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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 |
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 December 2, 2022, there were
Perma-Pipe International Holdings, Inc.
FORM 10-Q
For the fiscal quarter ended October 31, 2022
| Financial Statements |
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
| Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income from operations | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Other (expense)/income | ( | ) | ( | ) | ||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Earnings 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 INCOME/(LOSS) (Unaudited)
(In thousands)
| Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss)/income | ||||||||||||||||
| Foreign currency translation adjustments, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Minimum pension liability adjustment, net of tax | ||||||||||||||||
| Other comprehensive (loss)/income | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income/(loss) | $ | $ | $ | ( | ) | $ | ||||||||||
See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| October 31, 2022 | January 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Trade accounts receivable, less allowance for doubtful accounts of $ at October 31, 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 | ||||||||
| Long-term assets | ||||||||
| Property, plant and equipment, net of accumulated depreciation | ||||||||
| Operating lease right-of-use asset | ||||||||
| Deferred tax assets | ||||||||
| Goodwill | ||||||||
| Other long-term assets | ||||||||
| Total long-term 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 October 31, 2022 and issued and outstanding at January 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, shares at October 31, 2022 and 234 shares at 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 |
|||||||||||||||||||
| Total stockholders' equity at January 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
| Net loss |
( |
) | ( |
) | ||||||||||||||||||||
| Common stock issued under stock plans, net of shares used for tax withholding |
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| Stock-based compensation expense |
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| Foreign currency translation adjustment |
( |
) | ( |
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| Total stockholders' equity at April 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||
| Net income |
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| Common stock issued under stock plans, net of shares used for tax withholding |
( |
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| Repurchase of common stock |
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| Retirement of treasury stock |
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| Stock-based compensation expense |
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| Foreign currency translation adjustment |
( |
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| Total stockholders' equity at July 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
| Net income |
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| Common stock issued under stock plans, net of shares used for tax withholding |
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| Stock-based compensation expense |
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| Pension liability |
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| Foreign currency translation adjustment |
( |
) | ( |
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| Total stockholders' equity at October 31, 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 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
| Net income |
||||||||||||||||||||||||
| Common stock issued under stock plans, net of shares used for tax withholding |
( |
) | ( |
) | ( |
) | ||||||||||||||||||
| Stock-based compensation expense |
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| Foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
| Total stockholders' equity at July 31, 2021 |
$ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ||||||||||||||
| Net income |
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| Common stock issued under stock plans, net of shares used for tax withholding |
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| Repurchase of common stock |
( |
) | ( |
) | ||||||||||||||||||||
| Stock-based compensation expense |
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| Foreign currency translation adjustment |
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| Total stockholders' equity at October 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ |
|
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| Shares |
2022 |
2021 |
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| Balances at beginning of year |
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| Treasury stock purchased |
( |
) | ( |
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| Shares issued, net of shares used for tax withholding |
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| Prior period adjustments |
( |
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| Balances at period end |
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See accompanying notes to consolidated financial statements.
PERMA-PIPE INTERNATIONAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| (In thousands) |
Nine Months Ended October 31, |
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| 2022 |
2021 |
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| Operating activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash flows used in operating activities |
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| Depreciation and amortization |
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| Deferred tax expense |
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| Stock-based compensation expense |
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| Non-cash pension termination expense |
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| Provision on uncollectible accounts |
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| Loss 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 |
( |
) | ( |
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| Costs and estimated earnings in excess of billings on uncompleted contracts |
( |
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| Accounts payable |
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| Accrued compensation and payroll taxes |
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| Customers' deposits |
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| Income taxes receivable and payable |
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| Prepaid expenses and other current assets |
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| Unbilled accounts receivable |
( |
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| Other assets and liabilities |
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| Net cash used in operating activities |
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| Investing activities |
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| Capital expenditures |
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| Proceeds from sales of property and equipment |
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| Net cash used in investing activities |
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| Financing activities |
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| Proceeds from revolving lines |
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| Payments of debt on revolving lines |
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| 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 |
( |
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| Payments of other debt |
( |
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| Increase/(decrease) in drafts payable |
( |
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| Payments on finance lease obligations, net |
( |
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| Repurchase of common stock |
( |
) | ( |
) | ||||
| Stock options exercised and taxes paid related to restricted shares vested |
( |
) | ( |
) | ||||
| 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 |
( |
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| Cash, cash equivalents and restricted cash - beginning of period |
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| 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)
October 31, 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 year ending January 31, 2023 and the fiscal year ended January 31, 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 nine months ended October 31, 2022, the following accounting policies were adopted.
Treasury Stock
In accordance with Accounting Standards Codification ("ASC") Topic 505, "Equity", the Company accounted for share repurchases pursuant to its expired repurchase program under the cost method. This resulted in recognizing the shares as treasury stock, a reduction of stockholders' equity on the Company's consolidated balance sheets and on the Company's consolidated statements of stockholders' equity. These amounts included costs associated with the acquisition of the shares. On July 26, 2022, the Company retired all treasury stock previously repurchased under the stock repurchase program. The retirement was recorded as a reduction to common stock based on the par value of the shares, and the excess over par value was recorded as an increase to accumulated deficit in accordance with ASC 505-30, Equity -Treasury Stock.
Subsequent Events
The Company has evaluated subsequent events through December 6, 2022, the date the financial statements were issued. No material subsequent events occurred during this time that would require recognition or disclosure 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 evaluations of customers' financial condition, including the availability of credit insurance. In the United States, collateral is not generally required. In the Middle East, North Africa and India, letters of credit are usually obtained for significant orders. Accounts receivable are due within various time periods specified in the terms applicable to each customer and are presented net of any 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 exercises judgment in adjusting the allowance as a consequence of known events, 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 October 31, 2022,
As of October 31, 2022 and January 31, 2022, customer 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 PPIH engineers and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification includes coating applied to pipes and structures. |
| 2) | Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract. |
In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:
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| 1) | the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or |
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| 2) | the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus seller’s profit margin for products that have no alternative use for the Company. |
Products revenue is recognized when goods are shipped or services are performed (ASC 606-10-25-30).
A breakdown of the Company's revenues by revenue class for the three and nine months ended October 31, 2022 and 2021 are as follows (in thousands):
| Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Sales | % to Total | Sales | % to Total | Sales | % to Total | Sales | % to Total | |||||||||||||||||||||||||
| Products | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Specialty Piping Systems and Coating | ||||||||||||||||||||||||||||||||
| Revenue recognized under input method | % | % | % | % | ||||||||||||||||||||||||||||
| Revenue recognized under output method | % | % | % | % | ||||||||||||||||||||||||||||
| Total | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
The input method, as noted in ASC 606-10-55-20, is used by the U.S. operating entities to measure revenue by the costs incurred to date relative to the estimated costs to satisfy the contract over time. Generally, these contracts are considered a single performance obligation satisfied over time and due to the custom nature of the goods and services, the input method is the most faithful depiction of the Company’s performance as it measures the value of the goods and services transferred to the customer. Costs include all material, labor and direct costs incurred to satisfy the performance obligations of the contract. Revenue recognition begins when 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 impact the period end balances in these accounts.
The Company anticipates that substantially all costs incurred for uncompleted contracts as of October 31, 2022 will be billed and collected within year.
The following table shows the reconciliation of the cost in excess of billings:
| (In thousands) | October 31, 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 United Arab Emirates (the "U.A.E.") is not subject to local country income tax. Additionally, the relative proportion of taxable income earned domestically versus internationally can fluctuate significantly from period to period. Changes in the estimated level of annual pre-tax income, tax laws and the results of tax audits can affect the overall effective income tax rate, which impacts the level of income tax expense and net income. Judgments and estimates related to the Company's projections and assumptions are inherently uncertain; therefore, actual results could differ materially from projections.
The Company's worldwide effective tax rate ("ETR") from operations for the three months ended October 31, 2022 and 2021 was
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, including withholding taxes. As such, the Company has accrued a liability of $
The Inflation Reduction Act ("IRA") was signed into law in August 2022. The Company has evaluated the provisions of the IRA and does not expect any material impact to our consolidated provision for income taxes.
Note 6 - Impairment of long-lived assets
The Company's assessment of long-lived assets, and other identifiable intangibles is based upon factors that market participants would use in accordance with the accounting guidance for the fair value measurement of assets. At October 31, 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
During July 2022, flooding in the U.A.E. negatively impacted the Company's facility in Fujairah. The Company has an insurance policy with a deductible amount of $
The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.
Goodwill. The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. All identifiable goodwill as of October 31, 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 | October 31, 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 October 31, 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 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.
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. 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.
Stock-based compensation expense
The Company has granted stock-based compensation awards to eligible employees, officers or independent directors. The Company recognized the following stock-based compensation expense for the periods presented:
| Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| Restricted stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
Stock Options
The Company did grant any stock options during the three or nine months ended October 31, 2022. The following table summarizes the Company's stock option activity:
| (Options 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 October 31, 2022 | ||||||||||||||||
| Options exercisable at October 31, 2022 | $ | $ | ||||||||||||||
There was
Restricted stock
The following table summarizes the Company's restricted stock activity for the nine months ended October 31, 2022:
| (Shares in thousands) | Restricted Shares | Weighted Average Price | Aggregate Intrinsic Value | |||||||||
| Outstanding at January 31, 2022 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Vested and issued | ( | ) | ||||||||||
| Forfeited or retired for taxes | ( | ) | ||||||||||
| Outstanding at October 31, 2022 | $ | $ | ||||||||||
As of October 31, 2022, there was $
Note 8 - Retirement plans
Pension plan termination. The defined benefit plan (the "Plan") that covered the hourly rate employees of a non-operating filtration business unit, previously located in Winchester, Virginia, was frozen on June 30, 2013 per the third Amendment to the Plan dated May 15, 2013. The accrued benefit of each participant was frozen as of the freeze date, and no further benefits accrued with respect to any service or hours of service after the freeze date. The benefits were based on fixed amounts multiplied by years of service of participants.
In the third quarter of 2022, the Company’s Board of Directors approved the termination of the Plan. The Company provided participants of the Plan an option to elect either a lump sum distribution or an annuity. A group annuity contract was purchased with an insurance company for all participants who did not elect a lump sum distribution. That insurance company became responsible for administering and paying pension benefit payments effective December 1, 2022.
During the three and nine months ended October 31, 2022, the Company recognized a non-cash pre-tax settlement charge of $
| Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
| (In thousands, except per share data) | 2022 | 2021 | 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 income | $ | $ | $ | $ | ||||||||||||
| Income per share | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
Note 10 - 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 September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new -year $
The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate, London Inter-Bank Offered Rate ("LIBOR") or a LIBOR successor rate index, plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from
Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $
The Renewed Senior Credit Facility also contains a free cash flow financial covenant (the "FCF covenant") 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 October 31, 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 $
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., Egypt and Saudi Arabia as discussed further below.
The Company has a revolving line for
The Company has a revolving line for
The Company has a credit agreement for project financing with a bank in the U.A.E. for
The Company has a credit agreement for project financing with a bank in the U.A.E. for
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
In August 2022, the Company's Egyptian subsidiary entered into a credit arrangement with a bank in Egypt for a revolving line of
In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of
These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. As of October 31, 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., Egypt and Saudi Arabia as of October 31, 2022. On October 31, 2022, interest rates were based on the Emirates Inter Bank Offered Rate plus
Mortgages. On July 28, 2016, the Company entered into a mortgage agreement secured by the Company's manufacturing facility located in Alberta, Canada that matures on December 2042. As of October 31, 2022, the remaining balance on the mortgage in Canada is approximately CAD
On June 2012, the Company borrowed $
Note 11 - 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 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 termination took effect in September 2022 and the Company expects to vacate the space in December 2022. The Company is required to pay an additional amount equal to three months' rent after the termination to enable the lessor to prepare the assets for lease by another party. As a result of the termination, the Company has recognized adjustments to the amounts recorded in the consolidated financial statements as of October 31, 2022. The 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 years, which consist of real estate, vehicles and office equipment leases. These leases do not require any contingent rental payments, impose any financial restrictions or contain any residual value guarantees. Certain of the Company’s leases include renewal options and escalation clauses; renewal options have not been included in the calculation of the lease liabilities and right-of-use ("ROU") assets as the Company is not reasonably certain to exercise the options. The Company does not have any arrangements where it acts as a lessor, other than one sub-lease arrangement.
At October 31, 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: | October 31, 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):
| Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||
| Lease costs | Consolidated Statements of Operations Classification | 2022 | 2021 | 2022 | 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):
| Nine Months Ended October 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 | ||||||||
| Nine Months Ended October 31, | ||||||||
| 2022 | 2021 | |||||||
| 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:
| October 31, 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 October 31, 2022, are as follows (in thousands):
| Year: | Operating Leases | Finance Leases | ||||||
| For the three months ending January 31, 2023 | $ | $ | ||||||
| For the year ending January 31, 2024 | ||||||||
| For the year ending January 31, 2025 | ||||||||
| For the year ending January 31, 2026 | ||||||||
| For the year ending January 31, 2027 | ||||||||
| For the year ending January 31, 2028 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less: amount representing interest | ( | ) | ( | ) | ||||
| Total lease liabilities at October 31, 2022 | $ | $ | ||||||
Rent expense on operating leases, which is recorded on straight-line basis, was $
Note 12 - Restricted cash
| (In thousands) | October 31, 2022 | October 31, 2021 | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | $ | ||||||
Note 13 - 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 14 - 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. In April 2022, the FASB proposed to extend the effective date through December 31, 2024; however, a final ruling has not been issued. 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 15 - Treasury stock
The stock repurchase program, which was approved by the Company's Board of Directors on October 4, 2021, expired on October 3, 2022. The repurchase program authorized the Company to use up to $
The following table sets forth information with respect to repurchases by the Company of its shares of common stock during the program (In thousands, except per share data):
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | ||||||||||||
| October 1, 2021 - October 31, 2021 | $ | $ | ||||||||||||||
| November 1, 2021 - November 30, 2021 | ||||||||||||||||
| December 1, 2021 - December 31, 2021 | ||||||||||||||||
| January 1, 2022 - January 31, 2022 | ||||||||||||||||
| July 1, 2022 - July 31, 2022 | ||||||||||||||||
| Total | ||||||||||||||||
| 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. The Company's fiscal year ends on January 31. Years and balances described as 2022 and 2021 are for the fiscal year ending January 31, 2023 and the fiscal year ended January 31, 2022, respectively.
This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in the MD&A have been rounded to the nearest percentage point.
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 this region. The Company does not source materials from this region, nor does it serve this market in any material nature.
Oil and Gas Market
Increases in oil prices helped to improve demand for the Company's products in the oil and gas markets during the three and nine months ended October 31, 2022 as compared to the same periods in 2021. In particular, the Company's activity level in Canada has increased significantly due to the rise in energy prices. West Texas Intermediate crude oil average prices have increased from approximately $68 per barrel in 2021 to approximately $96 per barrel in the year-to-date 2022.
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
The Company further enhanced its liquidity position on September 17, 2021 when it executed an extension of a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, 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”). As of October 31, 2022, the Company had borrowed an aggregate of $7.1 million and had $7.9 million available under the Renewed Senior Credit Facility. See further discussion of the Company's liquidity position as of October 31, 2022 in "Liquidity and capital resources" below. Additionally, as of October 31, 2022, the Company had borrowed $6.6 million and had an additional $12.1 million of borrowing remaining available under its foreign revolving credit arrangements.
RESULTS OF OPERATIONS
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods.
| ($ in thousands) |
Three Months Ended October 31, |
Nine Months Ended October 31, |
||||||||||||||||||||||||||||||||||||||
| 2022 |
2021 |
Change favorable/(unfavorable) |
2022 |
2021 |
Change favorable/(unfavorable) |
|||||||||||||||||||||||||||||||||||
| Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
Amount |
Percent of Net Sales |
Amount |
Percent of Net Sales |
Amount |
|||||||||||||||||||||||||||||||
| Net sales |
$ | 37,903 | $ | 35,199 | $ | 2,704 | $ | 106,128 | $ | 99,426 | $ | 6,702 | ||||||||||||||||||||||||||||
| Gross profit |
11,130 | 29 | % | 7,629 | 22 | % | 3,501 | 28,065 | 26 | % | 22,877 | 23 | % | 5,188 | ||||||||||||||||||||||||||
| General and administrative expenses |
5,284 | 14 | % | 4,635 | 13 | % | (649 | ) | 16,180 | 15 | % | 14,643 | 15 | % | (1,537 | ) | ||||||||||||||||||||||||
| Selling expense |
1,310 | 3 | % | 1,303 | 4 | % | (7 | ) | 3,863 | 4 | % | 3,397 | 3 | % | (466 | ) | ||||||||||||||||||||||||
| Interest expense, net |
717 | 270 | (447 | ) | 1,585 | 717 | (868 | ) | ||||||||||||||||||||||||||||||||
| Other (expense)/income |
(948 | ) | 98 | (1,046 | ) | (963 | ) | 997 | (1,960 | ) | ||||||||||||||||||||||||||||||
| Income before income taxes |
2,871 | 1,519 | 1,352 | 5,474 | 5,117 | 357 | ||||||||||||||||||||||||||||||||||
| Income tax expense |
1,143 | 1,024 | (119 | ) | 2,763 | 2,049 | (714 | ) | ||||||||||||||||||||||||||||||||
| Net income |
1,728 | 495 | 1,233 | 2,711 | 3,068 | (357 | ) | |||||||||||||||||||||||||||||||||
Gross profit:
Gross profit was $11.1 million, or 29% of net sales, and $7.6 million, or 22% of net sales, in the three months ended October 31, 2022 and 2021, respectively. The increase of $3.5 million was driven primarily by higher sales volumes and improved gross margins.
General and administrative expenses:
General and administrative expenses were $5.3 million and $4.6 million in the three months ended October 31, 2022 and 2021, respectively. The increase of $0.7 million, or 15%, was primarily related to higher incentive compensation costs based on 2022 forecasted results.
Selling expenses:
Selling expenses did not change and were $1.3 million in the three months ended October 31, 2022 and 2021.
Interest expense, net:
Net interest expense was $0.7 million and $0.3 million in the three months ended October 31, 2022 and 2021, respectively. The increase was related primarily to increased borrowings and higher interest rates. In connection with the termination of the Company's defined benefit plan during the quarter, a current year net periodic benefit cost of $0.2 million was recognized during the three months ended October 31, 2022.
Other (expense)/income:
Other (expense)/income was expense of $0.9 million versus an income of $0.1 million in the three months ended October 31, 2022 and 2021, respectively. The change was due primarily to a non-cash pre-tax settlement charge of $0.9 million resulting from the termination of the Company's pension plan.
Income tax expense:
The Company's worldwide effective tax rates ("ETR") were 40% and 67% in the three months ended October 31, 2022 and 2021, respectively. The change in the ETR was largely due to changes in the mix of income and loss in various jurisdictions.
For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income:
Net income was $1.7 million and $0.5 million in the three months ended October 31, 2022 and 2021, respectively. The increase of $1.2 million was primarily due to increased gross profit as a result of increased sales volumes.
Nine months ended October 31, 2022 vs. Nine months ended October 31, 2021
Net sales:
Net sales were $106.1 million and $99.4 million in the nine months ended October 31, 2022 and 2021, respectively. The increase of $6.7 million, or 7%, was a result of increased sales volumes and pricing in North America.
Gross profit:
Gross profit was $28.1 million, or 26% of net sales, and $22.9 million, or 23% of net sales, in the nine months ended October 31, 2022 and 2021, respectively. The increase of $5.2 million was driven primarily by higher sales volumes and improved gross margins.
General and administrative expenses:
General and administrative expenses were $16.2 million and $14.6 million in the nine months ended October 31, 2022 and 2021, respectively. The majority of the increase of $1.6 million, or 11%, was the result of increased incentive compensation costs and additions to headcount in support of the Company's business growth.
Selling expenses:
Selling expenses were $3.9 million and $3.4 million in the nine months ended October 31, 2022 and 2021, respectively. The increase of $0.5 million was due primarily to increased payroll and commission expenses and the additional expenses related to marketing and trade shows.
Interest expense, net:
Net interest expense was $1.6 million and $0.7 million in the nine months ended October 31, 2022 and 2021, respectively. This increase was related to increased borrowings and higher interest rates as well as the sale leaseback transaction for the operating facility in Tennessee entered into in April 2021. Additionally, in connection with the termination of the Company's defined benefit plan during the quarter, a current year net periodic benefit cost of $0.2 million was recognized during the nine months ended October 31, 2022.
Other (expense)/income:
Other (expense)/income was expense of $1.0 million versus income of $1.0 million in the nine months ended October 31, 2022 and 2021, respectively. The change was in part due to a non-cash pre-tax settlement charge of $0.9 million resulting from the termination of the Company's pension plan. Additionally, grants from the Canadian government for approximately $0.7 million were received in the nine months ended October 31, 2021. Grants to the Company under these programs ended in the second quarter of 2021.
Income tax expense:
The Company's worldwide ETRs were 50% and 40% in the nine months ended October 31, 2022 and 2021, respectively. The change in the ETR is largely due to changes in the mix of income and loss in various jurisdictions.
Net income:
Net income was $2.7 million and $3.1 million in the nine months ended October 31, 2022 and 2021, respectively. The decrease of $0.4 million was primarily due to increases in general and administrative, selling, interest and other expenses, partially offset by increased gross profit as a result of increased sales volumes.
Net cash used in operating activities in the nine months ended October 31, 2022 and 2021 was $5.1 million and less than $0.1 million, respectively. This increase of $5.1 million was due primarily to increases in unbilled accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts, and a decrease to accounts payable, offset by changes to accounts receivable and other assets and liabilities.
Net cash used in investing activities in the nine months ended October 31, 2022 and 2021 was $3.1 million and $1.9 million, respectively. The increase of $1.2 million was due primarily to expansion activities in the United Arab Emirates in preparation for the Company's intended relocation from Fujairah to Abu Dhabi, as well as capital expenditures in Canada.
Net cash provided by financing activities in the nine months ended October 31, 2022 and 2021 was $7.6 million and $5.3 million, respectively. The main source of cash from financing activities during the nine months ended October 31, 2022 was net proceeds from borrowings of approximately $8.5 million under the Company's credit facilities, as compared to the nine months ended October 31, 2021, when net proceeds were approximately $1.9 million. Additionally, during the nine months ended October 31, 2021, the Company received net proceeds of $9.5 million as a result of the sale and leaseback of its land and buildings in Lebanon, Tennessee (the "Property"), partially offset by payment of $4.8 million to settle the mortgage debt. Debt totaled $28.0 million and $21.9 million as of October 31, 2022 and January 31, 2022, respectively. For additional information, see Note 10 - Debt, in the Notes to Consolidated Financial Statements.
Treasury stock. On October 4, 2021, the Company's Board of Directors approved a share repurchase program, which authorized the Company to use up to $3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases were permitted to be executed through open market or privately negotiated transactions over the course of 12 months, depending upon current market conditions and other factors. As of October 31, 2022, the Company used $2.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock. On July 26, 2022, the Company retired all treasury stock previously repurchased under the share repurchase program. The retirement was recorded as a reduction to common stock based on the par value of the shares, and the excess over par value was recorded as an increase to accumulated deficit in accordance with ASC 505-30, Equity -Treasury Stock.
The Borrowers have used and will continue to use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bear interest at a rate equal to an alternate base rate, London Inter-Bank Offered Rate ("LIBOR") or a LIBOR successor rate index, plus, in each case, an applicable margin. The applicable margin is based on a fixed charge coverage ratio ("FCCR") range. Interest on alternate base rate borrowings is the alternate base rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on LIBOR or LIBOR successor rate borrowings is the LIBOR rate (as defined in the Renewed Senior Credit Facility) plus an applicable margin ranging from 2.00% to 2.50%, based on the FCCR in the most recently reported period. Additionally, the Borrowers pay a 0.25% per annum facility fee on the unused portion of the Renewed Senior Credit Facility.
Subject to certain exceptions, borrowings under the Renewed Senior Credit Facility are secured by substantially all of the North American Loan Parties’ assets. The Renewed Senior Credit Facility matures on September 20, 2026. Subject to certain qualifications and exceptions, the Renewed Senior Credit Facility contains covenants that, among other things, restrict the North American Loan Parties’ ability to create liens, merge or consolidate, consummate acquisitions, make investments, dispose of assets, incur debt, and pay dividends and other distributions. In addition, the North American Loan Parties may not make capital expenditures in excess of $5.0 million annually, plus a limited carryover of unused amounts. Further, the North American Loan Parties may not make repurchases of the Company's common stock in excess of $3.0 million.
Revolving lines - foreign. The Company also has credit arrangements used by its Middle Eastern subsidiaries in the U.A.E., Egypt, and Saudi Arabia as discussed further below.
The Company has a revolving line for 8.0 million U.A.E. Dirhams (approximately $2.2 million at October 31, 2022) from a bank in the U.A.E. The facility has an interest rate of approximately 5.05% and was originally set to expire in November 2020, however, the expiration was extended due to the COVID-19 pandemic. The facility was renewed in July 2022 and is now set to expire in July 2025.
The Company has a revolving line for 17.5 million U.A.E. Dirhams (approximately $4.8 million at October 31, 2022) from a bank in the U.A.E. The facility has an interest rate of approximately 6.99% and is set to expire in January 2023.
The Company has a credit agreement for project financing with a bank in the U.A.E. for 1.0 million U.A.E. Dirhams (approximately $0.3 million at October 31, 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 6.99% and is expected to expire in June 2023 in connection with the completion of the project.
The Company has a credit agreement for project financing with a bank in the U.A.E. for 2.0 million U.A.E. Dirhams (approximately $0.5 million at October 31, 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 6.53% and is expected to expire in May 2024 in connection with the completion of the project.
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 $4.1 million at October 31, 2022). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. The facility has an interest rate of approximately 8.00% and expired in June 2022, however the Company has started the renewal process for this credit arrangement.
In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company has made collections, the facility has decreased to a current amount of 13.5 million Egyptian Pounds (approximately $0.6 million at October 31, 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 was set to expire in November 2022, however, the Company is in the process of extending it in connection with the completion of the project.
In August 2022, 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 $4.1 million at October 31, 2022). This credit arrangement is in the form of project financing at rates competitive in Egypt. The line is secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable, to be tested annually at fiscal year-end. The facility has an interest rate of approximately 8.00% and expired in August 2023.
In March 2022, the Company's Saudi Arabian subsidiary entered into a credit arrangement with a bank in Saudi Arabia for a revolving line of 20.0 million Saudi Riyal (approximately $5.3 million at October 31, 2022) This credit arrangement is in the form of project financing at rates competitive in Saudi Arabia. The line is secured by certain assets (such as accounts receivable) of the Company's Saudi Arabian subsidiary. The facility has an interest rate of approximately 7.43% and is set to expire in April 2023.
These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. As of October 31, 2022, the amount of foreign subsidiary debt guaranteed by the Company was approximately $0.6 million.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of October 31, 2022. On October 31, 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, based on the stated interest rate in the agreement for the Egypt credit arrangement, and based on the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these base rates, as of October 31, 2022, the Company's interest rates ranged from 5.05% to 8.00%, with a weighted average rate of 7.36%, and the Company had facility limits totaling $21.9 million under these credit arrangements. As of October 31, 2022, $3.2 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of October 31, 2022, the Company had borrowed $6.6 million and had an additional $12.1 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of October 31, 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 the Property for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale of the Property, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender. The Company used the remaining proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a 15-year lease agreement (the “Lease Agreement”), whereby the Company is leasing back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.
In accordance with ASC 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 $9.2 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of October 31, 2022. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
Liquidity from Canadian government grants
The Company's subsidiary, Perma-Pipe Canada, Ltd., received relief in the form of grants from the Canadian government of approximately $0.7 million during the year ended January 31, 2022. Grants to the Company ended in the second quarter of 2021. The proceeds from these grants were recognized in other (expense)/income in the consolidated statement of operations.
Accounts receivable:
In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $39.2 million as of October 31, 2022, with a remaining balance due in the amount of $2.7 million, all of which pertains to retention clauses within the agreements with the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. Of this retention amount, $2.5 million is classified in 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 June 2022 received a partial payment to settle $0.9 million of the customer's outstanding balances. 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 the remaining outstanding balances as of October 31, 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 October 31, 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 |
On July 26, 2022, the Company retired all treasury stock previously repurchased under the stock repurchase program. The retirement was recorded as a reduction to common stock based on the par value of the shares, and the excess over par value was recorded as an increase to accumulated deficit in accordance with ASC 505-30, Equity - Treasury Stock.
The following table sets forth information with respect to repurchases by the Company of its shares of common stock during the program (In thousands, except per share data):
| Period |
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Approximate dollar value of shares that may yet be purchased under the plans or programs |
||||||||||||
| October 1, 2021 - October 31, 2021 |
59 | $ | 8.45 | 59 | $ | 2,505 | ||||||||||
| November 1, 2021 - November 30, 2021 |
21 | 8.55 | 21 | 2,323 | ||||||||||||
| December 1, 2021 - December 31, 2021 |
56 | 7.99 | 56 | 1,872 | ||||||||||||
| January 1, 2022 - January 31, 2022 |
98 | 8.81 | 98 | 1,008 | ||||||||||||
| July 1, 2022 - July 31, 2022 |
5 | 8.85 | 5 | 964 | ||||||||||||
| Total |
239 | 239 | ||||||||||||||
| Exhibits |
| 31.1 |
|
| 31.2 |
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| 32 |
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| 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: |
December 6, 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: |
December 6, 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) |
