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 June 3, 2022, there were
Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended April 30, 2022
| Financial Statements |
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
| Three Months Ended April 30, | ||||||||
| 2022 | 2021 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses | ||||||||
| General and administrative expenses | ||||||||
| Selling expenses | ||||||||
| Total operating expenses | ||||||||
| Income/(loss) from operations | ( | ) | ||||||
| Interest expense, net | ||||||||
| Other income, net | ||||||||
| Loss from operations before income taxes | ( | ) | ( | ) | ||||
| Income tax expense | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Weighted average common shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Loss per share | ||||||||
| Basic | ( | ) | ( | ) | ||||
| Diluted | ( | ) | ( | ) | ||||
See accompanying notes to consolidated financial statements.
Note: Per share calculations could be impacted by rounding.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(In thousands)
| Three Months Ended April 30, | ||||||||
| 2022 | 2021 | |||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive (loss)/income | ||||||||
| Foreign currency translation adjustments, net of tax | ( | ) | ||||||
| Other comprehensive (loss)/income | ( | ) | ||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| April 30, 2022 | January 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, less allowance for doubtful accounts of $ at April 30, 2022 and $ at January 31, 2022 | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Unbilled accounts receivable | ||||||||
| 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 April 30, 2022 and issued and outstanding at January 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury Stock, shares at April 30, 2022 and January 31, 2022 | ( | ) | ( | ) | ||||
| 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 |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total Stockholders' Equity |
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| Total stockholders' equity at January 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
| Net loss |
( |
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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 |
( |
) | ( |
) | ||||||||||||||||||||
| Total stockholders' equity at April 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
| Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total Stockholders' Equity |
|||||||||||||||||||
| Total stockholders' equity at January 31, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||||||
| Stock-based compensation expense |
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| Foreign currency translation adjustment |
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| Total stockholders' equity at April 30, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
| Shares | 2022 | 2021 | ||||||
| Balances at beginning of year | ||||||||
| Treasury stock purchased | - | ( | ) | |||||
| Shares issued, net of shares used for tax withholding | ||||||||
| Balances at period end | ||||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| (In thousands) |
Three Months Ended April 30, |
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| 2022 |
2021 |
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| Operating activities |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash flows used in operating activities |
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| Depreciation and amortization |
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| Deferred tax expense/(benefit) |
( |
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| Stock-based compensation expense |
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| Provision on uncollectible accounts |
( |
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| Gain on disposal of fixed assets |
( |
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| Changes in operating assets and liabilities |
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| Accounts receivable |
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| Inventories, net |
( |
) | ( |
) | ||||
| Costs and estimated earnings in excess of billings on uncompleted contracts |
( |
) | ||||||
| Accounts payable |
||||||||
| Accrued compensation and payroll taxes |
( |
) | ||||||
| Customers' deposits |
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| Income taxes receivable and payable |
( |
) | ||||||
| Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
| Unbilled accounts receivable |
( |
) | ( |
) | ||||
| Other assets and liabilities |
( |
) | ( |
) | ||||
| Net cash used in operating activities |
( |
) | ( |
) | ||||
| Investing activities |
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| Capital expenditures |
( |
) | ( |
) | ||||
| Proceeds from sales of property and equipment |
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Financing activities |
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| Proceeds from revolving lines |
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| Payments of debt on revolving lines |
( |
) | ( |
) | ||||
| Payments of debt on mortgage |
( |
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| Proceeds from finance obligation, net of issuance costs |
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| Payments of principal on finance obligation |
( |
) | ( |
) | ||||
| Payments of other debt |
( |
) | ( |
) | ||||
| Decrease in drafts payable |
( |
) | ||||||
| Payments on finance lease obligations, net |
( |
) | ( |
) | ||||
| Stock options exercised and taxes paid related to restricted shares vested |
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| Net cash provided by financing activities |
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| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
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| Net (decrease)/increase 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 |
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| Interest paid |
$ | $ | ||||||
| Income taxes paid |
( |
) | ||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
April 30, 2022
(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, 2022 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 2022 and 2021 are for the fiscal years ended January 31, 2023 and 2022, respectively.
Significant New Accounting Policies
Refer to the Company's Annual Report on Form 10-K for the year ended January 31, 2022 as filed with the SEC on April 19, 2022 for discussion of the Company's significant accounting policies. During the three months ended April 30, 2022, the following accounting policy was adopted.
Treasury Stock
In accordance with Accounting Standards Codification ("ASC") Topic 505, "Equity", the Company has accounted for the share repurchases under the cost method, as the Company has not elected to retire the repurchased shares at this time. This results in recognizing the shares as treasury stock, a reduction of stockholders' equity on the Company's consolidated balance sheets as of April 30, 2022 and on the Company's consolidated statements of stockholders' equity for the three month period ended April 30, 2022. The amounts recognized as treasury stock in the consolidated balance sheets and consolidated statements of stockholders' equity include costs associated with the acquisition of the shares.
Reclassifications
Certain reclassifications have been made to prior period financial statements to conform to current period presentation. Unbilled accounts receivable was segregated from prepaid expenses and other current assets and reclassified into its own line on the consolidated balance sheets and consolidated statements of cash flows.
Subsequent Events
The Company has evaluated subsequent events through June 7, 2022, the date the financial statements were issued. Any material subsequent events that occurred during this time have been properly recognized and/or disclosed in these financial statements.
Note 2 - Business segment reporting
The Company is engaged in the manufacture and sale of products in
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 United States, 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 April 30, 2022 and 2021,
As of April 30, 2022 and January 31, 2022, customers collectively accounted for
Note 4 - Revenue recognition
The Company accounts for its revenues under ASC Topic 606, "Revenue from Contracts with Customers" ("Topic 606").
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:
|
| 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 months ended April 30, 2022 and 2021 are as follows (in thousands):
| Three Months Ended April 30, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| 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 project 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 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 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 April 30, 2022 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) | April 30, 2022 | January 31, 2022 | ||||||
| Costs incurred on uncompleted contracts | $ | $ | ||||||
| Estimated earnings | ||||||||
| Earned revenue | ||||||||
| Less billings to date | ||||||||
| Costs in excess of billings, net | $ | $ | ||||||
| Balance sheet classification | ||||||||
| Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts | $ | $ | ||||||
| Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts | ( | ) | ( | ) | ||||
| Costs in excess of billings, net | $ | $ | ||||||
Substantially all of the $
Unbilled accounts receivable:
The Company has recorded $
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 U.A.E. is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
The Company's effective tax rate ("ETR") from operations in the first quarter in fiscal 2022 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 April 30, 2022, 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 April 30, 2022 and January 31, 2022 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.
| (In thousands) | January 31, 2022 | Foreign exchange change effect | April 30, 2022 | |||||||||
| 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 April 30, 2022, 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 April 30, 2022 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 Company recognized the following stock-based compensation expense for the periods presented:
| Three Months Ended April 30, | ||||||||
| (In thousands) | 2022 | 2021 | ||||||
| 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 months ended April 30, 2022. The following table 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, 2022 | $ | $ | ||||||||||||||
| Exercised | ( | ) | - | |||||||||||||
| Expired or forfeited | ( | ) | - | - | ||||||||||||
| Outstanding at April 30, 2022 | ||||||||||||||||
| Options exercisable at April 30, 2022 | $ | $ | ||||||||||||||
Two thousand stock options were exercised during the three months ended April 30, 2022.
There was no vesting, expiration or forfeiture of previously unvested stock options during the three months ended April 30, 2022. As of April 30, 2022, there were
Restricted stock
The following table summarizes the Company's restricted stock activity for the three months ended April 30, 2022:
| (Shares in thousands) | Restricted Shares | Weighted Average Price | Aggregate Intrinsic Value | |||||||||
| Outstanding at January 31, 2022 | $ | $ | ||||||||||
| Forfeited or retired for taxes | ( | ) | ||||||||||
| Outstanding at April 30, 2022 | $ | $ | ||||||||||
The Company did grant any restricted stock, nor were any shares of restricted stock vested and issued, during the three months ended April 30, 2022. As of April 30, 2022, there was $
Note 8 - Earnings/(loss) per share
| Three Months Ended April 30, | ||||||||
| (In thousands, except per share data) | 2022 | 2021 | ||||||
| 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 loss | $ | ( | ) | $ | ( | ) | ||
| Loss per share | ||||||||
| Basic | ( | ) | ( | ) | ||||
| Diluted | ( | ) | ( | ) | ||||
Note 9 - Debt
Debt totaled $
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 $
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 ("FCCR") of
On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new -year $
The Borrowers will use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bears interest at a rate equal to an alternate base rate, LIBOR or a LIBOR successor rate index, plus, in each case, an applicable margin. The applicable margin will be based on an FCCR range. Interest on alternate base rate borrowings will be the alternate base rate as defined in the Renewed Senior Credit Facility plus an applicable margin ranging from
Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility will be secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility will mature on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $
The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than
The Renewed Senior Credit Facility contains customary events of default. If an event of default occurs and is continuing, then PNC may terminate all commitments to extend further credit and declare all amounts outstanding under the Renewed Senior Credit Facility due and payable immediately. In addition, if any of the North American Loan Parties or certain of their subsidiaries become the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Renewed Senior Credit Facility will automatically become immediately due and payable. Loans outstanding under the Renewed Senior Credit Facility will bear interest at a rate of
As of April 30, 2022, the Company had borrowed an aggregate of $
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 credit agreement for project financing with a bank in the U.A.E. 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 December 2021, the Company entered into a 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 only a portion of the subsidiaries' debt, including foreign debt. As of April 30, 2022, the amount of foreign subsidiary debt guaranteed by the Company was approximately $
The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of April 30, 2022. On April 30, 2022, 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
In March 2022, the Company served a Notice of Termination to its lessor for a portion of the Company's lease of certain land and buildings in Fujairah in the U.A.E. The partial termination will take effect in September 2022. The Company served the Notice of Termination in connection with the Company's intended relocation to a different facility under a new lease in Abu Dhabi. The Company is required to pay an additional amount equal to three months' rent after the partial termination to enable the lessor to prepare the assets for lease by another party. As a result of the partial termination, the Company has recognized adjustments to the amounts recorded in the consolidated financial statements as of April 30, 2022. The partial termination resulted in decreases of $
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 April 30, 2022, the Company had total operating lease liabilities of $
Supplemental balance sheet information related to leases is as follows (in thousands):
| Operating and Finance leases: | April 30, 2022 | January 31, 2022 | ||||||
| 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 April 30, 2022 | Three Months Ended April 30, 2021 | ||||||
| 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):
| Three Months Ended April 30, 2021 | Three Months Ended April 30, 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 | ||||||||
| Three Months Ended April 30, 2021 | Three Months Ended April 30, 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:
| April 30, 2022 | ||||
| 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 April 30, 2022, are as follows (in thousands):
| Year: | Operating Leases | Finance Leases | ||||||
| For the nine months 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 | ||||||||
| For the year ended January 31, 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: amount representing interest | ( | ) | ( | ) | ||||
| Total lease liabilities at April 30, 2022 | $ | $ | ||||||
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) | April 30, 2022 | April 30, 2021 | ||||||
| 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 Renewed Senior Credit Facility, which matures on September 20, 2026, bears interest at a rate equal to an alternate base rate, LIBOR or a LIBOR successor rate index, plus, in each case, an applicable margin. Based on the inclusion of the LIBOR successor rate index in the Renewed Senior Credit Facility, 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 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 - Treasury stock
There were
Note 15 - Subsequent Events
In June 2022, the Company received a partial payment to settle $
| 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 Receding Impacts
The Company’s results of operations, financial condition, liquidity and cash flow in early 2021 were materially adversely affected by the COVID-19 pandemic. During 2021, the Company experienced improved results as the adverse impact of the COVID-19 pandemic diminished and delayed projects were turned to production. The Company is not currently experiencing any significant negative impacts as a result of the COVID-19 pandemic.
Ukraine War
The war in Ukraine and resulting Russian oil and gas boycotts have added to the surge in oil prices which has impacted some of the Company's material and freight costs. However, the Company has not experienced any direct impact from the disruption in region. The Company does not source materials from this region, nor does it serve the market in any material nature.
Oil and Gas Market
Increases in oil prices helped to improve demand for the Company's products as reflected in the Company's results during the three months ended April 30, 2022 as compared to the same period in 2021. In particular, the Company's activity level in Canada has increased significantly due to the rise in energy prices.
Supply Chain Constraints and Inflationary Impacts
Due to the current inflationary environment, raw material supply shortages and transportation delays, the Company routinely experiences delays and increased prices for raw materials used in the Company's production processes. To mitigate these impacts, the Company has implemented several strategies, including purchasing from alternative suppliers and planning for material purchases further in advance to ensure the Company has materials when needed. The Company has also updated its pricing to customers to offset the impacts of the raw material price increases. These impacts are expected to continue throughout 2022.
Liquidity Position
On April 14, 2021, the Company entered into a purchase and sale agreement to sell its land and buildings in Lebanon, Tennessee (the "Property"), and subsequently enter into a fifteen-year lease agreement to lease back the Property. The transaction generated net cash proceeds of $9.1 million, following the release of the escrowed amount of $0.4 million in June 2021. The transaction provided significant liquidity for the Company, which used the proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. The Company will lease back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%.
The Company enhanced its liquidity position on September 17, 2021 when it executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). See further discussion of the Company's liquidity position as of April 30, 2022 in "Liquidity and capital resources" below.
RESULTS OF OPERATIONS
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods.
| ($ in thousands) |
Three Months Ended April 30, |
|||||||||||||||||||
| 2022 |
2021 |
Change favorable/(unfavorable) |
||||||||||||||||||
| Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
||||||||||||||||
| Net sales |
$ | 31,222 | $ | 24,423 | $ | 6,799 | ||||||||||||||
| Gross profit |
7,049 | 23 | % | 4,505 | 18 | % | 2,544 | |||||||||||||
| General and administrative expenses |
5,650 | 18 | % | 4,404 | 18 | % | (1,246 | ) | ||||||||||||
| Selling expense |
1,239 | 4 | % | 1,042 | 4 | % | (197 | ) | ||||||||||||
| Interest expense, net |
368 | 178 | (190 | ) | ||||||||||||||||
| Other income, net |
49 | 441 | (392 | ) | ||||||||||||||||
| Loss from operations before income taxes |
(159 | ) | (678 | ) | 519 | |||||||||||||||
| Income tax expense |
726 | 165 | (561 | ) | ||||||||||||||||
| Net loss |
(885 | ) | (843 | ) | (42 | ) | ||||||||||||||
Three months ended April 30, 2022 ("current quarter") vs. Three months ended April 30, 2021 ("prior year quarter")
Net sales:
Net sales were $31.2 million in the current quarter, an increase of $6.8 million, or 28%, from $24.4 million in the prior year quarter. The increase was a result of increased sales volumes, partly due to recovery from the effects of the COVID-19 pandemic.
Gross profit:
Gross profit increased to $7.0 million, or 23% of net sales, in the current quarter from $4.5 million, or 18% of net sales, in the prior year quarter. This increase was driven by higher sales volumes and project and product mix.
General and administrative expenses:
General and administrative expenses increased $1.2 million, or 28%, from $4.4 million in the prior year quarter to $5.7 million in the current quarter. Approximately $0.9 million of this increase was the result of increased incentive compensation. This amount was based on 2021 actual payouts as compared to estimated amounts previously accrued in addition to accruals made for 2022 forecasted results as compared to the prior year quarter, where no incentive compensation was recorded. The remainder of the increase was due to additions to headcount in support of the Company's business growth.
Selling expenses:
Selling expenses were relatively consistent, increasing slightly to $1.2 million in the current quarter, compared to $1.0 million in the prior year quarter.
Interest expense, net:
Net interest expense increased to $0.4 million in the current quarter from $0.2 million in the prior year quarter. This increase was related primarily 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 less than $0.1 million in the current quarter, compared to approximately $0.4 million in the prior year quarter. In the prior year quarter, the Company received grants from the Canadian government under the Canadian Emergency Wage Subsidy ("CEWS") and Canadian Emergency Rent Subsidy ("CERS") programs. The Company was approved for and received approximately $0.3 million and $0.1 million in grants under the CEWS and CERS programs, respectively, during the prior year quarter. Grants to the Company under both programs ended in the second quarter of 2021.
Loss from operations before income taxes:
Loss from operations before income taxes decreased by $0.5 million to a loss of $(0.2) million in the current quarter from a loss of $(0.7) million in the prior year quarter. The improvement was a result of increased sales volumes and margins as described above.
Income tax expense:
The Company's worldwide effective tax rates ("ETR") were (455.9%) and (24.3%) 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. The earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. As such, the Company has accrued a liability of $0.4 million as of April 30, 2022 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 $(0.9) million in the current quarter was relatively consistent with the net loss of $(0.8) million in the prior year quarter.
Liquidity and capital resources
Cash and cash equivalents as of April 30, 2022 were $6.4 million compared to $8.2 million on January 31, 2022. On April 30, 2022, $0.6 million was held in the United States, and $5.8 million was held at the Company's foreign subsidiaries. The Company's working capital was $38.7 million on April 30, 2022 compared to $40.0 million on January 31, 2022. Of the working capital components, accounts receivable decreased by $5.6 million and cash and cash equivalents decreased by $1.8 million as the result of the movements discussed below. As of April 30, 2022, the Company had $4.9 million of borrowing capacity under its Senior Credit Facility in North America and $6.5 million of borrowing capacity under its foreign revolving credit agreements. The Company had $5.2 million borrowed under its Senior Credit Facility and $6.1 million borrowed under its foreign revolving credit agreements at April 30, 2022.
Net cash used in operating activities in the three months ended April 30, 2022 and in the prior year period was $7.1 million and $2.4 million, respectively. This decrease of $4.7 million was due primarily to an increases in costs and estimated earnings in excess of billings on uncompleted contracts and a decrease in accounts receivable, partially offset by an increase in accounts payable and changes in other assets and liabilities in the current period compared to the prior year period.
Net cash used in investing activities in the three months ended April 30, 2022 and in the prior year period was $0.3 million and $0.4 million, respectively.
Net cash provided by financing activities in the three months ended April 30, 2022 and in the prior year period was $5.1 million and $3.9 million, respectively. The main source of cash from financing activities during the period was net proceeds from borrowings of approximately $5.3 million under the Senior Credit Facility, as compared to the prior year period, where net repayments were approximately $4.1 million. The increase in cash provided by financing activities was offset by net proceeds of $9.1 million as a result of the sale and leaseback of the Company's land and buildings in Lebanon, Tennessee during the prior year period. Debt totaled $26.3 million and $21.9 million as of April 30, 2022 and January 31, 2022, respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.
Treasury stock. There were no purchases of shares of the Company's common stock made by or on behalf of the Company during the three months ended April 30, 2022. On October 4, 2021, the Company's Board of Directors approved a share repurchase program, which authorizes the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases are permitted to be executed through open market or privately negotiated transactions over the course of 12 months, depending upon current market conditions and other factors. As of April 30, 2022, the Company has used $2.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock.
As of April 30, 2022, the Company had borrowed an aggregate of $5.2 million at a rate of 4.5% and had $4.9 million available under the Renewed Senior Credit Facility. As of January 31, 2022, the Company had borrowed an aggregate of $0.6 million and had $8.5 million available under the Renewed Senior Credit Facility, before application of a $2.5 million availability block that has subsequently been removed completely based on the Company's financial performance.
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 U.A.E. Dirhams (approximately $2.2 million at April 30, 2022) from a bank in the U.A.E. The facility has an interest rate of approximately 4.54% and was originally set to expire in November 2020, however, the expiration was extended due to the COVID-19 pandemic.
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 June 2022.
The Company has a second revolving line for 17.5 million U.A.E. Dirhams (approximately $4.8 million at April 30, 2022) from a bank in the U.A.E. The facility has an interest rate of approximately 4.50% and is set to expire in January 2023.
The Company has a third credit agreement for project financing with a bank in the U.A.E. for 3.0 million U.A.E. Dirhams (approximately $0.8 million at April 30, 2022). This credit arrangement is in the form of project financing at rates competitive in the U.A.E. The line is secured by the contract for a project being financed by the Company's U.A.E. subsidiary. The facility has an interest rate of approximately 4.50% and is expected to expire in June 2023 in connection with the completion of the project.
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 $5.4 million at April 30, 2022). 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 8.00% and is set to expire in August 2022.
In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds (approximately $1.5 million at April 30, 2022). 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 8.00% and is expected to expire in June 2022 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 only a portion of the subsidiaries' debt, including foreign debt. As of April 30, 2022, the amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 million.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt as of April 30, 2022. On April 30, 2022, interest rates were based on the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for the U.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum, and based on the stated interest rate in the agreement for the Egypt credit arrangement. Based on these base rates, as of April 30, 2022, the Company's interest rates ranged from 4.50% to 8.0%, with a weighted average rate of 7.63%, and the Company had facility limits totaling $14.9 million under these credit arrangements. As of April 30, 2022, $2.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of April 30, 2022, the Company had borrowed $6.1 million, and had an additional $6.5 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of April 30, 2022 and January 31, 2022, were included as current maturities of long-term debt in the Company's consolidated balance sheets.
Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for a purchase price of $10.4 million. The transaction generated net cash proceeds of $9.1 million, following the release of the escrowed amount in June 2021 discussed below. The Company used the proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option. Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender. At closing, $0.4 million was placed in a short-term escrow account to cover certain post-closing contingencies that may arise. The contingencies were resolved in May 2021 and the Company received the escrowed funds in June 2021.
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 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of $0.1 million is recognized in current maturities of long-term debt and the long-term portion of $9.3 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of January 31, 2022. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
Prior additional liquidity from the CEWS and CERS Programs
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 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 year ended January 31, 2022. Grants to the Company under both programs ended in the second quarter of 2021. The proceeds from CEWS and CERS are recognized in other income, net 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 collected approximately $38.3 million as of April 30, 2022, with a remaining balance due in the amount of $3.6 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, 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, $1.4 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. The Company continues to engage with the customer to ensure full payment of open balances, and during April 2022 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. Further, the Company has been engaged by the customer to perform additional work in 2022 under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against this amount as of April 30, 2022. 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, 2022 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 April 30, 2022. 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.
| Unregistered Sales of Equity Securities and Use of Proceeds |
| Exhibits |
| 3.1 | Certificate of Incorporation of Perma-Pipe International Holdings, Inc. (previously filed as a paper filing with the SEC and filed electronically herewith) |
| 31.1 |
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| 31.2 |
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| 32 |
|
| 101.INS |
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition |
| 101.LAB |
Inline XBRL Taxonomy Extension Labels |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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: |
June 7, 2022 |
/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: |
June 7, 2022 | /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) |
