, compared to $1.4 million in the prior year quarter due primarily to lower personnel costs.
Interest expense, net:
Net interest expense decreased to $0.1 million in the current quarter, compared to $0.2 million in the prior year quarter. This decrease was due to lower borrowings during the period.
Other income/(expense):
Other income/(expense) decreased to an expense of less than $0.1 million in the current quarter, compared to income of $0.1 million in the prior year quarter. This decrease was driven by the encashment of a $0.6 million performance bond securing one of the Company's contracts with a customer in Qatar. The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract. The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract. This expense was partially offset by income recorded for funds received under the CEWS program in Canada.
Income/(loss) from operations before income taxes:
Income/(loss) from operations before income taxes decreased by $4.4 million to a loss of $2.9 million in the current quarter from income of $1.5 million in the prior year quarter. The decrease was a result of lower sales volumes in the Company's Canadian and offshore Gulf of Mexico businesses driven by the impact of lower oil prices, combined with a reduction in sales in the Company's U.S. and Middle East district heating and cooling businesses caused by project delays arising as a result of the COVID-19 pandemic.
Income tax (benefit)/expense:
The Company's worldwide effective tax rates ("ETR") were 0.8% and 127.8% in the current quarter and the prior year quarter, respectively. The change in the ETR from the prior year quarter to the current year quarter is due to the impact of tax rates in various jurisdictions and the changing mix of taxable income and loss in those jurisdictions, as well as the impact of the lower current quarter pre-tax income as compared to the prior year quarter.
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, and earnings in its Indian subsidiary are partially permanently reinvested. The earnings from these subsidiaries will be subject to tax in their local jurisdiction, and the impact of Indian, Canadian and Egyptian withholding taxes will be recorded. As such, the Company has accrued a liability of $0.3 million as of October 31, 2020 related to these taxes.
For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.
Net loss:
The resulting net loss of $2.8 million in the current quarter was a decline of $2.7 million over the net loss of $0.1 million in the prior year quarter. The decrease was a result of lower sales volumes in the Company's Canadian and offshore Gulf of Mexico businesses driven by the impact of lower oil prices, combined with a reduction in sales in the Company's U.S. and Middle East district heating and cooling businesses caused by project delays arising as a result of the COVID-19 pandemic.
Nine months ended October 31, 2020 ("year-to-date") vs. Nine months ended October 31, 2019 ("prior year year-to-date")
Net sales:
Net sales were $63.4 million in the current year-to-date, a decrease of $32.0 million, or 34%, from $95.4 million in the prior year year-to-date. The decrease was a result of lower sales volumes in the Company's Canadian and offshore Gulf of Mexico businesses driven by the impact of lower oil prices, combined with a reduction in sales in the Company's U.S. and Middle East district heating and cooling businesses caused by project delays arising as a result of the COVID-19 pandemic.
Gross profit:
Gross profit decreased to $8.8 million, or 14% of net sales, in the current year-to-date from $22.0 million, or 23% of net sales, in the prior year year-to-date. This decrease was driven primarily by lower sales volumes.
General and administrative expenses:
General and administrative expenses decreased to $13.3 million in the current year-to-date from $13.9 million in the prior year year-to-date. This decrease was driven primarily by cost cutting measures enacted as a result of the COVID-19 pandemic.
Selling expenses:
Selling expenses increased to $4.2 million in the current year-to-date, compared to $4.0 million in the prior year year-to-date, an increase of $0.2 million, or 3%. This increase was primarily due to the addition of new sales employees and severance payments for terminated employees.
Interest expense, net:
Net interest expense decreased to $0.4 million in the current year-to-date, compared to $0.6 million in the prior year year-to-date. This decrease was due to lower borrowings during the period.
Other income/(expense):
Other income/(expense) increased to income of $3.7 million in the current year-to-date, compared to income of $0.4 million in the prior year year-to-date, an increase of $3.3 million. This increase was primarily the result of recognition of the Company's reasonable expectation of forgiveness of its PPP loan proceeds during the period of $3.2 million, as well as income recorded for funds received under the CEWS program in Canada. These amounts were offset partially by the encashment of a performance bond securing one of the Company's contracts with a customer in Qatar. The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract. The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract.
Income/(loss) from operations before income taxes:
Income/(loss) from operations before income taxes decreased by $9.2 million to a loss of $5.4 million in the current year-to-date from income of $3.8 million in the prior year year-to-date. The decrease was a result of lower sales volumes in the Company's Canadian and offshore Gulf of Mexico businesses driven by the impact of lower oil prices, combined with a reduction in sales in the Company's U.S. and Middle East district heating and cooling businesses caused by project delays arising as a result of the COVID-19 pandemic.
Income tax (benefit)/expense:
The Company's worldwide ETRs were 6.2% and 48.6% in the current year-to-date and the prior year year-to-date, respectively. The change in the ETR from the prior year year-to-date to the current year year-to-date is due to the impact of tax rates in various jurisdictions and the changing mix of taxable income and loss in those 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, and earnings in its Indian subsidiary are partially permanently reinvested. The earnings from these subsidiaries will be subject to tax in their local jurisdiction, and the impact of the Indian, Canadian and Egyptian withholding taxes will be recorded. As such, the Company has accrued a liability of $0.3 million as of October 31, 2020 related to these taxes.
For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income/(loss):
The resulting net loss of $5.1 million in the current year-to-date was a decline of $7.2 million over the net income of $2.1 million in the prior year year-to-date. The decrease was a result of lower sales volumes in the Company's Canadian and offshore Gulf of Mexico businesses driven by the impact of lower oil prices, combined with a reduction in sales in the Company's U.S. and Middle East district heating and cooling businesses caused by project delays arising as a result of the COVID-19 pandemic.
Liquidity and capital resources
Cash and cash equivalents as of October 31, 2020 were $6.6 million compared to $13.4 million on January 31, 2020. On October 31, 2020, $0.4 million was held in the U.S., and $6.2 million was held at the Company's foreign subsidiaries. The Company's working capital was $29.3 million on October 31, 2020 compared to $31.4 million on January 31, 2020. Of the working capital components, cash decreased $6.8 million as the result of the movements discussed below.
Net cash provided by operating activities in the nine months ended October 31, 2020 was $2.0 million, as compared to $2.8 million in the comparable prior year period. This decrease was due primarily to the Company settling accounts payable and increases in prepaid expenses and other current assets, partially offset by decreases in inventory in the current period compared to the prior year period.
Net cash used in investing activities in the nine months ended October 31, 2020 and in the comparable prior year period was $1.6 million and $1.4 million, respectively. This was due primarily to an increase in investments in fixed assets supporting growth initiatives in the Middle East.
Net cash used in financing activities in the nine months ended October 31, 2020 and the comparable prior year period was $7.2 million and $0.8 million, respectively. The primary reason for this change was that during the current period the Company had greater net repayments under its revolving credit facility of approximately $6.4 million, as compared to the prior year period where the Company had net repayments under its revolving credit facility of approximately $0.3 million. Debt totaled $9.7 million and $16.9 million as of October 31, 2020 and January 31, 2020, respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.
Revolving line - North America. On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender, providing for a three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).
The Company has used proceeds from the Senior Credit Facility to pay outstanding amounts under a prior credit facility, a cash collateralized letter of credit, and for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or LIBOR, plus, in each case, an applicable margin. The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility. Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period. Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility. The facility fee is payable quarterly in arrears.
Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).
The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve a ratio of their EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis; and (ii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) to achieve a ratio of their EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility of not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis.
Due to project delays as a result of the COVID-19 pandemic, as of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four-quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries.
On December 18, 2020, the Company entered into the First Amendment and Waiver to the Revolving Credit and Security Agreement (“Amendment and Waiver”) with PNC, which (i) reflected PNC’s waiver of the Company’s failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company’s Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenants requirements under the Credit Agreement as described below. Additionally, the Company was also required to have received, and applied to reduce the outstanding balance under the Credit Agreement, $1 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the United Arab Emirates. The transfer and repayment occurred on December 17, 2020 and did not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries. The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.2 million. The Amendment and Waiver also eliminates the Company’s ability to make LIBOR borrowings and reduces the overall availability by $2.0 million until maturity.
The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are (i) 1.25 to 1.00 for the six-month period ending April 30, 2021 and (ii) 1.25 to 1.00 for the nine-month period ending July 31, 2021. The amended fixed charge coverage ratio requirements for the North American Loan Parties under the Amendment and Waiver are (i) 1.10 to 1.00 for the three-month period ending January 31, 2021; (ii) 1.10 to 1.00 for the six-month period ending April 30, 2021; and (iii) 1.10 to 1.00 for the nine-month period ending July 31, 2021. In order to cure any future breach of the fixed charge coverage ratio covenant 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 Credit Agreement in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in pro forma compliance with the covenant. As of October 31, 2020, the Company’s foreign subsidiaries that are not a party to the Credit Agreement had approximately $6.2 million of cash available to satisfy a future potential repatriation cure of any potential future breach of the fixed charge coverage ratio covenant. Any cash required to cure future covenant defaults would be repatriated through the Company’s subsidiaries in the United Arab Emirates, Saudi Arabia, Egypt and/or India. The Company estimates that it may need to repatriate cash of up to $1.3 million in the next six months. Most of this cash could be repatriated without any tax consequences, however, some repatriation would require payment of withholding taxes. The Company does not anticipate any material tax impacts of any potential future repatriation.
The Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued based on the following:
● |
The Company’s execution of the Amendment and Waiver described above, |
● |
The Company’s ability to repatriate cash from its foreign subsidiaries to cure any future covenant defaults without any material cost or tax consequences, |
● |
The Company expects an increase in business activity and cash flow from operations over the remaining term of the Amendment and Waiver, |
● |
Management expects to be able to borrow within the reduced availability parameters noted above, and |
● |
The Company’s planned capital expenditures have some flexibility in the timing of the spend, allowing the Company to defer cash spending if necessary to aid compliance with loan covenants in the future. |
As of October 31, 2020, the Company had borrowed an aggregate of $1.8 million at a rate of 6.25% and 4.15% resulting in a weighted average rate of 5.09% and had $5.8 million available under the Senior Credit Facility, before application of the $2.0 million availability block noted above in connection with the Amendment and Waiver.
Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E. and Egypt as discussed further below. The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at October 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 3.7% and was originally set to expire in November 2020, however, the expiration has been extended to December 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.
The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at October 31, 2020) from a bank in the U.A.E. The facility has an interest rate of approximately 4.2% and was originally set to expire in July 2020, however, the expiration has been extended to December 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.
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.
In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.7 million at October 31, 2020). 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 establishes a maximum leverage ratio allowable and restricts the Company's Egyptian subsidiary's ability to undertake any additional debt. The facility has an interest rate of approximately 11.6% and was originally set to expire in June 2020, however, the expiration was extended to January 2021 due to the global pandemic and inability to finalize renewal documentation prior to that time.
The Company’s credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. The Company guarantees the subsidiaries' debt including all foreign debt.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of October 31, 2020. On October 31, 2020, interest rates were based on the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.0% to 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E. credit arrangements and based on the Central Bank of Egypt corridor rate plus 1.5% per annum for the Egypt credit arrangement. Based on these base rates, as of October 31, 2020, the Company's interest rates ranged from 3.7% to 11.6%, with a weighted average rate of 3.88%, and the Company could borrow $20.2 million under these credit arrangements. As of October 31, 2020, $4.5 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, 2020, the Company had borrowed $1.0 million, and had an additional $14.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of October 31, 2020 and January 31, 2020, were included as current maturities of long-term debt in the Company's consolidated balance sheets.
Additional liquidity from the PPP
On May 1, 2020, the Company entered into a loan agreement under the SBA's PPP and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to such effect may be provided. Under the current provisions of the CARES Act, any recipients of a PPP loan may be subject to an audit to confirm they qualify for the loan and that the proceeds were used for qualified expenses as prescribed by the program rules.
Based on the facts and circumstances of the Company's loan and according to the applicable accounting guidance described herein, the Company has elected to account for the PPP proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the nine months ended October 31, 2020. The amounts are recognized in other income in the consolidated statements of operations.
Additional liquidity from the CEWS Program
Beginning in April 2020, the Company's subsidiary, PPCA, applied for relief in the form of grants from the Canadian government under the CEWS program. Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month. PPCA was approved for and received approximately $1.1 million in grants under the program during the nine months ended October 31, 2020. The CEWS program is scheduled to continue through June 2021. PPCA plans to apply for additional grants under the program, however there is no guarantee that PPCA will be granted any additional funds under the program. The CEWS proceeds are recognized in other income in the consolidated statements of operations.
Accounts receivable:
In 2013, the Company started a project in the Middle East as a sub-contractor, with billings in the aggregate amount of approximately $41.9 million. The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer. Nevertheless, the Company has since then collected approximately $38.1 million as of October 31, 2020, with a remaining balance due in the amount of $3.8 million. Included in this balance is an amount of $3.4 million, which pertains to retention clauses within the agreements of the Company's customer (contractor), and which become payable by the customer when this project is fully tested and commissioned. In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable, $1.6 million of this retention amount was reclassified to a long-term receivable account.
The Company has been engaged in ongoing active efforts to collect the outstanding amount. During fiscal 2019, the Company received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. During the first quarter of 2020, the Company had certified invoices of $0.5 million in the process of collection. In August 2020, the Company received approximately $0.2 million from the customer and additional receipts are expected in the fourth quarter of 2020 and in 2021. As a result, the Company did not reserve any allowance against this amount as of October 31, 2020. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2020 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.
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, 2020. Based upon the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective and operating to provide reasonable assurance that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, including the Chief Executive Officer and Chief Financial Officer, based on the remediation activities implemented by the Company as described below, 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. Other than as set forth below, there were no changes in the Company's internal control over financial reporting during the Company's most recent quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Management previously reported on a material weakness in the Company's internal control over financial reporting that resulted from an accounting error identified by the Company’s auditors during the audit of the Company’s financial statements for the fiscal year ended January 31, 2020 related to the Company’s revenue recognition under percentage of completion accounting. Specifically, the Company had improperly recognized revenue for an open project based on imputed sales amounts greater than the total contracted amount. This accounting error was attributable to the Company’s deviation from its standard contract accounting policies and failure to recognize the error during monthly revenue reviews and led management to conclude that a material weakness existed with respect to the Company’s internal control over financial reporting. The Company considered this material weakness fully remediated as of October 31, 2020. 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.
The Company has implemented the following changes in response to the material weakness described above:
• |
Reinforced the importance of adherence to Company policies regarding entering into and subsequently modifying contracts with customers, and confirmed in monthly meetings with managers that no contracts have been entered into that deviate from Company’s accounting policies; |
• |
Created additional reports to identify potential system errors and exceptions related to project revenues and costs where higher risk may exist for inappropriate revenue recognition; |
• |
Reviewed listing of material request invoices each month to identify if any significant items are included and reviewed with additional scrutiny for appropriate revenue recognition; |
• |
Ensured adherence to guidelines for preparation of the Company's monthly revenue and contribution margin presentation to include all components of a project in one line to provide full visibility of total job performance; and |
• |
Implemented a monthly meeting between accounting personnel to discuss and analyze the asset and liability work-in-process accounts to identify any specific projects that require further investigation. |
Exhibits |
10 (bb) | First Amendment and Waiver to Revolving Credit and Security Agreement, dated December 18, 2020, by and among the Company, PNC Bank, National Association, and the other parties thereto |
31.1 |
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31.2 |
|
32 |
|
101.INS |
XBRL Instance |
101.SCH |
XBRL Taxonomy Extension Schema |
101.CAL |
XBRL Taxonomy Extension Calculation |
101.DEF |
XBRL Taxonomy Extension Definition |
101.LAB |
XBRL Taxonomy Extension Labels |
101.PRE |
XBRL Taxonomy Extension Presentation |
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 21, 2020 |
/s/ David J. Mansfield |
|
|
David J. Mansfield |
|
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
Date: |
December 21, 2020 |
/s/ D. Bryan Norwood |
|
|
D. Bryan Norwood |
|
|
Vice President and Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
Execution Version
FIRST AMENDMENT AND WAIVER TO REVOLVING CREDIT
AND SECURITY AGREEMENT
This First Amendment and Waiver to Revolving Credit and Security Agreement (this “Amendment”) dated as of December 18, 2020 is by and among PERMA-PIPE INTERNATIONAL HOLDINGS, INC., a Delaware corporation (“Holdings”), PERMA-PIPE, INC., a Delaware corporation (“Perma-Pipe”), PERMA-PIPE CANADA LTD., a company registered in the Province of Alberta, Canada (“Perma-Pipe Canada” and together with Holdings and Perma-Pipe, the “Borrowers” and each a “Borrower”), PERMA-PIPE CANADA, INC., a Delaware corporation (“Canada Holdings” or “Guarantor” and together with the Borrowers, collectively the “Loan Parties” and each a “Loan Party”), the financial institutions party hereto (collectively, the “Lenders” and each individually a “Lender”) and PNC BANK, NATIONAL ASSOCIATION (“PNC”), as agent for Lenders (PNC, in such capacity, the “Agent”).
BACKGROUND
A. Loan Parties, Agent and Lenders entered into that certain Revolving Credit and Security Agreement, dated as of September 20, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), pursuant to which Agent and Lenders established certain financing arrangements with the Loan Parties. Capitalized terms used herein but not specifically defined herein shall have the respective meanings ascribed to them in the Credit Agreement.
B. Loan Parties have notified Agent that for the fiscal quarter ending October 31, 2020, Holdings, Perma-Pipe, Canada Holdings and Perma-Pipe Canada have failed to maintain a Fixed Charge Coverage Ratio as required by Section 6.5(b) of the Credit Agreement (the “Existing Financial Covenant Default”).
C. Loan Parties have requested that Agent and Lenders make certain amendments to the Credit Agreement and waive the Waived Defaults (as defined below), and Agent and Lenders have agreed to such requests on the terms and conditions set forth herein.
TERMS AND CONDITIONS
NOW, THEREFORE, with the foregoing Background incorporated by reference and made a part hereof and intending to be legally bound, the parties agree as follows:
1. Waiver. Subject to the terms and conditions herein, upon the Effective Date (as defined below), Agent and Lenders hereby waive (a) the Existing Financial Covenant Default, (b) any Event of Default under 10.11 of the Credit Agreement arising as a result of the Existing Financial Covenant Default, and (c) any Default and/or Event of Default arising from (i) the Loan Parties’ failure to provide notice to Agent of the Events of Default specified in clauses (a) and (b) above as required by Section 9.5 of the Credit Agreement and/or (ii) any representation or warranty that any Loan Party may have provided to Agent and/or Lenders regarding the absence of any Default or Event of Default during the continuance of the Events of Default specified in clauses (a) and/or (b) above (all Defaults and Events of Default waived under this Section 1, collectively, the “Waived Defaults”); provided however that such waiver shall in no way constitute a waiver of any other Defaults or Events of Default which may have occurred but which are not specifically referenced as the “Waived Defaults”, nor shall this waiver obligate Agent or Lenders to provide any further waiver of any other Default or Event of Default (whether similar or dissimilar). Other than in respect of the Waived Defaults, this waiver shall not preclude the future exercise of any right, power, or privilege available to Agent or Lenders whether under the Credit Agreement, the Other Documents or otherwise.
2. Amendments to Credit Agreement. Upon the Effective Date, the Credit Agreement shall be amended as follows:
a. The following new defined terms are hereby added to Section 1.2 of the Credit Agreement in their proper alphabetical order:
“Cure Notice” shall have the meaning set forth in Section 6.5(d) hereof.
“Financial Covenant Amount” shall have the meaning set forth in Section 6.5(d) hereof.
“Financial Covenant Cure” shall have the meaning set forth in Section 6.5(d) hereof.
“Financial Covenant Default” shall have the meaning set forth in Section 6.5(d) hereof.
“First Amendment Effective Date” shall mean December 18, 2020.
“Repatriated Foreign Cash Cure” shall mean cash repatriated following a Financial Covenant Default from a non-Loan Party Subsidiary that is received by Borrowers and applied to the Obligations.
“Required Contribution Date” shall have the meaning set forth in Section 6.5(d) hereof.
“Testing Date” shall have the meaning set forth in Section 6.5(d) hereof.
b. The following definition contained in Section 1.2 of the Credit Agreement is hereby amended and restated as follows:
“Availability Block” shall mean an amount equal to $2,000,000.
c. Section 5.5(d) of the Credit Agreement shall be deleted in its entirety and replaced as follows:
(d) Since January 31, 2020, there has been no Material Adverse Effect (excluding, for the avoidance of doubt, changes or effects directly arising from the impact of the COVID-19 pandemic, as described in Holdings’ Annual Report on Form 10-K filed with the SEC on April 21, 2020 and Holdings’ Quarterly Reports on Form 10-Q filed with the SEC on June 9, 2020 and September 9, 2020).
d. Section 6.5 of the Credit Agreement shall be deleted in its entirety and replaced as follows:
6.5 Financial Covenants.
(a) [Reserved].
(b) Fixed Charge Coverage Ratio Consolidated North American Entities. Cause the Consolidated North American Entities to achieve, as of the end of each fiscal quarter, a Fixed Charge Coverage Ratio of not less than (i) 1.10 to 1.00 for the three (3) month period ending January 31, 2021, (ii) 1.10 to 1.00 for the six (6) month period ending April 30, 2021, (iii) 1.10 to 1.00 for the nine (9) month period ending July 31, 2021 and (iv) 1.10 to 1.00 for the fiscal quarter ending October 31, 2021 and each fiscal quarter end thereafter on a trailing four quarter basis.
(c) Consolidated Fixed Charge Coverage Ratio. Cause Holdings and each of its Subsidiaries on a consolidated basis to achieve, as of the end of the applicable fiscal quarter, a Fixed Charge Coverage Ratio of not less than (i) 1.25 to 1.00 for the six (6) month period ending April 30, 2021, (ii) 1.25 to 1.00 for the nine (9) month period ending July 31, 2021 and (iii) 1.25 to 1.00 for the fiscal quarter ending October 31, 2021 and each fiscal quarter end thereafter on a trailing four quarter basis.
(d) Financial Covenant Cure. Notwithstanding Section 6.5(b) above, the Loan Parties shall have the right to cure any actual or anticipated failure to perform, keep or observe any term, provision, condition or covenant, contained in Section 6.5(b) above (a “Financial Covenant Default”) on the following terms and conditions (a “Financial Covenant Cure”):
(i) In the event the Loan Parties desire to cure an actual or anticipated Financial Covenant Default, Borrowers shall deliver to the Agent written notice of their intent to cure (a “Cure Notice”) on or before the date that the financial statements and corresponding Compliance Certificate as of and for the period ending on the last day of the fiscal quarter as of which such Financial Covenant Default has occurred or is anticipated to occur (the “Testing Date”) are or were required to be delivered to Agent and Lenders. The Cure Notice shall set forth the calculation of the Financial Covenant Cure Amount (as hereinafter defined).
(ii) In the event Borrowers deliver a Cure Notice, a Repatriated Foreign Cash Cure shall be made in an amount not less than the Financial Covenant Cure Amount at any time prior to the tenth day after the date such Compliance Certificate was due (such tenth day, the “Required Contribution Date”). The proceeds of such Repatriated Foreign Cash Cure equal to the Financial Covenant Cure Amount shall be immediately deposited in a Depository Account to be remitted to Agent for application by Agent promptly thereafter to the Revolving Advances first and then to any other Obligations then due, in each case, with a view toward minimizing any breakage costs.
(iii) The “Financial Covenant Cure Amount” shall be the amount which, if added to the amount of EBITDA as of the applicable Testing Date, would result in the Loan Parties being in pro forma compliance with Section 6.5(b) above as of such Testing Date.
(iv) The Financial Covenant Cure may not be exercised, for the period from the First Amendment Effect Date through and including the last day of the Term, more than four (4) times.
(v) The Financial Covenant Cure Amount (A) shall be deemed added to EBITDA on a dollar for dollar basis for the fiscal quarter ending as of the applicable Testing Date and shall be included in each calculation of EBITDA which includes such fiscal quarter and (B) shall be disregarded for purposes of determining financial covenant ratio based conditions, interest rates or any baskets set forth in any covenants contained herein.
(vi) So long as (A) the Cure Notice is delivered to Agent when required by Section 6.5(d)(i) above, (B) on or before the Required Contribution Date, the Repatriated Foreign Cash Cure in an amount not less than the Financial Covenant Cure Amount is received by Borrowers in accordance with Section 6.5(d)(ii) above and is remitted to Agent for application to the Obligations in accordance with Section 6.5(d)(ii) and (C) the limitation in clause (iv) of this Section 6.5(d) is not exceeded, the Financial Covenant Default shall be deemed cured, the requirements of Section 6.5(b) above shall be deemed to have been satisfied as of the applicable Testing Date with the same effect as though there had been no Financial Covenant Default at such date or thereafter and neither Agent nor any Lender shall, on or prior to the Required Contribution Date, impose default interest, accelerate the Obligations or exercise any other right or remedy against any Loan Party or any Collateral solely on the basis of the Financial Covenant Default; provided that, until all the terms of this Section 6.5(d)(vi) are met with respect to a Financial Covenant Default, a Default shall exist and an Event of Default shall be deemed to exist for all other purposes of this Agreement, including, without limitation, any term or provision hereof or of any Other Document which prohibits any action to be taken by a Borrower or any of its Subsidiaries.
3. LIBOR. Notwithstanding anything to the contrary contained in the Credit Agreement or any Other Document, the Loan Parties hereby acknowledge and agree that from and after the date hereof no Borrower shall request, and no Lender shall make, any Advance as a LIBOR Rate Loan unless permitted by Agent in writing in its sole discretion, and any outstanding LIBOR Rate Loan on the date hereof shall convert to a Domestic Rate Loan as of the last day of the Interest Period applicable to such LIBOR Rate Loan.
4. Effectiveness Conditions. This Amendment shall become effective on the first date that all of the following conditions have been fully satisfied by the Loan Parties in form and substance acceptable to Agent (such date, the “Effective Date”):
a. Execution and delivery of this Amendment by each party hereto;
b. Execution and delivery of the First Amendment to Fee Letter by each party thereto;
c. Perma-Pipe shall have received $1,000,000 from Perma-Pipe Middle East FZC in repayment of certain intercompany loan obligations owing to Perma-Pipe from Perma-Pipe Middle East FZC, and such amount shall have been applied to the Obligations;
d. Agent shall have received all fees and expenses required to be paid by the Loan Parties to Agent and Lenders on or prior to the date hereof;
e. Since January 31, 2020, there shall not have occurred any Material Adverse Effect (excluding, for the avoidance of doubt, changes or effects directly arising from the impact of the COVID-19 pandemic, as described in Holdings’ Annual Report on Form 10-K filed with the SEC on April 21, 2020 and Holdings’ Quarterly Reports on Form 10-Q filed with the SEC on June 9, 2020 and September 9, 2020); and
f. upon giving effect to the terms of this Amendment, no Default or Event of Default shall exist or shall have occurred and be continuing.
5. Representations, Warranties and Reaffirmation. Each Loan Party hereby:
a. confirms, as of the date hereof and giving effect to the terms of this Amendment, that all representations and warranties made to Agent and Lenders under the Credit Agreement and all of the Other Documents are true and correct in all material respects (except to the extent any such representations and warranties specifically relate to a specific date, in which case such representations and warranties were true and correct in all material respects on and as of such other specific date);
b. reaffirms, as of the date hereof and giving effect to the terms of this Amendment, all of the covenants contained in the Credit Agreement and all of the Other Documents;
c. represents and warrants to the Agent and the Lenders that, other than the Waived Defaults, no Default or Event of Default has occurred and is continuing as of the date hereof;
d. represents and warrants, as of the date hereof, that such Loan Party has the full power, authority and legal right to enter into this Amendment and the other documents to be executed by it in connection herewith to which it is a party (this Amendment and such other documents, collectively, the “Amendment Documents”) and to perform all of its respective Obligations hereunder and thereunder; and
e. represents and warrants, as of the date hereof, that the execution, delivery and performance by it of this Amendment and the other Amendment Documents to which it is a party (i) are within such Loan Party’s corporate or company powers, as applicable, have been duly authorized by all necessary corporate or company action, as applicable, are not in contravention of law or the terms of such Loan Party’s Organizational Documents or to the conduct of such Loan Party’s business or of any Material Contract or undertaking to which such Loan Party is a party or by which such Loan Party is bound, (ii) will not conflict with or violate any law or regulation, or any judgment, order or decree of any Governmental Body, (iii) will not require the Consent of any Governmental Body, any party to a Material Contract or any other Person (other than Agent and the Lenders party hereto), and (iv) will not conflict with, nor result in any breach in any of the provisions of or constitute a default under or result in the creation of any Lien except Permitted Encumbrances and other Liens permitted under Section 7.3 of the Credit Agreement upon any asset of such Loan Party under the provisions of any agreement, instrument, or other document to which such Loan Party is a party or by which it or its property is a party or by which it may be bound.
6. Payment of Expenses. Loan Parties shall pay or reimburse Agent and Lenders for its/their reasonable out-of-pocket attorneys’ fees and expenses incurred in connection with the preparation, negotiation and execution of this Amendment.
7. Reaffirmation of Credit Agreement. Except as modified by the terms hereof, all of the terms and conditions of the Credit Agreement and all of the Other Documents (a) are hereby reaffirmed and (b) shall continue in full force and effect as therein written.
8. Release. Each Loan Party, by its signature below, hereby acknowledges and agrees that it has no actual or potential claim or cause of action against Agent or any Lender relating to this Amendment, the Credit Agreement or any Other Document and/or the Obligations arising thereunder or related thereto, in any such case arising on or before the date hereof. As further consideration for the amendments set forth herein, each Loan Party, by its signature below, hereby (a) waives and releases and forever discharges Agent, Issuer and each Lender, and the respective past, present and future officers, directors, attorneys, agents, professionals and employees of Agent, Issuer and each Lender (all collectively the “Released Parties”) from any and all claims, counterclaims and causes of action of any kind or nature whatsoever (and from any and all liability for any such claims, counterclaims and causes of action, including any such claims, counterclaims and causes of action for damages, losses or expenses of any kind), whether arising at law or in equity, that any Loan Party had, may now have or may hereafter have against any one or more of the Released Parties arising out of or relating to (i) the Credit Agreement, (ii) the Other Documents (including this Amendment), (iii) any and all Revolving Advances made or Letters of Credit issued through the date hereof and/or any other Obligations heretofore made and/or now outstanding under the Credit Agreement or any Other Document, (iv) any transactions related to any of the foregoing, or contemplated by the Credit Agreement or any Other Document (including this Amendment) and/or (v) any other action (or failure to act) taken (or, as applicable, not taken or taken only after any delay or satisfaction of any conditions) by any of the Released Parties in connection with any of the foregoing, or as contemplated by the Credit Agreement or any Other Document (including this Amendment), or in connection with the negotiation or administration of the Credit Agreement and the Other Documents (including this Amendment) and the credit facilities made available to the Loan Parties thereunder, in each case to the extent such claims, counterclaims and causes of action arise out of events or circumstances that occurred or existed, or which are occurring and/or existing, on or prior to the date hereof and (b) agrees that all waivers and releases made by the Loan Parties pursuant to this paragraph and this Amendment generally are made in consideration of the agreements of Agent and Lenders set forth in this Amendment and to induce Agent and Lenders to enter into this Amendment.
9. Miscellaneous.
a. Third Party Rights. No rights are intended to be created hereunder for the benefit of any third party donee, creditor, or incidental beneficiary.
b. Other Document. This Amendment is an “Other Document” as defined in the Credit Agreement and all of the terms and provisions of the Credit Agreement relating to Other Documents shall apply hereto.
c. Additional Provisions. Sections 16.1 (Governing Law), 16.2 (a)-(d) (Entire Understanding), 16.3(a) (Successors and Assigns), 16.8 (Severability), 16.12 (Captions), and 16.13 (Counterparts; Facsimile Signatures) of the Credit Agreement are hereby incorporated herein, mutatis mutandis.
[Signature Page Follows]
IN WITNESS WHEREOF, each of the parties has signed this Amendment as of the day and year first above written.
BORROWERS: PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
By: /s/ David J. Mansfield
Name: David J. Mansfield
Title: President
PERMA-PIPE, INC.
By: /s/ David J. Mansfield
Name: David J. Mansfield
Title: President
PERMA-PIPE CANADA LTD.
By: /s/ David J. Mansfield
Name: David J. Mansfield
Title: Secretary
GUARANTOR: PERMA-PIPE CANADA, INC.
By: /s/ David J. Mansfield
Name: David J. Mansfield
Title: Chairman
AGENT AND LENDER: PNC BANK, NATIONAL ASSOCIATION
By: /s/ Thomas F. Karlov
Name: Thomas F. Karlov
Title: Senior Vice President
Exhibit 31.1
I, David J. Mansfield, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Perma-Pipe International Holdings, Inc. |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: |
December 21, 2020 |
/s/ David J. Mansfield
David J. Mansfield
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, D. Bryan Norwood, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Perma-Pipe International Holdings, Inc. |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: |
December 21, 2020 |
/s/ D. Bryan Norwood
D. Bryan Norwood
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 32
Certification of Principal Executive Officers
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
The undersigned in their capacities as Chief Executive Officer and Chief Financial Officer of Perma-Pipe International Holdings, Inc. (the “Registrant’), certify that, to the best of their knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended October 31, 2020 of the Registrant, (the “Report”):
(1) |
The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ David J. Mansfield
David J. Mansfield
President and Chief Executive Officer
(Principal Executive Officer)
/s/ D. Bryan Norwood
D. Bryan Norwood
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
December 21, 2020
A signed original of this written statement required by Section 906 has been provided by Perma-Pipe International Holdings, Inc. and will be retained by Perma-Pipe International Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Document And Entity Information - shares |
9 Months Ended | |
---|---|---|
Oct. 31, 2020 |
Dec. 18, 2020 |
|
Document Information [Line Items] | ||
Entity Registrant Name | Perma-Pipe International Holdings, Inc. | |
Entity Central Index Key | 0000914122 | |
Trading Symbol | ppih | |
Current Fiscal Year End Date | --01-31 | |
Entity Filer Category | Non-accelerated Filer | |
Entity Current Reporting Status | Yes | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Interactive Data Current | Yes | |
Entity Common Stock, Shares Outstanding (in shares) | 8,164,989 | |
Entity Shell Company | false | |
Document Type | 10-Q | |
Document Period End Date | Oct. 31, 2020 | |
Document Fiscal Year Focus | 2020 | |
Document Fiscal Period Focus | Q3 | |
Amendment Flag | false | |
Title of 12(b) Security | Common Stock, $.01 par value per share |
Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Net sales | $ 20,294 | $ 34,457 | $ 63,399 | $ 95,400 |
Cost of sales | 17,356 | 26,814 | 54,630 | 73,382 |
Gross profit | 2,938 | 7,643 | 8,769 | 22,018 |
Operating expenses | ||||
General and administrative expenses | 4,528 | 4,636 | 13,320 | 13,907 |
Selling expenses | 1,174 | 1,354 | 4,153 | 4,030 |
Total operating expenses | 5,702 | 5,990 | 17,473 | 17,937 |
Income/(loss) from operations | (2,764) | 1,653 | (8,704) | 4,081 |
Interest expense, net | 107 | 194 | 411 | 612 |
Other income/(expense) | (2) | 95 | 3,672 | 351 |
Income/(loss) from operations before income taxes | (2,873) | 1,554 | (5,443) | 3,820 |
Income tax (benefit)/expense | (23) | 1,699 | (339) | 1,747 |
Net income/(loss) | $ (2,850) | $ (145) | $ (5,104) | $ 2,073 |
Weighted average common shares outstanding | ||||
Basic (in shares) | 8,165 | 8,037 | 8,113 | 7,970 |
Diluted (in shares) | 8,165 | 8,037 | 8,113 | 8,272 |
Income/(loss) per share | ||||
Basic (in dollars per share) | $ (0.35) | $ (0.02) | $ (0.63) | $ 0.26 |
Diluted (in dollars per share) | $ (0.35) | $ (0.02) | $ (0.63) | $ 0.25 |
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Net income/(loss) | $ (2,850) | $ (145) | $ (5,104) | $ 2,073 |
Other comprehensive income/(loss) | ||||
Foreign currency translation adjustments, net of tax | 110 | 12 | (104) | 53 |
Other comprehensive income/(loss) | 110 | 12 | (104) | 53 |
Comprehensive income/(loss) | $ (2,740) | $ (133) | $ (5,208) | $ 2,126 |
Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) shares in Thousands, $ in Thousands |
Oct. 31, 2020 |
Jan. 31, 2020 |
---|---|---|
Allowance for doubtful accoutns | $ 411 | $ 407 |
Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
Common stock, authorized (in shares) | 50,000 | 50,000 |
Common stock, issued (in shares) | 8,165 | 8,048 |
Common stock, outstanding (in shares) | 8,165 | 8,048 |
Note 1 - Basis of Presentation |
9 Months Ended |
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Oct. 31, 2020 | |
Notes to Financial Statements | |
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] | Note 1 - Basis of presentationThe interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2020 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 2020 2019 three and nine months ended October 31, 2020 and 2019 January 31, 2021 and 2020 |
Note 2 - Business Segment Reporting |
9 Months Ended |
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Oct. 31, 2020 | |
Notes to Financial Statements | |
Segment Reporting Disclosure [Text Block] | Note 2 - Business segment reportingThe Company is engaged in the manufacture and sale of products in one segment: Piping Systems. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property. |
Note 3 - Accounts Receivable |
9 Months Ended |
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Oct. 31, 2020 | |
Notes to Financial Statements | |
Loans, Notes, Trade and Other Receivables Disclosure [Text Block] | Note 3 - Accounts receivableThe majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition, including the availability of credit insurance. In the U.S., collateral is not generally required. In the United Arab Emirates and Saudi Arabia, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write-off is recorded against the allowance for doubtful accounts. One of the Company's accounts receivable in the total amount of $ 3.9 $4.1 million as of October 31, 2020 January 31, 2020 3.4 $1.6 million and $2.1 as of , respectively. The Company completed all of its deliverables in October 31, 2020 and January 31, 2020 2015 under the related contract, but the system has not yet been commissioned by the customer. Nevertheless, the Company has been engaged in ongoing active efforts to collect this outstanding amount. During the first quarter of 2020, the Company certified invoices of $0.5 million in the process of collection. During the third quarter of 2020, the Company received approximately $0.2 million from the customer and additional receipts are expected in the fourth quarter of 2020 and in 2021. The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2019 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this receivable as of October 31, 2020 not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. For the three months ended October 31, 2020 no 10% 2019, one individual customer accounted for 16% of the Company's consolidated net sales. For the nine October 31, 2020 no individual customer accounted for more than 10% of the Company's consolidated net sales, and during the same period in 2019, one individual customer accounted for 11% of the Company's consolidated net sales.At October 31, 2020 January 31, 2020 one 10.1% 13.3% |
Note 4 - Revenue Recognition |
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Revenue from Contract with Customer [Text Block] | Note 4 - Revenue recognition Revenue from contracts with customers: The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured. The Company's standard revenue transactions are classified into two main categories:
In accordance with Accounting Standards Codification ("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:
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, 2020 and 2019
The input method, as noted in ASC 606 -10 -55 -20, is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion method is the most faithful depiction of the Company's performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred. The output method, as noted in ASC 606 -10 -55 -17, is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company's performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped. Some of the Company's operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but do not recognize revenue until the performance obligations are satisfied under the methods discussed above. Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified. Contract assets and liabilities: Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts. The Company anticipates that substantially all costs incurred for uncompleted contracts as of October 31, 2020 one year.During the three months ended October 31, 2020, one of the Company's customers in Qatar made a call on a performance bond held to secure one of the Company's contracts. The Company believes the customer's claims of non-performance under the contract are invalid and that the customer's actions were themselves a breach of the contract. The Company has engaged local counsel to seek reimbursement as well as additional compensation for lost profits suffered as a result of cancellation of certain work orders under the contract. This expense was offset by funds received under the CEWS program in Canada. The Company has recorded the expense related to the encashment of approximately $0.6 The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated. In addition to these amounts, the Company has recorded $1.4 million of unbilled receivables from its subsidiaries in the Middle East in prepaid expenses and other current assets on its consolidated balance sheet as of October 31, 2020
Practical expedients: Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies the practical expedient for these types of costs and as such are expensed in the period incurred.As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. |
Note 5 - Income Taxes |
9 Months Ended |
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Oct. 31, 2020 | |
Notes to Financial Statements | |
Income Tax Disclosure [Text Block] | Note 5 - Income taxes The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowances requires management to make judgments and estimates. As a company with subsidiaries in foreign jurisdictions, the process of calculating income taxes involves estimating current tax obligations and exposures in each jurisdiction as well as making judgments regarding the future recoverability of deferred tax assets. Income earned in the United Arab Emirates is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections. The Company's effective tax rate ("ETR") from operations in the third 2020 0.8% and 6.2% compared to 127.8% and 48.6% during the respective prior year periods. The change in the ETR from the prior year quarter to the current year quarter is largely due to the impact of tax rates in various jurisdictions and the changing mix of taxable income and loss in those jurisdictions.The amount of unrecognized tax benefits, including interest and penalties at October 31, 2020 $0.1 million, all of which would impact the Company's ETR if recognized. On March 7, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act748 ) (the "CARES Act"). Among the changes to the U.S. federal income tax rules, the CARES Act restored net operating loss carryback rules that were eliminated by the U.S. Tax Cuts and Jobs Act ("Tax Act"), restored 100% bonus depreciation for qualified improvement property, modified the limit on the deduction for net interest expense and accelerated the timeframe for refunds of alternative minimum tax credits. With consideration to these changes to federal income tax rules, there is no net impact to the Company's deferred taxes due to the full valuation allowance. The Company will continue to evaluate the effects of the CARES Act as additional legislative guidance becomes available. |
Note 6 - Impairment of Long-lived Assets |
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Notes to Financial Statements | |||||||||||||||||||||||||||
Asset Impairment Charges [Text Block] | Note 6 - Impairment of long-lived assetsThe 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. At October 31, 2020 not that the fair values of the Company's long-lived assets exceeded their carrying values. The Company assessed three asset groups as part of this analysis: United States, Canada and Middle East. The qualitative assessment indicated that it was more likely than not that the fair values of the Company's long-lived assets exceeded their carrying values for the United States and Middle East asset groups. However, triggering events were identified related to the Company's Canada asset group, indicating potential impairment of the asset group's long-lived assets. Therefore, the Company performed a quantitative assessment to determine any potential impairment. After completion of this additional assessment, it was determined that there was no three and nine months ended October 31, 2020 and 2019 Goodwill. as of was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in October 31, 2020 and January 31, 2020 2016.
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 October 31, 2020 0 qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's goodwill exceeded its carrying value. The qualitative assessment identified triggering events that indicated potential impairment of the Company's goodwill. Therefore, the Company proceeded to complete the Step 1 analysis to determine any potential impairment. The Step 1 analysis involved a quantitative fair valuation of the reporting unit associated with the Company's goodwill, including a market approach, transaction approach and discounted cash flow analysis. After completion of the Step 1 analysis, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no three and nine months ended October 31, 2020 and 2019 no assurance that a future impairment charge will not be required. |
Note 7 - Stock-based Compensation |
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Share-based Payment Arrangement [Text Block] | Note 7 - Stock-based compensation The Company's 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ( "2017 Plan"), expired in June 2020. Prior to the 2017 Plan's expiration, grants were made to the Company's employees, officers and independent directors, as described below. 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, 2020 529,570 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards.While the 2017 Plan 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 Company issued only restricted shares and restricted stock units under the 2017 Plan. The 2017 Plan authorized awards to officers, employees, consultants and independent directors.The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The following were the Company's stock-based compensation expenses for the periods presented:
Stock Options The Company did not three or nine months ended October 31, 2020
No stock options were exercised during the nine months ended October 31, 2020
As of October 31, 2020 no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.Restricted stock The following table summarizes the Company's restricted stock activity for the nine October 31, 2020
As of October 31, 2020 $1.6 million of unrecognized compensation expense related to unvested restricted stock granted under the 2017 Plan. That cost is expected to be recognized over a weighted average period of 1.9 years. |
Note 8 - Income/(Loss) Per Share |
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Earnings Per Share [Text Block] | Note 8 - Income/(loss) per share
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Note 9 - Debt |
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Debt Disclosure [Text Block] | Note 9 - DebtDebt totaled $ 9.7 $16.9 million at October 31, 2020 January 31, 2020 Paycheck Protection Program Loan. May 1, 2020, the Company entered into a loan agreement under the Small Business Administration's Paycheck Protection Program ("PPP") and received proceeds of approximately $3.2 million. Interest on the loan accrued at a fixed interest rate of 1.0%, and the loan had a maturity date of April 28, 2022. Under Section 1106 of the CARES Act, borrowers are eligible for forgiveness of principal and accrued interest on the loans to the extent that the proceeds are used to cover eligible payroll costs, mortgage interest costs, rent and utility costs, otherwise described as qualified expenses. During the three months ended July 31, 2020, the Company used all of the PPP loan proceeds to pay for qualified expenses, 100% of which were used for payroll related expenses. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program.Guidance from the American Institute of Certified Public Accountants' ("AICPA") Technical Question and Answer Section 3200.18 states that if a company expects to meet the PPP's eligibility criteria and concludes that the PPP loan represents, in substance, a grant that is expected to be forgiven, it may analogize to International Accounting Standards ("IAS") 20 - Accounting for Government Grants and Disclosure of Government Assistance to account for the PPP loan. The Company believes the PPP loan proceeds will be forgiven under the terms of the CARES Act program, although no assurance to that effect can be provided. Therefore, the Company has recognized the earnings impact on a systematic basis over the periods in which the Company recognized as expenses the related costs for which the grants were intended to compensate. We noted that all of these expenses, and thus the related earnings impact, were incurred during the nine months ended October 31, 2020 The IAS 20 guidance allows for recognition in earnings either separately under a general heading such as other income, or as a reduction of the related expenses. The Company has elected the former option, to make a more clear distinction in its financial statements between its operating income and the amount of net income resulting from the PPP loan and subsequent expected forgiveness. As such, we have recognized the proceeds in earnings during the nine months ended October 31, 2020 Revolving lines - North America . On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("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”).The Company has used proceeds from the Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin. The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility. Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period. Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility. The facility fee is payable quarterly in arrears.Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of the assets of its North American subsidiaries. The North American Loan Parties' obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties' ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company's foreign subsidiaries not party to the Credit Agreement) ("fixed charge coverage ratio") to be not less than 1.10 to 1.00 at each quarter end on a trailing four -quarter basis; and (ii) the Company and its subsidiaries (including the Company's foreign subsidiaries not party to the Credit Agreement) to achieve a fixed charge coverage ratio of not less than 1.10 to 1.00 at each quarter end on a trailing four -quarter basis.As of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of 1.10 to 1.00 for the trailing four -quarters ended October 31, 2020 under its Credit Agreement for both the North American Loan Parties and the Company and its subsidiaries. It was critical to the Company to resolve its October 31, 2020 covenant violations and to avoid potential future covenant violations for the Company's ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued.On December 17, 2020, the Company entered into the First Amendment and Waiver to the Revolving Credit and Security Agreement (“Amendment and Waiver”) with PNC, which (i) reflected PNC's waiver of the Company's failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company's Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenants requirements under the Credit Agreement as described below. Additionally, the Company was also required to have received, and applied to reduce the outstanding balance under the Credit Agreement, $1 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the United Arab Emirates. The transfer and repayment occurred on December 17, 2020 and did not cause the Company to incur any additional fees or taxes, nor did it force the Company to change any of its assertions with regards to permanent reinvestment in any of its foreign subsidiaries. The Company will incur additional fees over the remainder of the Amendment and Waiver of approximately $0.2 million. The Amendment and Waiver also eliminates the Company's ability to make LIBOR borrowings and reduces the overall availability by $2.0 million until maturity. The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are (i) 1.25 to 1.00 for the six -month period ending April 30, 2021 and (ii) 1.25 to 1.00 for the nine -month period ending July 31, 2021. The amended fixed charge coverage ratio requirements for the North American Loan Parties under the Amendment and Waiver are (i) 1.10 to 1.00 for the three -month period ending January 31, 2021; ( ii) 1.10 to 1.00 for the six -month period ending April 30, 2021; and (iii) 1.10 to 1.00 for the nine -month period ending July 31, 2021. In order to cure any future breach of the fixed charge coverage ratio covenant 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 Credit Agreement in an amount which, when added to the amount of the Company's Consolidated EBITDA, would result in pro forma compliance with the covenant. As of October 31, 2020, the Company's foreign subsidiaries that are not a party to the Credit Agreement had approximately $6.2 million of cash available to satisfy a future potential repatriation cure of any potential future breach of the fixed charge coverage ratio covenant. Any cash required to cure future covenant defaults would be repatriated through the Company's subsidiaries in the United Arab Emirates, Saudi Arabia, Egypt and/or India. Most of this cash could be repatriated without any tax consequences, however, some repatriation would attract withholding taxes. The Company does not anticipate any material tax impacts of any potential future repatriation.The Company believes it has alleviated any concerns about its ability to satisfy its obligations in the normal course of business for the next year after the date these financial statements are available to be issued based on the following:
As of October 31, 2020 $1.8 million at rates of 6.25% and 4.15% resulting in a weighted average rate of 5.09% and had $5.8 million available under the Senior Credit Facility, before application of the $2.0 million availability block noted above in connection with the Amendment and Waiver. Revolving lines - foreign . The Company also has credit arrangements used by its Middle Eastern subsidiaries in the United Arab Emirates (the "U.A.E.") and Egypt as discussed further below.The Company has a revolving line for 8.0 million Dirhams (approximately $2.2 million at October 31, 2020 3.7% and was originally set to expire in November 2020, however, the expiration has been extended to December 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at October 31, 2020 4.2% and was originally set to expire in July 2020, however, the expiration has been extended to December 2020 due to the global pandemic and inability to finalize renewal documentation prior to that time.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. In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately $12.7 million at October 31, 2020 11.6% and was originally set to expire in June 2020, however, the expiration was extended to January 2021 due to the global pandemic and inability to finalize renewal documentation prior to that time.The Company's credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. The Company guarantees the subsidiaries' debt including all foreign debt. The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of October 31, 2020 October 31, 2020 3.0% to 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E. credit arrangements and based on the Central Bank of Egypt corridor rate plus 1.5% per annum for the Egypt credit arrangement. Based on these base rates, as of October 31, 2020 3.7% to 11.6%, with a weighted average rate of 3.88%, and the Company could borrow $20.2 million under these credit arrangements. As of October 31, 2020 $4.5 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, 2020 $1.0 million, and had an additional $14.7 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of , were included as current maturities of long-term debt in the Company's consolidated balance sheets. October 31, 2020 and January 31, 2020 Mortgages. July 28, 2016, the Company borrowed CAD 8.0 million (approximately $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, and was 4.55% at October 31, 2020 January 2018. On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%. |
Note 10 - Leases |
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Lessee, Operating and Finance Leases [Text Block] | Note 10 - LeasesOperating Leases. August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company intends to build a facility. The annual payments are initially expected to be approximately 1.2 million Dirhams (approximately $0.3 million at October 31, 2020), inclusive of rent and common charges, with escalation clauses in the agreement. Rent payments are deferred until August 2022. The lease expires in August 2050. Finance Leases. 2019, the Company obtained two finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023. In 2017, the Company obtained three finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases range from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature between April 2021 to September 2022. In August 2016, the Company obtained a finance lease for 0.6 million Indian Rupees (approximately $8 thousand at the prevailing exchange rate on the transaction date) to finance vehicle equipment. The interest rate for this finance lease was 15.6% per annum with monthly principal and interest payments of less than $1 thousand. This lease expired in July 2019. The Company has several significant operating lease agreements, with lease terms of one to 14 years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees. Certain of the Company's leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right-of-use ("ROU") assets as the Company is not reasonably certain to exercise the options. Variable expenses generally represent the Company's share of the landlord's operating expenses. The Company does not have any arrangements where it acts as a lessor, other than one sub-lease arrangement. At October 31, 2020 $14.9 million and total operating ROU assets of $13.8 million, which are reflected in the consolidated balance sheet. At October 31, 2020 0.8 1.0 Supplemental balance sheet information related to leases is as follows:
Total lease costs consist of the following:
( 1 ) Includes variable lease costs, which are immaterialSupplemental cash flow information related to leases is as follows:
Weighted-average lease terms and discount rates are as follows:
Maturities of lease liabilities as of October 31, 2020
Rent expense on operating leases, which is recorded on straight-line basis, was $0.7 million and $0.7 million for the three months ended October 31, 2020 2019 $2.2 million and $2.0 million for the nine October 31, 2020 2019 |
Note 11 - Restricted Cash |
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Cash and Cash Equivalents Disclosure [Text Block] | Note 11 - Restricted cashRestricted cash held by foreign subsidiaries was $1.2 million and $1.1 million as of October 31, 2020 2019
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Note 12 - Fair Value |
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Fair Value Disclosures [Text Block] | Note 12 - Fair value The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates. |
Note 13 - Recent Accounting Pronouncements |
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Description of New Accounting Pronouncements Not yet Adopted [Text Block] | Note 13 - Recent accounting pronouncementsIn March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020 -04, Reference Rate Reform (Topic 848 ), which provides guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by the scheduled discontinuation of LIBOR on December 31, 2021. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The ASU provides the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic. This ASU is effective for all entities; however, application of the guidance is optional, is only available in certain situations and is only available for companies to apply from March 12, 2020 until December 31, 2022. The Company's Senior Credit Facility which matures on September 20, 2021 bears interest using an alternate base rate or LIBOR plus an applicable margin. Based on the maturity of the Senior Credit Facility prior to the discontinuation of LIBOR, the Company does not expect a material impact from the adoption of this standard on the financial statements of the Company.In December 2019, the FASB issued ASU 2019 -12, Simplifying the Accounting for Income Taxes (Topic 740 ), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this standard and the impact to the financial statements of the Company.In August 2018, the FASB issued ASU 2018 -14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715 -20 ), which removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of existing disclosures and adds disclosure requirements identified as relevant. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company will adopt this standard in its Annual Report on Form 10 -K footnote disclosures for the year ended January 31, 2021 and does not expect a material impact on the financial statements of the Company.In June 2016, the FASB issued ASU No. 2016 -13, Financial Instruments-Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. A recently adopted amendment has delayed the effective date until fiscal years beginning after December 15, 2022. The Company is currently evaluating this standard and the impact to the financial statements of the Company. The Company evaluated other recent accounting pronouncements and does not expect them to have a material impact on its consolidated financial statements or related disclosures. |
Note 14 - Subsequent Events |
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Subsequent Events [Text Block] | Note 14 - Subsequent eventsAs described in more detail in Note 9 - Debt, on December 17, 2020, the Company entered into the Amendment and Waiver with PNC, which (i) reflected PNC's waiver of the Company's failure to maintain a fixed charge coverage ratio of 1.10 to 1.00 as of October 31, 2020 on a trailing four quarter basis as required under the Company's Credit Agreement and (ii) further amended certain future fixed charge coverage ratio covenant requirements under the Credit Agreement. |
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Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
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Note 10 - Leases (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Supplemental Balance Sheet Information Related to Leases [Table Text Block] |
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Lease, Cost [Table Text Block] |
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Supplemental Cash Flow Information Related Leases [Table Text Block] |
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Weighted-average Lease Terms and Discount Rates [Table Text Block] |
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Finance and Operating Lease, Liability, Maturity [Table Text Block] |
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Note 11 - Restricted Cash (Tables) |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Notes Tables | ||||||||||||||||||||||||||||||||||||||||||||||
Restrictions on Cash and Cash Equivalents [Table Text Block] |
|
Note 2 - Business Segment Reporting (Details Textual) |
9 Months Ended |
---|---|
Oct. 31, 2020 | |
Number of Reportable Segments | 1 |
Note 4 - Revenue Recognition (Details Textual) $ in Millions |
3 Months Ended | 9 Months Ended |
---|---|---|
Oct. 31, 2020
USD ($)
|
Oct. 31, 2020
USD ($)
|
|
Costs Incurred for Uncompleted Contracts, Anticipated Collection Period (Year) | 1 year | |
Middle East [Member] | ||
Unbilled Receivables, Current | $ 1.4 | $ 1.4 |
Other Nonoperating Income (Expense) [Member] | ||
Expense Related to Encashment | $ 0.6 | $ 0.6 |
Note 4 - Revenue Recognition - Revenues by Revenue Class (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Net sales | $ 20,294 | $ 34,457 | $ 63,399 | $ 95,400 |
Sales by product, percent | 100.00% | 100.00% | 100.00% | 100.00% |
Product [Member] | Transferred at Point in Time [Member] | ||||
Net sales | $ 2,435 | $ 2,448 | $ 8,603 | $ 13,205 |
Sales by product, percent | 12.00% | 7.00% | 14.00% | 14.00% |
Specialty Piping Systems And Coating [Member] | Transferred at Point in Time Using Input Method [Member] | ||||
Net sales | $ 8,252 | $ 14,363 | $ 26,597 | $ 38,601 |
Sales by product, percent | 41.00% | 42.00% | 42.00% | 40.00% |
Specialty Piping Systems And Coating [Member] | Transferred at Point in Time Using Output Method [Member] | ||||
Net sales | $ 9,607 | $ 17,646 | $ 28,199 | $ 43,594 |
Sales by product, percent | 47.00% | 51.00% | 44.00% | 46.00% |
Note 4 - Revenue Recognition - Contract With Customer, Asset and Liability (Details) - USD ($) $ in Thousands |
3 Months Ended | |||||
---|---|---|---|---|---|---|
Oct. 31, 2020 |
Jul. 31, 2020 |
Apr. 30, 2020 |
Oct. 31, 2019 |
Jul. 31, 2019 |
Apr. 30, 2019 |
|
Balance, assets | $ 1,750 | $ 2,900 | $ 2,166 | $ 3,474 | $ 1,983 | $ 1,653 |
Costs and gross profit recognized during the period for uncompleted contracts from the prior period | (930) | (1,743) | (2,896) | (1,799) | (1,509) | (1,038) |
Costs and deferred gross profit incurred on uncompleted contracts not billed at the end of the current period | 542 | 593 | 3,630 | 2,688 | 3,000 | 1,368 |
Balance, assets | 1,362 | 1,750 | 2,900 | 4,363 | 3,474 | 1,983 |
Balance, liabilities | 767 | 1,061 | 1,173 | 1,141 | 1,846 | 1,569 |
Revenue recognized during the period for uncompleted contracts from the prior period | 104 | 631 | (17) | (774) | (1,250) | (444) |
New contracts entered into that are uncompleted at the end of the current period | (199) | (925) | (95) | 984 | 545 | 721 |
Balance, liabilities | $ 672 | $ 767 | $ 1,061 | $ 1,351 | $ 1,141 | $ 1,846 |
Note 5 - Income Taxes (Details Textual) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Effective Income Tax Rate Reconciliation, Percent, Total | 0.80% | 127.80% | 6.20% | 48.60% |
Other Noncurrent Liabilities [Member] | ||||
Unrecognized Tax Benefits, Ending Balance | $ 0.1 | $ 0.1 |
Note 6 - Impairment of Long-lived Assets (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Impairment of Long-Lived Assets Held-for-use | $ 0 | $ 0 | $ 0 | $ 0 |
Goodwill, Impairment Loss | $ 0 | $ 0 | $ 0 | $ 0 |
Note 6 - Impairment of Long-lived Assets - Goodwill (Details) $ in Thousands |
9 Months Ended |
---|---|
Oct. 31, 2020
USD ($)
| |
Goodwill | $ 2,254 |
Goodwill, foreign exchange change effect | (17) |
Goodwill | $ 2,237 |
Note 7 - Stock-based Compensation (Details Textual) $ in Thousands |
3 Months Ended | 9 Months Ended |
---|---|---|
Oct. 31, 2020
USD ($)
shares
|
Oct. 31, 2020
USD ($)
shares
|
|
Common Stock, Capital Shares Reserved for Future Issuance (in shares) | 529,570 | 529,570 |
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross (in shares) | 0 | 0 |
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares, Ending Balance (in shares) | 0 | 0 |
Share-based Payment Arrangement, Option [Member] | ||
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total | $ | $ 0 | $ 0 |
Restricted Stock [Member] | ||
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Amount, Total | $ | $ 1,600 | $ 1,600 |
Share-based Payment Arrangement, Nonvested Award, Cost Not yet Recognized, Period for Recognition (Year) | 1 year 328 days |
Note 7 - Stock-based Compensation - Stock-based Compensation Expense (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Stock-based compensation expense | $ 285 | $ 226 | $ 764 | $ 786 |
Share-based Payment Arrangement, Option [Member] | ||||
Stock-based compensation expense | 2 | 3 | 10 | |
Restricted Stock [Member] | ||||
Stock-based compensation expense | $ 285 | $ 224 | $ 761 | $ 776 |
Note 7 - Stock-based Compensation - Unvested Option Activity (Details) - Unvested Option [Member] $ / shares in Units, shares in Thousands, $ in Thousands |
9 Months Ended |
---|---|
Oct. 31, 2020
USD ($)
$ / shares
shares
| |
Outstanding at beginning of period (in shares) | 3 |
Outstanding at beginning of period, weighted average exercise price (in dollars per share) | $ / shares | $ 7.33 |
Outstanding at beginning of period, aggregate intrinsic value | $ | $ 4 |
Vested, number (in shares) | (3) |
Expired or forfeited (in shares) | |
Expired or forfeited, weighted average exercise price (in dollars per share) | $ / shares | |
Outstanding at end of period (in shares) | |
Outstanding at end of period, weighted average exercise price (in dollars per share) | $ / shares | |
Outstanding at end of period, aggregate intrinsic value | $ |
Note 8 - Income/(Loss) Per Share - Summary of Earnings Per Share (Details) - shares shares in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Basic weighted average common shares outstanding (in shares) | 8,165 | 8,037 | 8,113 | 7,970 |
Dilutive effect of equity compensation plans (in shares) | 302 | |||
Weighted average common shares outstanding assuming full dilution (in shares) | 8,165 | 8,037 | 8,113 | 8,272 |
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 (in shares) | 227 | 83 | 223 | 68 |
Stock options and restricted stock with exercise prices or grant date prices below the average market prices (in shares) | 165 | 287 | 169 | 302 |
Note 10 - Leases - Supplemental Balance Sheet Information Related to Leases (Details) - USD ($) $ in Thousands |
Oct. 31, 2020 |
Jan. 31, 2020 |
---|---|---|
Property and Equipment - net | $ 26,958 | $ 28,629 |
Finance lease liability short-term | 333 | 417 |
Finance lease liability long-term | 446 | 677 |
Total finance lease liabilities | 779 | 1,094 |
Operating Lease, Right-of-Use Asset | 13,762 | 11,475 |
Operating lease liability short-term | 1,408 | 1,040 |
Operating lease liability long-term | 13,477 | 11,214 |
Total operating lease liabilities | 14,885 | 12,254 |
Finance Leases Assets [Member] | ||
Property and Equipment - gross | 1,683 | 1,696 |
Accumulated depreciation and amortization | (700) | (551) |
Property and Equipment - net | $ 983 | $ 1,145 |
Note 10 - Leases - Lease Costs (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||
---|---|---|---|---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
Oct. 31, 2020 |
Oct. 31, 2019 |
|||
Amortization of ROU assets | $ 50 | $ 53 | $ 151 | $ 155 | ||
Interest on lease liabilities | 17 | 18 | 54 | 36 | ||
Operating lease costs | 682 | 579 | 1,904 | 1,716 | ||
Short-term lease costs (1) | [1] | 53 | 140 | 289 | 401 | |
Sub-lease income | (21) | (20) | (61) | (61) | ||
Total Lease costs | $ 781 | $ 770 | $ 2,337 | $ 2,247 | ||
|
Note 10 - Leases - Supplemental Cash Flow Information Related to Leases (Details) - USD ($) $ in Thousands |
9 Months Ended | |
---|---|---|
Oct. 31, 2020 |
Oct. 31, 2019 |
|
Financing cash flows from finance leases | $ 310 | $ 185 |
Operating cash flows from finance leases | 54 | 17 |
Operating cash flows from operating leases | 1,713 | $ 1,127 |
Finance leases liabilities | ||
Operating leases liabilities | $ 3,255 |
Note 10 - Leases - Weighted-average Lease Terms and Discount Rates (Details) |
Oct. 31, 2020 |
---|---|
Finance leases (Year) | 2 years 182 days |
Operating leases (Year) | 12 years 328 days |
Finance leases | 7.70% |
Operating leases | 7.90% |
Note 11 - Restricted Cash (Details Textual) - USD ($) $ in Thousands |
Oct. 31, 2020 |
Jan. 31, 2020 |
Oct. 31, 2019 |
---|---|---|---|
Restricted Cash, Current | $ 1,154 | $ 1,287 | $ 1,138 |
Non-US [Member] | |||
Restricted Cash, Current | $ 1,200 | $ 1,100 |
Note 11 - Restricted Cash - Summary of Cash, Cash Equivalents and Restricted Cash (Details) - USD ($) $ in Thousands |
Oct. 31, 2020 |
Jan. 31, 2020 |
Oct. 31, 2019 |
---|---|---|---|
Cash and cash equivalents | $ 6,593 | $ 13,371 | $ 12,221 |
Restricted cash | 1,154 | $ 1,287 | 1,138 |
Cash, cash equivalents and restricted cash shown in the statement of cash flows | $ 7,747 | $ 13,359 |
Note 14 - Subsequent Events (Details Textual) |
12 Months Ended |
---|---|
Oct. 31, 2020 | |
Revolving Lines, North America [Member] | |
Line of Credit Facility, Covenant, Fixed Charge Coverage Ratio | 1.1 |
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