UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File No.
Perma-Pipe International Holdings, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| (Address of principal executive offices) | (Zip Code) |
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(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 |
| The |
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐
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
On September 3, 2021, there were
Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended July 31, 2021
| Financial Statements |
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
| Three Months Ended July 31, |
Six Months Ended July 31, |
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| 2021 |
2020 |
2021 |
2020 |
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| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
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| Gross profit |
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| Operating expenses |
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| General and administrative expenses |
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| Selling expenses |
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| Total operating expenses |
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| Income/(loss) from operations |
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| Interest expense, net |
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| Other income, net |
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| Income/(loss) from operations before income taxes |
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| Income tax expense/(benefit) |
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| Net income/(loss) |
$ | $ | $ | $ | ( |
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| Weighted average common shares outstanding |
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| Basic |
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| Diluted |
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| Earnings/(loss) per share |
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| Basic |
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| Diluted |
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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 July 31, | Six Months Ended July 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income/(loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Other comprehensive income/(loss) | ||||||||||||||||
| Foreign currency translation adjustments, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive income/(loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income/(loss) | $ | $ | $ | $ | ( | ) | ||||||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| July 31, 2021 | January 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, less allowance for doubtful accounts of $ at July 31, 2021 and $ at January 31, 2021 | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net of accumulated depreciation | ||||||||
| Other assets | ||||||||
| Operating lease right-of-use asset | ||||||||
| Deferred tax assets | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued compensation and payroll taxes | ||||||||
| Commissions and management incentives payable | ||||||||
| Revolving line - North America | ||||||||
| Current maturities of long-term debt | ||||||||
| Customers' deposits | ||||||||
| Outside commission liability | ||||||||
| Operating lease liability short-term | ||||||||
| Other accrued liabilities | ||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | ||||||||
| Income taxes payable | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Long-term debt, less current maturities | ||||||||
| Long-term finance obligation | ||||||||
| Deferred compensation liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Operating lease liability long-term | ||||||||
| Other long-term liabilities | ||||||||
| Total long-term liabilities | $ | $ | ||||||
| Stockholders' equity | ||||||||
| Common stock, par value, authorized shares; issued and outstanding at July 31, 2021 and issued and outstanding at January 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
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 |
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| Total stockholders' equity at January 31, 2021 |
$ | $ | $ | ( |
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) | $ | |||||||||||
| Net loss |
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| Stock-based compensation expense |
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| Foreign currency translation adjustment |
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| Total stockholders' equity at April 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
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| Net income |
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| Common stock issued under stock plans, net of shares used for tax withholding |
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| Stock-based compensation expense |
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| Foreign currency translation adjustment |
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| Total stockholders' equity at July 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||
| Total stockholders' equity at January 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||
| Net loss |
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| Stock-based compensation expense |
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| Foreign currency translation adjustment |
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| Total stockholders' equity at April 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||
| Net income |
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| Common stock issued under stock plans, net of shares used for tax withholding |
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| Stock-based compensation expense |
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| Foreign currency translation adjustment |
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| Total stockholders' equity at July 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
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| Shares |
2021 |
2020 |
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| Balances at beginning of year |
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| Shares issued, net of shares used for tax withholding |
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| Balances at period end |
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See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| (In thousands) | Six Months Ended July 31, | |||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net income/(loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income/(loss) to net cash flows (used in)/provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Deferred tax expense/(benefit) | ( | ) | ||||||
| Stock-based compensation expense | ||||||||
| Provision on uncollectible accounts | ( | ) | ||||||
| Loss on disposal of fixed assets | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories, net | ( | ) | ||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued compensation and payroll taxes | ( | ) | ||||||
| Customers' deposits | ( | ) | ||||||
| Income taxes receivable and payable | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Other assets and liabilities | ||||||||
| Net cash (used in)/provided by operating activities | ( | ) | ||||||
| Investing activities | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from sales of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Proceeds from revolving lines | ||||||||
| Payments of debt on revolving lines | ( | ) | ( | ) | ||||
| Payments of debt on mortgage | ( | ) | ||||||
| Proceeds from finance obligation, net of issuance costs | ||||||||
| Payments of principal on finance obligation | ( | ) | ||||||
| Payments of other debt | ( | ) | ( | ) | ||||
| Increase/(decrease) in drafts payable | ( | ) | ||||||
| Payments on finance lease obligations, net | ( | ) | ( | ) | ||||
| Stock options exercised and taxes paid related to restricted shares vested | ( | ) | ( | ) | ||||
| Net cash provided by/(used in) financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash - beginning of period | ||||||||
| Cash, cash equivalents and restricted cash - end of period | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | ||||||||
| Fixed assets acquired under capital leases - non-cash | ||||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 31, 2021
(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, 2021 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 2021 and 2020 are for the three and six months ended July 31, 2021 and 2020, and for the fiscal years ended January 31, 2022 and 2021, respectively.
Note 2 - Business segment reporting
The Company is engaged in the manufacture and sale of products in 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 (the "U.A.E.") and Saudi Arabia, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. 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 $
For the three months ended July 31, 2021, individual customer accounted for
As of July 31, 2021 and January 31, 2021,
Note 4 - Revenue recognition
The Company accounts for its revenues under Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers".
Revenue from contracts with customers:
The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.
The Company’s standard revenue transactions are classified into two main categories:
| 1) | Systems and Coating - which include all bundled products in which Perma-Pipe designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. |
| 2) | Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract. |
In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:
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| 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 |
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| 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 six months ended July 31, 2021 and 2020 are as follows (in thousands):
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Sales | % to Total | Sales | % to Total | Sales | % to Total | Sales | % to Total | |||||||||||||||||||||||||
| Products | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Specialty Piping Systems and Coating | ||||||||||||||||||||||||||||||||
| Revenue recognized under input method | % | % | % | % | ||||||||||||||||||||||||||||
| Revenue recognized under output method | % | % | % | % | ||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
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 over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the input 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 July 31, 2021 will be billed and collected within year.
During the year ended January 31, 2021, 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. The Company has recorded the expense related to the encashment of approximately $
The following table shows the reconciliation of the cost in excess of billings:
| (In thousands) | July 31, 2021 | January 31, 2021 | ||
| Costs incurred on uncompleted contracts |
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| Estimated earnings | | | ||
| Earned revenue | | | ||
| Less billings to date | | | ||
| Costs in excess of billings, net |
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| Balance sheet classification | ||||
| Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts |
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| Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts |
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| Costs in excess of billings, net |
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Substantially all of the $
Additionally, included in prepaid expenses and other current assets on the consolidated balance sheet, the Company has recorded .4 million and $
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 UAE 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 second quarter in fiscal 2021 was
The amount of unrecognized tax benefits, including interest and penalties at July 31, 2021, recorded in other long-term liabilities was $
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 July 31, 2021, 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 all three asset groups. Therefore, it was determined that there was
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 July 31, 2021 and January 31, 2021 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.
| (In thousands) | January 31, 2021 | Foreign exchange change effect | July 31, 2021 | |||||||||
| Goodwill | $ | $ | $ |
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 July 31, 2021, the Company elected to perform a qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's Canadian reporting unit exceeded its carrying value, including goodwill. The qualitative assessment did not identify any triggering events that would indicate potential impairment of the Company's Canadian reporting unit. Therefore, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in
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.
The Company has prior incentive plans under which previously granted awards remain outstanding, including the 2017 Plan, but under which no new awards may be granted. At July 31, 2021 the Company had reserved a total of
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's 2021 Omnibus Stock Incentive Plan dated May 26, 2021 was approved by the Company's stockholders in May 2021 ("2021 Plan"). The 2021 Plan will expire in May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors. Grants were made to the Company's employees, officers and independent directors under the 2021 Plan, as described below.
Stock-based compensation expense
The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The following were the Company's stock-based compensation expenses for the periods presented:
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| Restricted stock-based compensation expense | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
Stock Options
The Company did grant any stock options during the three or six months ended July 31, 2021. The following tables summarizes the Company's stock option activity:
| (Shares in thousands) | Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at January 31, 2021 | $ | $ | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Expired or forfeited | ( | ) | - | - | ||||||||||||
| Outstanding at July 31, 2021 | ||||||||||||||||
| Options exercisable at July 31, 2021 | $ | $ | ||||||||||||||
There was
Restricted stock
The following table summarizes the Company's restricted stock activity for the six months ended July 31, 2021:
| (Shares in thousands) | Restricted Shares | Weighted Average Price | Aggregate Intrinsic Value | |||||||||
| Outstanding at January 31, 2021 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested and issued | ( | ) | ||||||||||
| Forfeited or retired for taxes | ( | ) | ||||||||||
| Outstanding at July 31, 2021 | $ | $ | ||||||||||
As of July 31, 2021, there was $
Note 8 - Earnings/(loss) per share
| Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Dilutive effect of equity compensation plans | ||||||||||||||||
| Weighted average common shares outstanding assuming full dilution | ||||||||||||||||
| 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 | ||||||||||||||||
| Stock options and restricted stock with exercise prices or grant date prices below the average market prices | ||||||||||||||||
| Net income/(loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Earnings/(loss) per share | ||||||||||||||||
| Basic | ( | ) | ||||||||||||||
| Diluted | ( | ) | ||||||||||||||
Note 9 - Debt
Debt totaled $
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 $
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 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 year ended January 31, 2021.
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 forgiveness. As such, we have recognized the proceeds in earnings during the year ended January 31, 2021. The amounts were 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 $
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
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. The Company has engaged a consultant to assist with the search for, communication with and selection of a new lender or a replacement facility with PNC. We have been in communications and shared data with PNC and others. The Company expects to negotiate a renewal to or replacement for its existing credit facility prior to maturity.
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 $
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
As of October 31, 2020, the Company and its subsidiaries failed to achieve the necessary fixed charge coverage ratio of
The amended fixed charge coverage ratio requirements for the Company and its subsidiaries under the Amendment and Waiver are
As of July 31, 2021, the Company had $
Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for a purchase price of $
In accordance with ASC Topic 842, "Leases", this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially all of the fair value of the underlying asset. The Company utilized an incremental borrowing rate of
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
The Company has a second revolving line for
The Company has a third revolving line for
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 June 2021, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of
In January 2021, the Company entered into a second credit arrangement for project financing with a bank in Egypt for
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 July 31, 2021. On July 31, 2021, interest rates were based on the Emirates Inter Bank Offered Rate plus
Mortgages. On July 28, 2016, the Company borrowed CAD
On June 2012, the Company borrowed $
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
Finance Leases. In 2019, the Company obtained two finance leases for a total of CAD
The Company has several significant operating lease agreements, with lease terms of to
At July 31, 2021, the Company had total operating lease liabilities of $
Supplemental balance sheet information related to leases is as follows (in thousands):
| Operating and Finance leases: | July 31, 2021 | January 31, 2021 | ||||||
| Finance leases assets: | ||||||||
| Property and Equipment - gross | $ | $ | ||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and Equipment - net | $ | $ | ||||||
| Finance lease liabilities: | ||||||||
| Finance lease liability short-term | $ | $ | ||||||
| Finance lease liability long-term | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Operating lease assets: | ||||||||
| Operating lease ROU assets | $ | $ | ||||||
| Operating lease liabilities: | ||||||||
| Operating lease liability short-term | $ | $ | ||||||
| Operating lease liability long-term | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Total lease costs consist of the following (in thousands):
| Lease costs | Consolidated Statements of Operations Classification | Three Months Ended July 31, 2021 | Three Months Ended July 31, 2020 | Six Months Ended July 31, 2021 | Six Months Ended July 31, 2020 | ||||||||||||
| Finance Lease Costs | |||||||||||||||||
| Amortization of ROU assets | Cost of sales | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | Interest expense | ||||||||||||||||
| Operating lease costs | Cost of sales, SG&A expenses | ||||||||||||||||
| Short-term lease costs (1) | Cost of sales, SG&A expenses | ||||||||||||||||
| Sub-lease income | SG&A expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Lease costs | $ | $ | $ | $ | |||||||||||||
(1) Includes variable lease costs, which are immaterial
Supplemental cash flow information related to leases is as follows (in thousands):
| Six Months Ended July 31, 2021 | Six Months Ended July 31, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Financing cash outflows from finance leases | $ | $ | ||||||
| Operating cash outflows from finance leases | ||||||||
| Operating cash outflows from operating leases | ||||||||
| Six Months Ended July 31, 2021 | Six Months Ended July 31, 2020 | |||||||
| ROU Assets obtained in exchange for new lease obligations: | ||||||||
| Finance leases liabilities | $ | $ | ||||||
| Operating leases liabilities | ||||||||
Weighted-average lease terms and discount rates are as follows:
| July 31, 2021 | ||||
| Weighted-average remaining lease terms (in years): | ||||
| Finance leases | ||||
| Operating leases | ||||
| Weighted-average discount rates: | ||||
| Finance leases | % | |||
| Operating leases | % | |||
Maturities of lease liabilities as of July 31, 2021, are as follows (in thousands):
| Year: | Operating Leases | Finance Leases | ||||||
| For the six months ended January 31, 2022 | $ | $ | ||||||
| For the year ended January 31, 2023 | ||||||||
| For the year ended January 31, 2024 | ||||||||
| For the year ended January 31, 2025 | ||||||||
| For the year ended January 31, 2026 | ||||||||
| For the year ended January 31, 2027 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: amount representing interest | ( | ) | ( | ) | ||||
| Total lease liabilities at July 31, 2021 | $ | $ | ||||||
Rent expense on operating leases, which is recorded on straight-line basis, was $
Note 11 - Restricted cash
Restricted cash held by foreign subsidiaries was $
| (In thousands) | July 31, 2021 | July 31, 2020 | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | $ |
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 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.
| 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
The Company's results of operations, financial condition, liquidity and cash flow in 2020 and the three months ended April 30, 2021 were materially adversely affected by the COVID-19 pandemic and the depressed market prices for oil and gas, and may 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.
As of the date of filing this Form 10-Q, all of the Company’s plants are operating. The Company's global supply chains have been adversely affected by the COVID-19 pandemic and the effects of the winter weather events in the Gulf Coast region. The Company is taking steps to ensure continuity of supply. 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 factors noted above that negatively impacted our business in 2020 and early 2021, the Company has updated its forecasts more frequently to determine the continuing financial impact of these events on the Company’s results of operations, financial condition and liquidity. As a result of the anticipated conditions, the Company reduced headcount, planned capital expenditures and non-essential operating expenses.
On May 1, 2020, the Company entered into a loan agreement under the 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 submitted its application and supporting documentation for forgiveness to its bank, which submitted the application and supporting documents to the Small Business Administration ("SBA").
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 loan proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the year ended January 31, 2021. The amounts were recognized in other income in the consolidated statements of operations. On June 24, 2021, the Company was notified by its lender that its PPP loan had been forgiven by 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. Beginning in October 2020, PPCA also applied for grants under the Canadian Emergency Rent Subsidy ("CERS") program. PPCA was approved for and received approximately $0.6 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the six months ended July 31, 2021. Both programs are expected to continue through September 2021. PPCA plans to apply for additional grants under the program, however there is no guarantee that PPCA will be granted any additional funds under the program. The proceeds from the CEWS and CERS programs are recognized in other income in the consolidated statements of operations.
RESULTS OF OPERATIONS
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results are significantly impacted as a result of large variations in the level of project activity in reporting periods.
| ($ in thousands) |
Three Months Ended July 31, |
Six Months Ended July 31, |
||||||||||||||||||||||||||||||||||||||
| 2021 |
2020 |
Change favorable/(unfavorable) | 2021 |
2020 |
Change favorable/(unfavorable) | |||||||||||||||||||||||||||||||||||
| Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
|||||||||||||||||||||||||||||||
| Net sales |
$ | 39,804 | $ | 20,364 | $ | 19,440 | $ | 64,227 | $ | 43,106 | $ | 21,121 | ||||||||||||||||||||||||||||
| Gross profit |
10,743 | 27 | % | 2,364 | 12 | % | 8,379 | 15,248 | 24 | % | 5,831 | 14 | % | 9,417 | ||||||||||||||||||||||||||
| General and administrative expenses |
5,602 | 14 | % | 4,488 | 22 | % | (1,114 | ) | 10,008 | 16 | % | 8,792 | 20 | % | (1,216 | ) | ||||||||||||||||||||||||
| Selling expense |
1,053 | 3 | % | 1,331 | 7 | % | 278 | 2,094 | 3 | % | 2,978 | 7 | % | 884 | ||||||||||||||||||||||||||
| Interest expense, net |
268 | 118 | (150 | ) | 446 | 304 | (142 | ) | ||||||||||||||||||||||||||||||||
| Other income, net |
457 | 3,739 | (3,282 | ) | 899 | 3,674 | (2,775 | ) | ||||||||||||||||||||||||||||||||
| Income/(loss) from operations before income taxes |
4,277 | 166 | 4,111 | 3,599 | (2,569 | ) | 6,168 | |||||||||||||||||||||||||||||||||
| Income tax expense/(benefit) |
861 | (101 | ) | (962 | ) | 1,026 | (315 | ) | (1,341 | ) | ||||||||||||||||||||||||||||||
| Net income/(loss) |
3,416 | 267 | 3,149 | 2,573 | (2,254 | ) | 4,827 | |||||||||||||||||||||||||||||||||
Three months ended July 31, 2021 ("current quarter") vs. Three months ended July 31, 2020 ("prior year quarter")
Net sales:
Net sales were $39.8 million in the current quarter, an increase of $19.4 million, or 95%, from $20.4 million in the prior year quarter. The increase was a result of increased sales volumes in both North America and the Middle East due to recovery from the effects of the COVID-19 pandemic. In addition, the Company's U.A.E. business benefitted from the introduction of a new product line.
Gross profit:
Gross profit increased to $10.7 million, or 27% of net sales, in the current quarter from $2.4 million, or 12% of net sales, in the prior year quarter. This increase was driven by higher sales volumes and project mix.
General and administrative expenses:
General and administrative expenses increased $1.1 million, or 25%, from the prior year quarter. This increase was driven by personnel related expense increases corresponding to the business activity increases during the period.
Selling expenses:
Selling expenses decreased to $1.1 million in the current quarter, compared to $1.3 million in the prior year quarter due primarily to organizational changes in the roles of certain corporate employees.
Interest expense, net:
Net interest expense increased to $0.3 million in the current quarter from $0.1 million in the prior year quarter. This increase was primarily related to the sale leaseback transaction for our operating facility in Tennessee entered into in April 2021.
Other income, net:
Other income, net decreased to an income of $0.5 million in the current quarter, compared to income of $3.7 million in the prior year quarter. This decrease was a result of income recorded in the prior year quarter for funds received under the PPP program of $3.2 million.
Income from operations before income taxes:
Income from operations before income taxes increased by $4.1 million to $4.3 million in the current quarter from $0.2 million in the prior year quarter. The increase was a result of increased sales volumes in both North America and the Middle East due to recovery from the effects of the COVID-19 pandemic. In addition, the Company's U.A.E. business benefitted from the introduction of a new product line.
Income tax expense/(benefit):
The Company's worldwide effective tax rates ("ETR") were 20.1% and (56.8%) 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 largely due to changes in the mix of income and loss in various jurisdictions.
The Company expects that future distributions from foreign subsidiaries will not be subject to incremental U.S. federal tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends-received deduction. Current and future earnings in the Company's subsidiaries in Canada and Egypt are not permanently reinvested, 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 $0.5 million as of July 31, 2021 related to these taxes.
For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.
The resulting net income of $3.4 million in the current quarter was an improvement of $3.1 million over the $0.3 million in the prior year quarter. The increase was a result of increased sales volumes in both North America and the Middle East due to recovery from the effects of the COVID-19 pandemic. In addition, the Company's U.A.E. business benefitted from the introduction of a new product line.
Six months ended July 31, 2021 ("current year-to-date") vs. Six months ended July 31, 2020 ("prior year year-to-date")
Net sales:
Net sales were $64.2 million in the current year-to-date, an increase of $21.1 million, or 49%%, from $43.1 million in the prior year year-to-date. The increase was a result of increased sales volumes in both North America and the Middle East due to recovery from the effects of the COVID-19 pandemic. In addition, the Company's U.A.E. business benefitted from the introduction of a new product line.
Gross profit:
Gross profit increased to $15.2 million, or 24% of net sales, in the current year-to-date from $5.8 million, or 14% of net sales, in the prior year year-to-date. This increase was driven by higher sales volumes and project mix.
General and administrative expenses:
General and administrative expenses were $10.0 million in the current year-to-date, an increase of $1.2 million, or 14%, from $8.8 million in the prior year year-to-date. This increase was driven by personnel related expense increases corresponding to the business activity increases during the period.
Selling expenses:
Selling expenses decreased to $2.1 million in the current year-to-date, compared to $3.0 million in the prior year year-to-date due to organizational changes in the roles of certain corporate employees as well as the continued effects of cost reduction strategies implemented during the COVID-19 pandemic.
Interest expense, net:
Net interest expense remained relatively consistent, increasing slightly from $0.3 million in the prior year year-to-date to $0.4 million in the current year-to-date. This increase is primarily related to the sale leaseback transaction for our operating facility in Tennessee entered into in April 2021.
Other income, net:
Other income, net decreased to $0.9 million in the current year-to-date, compared to $3.7 million in the prior year year-to-date. This decrease was a result of income recorded in the prior year for funds received under the PPP program of $3.2 million, offset by funds received under the CEWS and CERS programs in Canada.
Income/(loss) from operations before income taxes:
Income/(loss) from operations before income taxes increased by $6.2 million to income of $3.6 million in the current year-to-date from a loss of ($2.6 million) in the prior year year-to-date. The increase was a result of increased sales volumes in both North America and the Middle East due to recovery from the effects of the COVID-19 pandemic. In addition, the Company's U.A.E. business benefitted from the introduction of a new product line.
Income tax expense/(benefit):
The Company's worldwide effective tax rates ("ETR") were 28.5% and 12.3% in the current year-to-date and the prior year year-to-date, respectively. The change in the ETR from the prior year to the current year was largely due to changes in the mix of income and loss in various jurisdictions.
Net income/(loss):
The resulting net income of $2.6 million in the current year-to-date was an improvement of approximately $4.9 million over the net loss of ($2.3 million) in the prior year year-to-date. The increase was a result of increased sales volumes in both North America and the Middle East due to recovery from the effects of the COVID-19 pandemic. In addition, the Company's U.A.E. business benefitted from the introduction of a new product line.
Liquidity and capital resources
Cash and cash equivalents as of July 31, 2021 were $5.5 million compared to $7.2 million on January 31, 2021. On July 31, 2021, $1.5 million was held in the U.S., and $4.0 million was held at the Company's foreign subsidiaries. The Company's working capital was $38.9 million on July 31, 2021 compared to $25.6 million on January 31, 2021. Of the working capital components, accounts receivable increased by $18.5 million and cash and cash equivalents decreased by $1.7 million as the result of the movements discussed below. As of July 31, 2021, the Company had $10.3 million of borrowing capacity under its Senior Credit Facility in North America and $10.1 million of borrowing capacity under its foreign revolving credit agreements. The Company had $3 thousand borrowed under its Senior Credit Facility $2.5 million borrowed under its foreign revolving credit agreements at July 31, 2021.
Net cash used in operating activities in the six months ended July 31, 2021 was $5.2 million, as compared to net cash provided by operating activities of $2.6 million in the prior year period. This decrease in cash from operations was due primarily to increases in net working capital requirements in the current period compared to the prior year period due to increased activity as a result of post-COVID-19 economic recovery. The largest component of this increase was an increase in accounts receivable resulting in cash used of $19.3 million, partially offset by increases in net income and accounts payable of $2.6 million and $6.4 million, respectively. All of these changes were the result of the increase in project activity during the period.
Net cash used in investing activities in the six months ended July 31, 2021 and in the prior year period was $1.1 million and $0.8 million, respectively. This increase was due primarily to our Canadian subsidiary entering into two capital equipment leases during the quarter.
Net cash provided by financing activities in the six months ended July 31, 2021 was $4.5 million, as compared to net cash used in financing activities of $6.3 million in the prior year period. The main source of cash from financing activities during the period was net proceeds of $8.6 million as a result of the sale and leaseback of the Company's land and buildings in Lebanon, Tennessee during the period. This increase was also impacted by increased net repayments of approximately $3.6 million under the Senior Credit Facility, as compared to the prior year period, where net repayments were approximately $5.8 million. Debt totaled $8.6 million and $13.2 million as of July 31, 2021 and January 31, 2021, 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 ("PNC"), as administrative agent and lender, providing for a three-year $18.0 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. The Company has engaged a consultant to assist with the search for, communication with and selection of a new lender or a replacement facility with PNC. The Company is in ongoing discussions with PNC to extend our current credit agreement for a multi-year term, which we expect to finalize prior to our current credit agreement's expiration 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. 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, $1.0 million from one of its foreign subsidiaries, Perma-Pipe Middle East FZC, in the UAE. 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 $0.1 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 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 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. The Company was in compliance with these covenants as of July 31, 2021.
As of July 31, 2021, the Company had $3 thousand in borrowings and had $10.3 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. As of January 31, 2021, the Company had borrowed an aggregate of $2.8 million and had $1.7 million available under the Senior Credit Facility.
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 July 31, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 3.58% and was originally set to expire in November 2020, however, the expiration was extended due to the COVID-19 pandemic and inability to finalize renewal documentation prior to that time. The Company has submitted final documentation to complete the renewal process, and is awaiting official notification from the bank of the renewal completion. This process is expected to be completed in September 2021.
The Company has a second revolving line for 19.5 million Dirhams (approximately $5.3 million at July 31, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 4.5% and is set to expire in January 2022.
The Company has a third revolving line for 3.0 million Dirhams (approximately $0.8 million at July 31, 2021) from a bank in the U.A.E. The facility has an interest rate of approximately 4.5% and is set to expire in January 2022.
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 June 2021, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 100.0 million Egyptian Pounds (approximately $6.2 million at July 31, 2021). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line was secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. The facility has an interest rate of approximately 11.0% and is set to expire in August 2022.
In January 2021, the Company entered into a second credit arrangement for project financing with a bank in Egypt for 46.0 million Egyptian Pounds (approximately $2.9 million at July 31, 2021). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 8.0% and is expected to expire in September 2021 in connection with the completion of the project.
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.
Additional liquidity from the PPP
On May 1, 2020, the Company entered into a loan agreement under the 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 submitted its application and supporting documentation for forgiveness to its bank, which submitted the application and supporting documents to the Small Business Administration ("SBA").
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 loan proceeds as a grant that has reasonable assurance of being forgiven. As such, the Company recognized the proceeds in earnings during the year ended January 31, 2021. The amounts were recognized in other income in the consolidated statements of operations. On June 24, 2021, the Company was notified by its lender that its PPP loan had been forgiven by the SBA.
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. Beginning in October 2020, PPCA also applied for grants under the CERS program. PPCA was approved for and received approximately $0.6 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the six months ended July 31, 2021. Both programs are expected to continue through September 2021. The proceeds from CEWS and CERS 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 $38.2 million as of July 31, 2021, with a remaining balance due in the amount of $3.7 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, $2.1 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 the first quarter of 2021, the Company received approximately $0.1 million from the customer and additional receipts are expected throughout the rest of 2021. The Company continues to engage with the customer to ensure full payment of open balances, and during August 2021 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this amount as of July 31, 2021. 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, 2021 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 July 31, 2021. 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, 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. 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. 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.
| Exhibits |
| 10.1 | Executive Employment Agreement, dated July 26, 2021, by and between the Company and Grant Dewbre |
| 31.1 |
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| 31.2 |
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| 32 |
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| 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: |
September 8, 2021 |
/s/ David J. Mansfield |
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David J. Mansfield |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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| Date: |
September 8, 2021 | /s/ D. Bryan Norwood |
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D. Bryan Norwood |
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Vice President and Chief Financial Officer |
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(Principal Financial and Accounting Officer) |