Perma-Pipe International Holdings, Inc. - Quarter Report: 2020 April (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended April 30, 2020.

 

Commission File No. 0-18370

 

Perma-Pipe International Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware	36-3922969
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6410 W. Howard Street, Niles, Illinois	60714
(Address of principal executive offices)	(Zip Code)

 

(847) 966-1000

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value per share	PPIH	The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐   Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company ☒   Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

 

On June 5, 2020, there were 8,048,006 shares of the registrant's common stock outstanding.

 

 

Perma-Pipe International Holdings, Inc.

 

FORM 10-Q

 

For the fiscal quarter ended April 30, 2020

 

TABLE OF CONTENTS

 

Item		Page
Part I	Financial Information
1.	Financial Statements
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended April 30, 2020 and 2019	2
	Consolidated Statements of Comprehensive Loss (Unaudited) for the Three Months Ended April 30, 2020 and 2019	3
	Consolidated Balance Sheets as of April 30, 2020 (Unaudited) and January 31, 2020	4
	Consolidated Statements of Stockholders' Equity (Unaudited) as of April 30, 2020 and 2019	5
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended April 30, 2020 and 2019	6
	Notes to Consolidated Financial Statements (Unaudited)	7
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
4.	Controls and Procedures	23
Part II	Other Information
6.	Exhibits	24
Signatures		25

 

 

 

		Three Months Ended April 30,
		2020				2019
Net sales		$	22,741			$	24,276
Cost of sales			19,275				19,554
Gross profit			3,466				4,722
Operating expenses
General and administrative expenses			4,369				4,442
Selling expenses			1,647				1,260
Total operating expenses			6,016				5,702
Loss from operations			(2,550	)			(980	)
Interest expense, net			186				210
Loss from operations before income taxes			(2,736	)			(1,190	)
Income tax (benefit)/expense			(215	)			312
Net loss		$	(2,521	)		$	(1,502	)
Weighted average common shares outstanding
Basic			8,048				7,887
Diluted			8,048				7,887
Loss per share
Basic			(0.31	)			(0.19	)
Diluted			(0.31	)			(0.19	)

 

		Three Months Ended April 30,
		2020				2019
Net loss		$	(2,521	)		$	(1,502	)
Other comprehensive loss
Foreign currency translation adjustments, net of tax			(367	)			(317	)
Other comprehensive loss			(367	)			(317	)
Comprehensive loss		$	(2,888	)		$	(1,819	)

 

		April 30, 2020				January 31, 2020
			(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	12,450			$	13,371
Restricted cash			1,105				1,287
Trade accounts receivable, less allowance for doubtful accounts of $342 at April 30, 2020 and $407 at January 31, 2020			25,284				29,402
Inventories, net			13,912				14,498
Prepaid expenses and other current assets			4,314				3,531
Costs and estimated earnings in excess of billings on uncompleted contracts			2,900				2,166
Total current assets			59,965				64,255
Property, plant and equipment, net of accumulated depreciation			27,553				28,629
Other assets
Operating lease right-of-use asset			11,165				11,475
Deferred tax assets			402				293
Goodwill			2,144				2,254
Other assets			5,564				5,319
Total other assets			19,275				19,341
Total assets		$	106,793			$	112,225
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable		$	8,557			$	9,577
Accrued compensation and payroll taxes			1,601				1,190
Commissions and management incentives payable			2,155				1,759
Revolving line - North America			7,211				8,577
Current maturities of long-term debt			1,521				1,458
Customers' deposits			1,452				2,202
Outside commission liability			1,845				1,755
Operating lease liability short-term			1,254				1,040
Other accrued liabilities			3,403				3,444
Billings in excess of costs and estimated earnings on uncompleted contracts			1,061				1,173
Income taxes payable			765				664
Total current liabilities			30,825				32,839
Long-term liabilities
Long-term debt, less current maturities			6,244				6,717
Deferred compensation liabilities			4,241				4,199
Deferred tax liabilities			751				1,052
Operating lease liability long-term			10,851				11,214
Other long-term liabilities			921				575
Total long-term liabilities			23,008				23,757
Stockholders' equity
Common stock, $.01 par value, authorized 50,000 shares; 8,048 issued and outstanding at April 30, 2020 and 8,048 issued and outstanding at January 31, 2020			80				80
Additional paid-in capital			60,243				60,024
Accumulated deficit			(3,236	)			(715	)
Accumulated other comprehensive loss			(4,127	)			(3,760	)
Total stockholders' equity			52,960				55,629
Total liabilities and stockholders' equity		$	106,793			$	112,225

 

		Common Stock				Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
Revised total stockholders' equity at January 31, 2019		$	79			$	58,793			$	(4,291	)		$	(2,880	)		$	51,701
Net loss											(1,502	)							(1,502	)
Common stock issued under stock plans, net of shares used for tax withholding							79												79
Stock-based compensation expense							154												154
Foreign currency translation adjustment															(317	)			(317	)
Revised total stockholders' equity at April 30, 2019		$	79			$	59,026			$	(5,793	)		$	(3,197	)		$	50,115

		Common Stock				Additional Paid-in Capital				Accumulated Deficit				Accumulated Other Comprehensive Loss				Total Stockholders' Equity
Total stockholders' equity at January 31, 2020		$	80			$	60,024			$	(715	)		$	(3,760	)		$	55,629
Net loss											(2,521	)							(2,521	)
Stock-based compensation expense							219												219
Foreign currency translation adjustment															(367	)			(367	)
Total stockholders' equity at April 30, 2020		$	80			$	60,243			$	(3,236	)		$	(4,127	)		$	52,960

Shares		2020				2019
Balances at beginning of year			8,048,006				7,854,322
Shares issued			-				193,684
Balances at period end			8,048,006				8,048,006

 

(In thousands)		Three Months Ended April 30,
		2020				2019
Operating activities
Net loss		$	(2,521	)		$	(1,502	)
Adjustments to reconcile net loss to net cash flows provided by in operating activities
Depreciation and amortization			1,111				1,154
Deferred tax benefit			(362	)			(4	)
Equity-based compensation expense			219				154
Loss on disposal of fixed assets			-				(3	)
Provision on uncollectible accounts			(62	)			(32	)
Changes in operating assets and liabilities
Accounts receivable			3,361				6,084
Inventories			468				(3,870	)
Contract assets and contract liabilities			(846	)			(54	)
Accounts payable			(977	)			(233	)
Accrued compensation and payroll taxes			900				(405	)
Customers' deposits			(750	)			(187	)
Income taxes receivable and payable			56				(560	)
Prepaid expenses and other current assets			(997	)			1,658
Other assets and liabilities			997				(826	)
Net cash provided by operating activities			597				1,374
Investing activities
Capital expenditures			(775	)			(508	)
Proceeds from sales of property and equipment			-				3
Net cash used in investing activities			(775	)			(505	)
Financing activities
Proceeds from revolving lines			15,186				21,865
Payments of debt on revolving lines of credit			(16,003	)			(24,622	)
Payments of other debt			(79	)			(88	)
Decrease in drafts payable			(44	)			(190	)
Payments on finance lease obligations			(105	)			(50	)
Stock options exercised and restricted shares retired for tax			-				79
Net cash used in financing activities			(1,045	)			(3,006	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash			120				(38	)
Net decrease in cash, cash equivalents and restricted cash			(1,103	)			(2,175	)
Cash, cash equivalents and restricted cash - beginning of period			14,658				12,737
Cash, cash equivalents and restricted cash - end of period		$	13,555			$	10,562
Supplemental cash flow information
Interest paid		$	196			$	226
Income taxes paid			49				862

 

Note 1 - Basis of presentation

 

The interim consolidated financial statements of Perma-Pipe International Holdings, Inc., and subsidiaries (collectively, "PPIH", "Company", or "Registrant") are unaudited, but include all adjustments that the Company's management considers necessary to present fairly the financial position and results of operations for the periods presented. These adjustments consist of normal recurring adjustments. Information and footnote disclosures have been omitted pursuant to Securities and Exchange Commission ("SEC") rules and regulations. The consolidated balance sheet as of January 31, 2020 is derived from the audited consolidated balance sheet as of that date. The results of operations for any interim period are not necessarily indicative of future or annual results. Interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2020 and 2019 are for the three months ended April 30, 2020 and 2019, and for the fiscal years ended January 31, 2021 and 2020, respectively.

 

Note 2 - Business segment reporting

 

The Company is engaged in the manufacture and sale of products in one segment: Piping Systems. The Company engineers, designs, manufactures and sells specialty piping systems, and leak detection systems. Specialty piping systems include: (i) insulated and jacketed district heating and cooling piping systems for efficient energy distribution from central energy plants to multiple locations, (ii) primary and secondary containment piping systems for transporting chemicals, hazardous fluids and petroleum products, and (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines. The Company's leak detection systems are sold with its piping systems or on a stand-alone basis, to monitor areas where fluid intrusion may contaminate the environment, endanger personal safety, cause a fire hazard, impair essential services or damage equipment or property.

 

Note 3 - Accounts receivable

 

The majority of the Company's accounts receivable are due from geographically dispersed contractors and manufacturing companies. Credit is extended based on an evaluation of a customer's financial condition, including the availability of credit insurance. In the U.S., collateral is not generally required. In the United Arab Emirates and Saudi Arabia, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. The allowance for doubtful accounts is based on specifically identified amounts in customers' accounts, where future collectability is deemed uncertain. Management may exercise its judgment in adjusting the provision as a consequence of known items, such as current economic factors and credit trends. Past due trade accounts receivable balances are written off when the Company's collection efforts have been unsuccessful in collecting the amount due and the amount is deemed uncollectible. The write-off is recorded against the allowance for doubtful accounts. 

 

One of the Company’s accounts receivable in the total amount of $4.1 million as of April 30, 2020 and January 31, 2020 has been outstanding for several years. Included in this balance is a retention receivable amount of $3.6 million, of which, due to the long-term nature of the receivable, $2.2 million and $2.1 million were included in the balance of other long-term assets as of April 30, 2020 and January 31, 2020, respectively. The Company completed all of its deliverables in 2015 under the related contract, and has been engaged in ongoing active efforts to collect this outstanding amount. During the first quarter of 2020, the Company has certified invoices of $0.5 million in the process of collection. The Company continues to engage with the customer to ensure full payment of open balances, and during fiscal 2019 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. As a result, the Company did not reserve any allowance against this receivable as of April 30, 2020. However, if the Company’s efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts. 

 

For the three months ended April 30, 2020, no individual customers accounted for 10% of the Company’s consolidated net sales, and during the same period in 2019, no individual customer accounted for more than 10% of the Company's consolidated net sales. 

 

At April 30, 2020 and January 31, 2020, one customer accounted for 15.0% and 13.3% of the Company's accounts receivable, respectively. 

 

 

 

Note 4 - Revenue recognition 

 

Revenue from contracts with customers:

 

The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.

 

The Company’s standard revenue transactions are classified into two main categories:

 

1)

Systems - which include all bundled products in which the Company designs, engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures.

 

2)

Products - which include cables, leak detection products, heat trace products sold under the PermAlert brand name, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract.

 

In accordance with Accounting Standards Codification ("ASC") 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:

 

1)

the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or

 

2)

the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company.

 

 Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).

 

A breakdown of the Company's revenues by revenue class for the three months ended April 30, 2020 and 2019 are as follows:

 

 

 

The input method, as noted in ASC 606-10-55-20, is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract using the percentage-of-completion method. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the percentage-of-completion method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when projects costs are incurred. 

 

The output method, as noted in ASC 606-10-55-17, is used by all other operating entities to measure revenue by the direct measurement of the outputs produced relative to the remaining goods promised under the contract. Due to the types of end customers, generally these contracts require formal inspection protocols or specific export documentation for units produced, or produced and shipped, therefore, the output method is the most faithful depiction of the Company’s performance. Depending on the conditions of the contract, revenue may be recognized based on units produced, inspected and held by the Company prior to shipment or on units produced, inspected and shipped. 

 

Some of the Company’s operating entities invoice and collect milestones or other contractual obligations prior to the transfer of goods and services, but do not recognize revenue until the performance obligations are satisfied under the methods discussed above. 

 

Contract modifications that occur prior to the start of the manufacturing process will supersede the original contract and revenue is recognized using the modified contract value. Contract modifications that occur during the manufacturing process (changes in scope of work, job performance, material costs, and/or final contract settlements) are recognized in the period in which the revisions are known. Provisions for losses on uncompleted contracts are made in contract liabilities account in the period such losses are identified.

Contract assets and liabilities:

Contract assets represent revenue recognized in excess of amounts billed (unbilled receivables) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Contract liabilities represent billings in excess of costs (unearned revenue) for contract work in progress for which the Company has a valid contract and an enforceable right to payment for work completed. Both customer billings and the satisfaction (or partial satisfaction) of the performance obligation(s) occur throughout the manufacturing process and impacts the period end balances in these accounts.

 

The Company anticipates that substantially all costs incurred for uncompleted contracts as of April 30, 2020 will be billed and collected within one year.

 

The following tables set forth the changes in the Company's contract assets and liabilities for the periods indicated. The Company expects to recognize the remaining balances as of April 30, 2020 within one year.

 

 

 

Practical expedients:

 

Costs to obtain a contract are not considered project costs as they are not usually incremental, nor does job duration span more than one year. The Company applies the practical expedient for these types of costs and as such are expensed in the period incurred.

 

As the Company's contracts are less than one year, the Company has applied the practical expedient regarding disclosure of the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period.

 

 

 

Note 5 - Income taxes 

 

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

 

The Company's effective tax rate ("ETR") from operations for the first quarter and year-to-date in fiscal 2020 was 7.8% compared to (26.1%) during the prior year period. The change in the ETR from the prior year quarter to the current year quarter was largely due to changes in the mix of income and loss in various jurisdictions.

 

On March 7, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (H.R. 748) (the "CARES Act"). Among the changes to the U.S. federal income tax rules, the CARES Act restored net operating loss carryback rules that were eliminated by the U.S. Tax Cuts and Jobs Act ("Tax Act"), restored 100% bonus depreciation for qualified improvement property, modified limit on the deduction for net interest expense and accelerated the timeframe for refunds of alternative minimum tax credits. With consideration to these changes to federal income tax rules, there is no net impact to the Company's deferred taxes due to the full valuation allowance. The Company will continue to evaluate the effects of the CARES Act as additional legislative guidance becomes available.

 

Note 6 - Impairment of long-lived assets

 

The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. At April 30, 2020, the Company elected to perform 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 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, resulting in no impairment of long-lived assets for the three months ended April 30, 2020. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.

 

Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of April 30, 2020 and January 31, 2020 was attributable to the purchase of Perma-Pipe Canada, Ltd., which occurred in 2016.

 

 

The Company performs an impairment assessment of goodwill annually as of January 31, or more frequently if triggering events occur, based on the estimated fair value of the related reporting unit or intangible asset. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. At April 30, 2020, the Company elected to perform a Step 0 qualitative analysis assessment to determine if it was more likely than not that the fair value of the Company's goodwill exceeded its carrying value. The qualitative assessment identified triggering events that indicated potential impairment of the Company's goodwill. Therefore, the Company proceeded to complete the Step 1 analysis to determine any potential impairment. The Step 1 analysis involved a quantitative fair valuation of the reporting unit associated with the Company's goodwill, including a market approach, transaction approach and discounted cash flow analysis. After completion of the Step 1 analysis, it was determined that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment for the three months ended April 30, 2020.

 

 

 

Note 7 - Stock-based compensation 

 

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

 

The Company has prior incentive plans under which previously granted awards remain outstanding, but under which no new awards may be granted. At April 30, 2020 the Company had reserved a total of 641,623 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards, and shares for new grants or issuances pursuant to the 2017 Plan.

 

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

 

The Company has stock-based compensation awards that can be granted to eligible employees, officers or independent directors. The following were the Company's stock-based compensation expenses for the periods presented:

 

 

Stock Options

 

The Company did not grant any stock options during the three months ended April 30, 2020. The following tables summarizes the Company's stock option activity:

 

 

No stock options were exercised during the three months ended April 30, 2020. 

 

 

 

As of April 30, 2020, there was less than $0.1 million of total unrecognized compensation expense related to unvested stock options. The expense is expected to be recognized over a weighted average period of 0.1 years.

 

Restricted stock

 

The following table summarizes the Company's restricted stock activity for the three months ended April 30, 2020:

 

 

As of April 30, 2020, there was $1.3 million of unrecognized compensation expense related to unvested restricted stock granted under the plans. That cost is expected to be recognized over a weighted average period of 2.0 years.

 

Note 8 - Loss per share

 

 

 

 

Note 9 - Debt

 

Debt totaled $15.0 million and $16.9 million at April 30, 2020 and January 31, 2020, respectively.

 

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

 

The Company has used proceeds from the Senior Credit Facility for on-going working capital needs, and expects to continue using this facility to fund future capital expenditures, working capital needs and other corporate purposes. Borrowings under the Senior Credit Facility bear interest at a rate equal to an alternate base rate or London Interbank Offered Rate ("LIBOR"), plus, in each case, an applicable margin.  The applicable margin is based on average quarterly undrawn availability with respect to the Senior Credit Facility.  Interest on alternate base rate borrowings are generally payable monthly in arrears and interest on LIBOR borrowings are generally payable in arrears on the last day of each interest period.  Additionally, the Company is required to pay a 0.375% per annum facility fee on the unused portion of the Senior Credit Facility.  The facility fee is payable quarterly in arrears.

 

Subject to certain exceptions, borrowings under the Senior Credit Facility are secured by substantially all of the assets of the Company and certain of the assets of its North American subsidiaries. The North American Loan Parties’ obligations under the Senior Credit Facility are guaranteed by Perma-Pipe Canada, Inc. The Senior Credit Facility will mature on September 20, 2021. Subject to certain qualifications and exceptions, the Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties cannot allow capital expenditures to exceed $3.0 million annually (plus a limited carryover of unused amounts).

 

The Senior Credit Facility also contains financial covenants requiring (i) the North America Loan Parties to achieve a ratio of its EBITDA (with certain additional adjustments) to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Senior Credit Facility (excluding from the calculation items related to the financial performance of the Company’s foreign subsidiaries not party to the Credit Agreement) to be not less than 1.10 to 1.00  at each quarter end on a trailing four-quarter basis; and (iii) the Company and its subsidiaries (including the Company’s foreign subsidiaries not party to the Credit Agreement) 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 of not less than 1.10 to 1.00 at each quarter end on a trailing four-quarter basis. The Company was in compliance with these covenants as of April 30, 2020. 

 

As of April 30, 2020, the Company borrowed an aggregate of $7.2 million at a rate of 6.25%, 4.40%, and 4.83% resulting in a weighted average rate of 4.52% and had $3.0 million available under the Senior Credit Facility. 

 

 

Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the United Arab Emirates (the "U.A.E.") and Egypt as discussed further below.

The Company has a revolving line for 8.0 million Dirhams (approximately USD $2.2 million at April 30, 2020) from a bank in the U.A.E. The loan has an interest rate of approximately 4.6% and expires in November 2020.

The Company has a revolving line for 25.5 million Dirhams (approximately USD $6.9 million at April 30, 2020) from a bank in the U.A.E. The loan has an interest rate of approximately 5.1% and expires in July 2020.

These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt.

In November 2019, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of 200.0 million Egyptian Pounds (approximately USD $12.7 million at April 30, 2020). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable). Among other covenants, the credit arrangement establishes a maximum leverage ratio allowable and restricts the ability to undertake any additional debt. The loan has an interest rate of approximately 16.3% and expires in June 2020.

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.

On April 30, 2020, the Company was in compliance with the covenants under the credit arrangements in the U.A.E. and Egypt. On April 30, 2020, interest rates were based on the Emirates Inter Bank Offered Rate ("EIBOR") plus 3.0% to 3.5% per annum, with a minimum interest rate of 4.5% per annum for the U.A.E. credit arrangements and based on the Central Bank of Egypt ("CBE") corridor rate plus 1.5% per annum for the Egypt credit arrangement. On April 30, 2020, the Company's interest rates ranged from 4.6% to 16.3%, with a weighted average rate of 5.01%, and the Company could borrow $21.7 million under these credit arrangements. On April 30, 2020, $3.8 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. On April 30, 2020, the Company had borrowed $0.8 million, and had an additional $16.8 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of April 30, 2020 and January 31, 2020, were included as current maturities of long-term debt in the Company's consolidated balance sheets. 

Mortgages. On July 28, 2016, the Company borrowed CAD 8.0 million (approximately USD $6.1 million at the prevailing exchange rate on the transaction date) from a bank in Canada under a mortgage note secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 23, 2042. The interest rate is variable, currently at 4.55%, with monthly payments of CAD 37 thousand (approximately USD $28 thousand) for interest; and monthly payments of CAD 27 thousand (approximately USD $21 thousand) for principal. Principal payments began January 2018.

On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for payment of amounts borrowed. The loan bears interest at 4.5% with monthly payments of $13 thousand for both principal and interest and matures July 1, 2027. On June 19, 2022, and on the same day of each year thereafter, the interest rate shall adjust to the prime rate, provided that the applicable interest rate shall not adjust more than 2.0% per annum and shall be subject to a ceiling of 18.0% and a floor of 4.5%.

 

 

 

Note 10 - Leases

 

Finance Leases. In 2019, the Company obtained two finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023.  In 2017, the Company obtained three finance leases for CAD 1.1 million (approximately USD $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases range from 4.0% to 7.8% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature between April 2021 to September 2022.

 

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

 

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

 

At April 30, 2020, the Company had operating lease liabilities of $12.1 million and operating ROU assets of $11.2 million, which are reflected in the consolidated balance sheet. At April 30, 2020, the Company also had finance lease liabilities of $0.9 million included in current maturities of long-term debt and long-term debt less current maturities, and finance ROU assets of $1.0 million which were included in property plant and equipment, net of accumulated depreciation in the consolidated balance sheet.

 

 

Supplemental balance sheet information related to leases is as follows: 

 

 

Total lease costs consist of the following: 

 

 

(1) Includes variable lease costs, which are immaterial

 

 

Supplemental cash flow information related to leases is as follows:

 

 

 

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

 

 

Maturities of lease liabilities as of April 30, 2020, are as follows:

 

 

Rent expense on operating leases, which is recorded on straight-line basis, was $0.7 million for the three months ended April 30, 2020 and 2019, respectively. 

 

 

 

Note 11 - Restricted cash

 

Restricted cash held by foreign subsidiaries was $1.1 million as of April 30, 2020 and 2019, respectively, and is related to fixed deposits that also serve as security deposits and guarantees. 

 

 

 

Note 12 - Fair value

 

The carrying values of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair value due to their short-term nature. The carrying amount of the Company's short-term debt, revolving line of credit and long-term debt approximate fair value because the majority of the amounts outstanding accrue interest at variable market rates.

 

Note 13 - Recent accounting pronouncements

 

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848), which provides guidance designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by the scheduled discontinuation of LIBOR on December 31, 2021. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The ASU provides the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic. This ASU is effective for all entities; however, application of the guidance is optional, is only available in certain situations and is only available for companies to apply from March 12, 2020 until December 31, 2022. The Company's Senior Credit Facility which matures on September 20, 2021 bears interest using an alternate base rate or LIBOR plus an applicable margin.  Based on the maturity of the Senior Credit Facility prior to the discontinuation of LIBOR, the Company does not expect a material impact from the adoption of this standard on the financial statements of the Company.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating this standard and the impact to the financial statements of the Company.

 

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),  which removes disclosures that are no longer considered cost beneficial, clarifies specific requirements of existing disclosures and adds disclosure requirements identified as relevant. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company will adopt this standard in our Annual Report on Form 10-K footnote disclosures for the year ended January 31, 2021 and does not expect a material impact on the financial statements of the Company.

 

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

 

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

 

 

Note 14 - Correction of immaterial errors

 

In the fourth quarter of 2019, management discovered prior period errors that accumulated over several years relating to accounting for leases with escalation clauses. The cumulative adjustment for the prior period errors was approximately $0.6 million. This impact can be seen as a $0.6 million adjustment in accumulated deficit in the revised total stockholders' equity at January 31, 2019 in the Company's unaudited statements of stockholders' equity herein. For additional information, refer to Note 3 - Correction of immaterial errors, in the Company's latest Annual Report on Form 10-K.

 

Pursuant to the guidance of Staff Accounting Bulletin ("SAB") No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. Although the errors were immaterial to prior periods, the prior period financial statements were revised, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, due to the significance of the out-of-period correction.

 

 

 

Note 15 - Subsequent Events

 

The Company applied for funding under the Small Business Administration's Paycheck Protection Program in April 2020, which provides forgivable funding for payroll and related costs as well as some non-payroll costs.  The Company received funding in the amount of $3.2 million in May 2020.