0000914122
Perma-Pipe International Holdings, Inc.
false
--01-31
FY
2023
612
486
0.01
0.01
50,000
50,000
8,004
8,004
8,152
8,152
3
234
0.2
0
0
0
1
3
2.7
2.6
0.1
0.1
0.1
0.1
1
5
15
4
5
December 23, 2042
June 19, 2012
1
0.3
0
0
1
4
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the reconciliation of benefit obligations, plan assets and funded status of the Pension Plan.
Uncollectible accounts charged off.
Trade receivable allowances primarily related to recoveries from accounts previously written off and currency translation. Deferred tax asset valuation allowance primarily related to amounts charged to other comprehensive income.
The domestic loss from continuing operations before income taxes includes corporate overhead costs.
Includes variable lease costs, which are immaterial
00009141222022-02-012023-01-31
iso4217:USD
00009141222022-07-29
xbrli:shares
00009141222023-04-25
thunderdome:item
00009141222021-02-012022-01-31
iso4217:USDxbrli:shares
00009141222023-01-31
00009141222022-01-31
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2023-01-31
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2022-01-31
0000914122us-gaap:CommonStockMember2021-01-31
0000914122us-gaap:AdditionalPaidInCapitalMember2021-01-31
0000914122us-gaap:RetainedEarningsMember2021-01-31
0000914122us-gaap:TreasuryStockMember2021-01-31
0000914122us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-31
00009141222021-01-31
0000914122us-gaap:CommonStockMember2021-02-012022-01-31
0000914122us-gaap:AdditionalPaidInCapitalMember2021-02-012022-01-31
0000914122us-gaap:RetainedEarningsMember2021-02-012022-01-31
0000914122us-gaap:TreasuryStockMember2021-02-012022-01-31
0000914122us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-02-012022-01-31
0000914122us-gaap:CommonStockMember2022-01-31
0000914122us-gaap:AdditionalPaidInCapitalMember2022-01-31
0000914122us-gaap:RetainedEarningsMember2022-01-31
0000914122us-gaap:TreasuryStockMember2022-01-31
0000914122us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-31
0000914122us-gaap:CommonStockMember2022-02-012023-01-31
0000914122us-gaap:AdditionalPaidInCapitalMember2022-02-012023-01-31
0000914122us-gaap:RetainedEarningsMember2022-02-012023-01-31
0000914122us-gaap:TreasuryStockMember2022-02-012023-01-31
0000914122us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-02-012023-01-31
0000914122us-gaap:CommonStockMember2023-01-31
0000914122us-gaap:AdditionalPaidInCapitalMember2023-01-31
0000914122us-gaap:RetainedEarningsMember2023-01-31
0000914122us-gaap:TreasuryStockMember2023-01-31
0000914122us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-01-31
0000914122ppih:CommonStockOutstandingMember2022-01-31
0000914122ppih:CommonStockOutstandingMember2021-01-31
0000914122ppih:CommonStockOutstandingMember2022-02-012023-01-31
0000914122ppih:CommonStockOutstandingMember2021-02-012022-01-31
0000914122srt:RestatementAdjustmentMemberppih:CommonStockOutstandingMember2022-01-31
0000914122srt:RestatementAdjustmentMemberppih:CommonStockOutstandingMember2021-01-31
0000914122ppih:CommonStockOutstandingMember2023-01-31
0000914122us-gaap:UnbilledRevenuesMember2022-02-012023-01-31
0000914122us-gaap:UnbilledRevenuesMember2021-02-012022-01-31
0000914122ppih:TermLoanMember2022-02-012023-01-31
0000914122ppih:TermLoanMember2021-02-012022-01-31
0000914122ppih:FinanceLeaseObligationsMember2022-02-012023-01-31
0000914122ppih:FinanceLeaseObligationsMember2021-02-012022-01-31
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2022-02-012023-01-31
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2021-02-012022-01-31
xbrli:pure
0000914122country:US2022-02-012023-01-31
0000914122country:US2021-02-012022-01-31
0000914122country:CA2022-02-012023-01-31
0000914122country:CA2021-02-012022-01-31
0000914122ppih:MiddleEastNorthAfricaMember2022-02-012023-01-31
0000914122ppih:MiddleEastNorthAfricaMember2021-02-012022-01-31
0000914122country:IN2022-02-012023-01-31
0000914122country:IN2021-02-012022-01-31
0000914122srt:EuropeMember2022-02-012023-01-31
0000914122srt:EuropeMember2021-02-012022-01-31
0000914122ppih:OtherGeographicalAreaMember2022-02-012023-01-31
0000914122ppih:OtherGeographicalAreaMember2021-02-012022-01-31
0000914122country:US2023-01-31
0000914122country:US2022-01-31
0000914122country:CA2023-01-31
0000914122country:CA2022-01-31
0000914122ppih:MiddleEastNorthAfricaMember2023-01-31
0000914122ppih:MiddleEastNorthAfricaMember2022-01-31
0000914122country:IN2023-01-31
0000914122country:IN2022-01-31
0000914122us-gaap:GeographicDistributionDomesticMember2023-01-31
0000914122us-gaap:GeographicDistributionForeignMember2023-01-31
0000914122us-gaap:GeographicDistributionDomesticMember2022-01-31
0000914122us-gaap:GeographicDistributionForeignMember2022-01-31
00009141222015-12-31
00009141222015-12-312023-01-31
00009141222022-06-012022-06-30
0000914122us-gaap:AccountsReceivableMember2023-01-31
0000914122us-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2022-02-012023-01-31
0000914122us-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2021-02-012022-01-31
0000914122us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2022-02-012023-01-31
0000914122us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2021-02-012022-01-31
0000914122us-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMemberppih:OneCustomerMember2021-02-012022-01-31
0000914122us-gaap:AccumulatedTranslationAdjustmentMember2023-01-31
0000914122us-gaap:AccumulatedTranslationAdjustmentMember2022-01-31
0000914122us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2023-01-31
0000914122us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-01-31
utr:Y
0000914122us-gaap:LandBuildingsAndImprovementsMember2023-01-31
0000914122us-gaap:LandBuildingsAndImprovementsMember2022-01-31
0000914122us-gaap:MachineryAndEquipmentMember2023-01-31
0000914122us-gaap:MachineryAndEquipmentMember2022-01-31
0000914122us-gaap:FurnitureAndFixturesMember2023-01-31
0000914122us-gaap:FurnitureAndFixturesMember2022-01-31
0000914122us-gaap:TransportationEquipmentMember2023-01-31
0000914122us-gaap:TransportationEquipmentMember2022-01-31
00009141222021-12-31
00009141222020-12-31
00009141222022-01-012022-12-31
00009141222021-01-012021-12-31
00009141222022-12-31
0000914122ppih:RestrictedStockAndStockOptionsMember2022-02-012023-01-31
0000914122ppih:RestrictedStockAndStockOptionsMember2021-02-012022-01-31
0000914122us-gaap:EmployeeStockOptionMember2022-02-012023-01-31
0000914122us-gaap:EmployeeStockOptionMember2021-02-012022-01-31
0000914122ppih:RestrictedStockAndStockOptionsMember2022-02-012023-01-31
0000914122ppih:RestrictedStockAndStockOptionsMember2021-02-012022-01-31
00009141222022-07-262022-07-26
0000914122us-gaap:ProductMemberus-gaap:TransferredAtPointInTimeMember2022-02-012023-01-31
0000914122us-gaap:ProductMemberus-gaap:TransferredAtPointInTimeMember2021-02-012022-01-31
0000914122ppih:SpecialtyPipingSystemsAndCoatingMemberppih:TransferredAtPointInTimeUsingInputMethodMember2022-02-012023-01-31
0000914122ppih:SpecialtyPipingSystemsAndCoatingMemberppih:TransferredAtPointInTimeUsingInputMethodMember2021-02-012022-01-31
0000914122ppih:SpecialtyPipingSystemsAndCoatingMemberppih:TransferredAtPointInTimeUsingOutputMethodMember2022-02-012023-01-31
0000914122ppih:SpecialtyPipingSystemsAndCoatingMemberppih:TransferredAtPointInTimeUsingOutputMethodMember2021-02-012022-01-31
0000914122us-gaap:MiddleEastMember2023-01-31
0000914122us-gaap:MiddleEastMember2022-01-31
0000914122ppih:RevolvingLinesNorthAmericaMember2023-01-31
0000914122ppih:RevolvingLinesNorthAmericaMember2022-01-31
0000914122us-gaap:MortgagesMember2023-01-31
0000914122us-gaap:MortgagesMember2022-01-31
0000914122ppih:ForeignRevolvingLinesMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMember2022-01-31
0000914122us-gaap:NotesPayableToBanksMember2023-01-31
0000914122us-gaap:NotesPayableToBanksMember2022-01-31
0000914122ppih:FinanceLeaseObligationsMember2023-01-31
0000914122ppih:FinanceLeaseObligationsMember2022-01-31
0000914122ppih:LongtermFinanceObligationMember2023-01-31
0000914122ppih:RevolvingLinesNorthAmericaMember2018-09-20
0000914122ppih:RevolvingLinesNorthAmericaMember2021-09-172021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMember2021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMembersrt:MinimumMemberus-gaap:BaseRateMember2021-09-172021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMembersrt:MaximumMemberus-gaap:BaseRateMember2021-09-172021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMembersrt:MinimumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-09-172021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMembersrt:MaximumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-09-172021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMember2021-09-172022-01-31
0000914122ppih:RevolvingLinesNorthAmericaMemberppih:NorthAmericanLoanPartiesMember2021-09-17
0000914122ppih:RevolvingLinesNorthAmericaMemberppih:NorthAmericanLoanPartiesMember2020-11-012021-01-31
0000914122ppih:RevolvingLinesNorthAmericaMemberppih:NorthAmericanLoanPartiesMember2020-11-012021-04-30
0000914122ppih:RevolvingLinesNorthAmericaMember2023-01-31
0000914122ppih:RevolvingLinesNorthAmericaMember2022-01-31
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2021-04-14
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2021-04-142021-04-14
0000914122ppih:MortgageNoteSecuredByTennesseeManufacturingFacilityMember2021-04-142021-04-14
0000914122ppih:LandAndBuildingsInLebanonTennesseeMember2021-04-14
0000914122country:AE2021-04-012021-04-30
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByMiddleEasternSubsidiaries1Member2023-01-31
iso4217:AED
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByMiddleEasternSubsidiaries2Member2023-01-31
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByMiddleEasternSubsidiaries3Member2023-01-31
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByMiddleEasternSubsidiaries4Member2023-01-31
iso4217:EGP
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByEgyptSubsidiariesMember2021-06-30
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByEgyptSubsidiariesMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByEgyptSubsidiaries2Member2021-12-31
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByEgyptSubsidiaries2Member2023-01-31
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByEgyptSubsidiaries3Member2022-08-31
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedByEgyptSubsidiaries3Member2023-01-31
iso4217:SAR
0000914122ppih:ForeignRevolvingLinesMemberppih:RevolvingCreditLinesUsedBySaudiArabianSubsidiaryMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMembersrt:MinimumMemberppih:EIBORMember2022-02-012023-01-31
0000914122ppih:ForeignRevolvingLinesMembersrt:MaximumMemberppih:EIBORMember2022-02-012023-01-31
0000914122ppih:ForeignRevolvingLinesMembersrt:MinimumMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMemberppih:SIBORMember2022-02-012023-01-31
0000914122ppih:ForeignRevolvingLinesMembersrt:MaximumMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMembersrt:WeightedAverageMember2023-01-31
0000914122ppih:ForeignRevolvingLinesMember2022-02-012023-01-31
0000914122ppih:CanadianMortgageNoteMember2016-07-282016-07-28
iso4217:CAD
0000914122ppih:CanadianMortgageNoteMember2022-02-012023-01-31
0000914122ppih:CanadianMortgageNoteMember2023-01-31
0000914122ppih:MortgageNoteSecuredByTennesseeManufacturingFacilityMember2012-06-192012-06-19
0000914122ppih:AbuDhabiLandLeaseMember2022-02-012023-01-31
0000914122ppih:AbuDhabiLandLeaseMember2023-01-31
0000914122ppih:FinanceVehicleEquipmentOneMember2020-01-31
0000914122ppih:FinanceVehicleEquipmentOneMembersrt:MaximumMember2019-02-012020-01-31
0000914122srt:MinimumMember2022-01-31
0000914122srt:MaximumMember2022-01-31
0000914122us-gaap:OtherAssetsMember2023-01-31
0000914122ppih:FinanceLeasesAssetsMember2023-01-31
0000914122ppih:FinanceLeasesAssetsMember2022-01-31
0000914122us-gaap:OtherCurrentLiabilitiesMember2023-01-31
0000914122us-gaap:OtherCurrentLiabilitiesMember2022-01-31
00009141222022-11-012023-01-31
0000914122us-gaap:ForeignCountryMemberus-gaap:MiddleEastMember2023-01-31
0000914122us-gaap:ForeignCountryMemberus-gaap:MinistryOfFinanceIndiaMember2023-01-31
0000914122us-gaap:ForeignCountryMembercountry:AE2023-01-31
0000914122us-gaap:ForeignCountryMembercountry:SA2023-01-31
0000914122us-gaap:DomesticCountryMember2022-02-012023-01-31
0000914122us-gaap:DomesticCountryMember2021-02-012022-01-31
0000914122us-gaap:StateAndLocalJurisdictionMember2022-02-012023-01-31
0000914122us-gaap:StateAndLocalJurisdictionMember2021-02-012022-01-31
0000914122us-gaap:DomesticCountryMemberus-gaap:InternalRevenueServiceIRSMember2023-01-31
0000914122us-gaap:StateAndLocalJurisdictionMember2023-01-31
0000914122us-gaap:OtherNoncurrentLiabilitiesMember2023-01-31
0000914122us-gaap:OtherNoncurrentLiabilitiesMember2022-01-31
0000914122us-gaap:OtherNonoperatingIncomeExpenseMember2022-02-012023-01-31
0000914122us-gaap:DefinedBenefitPlanEquitySecuritiesMemberus-gaap:FairValueInputsLevel1Member2023-01-31
0000914122us-gaap:DefinedBenefitPlanEquitySecuritiesMemberus-gaap:FairValueInputsLevel1Member2022-01-31
0000914122us-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueInputsLevel1Member2023-01-31
0000914122us-gaap:FixedIncomeSecuritiesMemberus-gaap:FairValueInputsLevel1Member2022-01-31
0000914122us-gaap:DefinedBenefitPlanRealEstateMemberus-gaap:FairValueInputsLevel1Member2023-01-31
0000914122us-gaap:DefinedBenefitPlanRealEstateMemberus-gaap:FairValueInputsLevel1Member2022-01-31
0000914122us-gaap:FairValueInputsLevel1Member2023-01-31
0000914122us-gaap:FairValueInputsLevel1Member2022-01-31
0000914122us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2023-01-31
0000914122us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2022-01-31
0000914122us-gaap:FairValueInputsLevel2Member2023-01-31
0000914122us-gaap:FairValueInputsLevel2Member2022-01-31
0000914122us-gaap:FairValueMeasuredAtNetAssetValuePerShareMember2023-01-31
0000914122us-gaap:FairValueMeasuredAtNetAssetValuePerShareMember2022-01-31
0000914122us-gaap:DefinedBenefitPlanCashMember2023-01-31
0000914122srt:MinimumMember2022-02-012023-01-31
0000914122srt:MaximumMember2022-02-012023-01-31
0000914122us-gaap:RestrictedStockMember2022-02-012023-01-31
0000914122us-gaap:RestrictedStockMember2021-02-012022-01-31
0000914122us-gaap:EmployeeStockOptionMember2021-01-31
0000914122us-gaap:EmployeeStockOptionMember2020-02-012021-01-31
0000914122us-gaap:EmployeeStockOptionMember2022-01-31
0000914122us-gaap:EmployeeStockOptionMember2023-01-31
0000914122ppih:DeferredStockMember2022-02-012023-01-31
0000914122ppih:DeferredStockMember2023-01-31
0000914122ppih:DeferredStockMember2022-01-31
0000914122us-gaap:RestrictedStockMembersrt:MinimumMember2022-02-012023-01-31
0000914122us-gaap:RestrictedStockMembersrt:MaximumMember2022-02-012023-01-31
0000914122us-gaap:RestrictedStockMember2021-01-31
0000914122us-gaap:RestrictedStockMember2022-01-31
0000914122us-gaap:RestrictedStockMember2023-01-31
00009141222022-12-07
00009141222021-10-04
00009141222022-09-22
00009141222021-09-23
0000914122us-gaap:TreasuryStockMember2021-10-012021-10-31
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2021-10-012021-10-31
00009141222021-10-31
0000914122us-gaap:TreasuryStockMember2021-11-012021-11-30
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2021-11-012021-11-30
00009141222021-11-30
0000914122us-gaap:TreasuryStockMember2021-12-012021-12-31
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2021-12-012021-12-31
0000914122us-gaap:TreasuryStockMember2022-01-012022-01-31
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2022-01-012022-01-31
00009141222022-07-012022-07-31
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2022-07-012022-07-31
00009141222022-07-31
00009141222022-12-012022-12-31
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2022-12-012022-12-31
0000914122us-gaap:TreasuryStockMember2021-10-012023-01-31
0000914122ppih:PubliclyAnnouncedShareRepurchaseProgramMember2021-10-012023-01-31
0000914122us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember2022-01-31
0000914122us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember2022-02-012023-01-31
0000914122us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember2023-01-31
0000914122us-gaap:AllowanceForCreditLossMember2022-01-31
0000914122us-gaap:AllowanceForCreditLossMember2022-02-012023-01-31
0000914122us-gaap:AllowanceForCreditLossMember2023-01-31
0000914122us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember2021-01-31
0000914122us-gaap:ValuationAllowanceOfDeferredTaxAssetsMember2021-02-012022-01-31
0000914122us-gaap:AllowanceForCreditLossMember2021-01-31
0000914122us-gaap:AllowanceForCreditLossMember2021-02-012022-01-31
PART I
Cautionary Statements Regarding Forward Looking Information
Certain statements contained in this Annual Report on Form 10-K, 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 ("Exchange Act"), 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, the following:
Market Condition Risks
|
• |
fluctuations in the price of oil and natural gas and its impact on customer order volume for the Company's products; |
|
• |
the Company’s ability to purchase raw materials at favorable prices and to maintain beneficial relationships with its suppliers; |
|
• |
decreases in government spending on projects using the Company’s products, and challenges to the Company’s non-government customers’ liquidity and access to capital funds; |
Financial Risks
|
• |
the Company’s ability to repay its debt and renew expiring international credit facilities; |
|
• |
the Company’s ability to effectively execute its strategic plan and achieve sustained profitability and positive cash flows; |
|
• |
the Company's ability to collect a long-term account receivable related to a project in the Middle East; |
|
• |
the Company's ability to interpret and adapt to changes in tax regulations and legislation; |
|
• |
the Company’s ability to use its net operating loss carryforwards; |
|
• |
reversals of previously recorded revenue and profits resulting from inaccurate estimates made in connection with the Company’s "over time" revenue recognition; |
|
• |
the Company’s failure to establish and maintain effective internal control over financial reporting; |
Business Condition Risks
|
• |
the timing of order receipt, execution, delivery and acceptance for the Company’s products; |
|
• |
the Company’s ability to successfully negotiate progress-billing arrangements for its large contracts; |
|
• |
aggressive pricing by existing competitors and the entrance of new competitors in the markets in which the Company operates; |
|
• |
the Company’s ability to manufacture products free of latent defects and to recover from suppliers who may provide defective materials to the Company; |
|
• |
reductions or cancellations of orders included in the Company’s backlog; |
|
• |
risks and uncertainties specific to the Company's international business operations; |
General Risks
|
• |
the Company’s ability to attract and retain senior management and key personnel; |
|
• |
the Company’s ability to achieve the expected benefits of its growth initiatives; |
|
• |
the impact of pandemics and other public health crises on the Company and its operations; and |
|
• |
the impact of cybersecurity threats on the Company’s information technology systems. |
Item 1. BUSINESS
Perma-Pipe International Holdings, Inc., collectively with its subsidiaries ("PPIH", the "Company" or the "Registrant"), is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. The Company was incorporated in Delaware on October 12, 1993. The Company's common stock is traded on the Nasdaq Global Market and reported under the ticker symbol "PPIH". The Company's fiscal year ends on January 31. Years, results and balances described as 2023, 2022 and 2021 are for the fiscal year ending January 31, 2024 and the fiscal years ended January 31, 2023 and 2022, respectively.
PRODUCTS AND SERVICES
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, (iii) the coating and/or insulation of oil and gas gathering and transmission pipelines, and (iv) liquid and powder based anti-corrosion coatings applied both to the external and internal surfaces of steel pipe, including shapes like bends, reducers, tees, and other spools/fittings used in pipelines for the transportation of oil and gas products and potable water. 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.
The Company frequently engineers and custom fabricates to job site dimensions and incorporates provisions for thermal expansion due to cycling temperatures. Most of the Company's piping systems are produced for underground installations and, therefore, require trenching, which is the responsibility of the general contractor, and completed by unaffiliated installation contractors.
The Company’s piping systems are typically sold as a part of discrete projects, and customer demand can vary by reporting period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Operating Facilities. The Company operates its business from the following locations:
Perma-Pipe, Inc. |
Perma-Pipe Middle East LLC |
Niles, IL |
Abu Dhabi, United Arab Emirates |
New Iberia, LA |
Perma-Pipe Middle East FZC |
Lebanon, TN |
Fujairah, United Arab Emirates |
Perma-Pipe Canada, Ltd. |
Perma-Pipe Saudi Arabia, LLC |
Camrose, Alberta, Canada |
Dammam, Kingdom of Saudi Arabia |
Perma-Pipe Egypt for Metal Fabrication and Insulation Industries (Perma-Pipe Egypt) S.A.E. |
Perma-Pipe India Pvt. Ltd |
Beni Suef, Egypt |
Gandhidham, India |
Customers and sales channels. The Company's customer base is industrially and geographically diverse. In the United States, the Company employs inside and outside sales managers who use and assist a network of independent manufacturers' representatives, none of whom sell products that are competitive with the Company's piping systems. The Company employs a direct sales force to market and sell products and services in Canada, India, Egypt, and in several countries in the Middle East. On a country-by-country basis, and where advantageous, the Company uses an agent network to assist in marketing and selling the Company's products and services.
For the years ended January 31, 2023 and 2022, no one customer accounted for greater than 10% of the Company's consolidated net sales.
As of January 31, 2023, no one customer accounted for greater than 10% of accounts receivable. As of January 31, 2022, one customer accounted for 11.9% of accounts receivable.
Backlog. The Company’s backlog on January 31, 2023 was $38.5 million compared to $39.3 million on January 31, 2022, most of which is expected to be completed within the year ending January 31, 2024. The Company's backlog has remained consistent year-over-year as completed projects have been replaced with new awards during the year. The Company defines backlog as the expected total revenue value resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. If a customer cancels an order, the customer is normally responsible for all finished goods produced or shipped, all direct and indirect costs incurred, and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any cancellation or delay in orders may result in lower than expected revenue from the Company's reported backlog.
Intellectual property. The Company owns various patents covering its piping and electronic leak detection systems, as well as for some of the features of its sensor cables. These patents are not material to the Company either individually or in the aggregate because the Company believes its sales would not be materially reduced if patent protection was not available. The Company owns numerous trademarks connected with its piping and leak detection systems throughout the world.
Suppliers. The basic raw materials used in production are pipes and tubes made of carbon steel, steel alloys, copper, ductile iron, or polymers and various chemicals such as polyols, isocyanate, urethane resin, polyethylene, and fiberglass, which are mostly purchased in bulk quantities. The Company believes there are currently adequate supplies and sources of availability of these needed raw materials.
The sensor cables used in the Company's leak detection and location systems are manufactured to the Company's specifications by companies regularly engaged in manufacturing such cables. The Company assembles the monitoring component of its leak detection and location systems from components purchased from many sources.
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 also adjusts its pricing to customers to offset the impacts of the raw material price increases. These impacts are expected to continue throughout 2023, and the resulting future disruptions to the Company’s operations are uncertain.
Competition. The piping systems market is highly competitive. The Company believes that quality, service, engineering design capabilities and support, a comprehensive product line, timely execution, plant location and price are key competitive factors in the industry. The Company also believes it has a more comprehensive product line than any competitor.
Research and Development. The Company's research and development efforts primarily focus on activities and development to meet product specifications mandated by its customers and the industry.
Environmental impacts. The Company provides insulated pipe for district energy systems. A district energy system is a highly efficient way to provide heating or cooling to buildings. A central plant produces steam or chilled water that flows through insulated pipes to buildings. The goal of a district energy system is to centralize production to deliver energy efficiency, reduce operating costs, and use less equipment compared to individual buildings with their own boilers and chillers. In addition, district heating and cooling plants can provide better pollution control than localized boilers and cooling equipment.
EMPLOYEES
As of January 31, 2023, the Company had approximately 194 full-time employees working in the United States, of which approximately 77 were under two collective bargaining agreements expiring on April 30, 2023 and March 31, 2025. As of January 31, 2023, there were approximately 473 full-time employees working at the Company's international locations. The Company considers its relationship with its employees to be good.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following table sets forth information regarding the executive officers of the Company as of April 27, 2023:
|
|
Executive officer of the |
Name |
Offices and Positions; Age |
Company since |
David J. Mansfield |
Director, President and Chief Executive Officer; Age 63 |
2016 |
|
|
|
Grant Dewbre |
Chief Operating Officer; Age 54 |
2021 |
|
|
|
D. Bryan Norwood |
Vice President and Chief Financial Officer; Age 67 |
2018 |
David J. Mansfield: President, Chief Executive Officer ("CEO") and member of the Board of Directors since November 2016. From 2015 to 2016, Mr. Mansfield served as Chief Financial Officer ("CFO") of Compressor Engineering Corp. & CECO Pipeline Services Co., which provides products and services to the gas transmission, midstream, gas processing, and petrochemical industries. In this position, he had overall responsibility for the group’s financial affairs, including the development and execution of turnaround plans and the successful negotiation of a corporate refinancing. From 2009 to 2014, Mr. Mansfield served as CFO and as Acting CEO of Pipestream, Inc., a venture capital-owned technology development company providing a suite of products to the oil and gas pipeline industry. From 1992 to 2009, Mr. Mansfield was employed with Bredero Shaw, the world’s largest provider of protective coatings for the oil and gas pipeline industry, most recently as Vice President Strategic Planning. During his tenure with Bredero Shaw, Mr. Mansfield served in numerous roles including Vice President Controller, and Commercial General Manager, Europe, Africa & the former Soviet Union region, and played a key role in strategy development and merger and acquisition activities as the company grew from annual revenues of $100 million to over $900 million. He is a Fellow member of the Association of Chartered Certified Accountants.
Grant Dewbre: Appointed Chief Operating Officer in July 2021. Mr. Dewbre was formerly Senior Vice President, Middle East & North Africa for the Company since December 2017. He was responsible for facilities in Fujairah, United Arab Emirates ("U.A.E."), Dammam, Saudi Arabia, Gujarat, India, and Beni Suef, Egypt. Before joining the Company, Mr. Dewbre served as Managing Director for Seaway Heavy Lifting in Houston, Texas, a Dutch offshore construction company, which was part of the Subsea 7 group from July 2015 to November 2017. In addition, he was Senior Vice President for Ceona Offshore, a startup offshore construction specialist company based in London, United Kingdom from December 2013 to June 2015. From March 2004 to November 2013, he held several roles, including project management, sales, and commercial management, in Houston, Texas and Leiden, The Netherlands, for Heerema Marine Contractors, a Dutch offshore construction company specialized in the installation of fixed and floating offshore platforms as well as pipeline installation services. Mr. Dewbre has held various project and plant management and commercial positions in the United States, United Kingdom, Malaysia, Azerbaijan, and at other locations for Bredero Shaw, the world’s largest provider of protective coatings for the oil & gas pipeline industry from October 1992 to February 2004.
D. Bryan Norwood: Appointed Vice President and CFO in November 2018. From 2014 to 2018, Mr. Norwood served as CFO of API Perforating, LLC, an oilfield service company providing stage perforation and wireline services. From 2012 to 2014, Mr. Norwood served as CFO of Dupre’ Energy Services, LLC, an oilfield service company offering multiple services lines. From 2010 to 2012, Mr. Norwood was Vice President Finance for the Environmental Services Division of PSC, LLC, a hazardous waste disposal company. From 1992 to 2010, Mr. Norwood held several senior leadership positions, including CFO of Smith Equipment Rental and Services, LLC, a regional oilfield service provider, Vice President and Treasurer of Key Energy Services, Inc., an oilfield multi-service provider, and Corporate Controller and Vice President Finance-Americas with Bredero Shaw, the world's largest provider of protective coatings for the oil and gas pipeline industry.
The Company files with, and furnishes to, the Securities and Exchange Commission ("SEC") reports, including annual meeting materials, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as amendments thereto. The Company maintains a website, www.permapipe.com, where these reports and related materials are available free of charge as soon as reasonably practicable after the Company electronically files with, or furnishes such material to, the SEC. The information on the Company's website is not part of this Annual Report on Form 10-K and is not incorporated into this or any other filings by the Company with the SEC.
Item 1A. RISK FACTORS
The Company's business, financial condition, results of operations and cash flows are subject to various risks, including, but not limited to, those set forth below, which could cause actual results to vary materially from recent results or from anticipated future results. These risk factors should be considered together with information included elsewhere in this Annual Report on Form 10-K.
Market Condition Risks
The Company's operations and earnings may be significantly affected by changes in oil and gas prices. Oil and gas prices depend on local, regional, and global events or conditions that affect supply and demand. Any material decline in oil or gas prices could have a material adverse effect on the demand for the Company's products, its operations and financial condition.
The Company may be unable to purchase raw materials at favorable prices, or maintain beneficial relationships with its suppliers, which could result in a shortage of supply, or increased pricing. There can be no assurance regarding the availability of supply for key components of the Company's products. The lack of supply of these components could result in an adverse effect on the financial condition of the Company.
The steel industry in particular is highly cyclical in nature, and at times, pricing can be highly volatile due to a number of factors beyond the Company's control. The Company utilizes escalation clauses and bid expiration dates to mitigate the impact of this volatility on its earnings. This volatility may negatively impact market conditions thus reducing project activity and the Company's results of operations. If the United States or other countries in which the Company operates impose tariffs on imports of raw materials, including steel, used in the Company's operations, that could have a further adverse impact on our business.
The Company regularly updates its quoting system for the movements in raw material prices and seeks to recover price differentials through increases in the selling price of the Company's products; however, the Company may not always be successful, and any increase in raw material prices that is not offset by an increase in the Company's prices that is accepted by customers could have an adverse effect on the Company's business, results of operations, financial position and cash flows. In addition, if the Company is unable to acquire timely raw material supplies, it may need to decline bid and order opportunities, which could also have an adverse effect on the Company's business, results of operations, financial position and cash flows.
Due to the current inflationary environment, raw material supply shortages and transportation delays, the Company could experience delays and has incurred increased prices for raw materials used in our production processes. To mitigate these impacts, the Company has implemented several strategies, including purchasing from alternative suppliers and planning for material purchases farther in advance to ensure the Company has materials when needed. The Company also adjusts its pricing to customers to offset the impacts of the raw material price increases. The Company is unable to predict the duration of the current inflationary environment, raw material supply shortages and transportation delays, and the resulting future disruptions to the Company’s operations are uncertain.
Decreases in government spending on projects using the Company’s products, and challenges to the Company’s non-government customers’ liquidity and availability of capital funds, may adversely impact demand for the Company’s products. Decreases in government spending on projects using the Company's products can have a negative impact on the Company's sales volumes. Uncertainty about economic market conditions poses risks that the Company's customers may postpone spending for capital improvement and maintenance projects in response to tighter credit markets or negative financial news, which could have a material adverse effect on the demand for the Company's products.
Financial Risks
The Company may be unable to maintain compliance with existing debt covenants, repay its debt or renew its expiring international credit facilities. There is a risk that the Company may not be able to remain in compliance with its credit agreement covenants. If there were an event of default under the Company's current revolving credit facilities, the lenders could cause all amounts outstanding with respect to that debt to be due and payable immediately. The Company cannot assure that its cash flow will be sufficient to fully repay amounts due under any of the financing arrangements, if accelerated upon an event of default, or, that the Company would be able to repay, refinance or restructure the payments under any such arrangements. Complying with the covenants under the Company's domestic and/or foreign revolving credit facilities may limit management's discretion by restricting options such as:
|
• |
incurring additional debt; |
|
• |
entering into transactions with affiliates; |
|
• |
making investments or other restricted payments; |
|
• |
paying dividends, capital returns, intercompany obligations and other forms of repatriation; and |
|
• |
creating liens. |
The Company has approximately $4.0 million becoming due in the year ending January 31, 2024 under its various foreign revolving lines of credit. The Company’s credit arrangements used by its Middle Eastern subsidiaries are renewed on an annual basis. In addition to these credit arrangements, the Company also obtains financing in the Middle East on a project-by-project basis. The Company has approximately $1.7 million becoming due in the year ending January 31, 2024 under its project financing agreements. While the Company believes that it will be able to renew its Middle East credit arrangements and will have continued access to individual project financing, there is no assurance that such arrangements will be renewed or made available in similar amounts or on similar terms and conditions as the current arrangements, or that such individual project financing will be available for projects that the Company is interested in pursuing in the future.
Any replacement credit arrangements outside of the United States may further limit the Company’s ability to repatriate funds from abroad. Repatriation of funds from certain countries may become limited based upon regulatory restrictions or economically unfeasible because of the taxation of funds when moved to another subsidiary or to the parent company. In addition, any refinancing, replacement or additional financing the Company may obtain could contain similar or more restrictive covenants than those currently applicable to the Company. The Company’s ability to comply with any covenants may be adversely affected by general economic conditions, political decisions, industry conditions and other events beyond management’s control.
The Company may be unable to achieve sustained levels of profitability or positive cash flows in the future. There is no guarantee that the Company will be able to achieve profitability or positive cash flows in the future. The Company’s inability to successfully achieve profitability and positive cash flows may result in it experiencing a serious liquidity deficiency resulting in material adverse consequences that could threaten its viability.
The Company extended credit to a customer for a project in the Middle East in 2013 and, if the Company is unable to collect this account receivable, its future profitability could be adversely impacted. One of the Company’s accounts receivable in the total amount of $2.7 million and $3.6 million as of January 31, 2023 and 2022, respectively, has been outstanding for several years. As of January 31, 2023, the entire balance represents a retention receivable that is payable upon the commissioning of the system. Due to the long-term nature of the receivable, $2.5 million and $2.0 million were included in other long-term assets as of January 31, 2023 and 2022, respectively. The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer as additional activities must be completed prior to the overall system completion and commissioning. Nevertheless, the Company has been engaged in ongoing active efforts to collect this outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances, and during April 2022 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. During 2022, the Company received a partial payment to settle $0.9 million of the customer's outstanding balance. Further, the Company has been engaged by the customer to perform additional work in the year ending January 31, 2024 under customary trade credit terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against this outstanding receivable as of January 31, 2023. 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.
The Company may be impacted by interpretations and changes in tax regulations and legislation which could adversely affect the Company's results of operations. Tax interpretations, regulations, and legislation in the various jurisdictions in which the Company operates are subject to measurement uncertainty and the interpretations can impact net income, income tax expense or benefit, and income tax assets or liabilities. Tax rules and regulations, including those relating to foreign jurisdictions, are subject to interpretation and require judgment by the Company that may be challenged by the applicable taxation authorities upon audit. Although the Company believes its assumptions, judgements and estimates are reasonable, changes in tax laws or the Company's interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in the Company's consolidated financial statements.
The Company’s ability to use its net operating loss carryforwards and certain other tax attributes may be limited. The Company’s net operating loss (“NOL”) carryforwards in the U.S. could expire unused and be unavailable to offset future income tax liabilities because of their limited duration or because of restrictions under U.S. tax law. As of January 31, 2023, the Company had $34.3 million of gross federal NOLs and $45.5 million of gross state NOLs available to offset the Company’s future taxable income. Of the gross federal NOL amount, $26.9 million will begin to expire between tax years 2033 and 2038 and the remainder has an indefinite carryforward. The state NOLs expire at various dates from 2023 to 2032. In addition, the Company's ability to use its NOLs may be limited in the event of future changes in its stock ownership. As a result, if the Company earns net taxable income, the Company’s ability to use its pre-change NOLs to offset U.S. federal taxable income may be subject to limitations, which could potentially result in a future tax liability of the Company. In addition, at the state level, there may be periods in the future during which the use of NOLs is suspended or otherwise limited, which could result in a state tax liability which would otherwise not arise.
The Company may be required to reverse previously recorded revenue and profits as a result of inaccurate estimates made in connection with the Company’s "over time" revenue recognition. Certain of the Company's contracts recognize revenues using periodic recognition of income. For these contracts, the Company uses the "over time" accounting method. This methodology allows revenue and profits to be recognized proportionally over the life of a contract by comparing the amount of the cost incurred to date against the total amount of cost expected to be incurred. The effect of revisions to revenue and total estimated cost is recorded when amounts are known or can be reasonably estimated. Revisions can occur at any time and could be material. On a historical basis, management believes that reasonably reliable estimates of the progress towards completion on long-term contracts have been made. However, given the uncertainties associated with these types of contracts, it is possible for actual cost to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.
The Company’s failure to establish and maintain effective internal control over financial reporting could harm its business and financial results. The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that the Company would prevent or detect a misstatement of its financial statements or fraud.
As of January 31, 2023, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal control over financial reporting was not effective due to an identified material weakness. The material weakness was regarding the design and operating effectiveness of controls related to the existence of inventory during the fiscal year ended January 31, 2023. Specifically, the Company failed to appropriately perform cycle count procedures at one of the Company's operating facilities, resulting in a significant adjustment during the full physical inventory count at period end. Further, management review of the process and resulting adjustments on a periodic basis failed to identify the issue. The material weakness did not result in any material misstatements to the Company’s consolidated financial statements. A material weakness is defined as 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 annual or interim financial statements will not be prevented or detected on a timely basis. If the current material weakness is not remediated, or if additional material weaknesses or significant deficiencies in the Company’s internal control over financial reporting are discovered or occur in the future, the Company’s consolidated financial statements may contain material misstatements and the Company could be required to restate its financial results. The failure to maintain an effective system of internal control over financial reporting could limit the Company’s ability to report its financial results accurately and in a timely manner or to detect and prevent fraud and could also cause a loss of investor confidence and decline in the market price of the Company’s common stock. See further discussion of the material weakness, including the Company's planned remediation procedures, in Item 9A., Controls and Procedures.
Business Condition Risks
Delays in the timing of order receipt, execution, delivery and acceptance for the Company’s products generally negatively impact the Company’s operating results. Since the Company's revenues are based on discrete projects, the Company's operating results in any reporting period generally are negatively impacted as a result of large declines in the level of overall market demand or delays in the timing of project execution phases.
The Company may not be able to successfully negotiate progress-billing arrangements for its large contracts, which could adversely impact the Company’s working capital needs, cash flows and credit risk. The Company sells systems and products under contracts that allow the Company to either bill upon the completion of certain agreed upon milestones, or upon actual shipment of the system or product. The Company attempts to negotiate progress-billing milestones on large contracts to help manage its working capital and cash flows, and to reduce the credit risk associated with these large contracts. Consequently, changes in accepted billing terms of contracts could impact the Company's requirements for working capital and cash flows.
Aggressive pricing by existing competitors and the entrance of new competitors in the markets in which the Company operates could drive down the Company's profits and reduce the Company's revenue. The Company's business is highly competitive. Some of the Company's competitors are larger and have more resources than the Company. Additionally, many of the Company's products are also subject to competition from alternative technologies and alternative products. In periods of declining demand, the Company's fixed cost structure may limit its ability to cut costs, which may be a competitive disadvantage compared to companies with more flexible cost structures, or may result in reduced operating margins, operating losses and negative cash flows.
The Company may be subject to claims for damages for defective products. The Company warrants its products to be free of certain defects. The Company has, from time to time, had claims alleging defects in its products. The Company may experience material product liability claims in the future and it could incur significant costs to defend such claims. While the Company currently has product liability insurance that it believes to be sufficient, the Company cannot be certain that its product liability insurance coverage will be adequate for liabilities that may be incurred in the future or that such coverage will continue to be available to the Company on commercially reasonable terms. Any claims relating to defective products that result in liabilities exceeding the Company's insurance coverage could have a material adverse effect on the Company's business, results of operations, financial position and cash flows.
The Company may not be able to recover costs and damages from vendors that supply defective materials. The Company may receive defective materials from its vendors that are incorporated into the Company's products during the manufacturing process. While the Company mitigates this risk through contract terms, traceability and specifications, and has recourse to recover from vendors the costs to repair, remake or replace defective products, such costs could be greater than the amount that can be recovered. Such excess costs could have an adverse effect on the Company's business, results of operations, financial position and cash flows.
Product and service orders included in the Company’s backlog may be reduced or cancelled. The Company defines backlog as the revenue value resulting from confirmed customer purchase orders that have not yet been recognized as revenue. However, by industry practice, orders may be canceled or modified at any time. If a customer cancels an order, the customer is normally responsible for all finished goods produced or shipped, all direct and indirect costs incurred and also for a reasonable allowance for anticipated profits. No assurance can be given that these amounts will be recovered after cancellation. Any reduction or cancellation of orders may result in revenues that are lower than expected.
The Company's results of operations could be adversely affected by changes in international regulations and other activities of governmental agencies related to the Company’s operations. International sales represent a significant portion of the Company's total sales. The Company's sales to foreign customers were 63.8% and 66.2% in the years ended January 31, 2023 and 2022, respectively. The Company's anticipated growth and profitability may require increasing foreign sales volume and may necessitate further international expansion. The Company's results of operations could be adversely affected by changes in trade, monetary and fiscal policies, laws and regulations, other activities of governments, agencies and similar organizations, and other factors. These factors include, but are not limited to, changes in a country's or region's economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. We cannot predict the impact of changes in foreign policies adopted by the current U.S. administration will have on our business. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales. In addition, these risks can include extraordinarily delayed collections of accounts receivable. Because the Company conducts a significant portion of its business activities in the Gulf Cooperation Council ("GCC"), the political and economic events of the countries that comprise the GCC can have a material effect on the Company’s business, results of operations, financial condition, and cash flows.
Due to the international scope of the Company’s operations, it is subject to a complex system of commercial and trade regulations around the world. The Company’s foreign subsidiaries are governed by laws, rules and business practices that differ from those of the United States. If the activities of these entities do not comply with U.S. laws or business practices or the Company’s Code of Business Conduct, then violations of these laws may result in severe criminal or civil sanctions, which could disrupt the Company’s business, and result in an adverse effect on the Company’s reputation, business and results of operations or financial condition. The Company cannot predict the nature, scope, or effect of future regulatory requirements to which its operations might be subject or the manner in which existing laws might be administered or interpreted.
General Risks
The Company may be unable to retain its senior management and key personnel. The Company's ability to meet its strategic and financial goals will depend to a significant extent on the continued contributions of its senior management and key personnel. Future success will also depend in large part on the Company's ability to identify, attract, motivate, effectively utilize and retain highly qualified managerial, sales, marketing and technical personnel. The loss of senior management or other key personnel or the inability to identify, attract and retain qualified personnel in the future could make it more difficult to manage the Company's business and could adversely affect operations and financial results.
The Company may not be able to achieve the expected benefits from its growth initiatives. The Company's cyclical or general expansion may result in unanticipated adverse consequences, including significant strain on management, operations and financial systems, as well as on the Company's ability to attract and retain competent employees. In the future, the Company may seek to grow its business by investing in new or existing facilities, making acquisitions, entering partnerships and joint ventures, or constructing new facilities, which could introduce additional risks, including:
|
• |
strain on working capital; |
|
• |
diversion of management's attention away from other activities, which could impair the operation of existing businesses; |
|
• |
failure to successfully integrate an acquired business or facility into existing operations; |
|
• |
inability to maintain key pre-acquisition business relationships; |
|
• |
loss of key personnel of an acquired business or facility; |
|
• |
exposure to unanticipated liabilities; and |
|
• |
failure to realize efficiencies, synergies and cost savings. |
As a result of these and other factors, including general economic risks, the Company may not be able to realize the expected benefits from future acquisitions, new facility developments, partnerships, joint ventures or other investments.
The Company and its operations may be negatively impacted by pandemics and other public health crises.
Pandemics and other public health crises may impact
the Company's office locations and manufacturing facilities, as well as those of its customers and third-party vendors, including through the effects of facility closures, reductions in operating hours and other social distancing efforts.
The Company’s results of operations, financial condition, liquidity and cash flow may in the future be materially adversely affected by pandemics and other public health crises, although the extent of any such impacts cannot be predicted.
The Company's information technology systems may be negatively affected by cybersecurity threats. The Company faces risks relating to cybersecurity attacks that could cause the loss of confidential information and other business disruptions. The Company relies extensively on computer systems to process transactions and manage its business, and its business is at risk from and may be impacted by cybersecurity attacks. The Company employs a number of measures to prevent, detect and mitigate these threats, which include data and email encryption, strong password management policy, firewall systems, anti-virus software, and frequent backups. However, there is no guarantee such efforts will be successful in preventing a cyber-attack. A successful attack could adversely affect the Company's reputation and results of operations, including through lawsuits by third parties. The Audit Committee of the Board of Directors is responsible for overseeing the adequacy and effectiveness of the Company's cybersecurity policies and programs.
Item 1B. UNRESOLVED STAFF COMMENTS - None.
Item 2. PROPERTIES
Location |
Leased and/or Owned |
Illinois |
Leased building and office space |
Louisiana |
Owned building and leased land |
Tennessee |
Leased building and office space |
Texas |
Leased office space |
Canada |
Owned building with office space on owned land; leased land and leased office space |
India |
Leased building, office space and land |
Kingdom of Saudi Arabia |
Owned building and office space on leased land |
United Arab Emirates |
Leased office space and building on leased land; owned building with office space on leased land |
Egypt |
Leased building and office space |
For further information, see Note 6 - Leases, in the Notes to Consolidated Financial Statements.
Item 3. |
LEGAL PROCEEDINGS - As of January 31, 2023, the Company had no material pending litigation. |
Item 4. |
MINE SAFETY DISCLOSURES - Not applicable. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2023 AND 2022
(Tabular amounts presented in thousands, except per share data)
Note 1 - Business information
Perma-Pipe International Holdings, Inc. ("PPIH", the "Company", or the "Registrant") was incorporated in Delaware on October 12, 1993. The Company is engaged in the manufacture and sale of products in one distinct segment: Piping Systems.
Fiscal year. The Company's fiscal year ends on January 31. Years, results and balances described as 2022 and 2021 are for the fiscal years ended January 31, 2023 and 2022, respectively.
Nature of business. 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 ("DHC") 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.
Geographic information. Net sales attributed to a geographic area are based on the destination of the product shipment. Sales to foreign customers were 63.8% in 2022 compared to 66.2% in 2021. Long-lived assets are based on the physical location of the assets and consist of property, plant and equipment.
(In thousands) | | 2022 | | | 2021 | |
Net sales | | | | | | | | |
United States | | $ | 51,557 | | | $ | 46,770 | |
Canada | | | 36,482 | | | | 28,302 | |
Middle East/North Africa | | | 50,432 | | | | 51,543 | |
India | | | 3,311 | | | | 11,101 | |
Europe | | | 456 | | | | 194 | |
Other | | | 331 | | | | 642 | |
Total net sales | | $ | 142,569 | | | $ | 138,552 | |
| | | | | | | | |
Property, plant and equipment, net of accumulated depreciation | | | | | | | | |
United States | | $ | 5,920 | | | $ | 6,415 | |
Canada | | | 9,290 | | | | 9,750 | |
Middle East/North Africa | | | 10,677 | | | | 7,595 | |
India | | | 631 | | | | 996 | |
Total property, plant and equipment, net of accumulated depreciation | | $ | 26,518 | | | $ | 24,756 | |
Note 2 - Significant accounting policies
Use of estimates. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition. During 2022 and 2021 and in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, the Company recognizes revenue for certain contracts when a customer obtains control of promised goods or services. Other contracts recognize revenues using periodic recognition of income. For these contracts, the Company uses the "over time" accounting method. Under this approach, income is recognized in each reporting period based on the status of the uncompleted contracts and the current estimates of costs to complete. The amount of revenue recognized is determined by the relationship of costs incurred to the total estimated costs of the contract. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Such revisions are recognized in the period in which they are determined. Claims for additional compensation due to the Company are recognized in contract revenues when realization is probable, the amount can be reliably estimated and the amount is not subject to reversal. See Note 4 - Revenue recognition for more detail.
Shipping and handling. Shipping and handling costs are included in cost of sales, and the amounts invoiced to customers relating to shipping and handling are included in net sales.
Sales tax. Sales tax is reported on a net basis in the consolidated financial statements.
Operating cycle. The length of contracts vary but are typically less than one year. The Company includes in current assets and liabilities amounts realizable and payable in the normal course of contract completion unless completion of such contracts extends significantly beyond one year.
Consolidation. The consolidated financial statements include the accounts of the Company and its domestic and foreign subsidiaries, all of which are wholly owned. All intercompany balances and transactions have been eliminated.
Translation of foreign currency. Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year-end. Revenues and expenses are translated at weighted average exchange rates prevailing during the year. The resulting translation adjustments are included in stockholders' equity as part of accumulated other comprehensive income (loss). Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. The aggregated foreign exchange transaction loss recognized in the income statement was $0.3 million and $0.1 million in 2022 and 2021, respectively.
Contingencies. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, including those involving environmental, tax, product liability and general liability claims. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, the Company's estimates of the outcomes of these matters, and its experience in contesting, litigating and settling other similar matters. The Company does not currently anticipate the amount of any ultimate liability with respect to these matters will materially affect the Company's financial position, liquidity or future operations.
Cash and cash equivalents. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Cash and cash equivalents were $5.8 million and $8.2 million as of January 31, 2023 and 2022, respectively. On January 31, 2023, $0.1 million was held in the United States and $5.7 million was held by foreign subsidiaries. On January 31, 2022, less than $0.1 million was held in the United States and $8.2 million was held by foreign subsidiaries.
Accounts payable included drafts payable of $0.2 million on January 31, 2023 and 2022.
Restricted cash. There was no restricted cash held in the United States on January 31, 2023 or 2022. Restricted cash held by foreign subsidiaries was $1.0 million and $1.6 million as of January 31, 2023 and 2022, respectively. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.
(In thousands) | | 2022 | | | 2021 | |
Cash and cash equivalents | | $ | 5,773 | | | $ | 8,214 | |
Restricted cash | | | 1,020 | | | | 1,557 | |
Cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 6,793 | | | $ | 9,771 | |
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. In the United States, collateral is not generally required. In the United Arab Emirates ("U.A.E."), Saudi Arabia, Egypt 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 the specific customer and are stated at amounts due from customers net of an allowance for claims and doubtful accounts. Standard payment terms are net 30 days. 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.
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 $39.1 million as of January 31, 2023, 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 this 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 2023 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 January 31, 2023. 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 years ended January 31, 2023 and 2022, respectively, no one customer accounted for greater than 10% of the Company's consolidated net sales.
As of January 31, 2023, no one customer accounted for greater than 10% of accounts receivable. As of January 31, 2022, one customer accounted for 11.9% of accounts receivable.
Concentration of credit risk. The Company maintains its U.S. cash in bank deposit accounts at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC"). Cash balances are below FDIC limits. The Company has not experienced any losses in such accounts. The Company's foreign cash is held in accounts at multiple institutions in the various countries in which the Company operates, limiting the concentration of risk internationally. The Company has a broad customer base doing business in all regions of the United States as well as other areas in the world.
Accumulated other comprehensive loss. Accumulated other comprehensive loss represents the change in equity from non-owner transactions and consisted of foreign currency translation and minimum pension liability.
(In thousands) | | 2022 | | | 2021 | |
Equity adjustment foreign currency, gross | | $ | (6,707 | ) | | $ | (1,947 | ) |
Minimum pension liability, gross | | | - | | | | (1,362 | ) |
Subtotal excluding tax effect | | | (6,707 | ) | | | (3,309 | ) |
Tax effect of equity adjustment foreign currency | | | 258 | | | | 91 | |
Tax effect of minimum pension liability | | | - | | | | 114 | |
Total accumulated other comprehensive loss | | $ | (6,449 | ) | | $ | (3,104 | ) |
Inventories. Inventories are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories.
(In thousands) | | 2022 | | | 2021 | |
Raw materials | | $ | 14,992 | | | $ | 13,909 | |
Work in process | | | 750 | | | | 426 | |
Finished goods | | | 203 | | | | 527 | |
Subtotal | | | 15,945 | | | | 14,862 | |
Less allowance | | | 1,207 | | | | 1,102 | |
Inventories, net | | $ | 14,738 | | | $ | 13,760 | |
Long-lived assets. Property, plant and equipment are stated at cost. Interest is capitalized in connection with the construction of facilities and amortized over the estimated useful life of the asset. Long-lived assets are reviewed for possible impairment whenever events indicate that the carrying amount of such assets may not be recoverable. If such a review indicates impairment, the carrying amount of such assets is reduced to an estimated fair value.
Depreciation is computed using the straight-line method over the estimated useful lives of assets, which range from three to 30 years. Leasehold improvements are depreciated over the remaining life of the lease or its useful life, whichever is shorter. Amortization of assets under capital leases is included in depreciation. Depreciation expense was approximately $3.7 million and $4.1 million in the years ended January 31, 2023 and 2022, respectively.
(In thousands) | | 2022 | | | 2021 | |
Land, buildings and improvements | | $ | 22,276 | | | $ | 22,748 | |
Machinery and equipment | | | 54,200 | | | | 50,534 | |
Furniture, office equipment and computer systems | | | 3,727 | | | | 3,941 | |
Transportation equipment | | | 2,727 | | | | 2,000 | |
Subtotal | | | 82,930 | | | | 79,223 | |
Less accumulated depreciation | | | 56,412 | | | | 54,467 | |
Property, plant and equipment, net of accumulated depreciation | | $ | 26,518 | | | $ | 24,756 | |
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 January 31, 2023, 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 no impairment of the Company's long-lived assets for the year ended January 31, 2023. 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 January 31, 2023 and 2022, is attributable to the purchase of the remaining 50% interest in Perma-Pipe Canada, Ltd., which occurred in 2016.
The movement of the goodwill for the years ended January 31, 2023 and 2022 are as follows:
(In thousands) | | 2022 | | | 2021 | |
Balance at beginning of year | | $ | 2,342 | | | $ | 2,332 | |
Foreign exchange adjustment | | | (115 | ) | | | 10 | |
Balance at end of year | | $ | 2,227 | | | $ | 2,342 | |
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 January 31, 2023, 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 no impairment for the year ended January 31, 2023. The Company will continue testing for potential impairment at least annually or as otherwise required by applicable accounting standards.
Other intangible assets with definite lives. The Company owns several patents including those covering features of its piping and electronic leak detection systems. Patents are capitalized and amortized on a straight-line basis over a period not to exceed the legal lives of the patents. The Company expenses costs incurred to renew or extend the term of intangible assets. Gross patents were $2.7 million as of January 31, 2023 and 2022. Accumulated amortization was approximately $2.6 million as of January 31, 2023 and 2022. Amortization over the next five fiscal years will be less than $0.1 million and less than $0.1 million thereafter. Amortization expense is expected to be recognized over the weighted-average period of 8.0 years.
Research and development. Research and development expenses consist of materials, salaries and related expenses of engineering personnel and outside services for product development projects. Research and development costs are expensed as incurred. Research and development expense was approximately $0.7 million and $0.4 million in the years ended January 31, 2023 and 2022, respectively.
Income taxes. Deferred income taxes have been provided for temporary differences arising from differences in the basis of assets and liabilities for tax and financial reporting purposes. Deferred income taxes on temporary differences have been recorded at the current tax rate. The Company assesses its deferred tax assets and liabilities for realizability at each reporting period.
The Company recognizes a tax position in its consolidated financial statements only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. For further information, see Note 7 - Income taxes.
One of the base broadening provisions of the U.S. Tax Cuts and Jobs Act of 2017 ("Tax Act") is the Global Intangible Low-Taxed Income provisions ("GILTI"). In accordance with guidance issued by the Financial Accounting Standards Board ("FASB") staff, the Company has adopted an accounting policy to treat any GILTI inclusions as a period cost if and when incurred. Thus, for the years ended January 31, 2023 and 2022, deferred taxes were computed without consideration of the possible future impact of the GILTI provisions, and any current year impact was recorded as a part of the current portion of income tax expense.
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 its consolidated provision for income taxes.
Fair value of financial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are based upon 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 rates.
Net income per common share. Earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding (basic). The Company reported net income in 2022 and 2021. Therefore, the Company adjusted for dilutive shares in 2022 and 2021, assuming conversion, exercise, or contingent issuance of securities that would have an anti-dilutive effect on earnings per share. The dilutive shares are in the following table:
Basic weighted average number of common shares outstanding (in thousands) | | 2022 | | | 2021 | |
Basic weighted average number of common shares outstanding | | | 7,976 | | | | 8,110 | |
Dilutive effect of stock options and restricted stock units | | | 140 | | | | 285 | |
Weighted average number of common shares outstanding assuming full dilution | | | 8,116 | | | | 8,395 | |
| | | | | | | | |
Restricted stock and stock options not included in the computation of diluted EPS of common stock because the option exercise prices exceeded the average market prices | | | 105 | | | | 39 | |
Canceled options during the year | | | (11 | ) | | | (33 | ) |
Restricted stock and stock options with an exercise price below the average stock price | | | 140 | | | | 285 | |
Equity-based compensation. The Company issues or has issued various types of stock-based awards to employees and directors: restricted stock, deferred stock and stock options. Non-cash compensation expense associated with restricted stock is based on the fair value of the common stock at the date of grant, and amortized using the straight line method over the vesting period. Compensation expense associated with deferred stock which has been awarded to the Board of Directors (non-employee) is based upon the fair value of the common stock at the date of grant, and since the grant vests immediately it is expensed on the date of the grant. Stock compensation expense for stock options is recognized ratably over the requisite service period of the award. The Black-Scholes option-pricing model is utilized to estimate the fair value of option awards.
Treasury Stock. In accordance with ASC 505, Equity, the Company accounted for share repurchases pursuant to its 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 239,168 shares of 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 a decrease to retained earnings in accordance with ASC 505-30, Equity - Treasury Stock.
Segments. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker ("CODM") in making decisions regarding resource allocation and assessing performance the Company’s Chief Executive Officer is the CODM, and he uses a combination of several management reports, including the Company's financial information in determining how to allocate resources and assess performance. The Company has determined that it operates in one segment.
Recent accounting pronouncements. In March 2020, the 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 the London Inter-Bank Offered Rate ("LIBOR") on December 31, 2021. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The ASU provides the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic. This ASU is effective for all entities; however, application of the guidance is optional, is only available in certain situations and is only available for companies to apply from March 12, 2020 until December 31, 2022. The Company's Renewed Senior Credit Facility which matures on September 20, 2026, bears interest at a rate equal to an alternate base rate, the 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, there was no material impact on the Company's financial statements from the adoption of this standard.
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 does not expect a material 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.
Note 3 - Retention
A retention receivable is a portion of an outstanding receivable balance amount withheld by a customer until a contract is fully completed as specified in the contract. Retention receivables of $2.4 million and $2.8 million were included in the balance of trade accounts receivable as of January 31, 2023 and 2022, respectively. A retention receivable of $2.9 million and $4.3 million was included in the balance of other long-term assets as of January 31, 2023 and 2022, respectively, due to the long-term nature of the receivables. See Note 2 - Accounts receivable for further information regarding the future realization of these long-term balances.
Note 4 - Revenue recognition
The Company accounts for its revenues under ASC 606, Revenue from Contracts with Customers.
Revenue from contracts with customers
The Company defines a contract as an agreement that has approval and commitment from both parties, defined rights and identifiable payment terms, which ensures the contract has commercial substance and that collectability is reasonably assured.
The Company’s standard revenue transactions are classified into two main categories:
| 1) | Systems and Coating - which include all bundled products in which Perma-Pipe engineers, and manufactures pre-insulated specialty piping systems, insulates subsea flowline pipe, subsea oil production equipment, and land-lines. Additionally, this systems classification also includes coating applied to pipes and structures. |
| 2) | Products - which include cables, leak detection products, heat trace products, material/goods not bundled with piping or flowline systems, and field services not bundled into a project contract. |
In accordance with ASC 606-10-25-27 through 29, the Company recognizes specialty piping and coating systems revenue over time as the manufacturing process progresses because one of the following conditions exist:
| 1) | the customer owns the material that is being insulated or coated, so the customer controls the asset and thus the work-in-process; or |
| 2) | the customer controls the work-in-process due to the custom nature of the pre-insulated, fabricated system being manufactured as evidenced by the Company’s right to payment for work performed to date plus profit margin for products that have no alternative use to 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 years ended January 31, 2023 and 2022 are as follows (in thousands):
| | 2022 | | | 2021 | |
| | Sales | | | % to Total | | | Sales | | | % to Total | |
Products | | $ | 14,626 | | | | 10 | % | | $ | 13,575 | | | | 10 | % |
| | | | | | | | | | | | | | | | |
Specialty Piping Systems and Coating | | | | | | | | | | | | | | | | |
Revenue recognized under input method | | | 44,648 | | | | 31 | % | | | 44,778 | | | | 32 | % |
Revenue recognized under output method | | | 83,295 | | | | 59 | % | | | 80,199 | | | | 58 | % |
Total | | $ | 142,569 | | | | 100 | % | | $ | 138,552 | | | | 100 | % |
The input method as noted in ASC 606-10-55-20 is used by certain 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 "over time" 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 are made for estimated losses on uncompleted contracts in the contract liabilities account in the period in which such losses are determined.
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 January 31, 2023 will be billed and collected within one year.
The following table shows the reconciliation of the cost in excess of billings:
(In thousands) | | 2022 | | | 2021 | |
Costs incurred on uncompleted contracts | | $ | 18,342 | | | $ | 20,021 | |
Estimated earnings | | | 9,370 | | | | 12,030 | |
Earned revenue | | | 27,712 | | | | 32,051 | |
Less billings to date | | | 26,329 | | | | 31,019 | |
Costs in excess of billings, net | | $ | 1,383 | | | $ | 1,032 | |
Balance sheet classification | | | | | | | | |
Contract assets: Costs and estimated earnings in excess of billings on uncompleted contracts | | $ | 3,126 | | | $ | 2,309 | |
Contract liabilities: Billings in excess of costs and estimated earnings on uncompleted contracts | | | (1,743 | ) | | | (1,277 | ) |
Costs in excess of billings, net | | $ | 1,383 | | | $ | 1,032 | |
Substantially all of the $1.3 million and $0.8 million contract liabilities balances at January 31, 2022 and 2021, respectively, were recognized in revenues during 2022 and 2021, respectively.
Unbilled accounts receivable:
The Company has recorded $11.6 million and $2.7 million of unbilled accounts receivable on the consolidated balance sheets as of January 31, 2023 and 2022, respectively, from revenues generated by its subsidiaries in the Middle East and North Africa. The Company has fulfilled all performance obligations and has recorded revenue under the respective contracts. The deliverables under these contracts have been accepted by the customer and billings will be made once the customer takes possession of or arranges shipping for the products. The Company anticipates that substantially all of the amounts included in unbilled accounts receivable as of January 31, 2023 will be billed 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 - Debt
(In thousands) | | 2022 | | | 2021 | |
Revolving line - North America | | $ | 4,387 | | | $ | 634 | |
Mortgage note | | | 4,772 | | | | 5,257 | |
Revolving lines - foreign | | | 5,714 | | | | 6,049 | |
Term loan - foreign | | | 5 | | | | 33 | |
Finance lease obligations | | | 9,472 | | | | 9,944 | |
Total debt | | | 24,350 | | | | 21,917 | |
Unamortized debt issuance costs | | | (132 | ) | | | (147 | ) |
Less current maturities | | | 10,614 | | | | 7,384 | |
Total long-term debt | | $ | 13,604 | | | $ | 14,386 | |
The following table summarizes the Company's scheduled maturities on January 31:
(In thousands) | | Total | | | 2024 | | | 2025 | | | 2026 | | | 2027 | | | 2028 | | | Thereafter | |
Revolving line - North America | | $ | 4,387 | | | $ | 4,387 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | | - | |
Mortgage note | | | 4,772 | | | | 251 | | | | 251 | | | | 251 | | | | 251 | | | | 251 | | | | 3,517 | |
Revolving lines - foreign | | | 5,714 | | | | 5,714 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Long-term finance obligation | | | 9,327 | | | | 112 | | | | 137 | | | | 168 | | | | 201 | | | | - | | | | 8,709 | |
Term loan - foreign | | | 5 | | | | 5 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Finance lease obligations | | | 145 | | | | 145 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 24,350 | | | $ | 10,614 | | | $ | 388 | | | $ | 419 | | | $ | 452 | | | $ | 251 | | | $ | 12,226 | |
Revolving lines - North America. On September 20, 2018, the Company and certain of its U.S. and Canadian subsidiaries (collectively, together with the Company, the “North American Loan Parties”) entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and lender, providing for a three-year $18 million Senior Secured Revolving Credit Facility, subject to a borrowing base including various reserves (the “Senior Credit Facility”).
On September 17, 2021, the North American Loan Parties executed an extension of the Credit Agreement with PNC, providing for a new five-year $18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the “Renewed Senior Credit Facility”). The Company's obligations under the Renewed Senior Credit Facility are currently guaranteed by Perma-Pipe Canada, Inc. Each of the North American Loan Parties other than Perma-Pipe Canada, Inc. is a borrower under the Renewed Senior Credit Facility (collectively, the “Borrowers”).
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, 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.
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 1.10 to 1.00 for any five consecutive days in which the undrawn availability is less than $3.0 million or any day in which the undrawn availability is less than $2.0 million. As of January 31, 2023, the calculated ratio was greater than 1.10 to 1.00. In order to cure any future breach of the FCF covenant by the North American Loan Parties, the Company may repatriate cash from any of its foreign subsidiaries that are otherwise not a party to the Renewed Senior Credit Facility in an amount which, when added to the amount of the Company’s Consolidated EBITDA, would result in pro forma compliance with the FCF covenant. The Company was in compliance with these covenants as of January 31, 2023.
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 2.00% per annum in excess of the otherwise applicable rate (i) while a bankruptcy event of default exists or (ii) upon the lender's request, during the continuance of any other event of default.
As of January 31, 2023, the Company had borrowed an aggregate of $4.4 million at a rate of 8.50% and had $9.9 million available under the Renewed Senior Credit Facility. As of January 31, 2022, the Company had borrowed an aggregate of $0.6 million and had $8.5 million available under the Renewed Senior Credit Facility.
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 2.00%. 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 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 8.00% 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 $0.11 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 January 31, 2023. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
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 January 31, 2023) from a bank in the U.A.E. The facility has an interest rate of approximately 8.38%. 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 January 31, 2023) from a bank in the U.A.E. The facility has an interest rate of approximately 8.38% and expired in January 2023, however the Company is in the process of renewing it. The Company is in regular communication with the bank throughout the renewal process and the facility has continued without interruption or penalty.
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 January 31, 2023). 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 8.38% 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 January 31, 2023). 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 8.38% 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 $3.3 million at January 31, 2023). 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. The Company is in regular communication with the bank throughout the renewal process and the facility has continued without interruption or penalty.
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 11.2 million Egyptian Pounds (approximately $0.4 million at January 31, 2023). 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 expired in November 2022, however, the Company is in the process of extending it in connection with the completion of the project. The Company is in regular communication with the bank throughout the process and the facility has continued without interruption or penalty.
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 $3.3 million at January 31, 2023). 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 18.25% and is set to expire 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 25.0 million Saudi Riyal (approximately $6.7 million at January 31, 2023) 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 9.15% 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 January 31, 2023, the amount of foreign subsidiary debt guaranteed by the Company was approximately $0.5 million.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of January 31, 2023, with the exception of those arrangements that have expired and have not yet been renewed. Although certain of the arrangements have expired and the borrowings could be required to be repaid immediately by the banks, the Company is in regular communication with the respective banks throughout the renewal process and all of the arrangements have continued without interruption or penalty. On January 31, 2023, 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 January 31, 2023, the Company's interest rates ranged from 8.00% to 18.25%, with a weighted average rate of 10.72%, and the Company had facility limits totaling $21.5 million under these credit arrangements. As of January 31, 2023, $5.6 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of January 31, 2023, the Company had borrowed $5.7 million and had an additional $10.2 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as of January 31, 2023 and 2022, were included as current maturities of long-term debt in the Company's consolidated balance sheets.
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 23, 2042. As of January 31, 2023, the remaining balance on the mortgage in Canada is approximately 6.4 million Canadian Dollars ("CAD") (approximately $4.8 million at January 31, 2023). The interest rate is variable, and was 8.30% at January 31, 2023. Principal payments began in January 2018.
On June 19, 2012, the Company borrowed $1.8 million under a mortgage note secured by its manufacturing facility in Lebanon, Tennessee. The proceeds were used for repayment of amounts borrowed. On April 14, 2021, the Company entered into the Purchase and Sale Agreement discussed above. Concurrently with the sale, the Company paid off the approximately $0.9 million remaining on the mortgage note on the Property to its lender.
Note 6 - Leases
The Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities short-term, and operating lease liabilities long-term in the Company's consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term debt, and long-term debt less current maturities in the Company's consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the ROU asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the ROU asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the ROU asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred. ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease payments in a similar economic environment.
In calculating the ROU asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.
Operating Leases. In August 2020, the Company entered into a new lease in Abu Dhabi for land upon which the Company has built a production facility. The annual payments are approximately 1.2 million U.A.E. Dirhams (approximately $0.3 million at January 31, 2023), inclusive of rent and common charges, with escalation clauses in the agreement. Rent payments were deferred until August 2022 and have now commenced. The lease expires in August 2050.
In March and December 2022, the Company served Notices of Termination to its lessor for the Company's lease of the land and buildings in Fujairah in the U.A.E. The Company served the Notices of Termination in connection with the Company's intended relocation to a different facility in Abu Dhabi. The Company vacated portions of the leased space in December 2022 and is expected to vacate the remaining space in April 2023. The first Notice of Termination required that the Company pay an additional amount equal to three months' rent after that 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 January 31, 2023. The termination resulted in decreases of $0.4 million, $6.0 million and $5.5 million to operating lease liability short-term, operating lease liability long-term and operating lease right-of-use asset, respectively, in the consolidated balance sheets as of January 31, 2023. The termination also resulted in a decrease in rent expense of $1.1 million in the consolidated statement of operations for the year ended January 31, 2023.
Finance Leases. In 2019, the Company obtained two finance leases for a total of CAD 1.1 million (approximately $0.8 million at the prevailing exchange rates on the transaction dates) to finance vehicle equipment. The interest rates for these finance leases were 8.0% per annum with monthly principal and interest payments of less than $0.1 million. These leases mature in August 2023.
The Company has several significant operating lease agreements, with lease terms of one to 30 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 January 31, 2023, the Company had total operating lease liabilities of $5.2 million and operating ROU assets of $4.5 million, which are reflected in the consolidated balance sheet. At January 31, 2023, the Company also had finance lease liabilities of $0.2 million included in current maturities of long-term debt and long-term debt less current maturities, and finance ROU assets of $0.5 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 follows (in thousands):
Operating and Finance leases: | | January 31, 2023 | | | January 31, 2022 | |
Finance leases assets: | | | | | | | | |
Property and Equipment - gross | | $ | 1,161 | | | $ | 1,221 | |
Accumulated depreciation and amortization | | | (700 | ) | | | (490 | ) |
Property and Equipment - net | | $ | 461 | | | $ | 731 | |
| | | | | | | | |
Finance lease liabilities: | | | | | | | | |
Finance lease liability short-term | | $ | 164 | | | $ | 357 | |
Finance lease liability long-term | | | - | | | | 173 | |
Total finance lease liabilities | | $ | 164 | | | $ | 530 | |
| | | | | | | | |
Operating lease assets: | | | | | | | | |
Operating lease ROU assets | | $ | 4,527 | | | $ | 11,213 | |
| | | | | | | | |
Operating lease liabilities: | | | | | | | | |
Operating lease liability short-term | | $ | 912 | | | $ | 1,496 | |
Operating lease liability long-term | | | 4,252 | | | | 11,270 | |
Total operating lease liabilities | | $ | 5,164 | | | $ | 12,766 | |
Total lease costs consist of the following (in thousands):
Lease costs | Consolidated Statements of Operations Classification | | Three Months Ended January 31, 2023 | | | Year Ended January 31, 2023 | | | Year Ended January 31, 2022 | |
| | | | | | | | | | | | | |
Finance Lease Costs | | | | | | | | | | | | | |
Amortization of ROU assets | Cost of sales | | $ | 53 | | | $ | 233 | | | $ | 214 | |
Interest on lease liabilities | Interest expense | | | 22 | | | | 28 | | | | 69 | |
Operating lease costs | Cost of sales, SG&A expenses | | | 610 | | | | 1,388 | | | | 2,570 | |
Short-term lease costs (1) | Cost of sales, SG&A expenses | | | 24 | | | | 421 | | | | 398 | |
Sub-lease income | SG&A expenses | | | (20 | ) | | | (81 | ) | | | (81 | ) |
Total Lease costs | | $ | 689 | | | $ | 1,989 | | | $ | 3,170 | |
(1) Includes variable lease costs, which are immaterial
Supplemental cash flow information related to leases is as follows (in thousands):
| | Year Ended January 31, | |
| | 2023 | | | 2022 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Financing cash flows from finance leases | | $ | 338 | | | $ | 375 | |
Operating cash flows from finance leases | | | 28 | | | | 69 | |
Operating cash flows from operating leases | | | 1,839 | | | | 3,097 | |
| | | | | | | | |
ROU Assets obtained in exchange for new lease obligations: | | | | | | | | |
Operating leases liabilities | | $ | 143 | | | $ | 121 | |
Weighted-average lease terms discount rates are as follows:
| | January 31, 2023 | | | January 31, 2022 | |
| | | | | | | | |
Weighted-average remaining lease terms (in years): | | | | | | | | |
Finance leases | | | 0.5 | | | | 1.5 | |
Operating leases | | 19.6 | | | | 13.5 | |
| | | | | | | | |
Weighted-average discount rates: | | | | | | | | |
Finance leases | | | 12.0 | % | | | 9.1 | % |
Operating leases | | | 8.2 | % | | | 7.4 | % |
On January 31, 2023, future minimum annual rental commitments under non-cancelable lease obligations were as follows (in thousands):
Year: | | Operating Leases | | | Finance Leases | |
For the year ended January 31, 2024 | | $ | 1,533 | | | $ | 168 | |
For the year ended January 31, 2025 | | | 650 | | | | - | |
For the year ended January 31, 2026 | | | 443 | | | | - | |
For the year ended January 31, 2027 | | | 442 | | | | - | |
For the year ended January 31, 2028 | | | 404 | | | | - | |
Thereafter | | | 7,523 | | | | - | |
Total lease payments | | | 10,995 | | | | 168 | |
Less: amount representing interest | | | (5,831 | ) | | | (4 | ) |
Total lease liabilities at January 31, 2023 | | $ | 5,164 | | | $ | 164 | |
Rental expense for operating leases was $1.7 million and $3.0 million for the years ended January 31, 2023 and 2022, respectively.
The Company has several significant operating lease agreements as follows:
| • | Office space of approximately 31,650 square feet in Niles, IL is leased until October 2023. |
| • | Production facilities and office space of approximately 139,000 square feet in Lebanon, Tennessee is leased until December 31, 2035. |
| • | Five acres of land in Louisiana is leased through March 2027. |
| • | Twenty acres of land in Canada leased through December 2022 which was extended to April 2023. |
| • | Nine acres of land in the Kingdom of Saudi Arabia is leased through April 2030. |
| • | Production facilities in the U.A.E. of approximately 80,200 square feet on approximately 107,600 square feet of land is leased until June 2030. |
| • | Office space of approximately 21,500 square feet and land for production facilities of approximately 423,000 square feet in the U.A.E. is leased until July 2032. |
| • | Production facilities in the U.A.E. of approximately 78,100 square feet is leased until December 2032. |
| • | Approximately fourteen acres of land in the U.A.E. is leased through August 2050. |
Note 7 - Income taxes
Income/(loss) from continuing operations before income taxes (in thousands) | | 2022 | | | 2021 | |
Domestic (1) | | $ | (5,392 | ) | | $ | (3,357 | ) |
Foreign | | | 14,950 | | | | 11,684 | |
Total | | $ | 9,558 | | | $ | 8,327 | |
(1) The domestic loss from continuing operations before income taxes includes corporate overhead costs.
Components of income tax expense/(benefit) (in thousands) | | 2022 | | | 2021 | |
Current | | | | | | | | |
Federal | | $ | (3 | ) | | $ | 1 | |
Foreign | | | 2,971 | | | | 2,317 | |
State and other | | | 166 | | | | 144 | |
Total current income tax expense | | | 3,134 | | | | 2,462 | |
Deferred | | | | | | | | |
Federal | | | - | | | | - | |
Foreign | | | 479 | | | | (197 | ) |
State and other | | | - | | | | - | |
Total deferred income tax expense/(benefit) | | | 479 | | | | (197 | ) |
Total income tax expense | | $ | 3,613 | | | $ | 2,265 | |
As a result of the onetime transition tax from the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”), the Company estimates that distributions from foreign subsidiaries will no longer be subject to incremental U.S. 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. Earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. The Company's liability was $0.6 million and $0.2 million as of January 31, 2023 and 2022, respectively, related to these taxes.
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested outside the United States. The Company intends to permanently reinvest the undistributed earnings of its Middle Eastern and Indian subsidiaries. The Middle Eastern and Indian subsidiaries have unremitted earnings of $28.2 million and $8.4 million, respectively, as of January 31, 2023, all of which has been subject to the transition tax in the United States. Unremitted earnings of $22.8 million in the United Arab Emirates would not be subject to withholding tax in the event of a distribution, and $5.4 million of unremitted earnings in Saudi Arabia would be subject to withholding tax of $0.3 million. The Company has not recorded a deferred tax liability related to any financial reporting basis over tax basis related to the investment in these foreign subsidiaries as it is not practical to estimate.
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 its consolidated provision for income taxes.
The difference between the provision for income taxes and the amount computed by applying the U.S. Federal statutory rate of 21% was as follows:
(In thousands) | | 2022 | | | 2021 | |
Tax expense at federal statutory rate | | $ | 2,007 | | | $ | 1,749 | |
State expense, net of federal income tax effect | | | 110 | | | | 148 | |
Deferred compensation adjustment | | | (32 | ) | | | 456 | |
Domestic valuation allowance | | | (590 | ) | | | (636 | ) |
Domestic return to provision | | | 390 | | | | (6 | ) |
Global Intangible Low-Taxed Income inclusion | | | 1,206 | | | | 742 | |
Valuation allowance for state NOLs | | | 133 | | | | (29 | ) |
Differences in foreign tax rate | | | (410 | ) | | | (430 | ) |
Deferred tax on unremitted earnings | | | 438 | | | | (55 | ) |
Foreign withholding taxes | | | 304 | | | | 178 | |
Research tax credit | | | 220 | | | | 80 | |
Pension Settlement | | | (115 | ) | | | - | |
All other, net expense | | | (48 | ) | | | 68 | |
Total income tax expense/(benefit) | | $ | 3,613 | | | $ | 2,265 | |
The Company's worldwide effective tax rates ("ETR") were 37.8% and 27.2% in the years ended January 31, 2023 and 2022, respectively. The change in the ETR was primarily due to additional tax expense for the Global Intangible Low-Taxed Income inclusion, the absence of recognizing tax benefits on losses in the United States due to a full valuation allowance and changes in the mix of income and loss in the various tax jurisdictions.
Components of deferred income tax assets (in thousands) | | 2022 | | | 2021 | |
U.S. Federal NOL carryforward | | $ | 7,197 | | | $ | 8,424 | |
Deferred compensation | | | 276 | | | | 350 | |
Research tax credit | | | 2,258 | | | | 2,573 | |
Foreign NOL carryforward | | | 318 | | | | 448 | |
Foreign tax credit | | | 2,580 | | | | 2,580 | |
Stock compensation | | | 43 | | | | 62 | |
Other accruals not yet deducted | | | 305 | | | | 276 | |
State NOL carryforward | | | 2,744 | | | | 2,730 | |
Accrued commissions and incentives | | | 851 | | | | 483 | |
Inventory valuation allowance | | | 107 | | | | 116 | |
Lease liability | | | 278 | | | | 418 | |
Other | | | 165 | | | | 17 | |
Deferred tax assets, gross | | | 17,122 | | | | 18,477 | |
Valuation allowance | | | (15,993 | ) | | | (16,905 | ) |
Total deferred tax assets, net of valuation allowances | | $ | 1,129 | | | $ | 1,572 | |
| | | | | | | | |
Components of the deferred income tax liability | | | | | | | | |
Depreciation | | $ | (415 | ) | | $ | (643 | ) |
Foreign subsidiaries unremitted earnings | | | (591 | ) | | | (231 | ) |
Prepaid | | | (70 | ) | | | (54 | ) |
Accrued pension | | | - | | | | (159 | ) |
Right of use asset | | | (266 | ) | | | (386 | ) |
Total deferred tax liabilities | | $ | (1,342 | ) | | $ | (1,473 | ) |
| | | | | | | | |
Deferred tax (liability)/asset, net | | $ | (213 | ) | | $ | 99 | |
| | | | | | | | |
Balance sheet classification | | | | | | | | |
Long-term assets | | $ | 696 | | | $ | 811 | |
Long-term liability | | | (909 | ) | | | (712 | ) |
Total deferred tax assets/(liabilities), net of valuation allowances | | $ | (213 | ) | | $ | 99 | |
As of January 31, 2023 the Company had a deferred tax asset of $7.2 million related to gross U.S. Federal net operating loss ("NOL") carryforwards of $34.3 million, of which $26.9 million will expire between tax years 2033 and 2038, with the remainder not subject to expiration. As of January 31, 2023 the Company had a deferred tax asset of $2.7 million related to gross state NOLs of $45.5 million that expire between 2023 and 2032 As of January 31, 2023 the Company had a deferred tax asset of $0.3 million related to gross foreign NOLs of $1.6 million for its subsidiary in Saudi Arabia, which can be carried forward indefinitely and does not have a valuation allowance recorded against it. The ultimate realization of the tax benefit is dependent upon the future generation of operating income in the respective tax jurisdictions.
The Company periodically reviews the adequacy of its valuation allowance in all of the tax jurisdictions in which it operates, evaluates future sources of taxable income and tax planning strategies and may make further adjustments based on management's outlook for continued profits in each jurisdiction.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the domestic cumulative loss incurred over the three-year period ended January 31, 2023. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of this evaluation, as of January 31, 2023, a full valuation allowance was recorded against the domestic deferred tax assets. The amount of the domestic deferred tax assets considered realizable, however, could be increased if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for future growth.
The Company has a deferred tax asset of $2.6 million for U.S. foreign tax credits after considering the impact of the repatriated foreign earnings and the one-time transition tax. The foreign tax credit deferred tax asset is fully offset with a valuation allowance. The excess foreign tax credits are subject to a ten-year carryforward and will begin to expire on January 31, 2026.
The following table summarizes uncertain tax position ("UTP") activity, excluding the related accrual for interest and penalties:
(In thousands) | | 2022 | | | 2021 | |
Balance at beginning of year | | $ | 1,611 | | | $ | 1,591 | |
Decreases in positions taken in a prior period | | | - | | | | (4 | ) |
Increases in positions taken in a current period | | | 159 | | | | 66 | |
Decreases due to lapse of statute of limitations | | | (3 | ) | | | (8 | ) |
Decreases due to settlements | | | (94 | ) | | | (34 | ) |
Balance at end of year | | $ | 1,673 | | | $ | 1,611 | |
Included in the total UTP liability were estimated accrued interest and penalties of $0.3 million and $0.2 million as of January 31, 2023 and 2022, respectively. These non-current income tax liabilities are recorded in other long-term liabilities in the consolidated balance sheet and recognized as an expense during the period. The Company's policy is to include interest and penalties in income tax expense. On January 31, 2023, the Company did not anticipate any significant adjustments to its unrecognized tax benefits within the next twelve months. Included in the balance on January 31, 2023 were amounts offset by deferred taxes (i.e. temporary differences) or amounts that could be offset by refunds in other taxing jurisdictions (i.e., corollary adjustments). Upon reversal, $0.9 million of the amount accrued on January 31, 2023 would impact the future ETR.
The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Tax years related to January 31, 2019, 2020, 2021 and 2022 are open for federal and state tax purposes. In addition, federal and state tax years January 31, 2004 through January 31, 2010, are subject to adjustment on audit, up to the amount of research tax credit generated in those years. Any NOL carryover can still be adjusted by the Internal Revenue Service in future year audits.
The Company's management periodically estimates the probable tax obligations of the Company using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for federal, foreign and state tax issues are included in other long-term liabilities on the consolidated balance sheet.
Note 8 - Retirement plans
Pension plan
The defined benefit plan (the "Pension 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 Pension 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. The Company engaged outside actuaries to calculate its obligations and costs.
During the year ended January 31, 2023, the Company’s Board of Directors approved the termination of the Pension Plan. The Company provided participants of the Pension 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 year ended January 31, 2023, the Company recognized a non-cash pre-tax settlement charge of $0.9 million, within other income/(expense) in the consolidated statements of operations in connection with the Pension Plan termination process, which represents the acceleration of deferred charges previously included within accumulated other comprehensive loss and the impact of remeasuring the Pension Plan assets and obligations at termination. In addition, the Company recorded an income tax benefit of $0.1 million for the year ended January 31, 2023, to reclassify the tax effects in accumulated other comprehensive loss upon completion of the termination of the Pension Plan. The Pension Plan termination did not require a cash outlay by the Company. Upon completion of the termination and settlement processes, the Company expects a remaining pension surplus investment balance of approximately $0.9 million.
Asset allocation
The Pension Plan holds no securities of Perma-Pipe International Holdings, Inc.; 100% of the assets are held for benefits under the Pension Plan. The fair value of the major categories of the Pension Plan's investments are presented below. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
(In thousands) | | 2022 | | | 2021 | |
Level 1 market value of plan assets | | | | | | | | |
Equity securities | | $ | - | | | $ | 4,119 | |
U.S. bond market | | | - | | | | 1,544 | |
Real estate securities | | | - | | | | 322 | |
Subtotal | | | - | | | | 5,985 | |
Level 2 significant other observable inputs | | | | | | | | |
Money market fund | | $ | 895 | | | $ | 321 | |
Subtotal | | | 895 | | | | 321 | |
Investments measured at net asset value* | | $ | 22 | | | $ | 829 | |
Total | | $ | 917 | | | $ | 7,135 | |
* Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the reconciliation of benefit obligations, plan assets and funded status of the Pension Plan.
On January 31, 2023, the Pension Plan assets were held 100% in cash.
Investment market conditions in 2022 resulted in $0.5 million loss on plan assets, computed as the actual return as presented below less the expected return, which decreased the fair value of plan assets at year end.
Reconciliation of benefit obligations, plan assets and funded status of plan (in thousands) | | 2022 | | | 2021 | |
Accumulated benefit obligations | | | | | | | | |
Vested benefits | | $ | - | | | $ | 6,448 | |
Accumulated benefits | | $ | - | | | $ | 6,448 | |
| | | | | | | | |
Change in benefit obligation | | | | | | | | |
Benefit obligation - beginning of year | | $ | 6,448 | | | $ | 7,090 | |
Interest cost | | | 141 | | | | 173 | |
Actuarial gain | | | (220 | ) | | | (511 | ) |
Benefits paid | | | (259 | ) | | | (304 | ) |
Lump sum benefits paid | | | (5,531 | ) | | | - | |
Reimbursement of premiums | | | 112 | | | | - | |
Effect of settlement/curtailment | | | (691 | ) | | | - | |
Benefit obligation - end of year | | $ | - | | | $ | 6,448 | |
| | | | | | | | |
Change in plan assets | | | | | | | | |
Fair value of plan assets - beginning of year | | $ | 7,135 | | | $ | 7,016 | |
Actual (loss) gain on plan assets | | | (540 | ) | | | 423 | |
Benefits paid | | | (259 | ) | | | (304 | ) |
Lump sum benefits paid | | | (5,531 | ) | | | - | |
Reimbursement of premiums | | | 112 | | | | - | |
Fair value of plan assets - end of year | | $ | 917 | | | $ | 7,135 | |
| | | | | | | | |
Over-funded/(unfunded) status | | $ | 917 | | | $ | 688 | |
| | | | | | | | |
Balance sheet classification | | | | | | | | |
Prepaid expenses and other current assets | | $ | 917 | | | $ | 322 | |
Other assets | | | - | | | | 2,050 | |
Deferred compensation liabilities | | | - | | | | (1,684 | ) |
Net amount recognized | | $ | 917 | | | $ | 688 | |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive loss | | | | | | | | |
Unrecognized actuarial loss | | $ | - | | | $ | 1,362 | |
Net amount recognized | | $ | - | | | $ | 1,362 | |
Weighted-average assumptions used to determine net cost and benefit obligations | | 2022 | | | 2021 | |
End of year benefit obligation discount rate | | | N/A | | | | 3.00 | % |
End of year net periodic benefit cost discount rate | | | N/A | | | | 2.50 | % |
Expected return on plan assets | | | N/A | | | | 7.50 | % |
In connection with the termination of the Pension Plan, participants elected either a lump sum payment or annuity. For those electing lump sum payouts, the benefit obligation was based on rates determined as of the beginning of the plan year, in accordance with the plan document. For those electing annuity payouts, the benefit obligation was determined by the annuity provider.
Components of net periodic benefit cost (in thousands) | | 2022 | | | 2021 | |
Interest cost | | $ | 141 | | | $ | 173 | |
Expected return on plan assets | | | - | | | | (514 | ) |
Recognized actuarial loss | | | 49 | | | | 119 | |
Net periodic benefit expense/(income) | | $ | 190 | | | $ | (222 | ) |
| | | | | | | | |
Amounts recognized in other comprehensive income (in thousands) | | | | | | |
Actuarial gain/(loss) on obligation | | $ | 220 | | | $ | 511 | |
Settlement/plan termination | | | 1,518 | | | | - | |
Actual gain/(loss) on plan assets | | | (540 | ) | | | (90 | ) |
Amounts recognized in current year | | | 49 | | | | 119 | |
Total in other comprehensive income | | $ | 1,247 | | | $ | 540 | |
Other comprehensive income is also affected by the tax effect of the valuation allowance recorded on the domestic deferred tax assets. During the year ended January 31, 2023, there was an actuarial loss of $0.3 million. This actuarial loss is comprised of an asset loss of $0.5 million and liability gain of $0.2 million. The liability gain is primarily the result of demographic gains. During the year ended January 31, 2022, there was an actuarial gain of $0.4 million. This actuarial gain is comprised of an asset loss of $0.1 million and liability gain of $0.5 million. The liability gain is the combination of: (i) a gain due to a 50 basis point increase in the discount rate, (ii) a loss resulting from an update to the mortality improvement assumption and (iii) other demographic gains.
Due to the termination of the Pension Plan there are no expected employer contributions.
401(k) plan
The domestic employees of the Company participate in the PPIH 401(k) Employee Savings Plan, which is applicable to all employees except employees covered by collective bargaining agreement benefits. The plan allows employee pretax payroll contributions from 1% to 16% of total compensation. The Company matches 100% of each participant's payroll deferral contributions up to 1% of their compensation, plus 50% of each participant's payroll deferral contributions on the next 5% of compensation.
Contributions to the 401(k) plan were $0.3 million each in the years ended January 31, 2023 and 2022.
Multi-employer plans
The Company contributes to a multi-employer plan for certain collective bargaining U.S. employees. The risks of participating in this multi-employer plan are different from a single employer plan in the following aspects:
| • | Assets contributed to the multi-employer plans by one employer may be used to provide benefits to employees of other participating employers. |
| • | If a participating employer ceases contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers. |
| • | If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability. |
The Company has assessed and determined that the multi-employer plans to which it contributes are not significant to the Company's consolidated financial statements. The Company does not expect to incur a withdrawal liability or expect to significantly increase its contribution over the remainder of the contract period. The Company made contributions to the bargaining unit supported multi-employer pension plans (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | FIP/RP Status | | 2022 | | | 2021 | | Surcharge | |
Plan Name | | EIN | | | Plan # | | Funded Zone Status | Pending/Implemented | | Contribution | | | Contribution | | Imposed | Collective Bargaining Expiration Date |
Plumbers & Pipefitters Local 572 Pension Fund | | 62-6102837 | | | 001 | | Yellow | No | | $178 | | | $172 | | No | 3/31/2025 |
Note 9 - Stock-based compensation
The Company’s 2017 Omnibus Stock Incentive Plan dated June 13, 2017, as amended, which the Company's stockholders approved in June 2017 ("2017 Plan"), expired in June 2020.
The Company has prior incentive plans under which previously granted awards remain outstanding, including the 2017 Plan, but under which no new awards may be granted. At January 31, 2023, the Company had reserved a total of 307,475 shares for grants and issuances under these incentive stock plans, which includes a reserve for issuances pursuant to unvested or unexercised prior awards.
While the 2017 Plan provided for the grant of deferred shares, non-qualified stock options, incentive stock options, restricted shares, restricted stock units, and performance-based restricted stock units intended to qualify under section 422 of the Internal Revenue Code, the Company issued only restricted shares and restricted stock units under the 2017 Plan. The 2017 Plan authorized awards to officers, employees, consultants, and independent directors.
The Company's 2021 Omnibus Stock Incentive Plan dated May 26, 2021 was approved by the Company's stockholders in May 2021 ("2021 Plan"). The 2021 Plan will expire in May 2024. The 2021 Plan authorizes awards to officers, employees, consultants and independent directors. Grants were made to the Company's employees, officers and independent directors under the 2021 Plan, as described below.
Stock 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:
(In thousands) | | 2022 | | | 2021 | |
Restricted stock based compensation expense | | $ | 1,002 | | | $ | 1,101 | |
Total stock-based compensation expense | | $ | 1,002 | | | $ | 1,101 | |
Stock options
The Company did not grant any stock options during the years ended January 31, 2023 or 2022. The following tables summarizes the Company's stock option activity:
(Shares in thousands) | | Options | | | Weighted average exercise price | | | Weighted average remaining contractual term | | | Aggregate intrinsic value | |
Outstanding on January 31, 2021 | | | 107 | | | $ | 9.24 | | | | 2.5 | | | $ | 5 | |
| | | | | | | | | | | | | | | | |
Exercised | | | (7 | ) | | | 6.16 | | | | | | | | | |
Expired or forfeited | | | (33 | ) | | | 9.36 | | | | | | | | | |
Outstanding on January 31, 2022 | | | 67 | | | | 9.51 | | | | 1.7 | | | | 63 | |
| | | | | | | | | | | | | | | | |
Options exercisable on January 31, 2022 | | | 67 | | | $ | 9.51 | | | | 1.7 | | | | 63 | |
| | | | | | | | | | | | | | | | |
Exercised | | | (16 | ) | | | 6.66 | | | | | | | | | |
Expired or forfeited | | | (11 | ) | | | 10.85 | | | | | | | | | |
Outstanding on January 31, 2023 | | | 40 | | | | 10.85 | | | | 1.1 | | | | 19 | |
| | | | | | | | | | | | | | | | |
Options exercisable on January 31, 2023 | | | 40 | | | $ | 10.85 | | | | 1.1 | | | $ | 19 | |
There was no vesting, expiration or forfeiture of previously unvested stock options during the year ended January 31, 2023. As of January 31, 2023, there were no remaining unvested stock options outstanding, and therefore no unrecognized compensation expense related to unvested stock options.
Deferred stock
As part of their compensation, in previous years the Company granted deferred stock units to each non-employee director, equal to the result of dividing the award amount by the fair market value of the common stock on the date of grant. The stock vests on the date of grant; however, it is distributed to the directors only upon their separation from service. During the year ended January 31, 2023, 34,873 deferred stock units were distributed. There were approximately 62,926 and 97,799 deferred stock units outstanding included in the restricted stock activity shown below as of January 31, 2023 and 2022, respectively.
Restricted stock
The Company has granted restricted stock to executive officers, independent directors, and employees. The restricted stock vests ratably over one to four years. The Company calculates restricted stock compensation expense based on the grant date fair value and recognizes expense on a straight-line basis over the vesting period. The following table summarizes restricted stock activity for the years ended January 31, 2023 and 2022, respectively:
(Shares in thousands) | | Restricted shares | | | Weighted average price | | | Aggregate intrinsic value | |
Outstanding on January 31, 2021 | | | 372 | | | $ | 7.62 | | | $ | 2,843 | |
Granted | | | 137 | | | | 7.14 | | | | | |
Issued | | | (113 | ) | | | | | | | | |
Forfeited | | | (43 | ) | | | 7.47 | | | | | |
Outstanding on January 31, 2022 | | | 353 | | | $ | 7.48 | | | $ | 2,652 | |
Granted | | | 103 | | | | 10.96 | | | | | |
Issued | | | (147 | ) | | | | | | | | |
Forfeited | | | (42 | ) | | | 6.87 | | | | | |
Outstanding on January 31, 2023 | | | 267 | | | $ | 8.55 | | | $ | 2,286 | |
The fair value of vested restricted stock was $1.2 million and $1.1 million in the year ended January 31, 2023 and 2022 respectively. As of January 31, 2023, there was $1.1 million of unrecognized compensation cost related to unvested restricted stock granted under the plans. That cost is expected to be recognized over the weighted-average period of 2.0 years.
Note 10 - Interest expense, net
(In thousands) | | 2022 | | | 2021 | |
Interest expense | | | 2,243 | | | | 918 | |
Interest income | | | 124 | | | | 90 | |
Interest expense, net | | | 2,119 | | | | 828 | |
Note 11 - Treasury stock
On December 7, 2022 the Board of Directors authorized the use of $1.0 million remaining under the share repurchase program previously approved on October 4, 2021 that expired on October 3, 2022. Share repurchases may be executed through open market or in privately negotiated transactions over the course of the 12 months following the Board of Directors authorization. The repurchase program approved on October 4, 2021 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, depending upon current market conditions and other factors. In total, the Company used $2.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock under the program.
On July 26, 2022, the Company retired 239,168 shares of 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 a decrease to retained earnings 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 2021 and 2022 (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 | |
December 1, 2022 - December 31, 2022 | | | 3 | | | | 8.61 | | | | 3 | | | | 939 | |
Total | | | 242 | | | | | | | | 242 | | | | | |