PERMA-PIPE INTERNATIONAL HOLDINGS, INC. The statements contained under the caption MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K. This MD&A should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in the MD&A have been rounded to the nearest percentage point, and may not exactly correspond to the comparative data presented. COVID-19 Receding Impacts The Company's results of operations, financial condition, liquidity and cash flow in early 2021 were materially adversely affected by the COVID-19 pandemic. During 2021, the Company experienced improved results as the adverse impact of the COVID-19 pandemic diminished and delayed projects were turned to production. The Company is not currently experiencing any significant negative impacts as a result of the COVID-19 pandemic. Ukraine War The war inUkraine and resulting Russian oil and gas boycotts have added to the surge in oil prices which has impacted some of the Company's material and freight costs. However, the Company has not experienced any direct impact from the disruption in region. The Company does not source materials from this region, nor does it serve the market in any material nature. Oil and Gas Market Increases in oil prices helped to improve demand for the Company's products as reflected in the Company's results during the three months endedApril 30, 2022 as compared to the same period in 2021. In particular, the Company's activity level inCanada has increased significantly due to the rise in energy prices.
Supply Chain Constraints and Inflationary Impacts
Due to the current inflationary environment, raw material supply shortages and transportation delays, the Company routinely experiences delays and increased prices for raw materials used in the Company's production processes. To mitigate these impacts, the Company has implemented several strategies, including purchasing from alternative suppliers and planning for material purchases further in advance to ensure the Company has materials when needed. The Company has also updated its pricing to customers to offset the impacts of the raw material price increases. These impacts are expected to continue throughout 2022. Liquidity Position OnApril 14, 2021 , the Company entered into a purchase and sale agreement to sell its land and buildings inLebanon, Tennessee (the "Property"), and subsequently enter into a fifteen-year lease agreement to lease back the Property. The transaction generated net cash proceeds of$9.1 million , following the release of the escrowed amount of$0.4 million inJune 2021 . The transaction provided significant liquidity for the Company, which used the proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. The Company will lease back the Property at an annual rental rate of approximately$0.8 million , subject to annual rent increases of 2.0%. The Company enhanced its liquidity position onSeptember 17, 2021 when it executed an extension of the Credit Agreement with PNC, providing for a new five-year$18 million senior secured revolving credit facility, subject to a borrowing base including various reserves (the "Renewed Senior Credit Facility"). See further discussion of the Company's liquidity position as ofApril 30, 2022 in "Liquidity and capital resources" below. 19
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Table of Contents RESULTS OF OPERATIONS The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on large discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods. ($ in thousands)
Three Months Ended
Change
2022 2021 favorable/(unfavorable)
Percent of Percent of
Amount Net Sales Amount Net Sales Amount
Net sales $ 31,222 $ 24,423 $ 6,799
Gross profit 7,049 23 % 4,505 18 % 2,544
General and administrative expenses 5,650 18 % 4,404 18 % (1,246 )
Selling expense 1,239 4 % 1,042 4 % (197 )
Interest expense, net 368 178 (190 )
Other income, net 49 441 (392 )
Loss from operations before income taxes (159 ) (678 ) 519
Income tax expense 726 165 (561 )
Net loss (885 ) (843 ) (42 )
Three months ended
Net sales: Net sales were$31.2 million in the current quarter, an increase of$6.8 million , or 28%, from$24.4 million in the prior year quarter. The increase was a result of increased sales volumes, partly due to recovery from the effects of the COVID-19 pandemic. 20
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Table of Contents Gross profit:
Gross profit increased to
General and administrative expenses:
General and administrative expenses increased$1.2 million , or 28%, from$4.4 million in the prior year quarter to$5.7 million in the current quarter. Approximately$0.9 million of this increase was the result of increased incentive compensation. This amount was based on 2021 actual payouts as compared to estimated amounts previously accrued in addition to accruals made for 2022 forecasted results as compared to the prior year quarter, where no incentive compensation was recorded. The remainder of the increase was due to additions to headcount in support of the Company's business growth. Selling expenses:
Selling expenses were relatively consistent, increasing slightly to
Interest expense, net: Net interest expense increased to$0.4 million in the current quarter from$0.2 million in the prior year quarter. This increase was related primarily to the sale leaseback transaction for our operating facility inTennessee entered into inApril 2021 . Other income, net: Other income, net decreased to an income of less than$0.1 million in the current quarter, compared to approximately$0.4 million in the prior year quarter. In the prior year quarter, the Company received grants from the Canadian government under the Canadian Emergency Wage Subsidy ("CEWS") and Canadian Emergency Rent Subsidy ("CERS") programs. The Company was approved for and received approximately$0.3 million and$0.1 million in grants under the CEWS and CERS programs, respectively, during the prior year quarter. Grants to the Company under both programs ended in the second quarter of 2021.
Loss from operations before income taxes:
Loss from operations before income taxes decreased by$0.5 million to a loss of$(0.2) million in the current quarter from a loss of$(0.7) million in the prior year quarter. The improvement was a result of increased sales volumes and margins as described above. Income tax expense: The Company's worldwide effective tax rates ("ETR") were (455.9%) and (24.3%) in the current quarter and the prior year quarter, respectively. The change in the ETR from the prior year quarter to the current year quarter is largely due to changes in the mix of income and loss in various jurisdictions. The Company expects that future distributions from foreign subsidiaries will not be subject to incrementalU.S. federal tax as they will either be remittances of previously taxed earnings and profits or eligible for a full dividends-received deduction. Current and future earnings in the Company's subsidiaries inCanada andEgypt are not permanently reinvested. The earnings from these subsidiaries are subject to tax in their local jurisdiction, and withholding taxes in these jurisdictions are considered. As such, the Company has accrued a liability of$0.4 million as ofApril 30, 2022 related to these taxes.
For further information, see Note 5 - Income taxes, in the Notes to Consolidated Financial Statements.
Net loss:
The resulting net loss of
Liquidity and capital resources
Cash and cash equivalents as ofApril 30, 2022 were$6.4 million compared to$8.2 million onJanuary 31, 2022 . OnApril 30, 2022 ,$0.6 million was held inthe United States , and$5.8 million was held at the Company's foreign subsidiaries. The Company's working capital was$38.7 million onApril 30, 2022 compared to$40.0 million onJanuary 31, 2022 . Of the working capital components, accounts receivable decreased by$5.6 million and cash and cash equivalents decreased by$1.8 million as the result of the movements discussed below. As ofApril 30, 2022 , the Company had$4.9 million of borrowing capacity under its Senior Credit Facility inNorth America and$6.5 million of borrowing capacity under its foreign revolving credit agreements. The Company had$5.2 million borrowed under its Senior Credit Facility and$6.1 million borrowed under its foreign revolving credit agreements atApril 30, 2022 . 21
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Net cash used in operating activities in the three months endedApril 30, 2022 and in the prior year period was$7.1 million and$2.4 million , respectively. This decrease of$4.7 million was due primarily to an increases in costs and estimated earnings in excess of billings on uncompleted contracts and a decrease in accounts receivable, partially offset by an increase in accounts payable and changes in other assets and liabilities in the current period compared to the prior year period.
Net cash used in investing activities in the three months ended
Net cash provided by financing activities in the three months endedApril 30, 2022 and in the prior year period was$5.1 million and$3.9 million , respectively. The main source of cash from financing activities during the period was net proceeds from borrowings of approximately$5.3 million under the Senior Credit Facility, as compared to the prior year period, where net repayments were approximately$4.1 million . The increase in cash provided by financing activities was offset by net proceeds of$9.1 million as a result of the sale and leaseback of the Company's land and buildings inLebanon, Tennessee during the prior year period. Debt totaled$26.3 million and$21.9 million as ofApril 30, 2022 andJanuary 31, 2022 , respectively. For additional information, see Note 9 - Debt, in the Notes to Consolidated Financial Statements.Treasury stock. There were no purchases of shares of the Company's common stock made by or on behalf of the Company during the three months endedApril 30, 2022 . OnOctober 4, 2021 , the Company's Board of Directors approved a share repurchase program, which authorizes the Company to use up to$3.0 million for the purchase of its outstanding shares of common stock. Stock repurchases are permitted to be executed through open market or privately negotiated transactions over the course of 12 months, depending upon current market conditions and other factors. As ofApril 30, 2022 , the Company has used$2.0 million of the$3.0 million authorized to repurchase its outstanding shares of common stock. Revolving lines -North America . OnSeptember 20, 2018 , the Company and certain of itsU.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") withPNC 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"). OnSeptember 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 byPerma-Pipe Canada, Inc. Each of the North American Loan Parties other thanPerma-Pipe Canada, Inc. is a borrower under the Renewed Senior Credit Facility (collectively, the "Borrowers"). The Borrowers will use borrowings under the Renewed Senior Credit Facility (i) to fund future capital expenditures; (ii) to fund ongoing working capital needs; and (iii) for other corporate purposes, including potentially additional stock repurchases. Borrowings under the Renewed Senior Credit Facility bears interest at a rate equal to an alternate base rate, LIBOR or a LIBOR successor rate index, plus, in each case, an applicable margin. The applicable margin will be based on an FCCR range. Interest on alternate base rate borrowings will be the alternate base rate as defined in the Renewed Senior Credit Facility plus an applicable margin ranging from 1.00% to 1.50%, based on the FCCR in the most recently reported period. Interest on LIBOR or LIBOR successor rate borrowings will be 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 will 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 will be secured by substantially all of the North American Loan Parties' assets. The Renewed Senior Credit Facility will mature onSeptember 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 financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA to the sum of scheduled cash principal payments on indebtedness for borrowed money and interest payments on the advances under the Renewed Senior Credit Facility to be not less than 1.10 to 1.00 if for any five consecutive days the undrawn availability is less than$3.0 million or any day in which the undrawn availability is less than$2.0 million . As ofApril 30, 2022 , the calculated ratio was greater than 1.10 to 1.00. In order to cure any future breach of the FCCR 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 covenant. The Company was in compliance with these covenants as ofApril 30, 2022 . 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. 22
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As of
Revolving lines - foreign. The Company also has credit arrangements used by its
Middle Eastern subsidiaries in the
The Company has a revolving line for 8.0 millionU.A.E. Dirhams (approximately$2.2 million atApril 30, 2022 ) from a bank in theU.A.E. The facility has an interest rate of approximately 4.54% and was originally set to expire inNovember 2020 , however, the expiration was extended due to the COVID-19 pandemic. The Company has submitted final documentation to complete the renewal process, and is awaiting official notification from the bank of the renewal completion. This process is expected to be completed inJune 2022 .
The Company has a second revolving line for 17.5 million
The Company has a third credit agreement for project financing with a bank in theU.A.E. for 3.0 millionU.A.E. Dirhams (approximately$0.8 million atApril 30, 2022 ). This credit arrangement is in the form of project financing at rates competitive in theU.A.E. The line is secured by the contract for a project being financed by the Company'sU.A.E. subsidiary. The facility has an interest rate of approximately 4.50% and is expected to expire inJune 2023 in connection with the completion of the project. These credit arrangements are in the form of overdraft facilities and project financing at rates competitive in the countries in which the Company operates. The lines are secured by certain equipment, certain assets (such as accounts receivable and inventory), and a guarantee by the Company. Some credit arrangement covenants require a minimum tangible net worth to be maintained, including maintaining certain levels of intercompany subordinated debt. In addition, some of the revolving credit facilities restrict payment of dividends or undertaking of additional debt. InJune 2021 , the Company's Egyptian subsidiary entered into a credit arrangement with a bank inEgypt for a revolving line of100.0 million Egyptian Pounds (approximately$5.4 million atApril 30, 2022 ). This credit arrangement is in the form of project financing at rates competitive inEgypt . The line was secured by certain assets (such as accounts receivable) of the Company's Egyptian subsidiary. Among other covenants, the credit arrangement established a maximum leverage ratio allowable and restricted the Company's Egyptian subsidiary's ability to undertake any additional debt. The facility has an interest rate of approximately 8.00% and is set to expire inAugust 2022 . InDecember 2021 , the Company entered into a credit arrangement for project financing with a bank inEgypt for28.2 million Egyptian Pounds (approximately$1.5 million atApril 30, 2022 ). This credit arrangement is in the form of project financing at rates competitive inEgypt . The line is secured by the contract for a project being financed by the Company's Egyptian subsidiary. The facility has an interest rate of approximately 8.00% and is expected to expire inJune 2022 in connection with the completion of the project. The Company's credit arrangements used by its Middle Eastern subsidiaries renew on an annual basis. The Company guarantees only a portion of the subsidiaries' debt, including foreign debt. As ofApril 30, 2022 , the amount of foreign subsidiary debt guaranteed by the Company was approximately$0.1 million . The Company was in compliance with the covenants under the credit arrangements in theU.A.E. andEgypt as ofApril 30, 2022 . OnApril 30, 2022 , interest rates were based on the Emirates Inter Bank Offered Rate plus 3.0% to 3.5% per annum for theU.A.E. credit arrangements, two of which have a minimum interest rate of 4.5% per annum, and based on the stated interest rate in the agreement for theEgypt credit arrangement. Based on these base rates, as ofApril 30, 2022 , the Company's interest rates ranged from 4.50% to 8.0%, with a weighted average rate of 7.63%, and the Company had facility limits totaling$14.9 million under these credit arrangements. As ofApril 30, 2022 ,$2.3 million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as ofApril 30, 2022 , the Company had borrowed$6.1 million , and had an additional$6.5 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances as ofApril 30, 2022 andJanuary 31, 2022 , were included as current maturities of long-term debt in the Company's consolidated balance sheets. 23
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Finance obligation - buildings and land. OnApril 14, 2021 , the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings inLebanon, Tennessee (the "Property") for a purchase price of$10.4 million . The transaction generated net cash proceeds of$9.1 million , following the release of the escrowed amount inJune 2021 discussed below. The Company used the proceeds to repay its borrowings under the Senior Credit Facility, for strategic investments, and for general corporate needs. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the "Lease Agreement"), whereby the Company will lease back the Property at an annual rental rate of approximately$0.8 million , subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option. Concurrently with the sale of the Property, the Company paid off the approximately$0.9 million remaining on the mortgage note on the Property to its lender. At closing,$0.4 million was placed in a short-term escrow account to cover certain post-closing contingencies that may arise. The contingencies were resolved inMay 2021 and the Company received the escrowed funds inJune 2021 . In accordance with ASC Topic 842, "Leases", this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially all of the fair value of the underlying asset. The Company utilized an incremental borrowing rate of 8.0% to determine the finance obligation to record for the amounts received and will continue to depreciate the assets. The current portion of the finance obligation of$0.1 million is recognized in current maturities of long-term debt and the long-term portion of$9.3 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as ofJanuary 31, 2022 . The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
Prior additional liquidity from the CEWS and CERS Programs
Beginning inApril 2020 , the Company's subsidiary,Perma-Pipe Canada, Ltd. ("PPCA"), applied for relief in the form of grants from the Canadian government under the CEWS program. Based on the program rules, the grants are applied for each month and are granted based on the amount of eligible employee expenses incurred over the previous month. Beginning inOctober 2020 , PPCA also applied for grants under the CERS program. PPCA was approved for and received approximately$0.6 million and$0.1 million in grants under the CEWS and CERS programs, respectively, during the year endedJanuary 31, 2022 . Grants to the Company under both programs ended in the second quarter of 2021. The proceeds from CEWS and CERS are recognized in other income, net in the consolidated statements of operations.
Accounts receivable:
In 2013, the Company started a project in theMiddle East as a sub-contractor, with billings in the aggregate amount of approximately$41.9 million . The Company completed all of its deliverables in 2015 under the related contract, but the system has not yet been commissioned by the customer. Nevertheless, the Company has collected approximately$38.3 million as ofApril 30, 2022 , with a remaining balance due in the amount of$3.6 million . Included in this balance is an amount of$3.4 million , which pertains to retention clauses within the agreements of the Company's customer, and which become payable by the customer when this project is fully tested and commissioned. In the absence of a firm date for the final commissioning of the project, and due to the long-term nature of this receivable,$1.4 million of this retention amount was reclassified to a long-term receivable account. The Company has been engaged in ongoing active efforts to collect the outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances, and duringApril 2022 received an updated acknowledgment of the outstanding balances and assurances of payment from the customer. Further, the Company has been engaged by the customer to perform additional work in 2022 under customary trade terms that supports the continued cooperation between the Company and the customer. As a result, the Company did not reserve any allowance against this amount as ofApril 30, 2022 . However, if the Company's efforts to collect on this account are not successful, the Company may recognize an allowance for all, or substantially all, of any such then uncollected amounts.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year endedJanuary 31, 2022 contained in the Company's latest Annual Report on Form 10-K. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been discussed in the Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The application of critical accounting policies may require management to make assumptions, judgments and estimates about the amounts reflected in the Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments, and different amounts could be reported using different assumptions and estimates. 24
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