Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), 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 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, those under the headings Cautionary Statements Regarding Forward Looking Information and Item 1A. Risk Factors.
The analysis presented below and discussed in more detail throughout this MD&A was organized to provide instructive information for better understanding the Company's results of operations, financial condition and cash flows. However, this MD&A should be read in conjunction with the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, including the notes thereto and the risk factors contained herein. The Company's fiscal year ends on January 31. Years, results and balances described as 2023 and 2022 are for the fiscal years ended January 31, 2024 and 2023 , respectively.
The Company is engaged in the manufacture and sale of products in one reportable segment: Piping Systems. Since the Company's revenues are significantly dependent upon discrete projects, the Company's operating results in any reporting period could be negatively impacted as a result of variations in the level of the Company's discrete project orders or delays in the timing of the specific project phases.
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Results of Operations
Consolidated Results of Operations
(In thousands, except per share data, or unless otherwise specified)
Year Ended January 31,
2024
2023
Change favorable (unfavorable)
Amount
Percent of Net Sales
Amount
Percent of Net Sales
Amount
Net sales
$
150,668
$
142,569
$
8,099
Gross profit
41,458
28
%
38,301
27
%
3,157
General and administrative expenses
22,591
15
%
21,994
15
%
(597
)
Selling expense
5,508
4
%
5,163
4
%
(345
)
Interest expense
2,266
2,119
(147
)
Other (expense) income
(1,202
)
533
(1,735
)
Income before income tax
9,891
9,558
333
Income tax (benefit) expense
(3,320
)
3,613
6,933
Net income
13,211
5,945
7,266
Less: Net income attributable to non-controlling interest
2,740
-
2,740
Net income attributable to common stock
10,471
5,945
4,526
Year ended January 31, 2024 Compared to year ended January 31, 2023
Net sales
Net sales were $ 150.7 million and $ 142.6 million in the years ended January 31, 2024 and 2023 , respectively. The increase of $ 8.1 million was primarily a result of higher sales volumes in Saudi Arabia.
Gross profit
Gross profit was $ 41.5 million, or 28% of net sales and $ 38.3 million, or 27% of net sales, in the years ended January 31, 2024 and 2023 , respectively. The increase of $ 3.2 million was driven primarily by higher sales volumes and improved gross margins in Saudi Arabia.
General and administrative expense
General and administrative expenses were $ 22.6 million and $ 22.0 million in the years ended January 31, 2024 and 2023 , respectively. The increase of $ 0.6 million was primarily related to higher compensation costs.
Selling expenses
Selling expenses were $ 5.5 million and $ 5.2 million in the years ended January 31, 2024 and 2023 , respectively. The increase of $ 0.3 million was driven by higher payroll expenses.
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Interest expense
Interest expense remained consistent and was $ 2.3 million and $ 2.1 million in the years ended January 31, 2024 and 2023 , respectively. The increase of $ 0.2 million was related to increased borrowings and, to a lesser extent, higher interest rates.
Other expense
Other expense was $ 1.2 million, as compared to other income of $ 0.5 million in the years ended January 31, 2024 and 2023 , respectively. The current year amount includes certain one-time adjustments, including a charge associated with the termination of the Company's pension plan and the settlement of a legal proceeding. The prior year amount includes income from the release of the Company's liability for a past project and insurance recovery income, partially offset by a non-cash pre-tax settlement charge resulting from the termination of the Company's pension plan.
Income taxes
The Company's worldwide effective tax rates ("ETR") were (33.6%) and 37.8% in the years ended January 31, 2024 and 2023 , respectively. The change in ETR was largely due to a partial release of the U.S. valuation allowance and changes in the mix of income and loss in various tax jurisdictions. For further information, see Note 7 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income attributable to common stock
Net income attributable to common stock was $10.5 million and $5.9 million in the years ended January 31, 2024 and 2023 , respectively. The increase in net income was a result of the changes discussed above, less amounts attributable to non-controlling interest.
Liquidity and capital resources
Cash and cash equivalents were $5.8 million as of January 31, 2024 and January 31, 2023 , respectively. On January 31, 2024 , approximately $ 0.1 million was held in the United States, and $ 5.7 million was held by the Company's foreign subsidiaries. The Company's working capital was $ 41.1 million on January 31, 2024 compared to $ 41.9 million on January 31, 2023 . As o f January 31, 2024 , the Company had $ 4.0 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $ 15.4 million of borrowing capacity under its foreign revolving credit agreements. The Company had $ 5.5 million borrowed under the Renewed Senior Credit Facility and $ 6.4 million borrowed under its foreign revolving credit agreements at January 31, 2024 .
Net cash from operating activities in the years ended January 31, 2024 and 2023 was $ 14.7 million and $ (1.2) million, respectively. The current year increase of $ 15.9 million was due primarily to a rise customer deposits and accounts payable, partially offset by increases in accounts receivable, unbilled accounts receivable, and prepaid expenses and other current assets, as compared to the prior year.
Net cash from investing activities in the years ended January 31, 2024 and 2023 was $ 11.1 million and $ 6.4 million, respectively. The increase of $ 4.7 million was primarily due to investments capital assets in the Middle East and Canada during the period.
Net cash from financing activities in the years ended January 31, 2024 and 2023 was $ (3.3) million and $ 4.5 million, respectively. The decrease of $7.8 million during the year ended January 31, 2024 consisted of using the remaining $1.0 million authorized as part of the Company's share repurchase program to reacquire its outstanding shares of common stock, as compared to $0.1 million during the year ended January 31, 2023. Additionally, a net repayment was made from borrowings under the Company's credit facilities of approximately $6.8 million, as compared to net proceeds received from borrowings of approximately $5.5 million during the year ended January 31, 2023 . Further, d ebt totaled $ 25.7 million and $ 24.4 million as of January 31, 2024 and 2023 , respectively. For additional information, see Note 5 - Debt, in the Notes to Consolidated Financial Statements.
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The Company believes it will have the ability to satisfy all working capital needs and any planned capital expenditures for the twelve months following the issuance of the Consolidated Financial Statements, based on its existing cash on hand, cash flows from operations, and available credit facilities.
There was no restricted cash held in the United States on January 31, 2024 or January 31, 2023 . Restricted cash held by foreign subsidiaries was $ 1.4 million and $ 1.0 million as of January 31, 2024 and 2023 , respectively. Restricted cash held by foreign subsidiaries related to fixed deposits that also serve as security deposits and guarantees.
The following table summarizes the Company's estimated contractual obligations on January 31, 2024
Year Ending January 31,
Contractual obligations
Total
2025
2026
2027
2028
2029
Thereafter
Revolving line - North America (1)
$
5,519
$
5,519
$
-
$
-
$
-
$
-
$
-
Mortgage note (2)
4,512
239
239
239
239
239
3,317
Revolving lines - foreign (3)
3,632
3,632
-
-
-
-
-
Long-term finance obligation (4)
9,203
175
210
247
287
329
7,955
Subtotal
22,866
9,565
449
486
526
568
11,272
Finance lease obligations
113
25
34
37
17
-
-
Operating lease obligations (5)
15,709
1,871
1,714
1,701
1,656
1,286
7,481
Uncertain tax position obligations (6)
1,112
-
-
-
-
-
1,112
Loan payable to GIG (7)
2,753
-
-
-
-
-
2,753
Total
$
42,553
$
11,461
$
2,197
$
2,224
$
2,199
$
1,854
$
22,618
(1)
Interest obligations exclude floating rate interest on debt payable under the North American revolving line of credit. Based on the amount of such debt on January 31, 2024 , and the weighted average interest rate of 10.0% on that debt, such interest was being incurred at an annual rate of approximately $ 0.6 million.
(2)
Scheduled maturities, excluding interest.
(3)
Scheduled maturities of foreign revolver line, excluding interest.
(4)
This schedule represents the cash payments to be made under the lease agreement for the land and buildings sold by the Company in Lebanon, Tennessee and leased back from the purchaser in April 2021. These amounts differ from the liabilities presented as debt in the consolidated balance sheets as the debt amount represents future payments discounted to the present date. Refer to Note 5 - Debt, in the Notes to the Consolidated Financial Statements for further discussion of the transaction.
(5)
Minimum contractual amounts, assuming no changes in variable expenses.
(6)
Refer to Note 7 - Income taxes, in the Notes to Consolidated Financial Statements for a description of the uncertain tax position obligations.
(7)
Refer to Note 12 - Non-controlling interest, in the Notes to Consolidated Financial Statements for further discussion regarding the loan payable to Gulf Insulation Group ("GIG").
Financing
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, SOFR 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 SOFR rate borrowings is the SOFR 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, as well as an additional SOFR adjustment ranging from 0.10% to 0.25%, based on the term of the interest 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.
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The Renewed Senior Credit Facility also contains financial covenants requiring the North American Loan Parties to achieve a ratio of its EBITDA (as defined in the Renewed Senior Credit Facility) 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, 2024 , the calculated ratio was greater than 1.10 to 1.00. In order to cure any future breach of these covenants 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 compliance on a pro forma basis. The Company was in compliance with respect to these covenants as of January 31, 2024 .
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, 2024
, the Company had borrowed an aggregate of $
5.5
million at a rate of
10.0%
and had $
4.0
million available under the Renewed Senior Credit Facility. As of
January 31, 2023
, the Company had borrowed an aggregate of $
4.4
million and had $
9.9
million available under the Renewed Senior Credit Facility.
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 further described below:
United Arab Emirates
The Company has a revolving line for
8.0
million U.A.E. Dirhams (approximately $
2.2
million at
January 31, 2024
) from a bank in the U.A.E. as of January 31, 2024, the facility has an interest rate of approximately
9.00%
and is set to expire in May 2024. The Company had borrowed an aggregate of $0.2 million and $0.6 million as of January 31, 2024 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of January 31, 2024 and January 31, 2023, the Company had unused borrowing availability of approximately $1.9 million and $1.6 million, respectively.
The Company has a revolving line for
20.5
million U.A.E. Dirhams (approximately $
5.6
million at
January 31, 2024
) from a bank in the U.A.E. as of January 31, 2024, the facility has an interest rate of approximately
9.00%
and is set to expire in May 2024. The Company had borrowed an aggregate of $0.1 million and $1.0 million as of January 31, 2024 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of January 31, 2024 and January 31, 2023, the Company had unused borrowing availability of approximately $1.0 million and $1.8 million, respectively.
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In June 2021, and as renewed or amended subsequently thereafter, 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 $
3.2 million at
January 31, 2024). 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. As of
January 31, 2024, the facility has an interest rate of approximately
20.75% and expired in August 2023. This credit arrangement was subsequently renewed in November 2023 with substantially the same terms and conditions and expires in November 2024. The Company had borrowed an aggregate of $1.4 million and $3.1 million
as of January 31, 2024 and
January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of
January 31, 2024 and January 31, 2023, the Company had unused borrowing capacity of $3.2 million and $2.0 million, respectively.
In December 2021, the Company entered into a credit arrangement for project financing with a bank of Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company received collections, the facility has decreased to a current amount of
2.1 million Egyptian Pounds (approximately $
0.1 million at
January 31, 2024). 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
20.75% and, as of November 2022, is no longer available for borrowings by the Company. The facility will expire in connection with final customer balance collections and the completion of the project. The Company had approximately $
0.1 million and $
0.4 million outstanding
as of January 31, 2024 and
January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets.
Saudi Arabia
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
37.0
million Saudi Riyal (approximately $
9.9
million at
January 31, 2024
.) 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, and as of January 31, 2024, the facility has an interest rate of approximately
9.50%
and is set to expire in May 2024. The Company had borrowed an aggregate of $3.2 million and $1.1 million as of January 31, 2024 and January 31, 2023, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The unused borrowing availability attributable to this credit arrangement at
January 31, 2024 and January 31, 2023, was $6.1 million and $2.3 million, respectively.
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. The amount of foreign subsidiary debt guaranteed by the Company was approximately $0.1 at January 31, 2024
and January 31, 2023, respectively.
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, 2024
, with the exception of those arrangements that may have expired and have not yet been renewed. Although certain of the arrangements may 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. As of
January 31, 2024
, interest rates were based on (i) 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; (ii) either the Central Bank of Egypt corporate loan rate plus 1.5% to 3.5% per annum or the stated interest rate in the agreements for the Egypt credit arrangements; and (iii) the Saudi Inter Bank Offered Rate plus 3.5% for the Saudi Arabia credit arrangement. Based on these rates, as of January 31, 2024, the Company's interest rates ranged from
8.00%
to
20.75%
, with a weighted average rate of
10.71%
, and the Company had facility limits totaling $
24.5
million under these credit arrangements. As of
January 31, 2024
, $
8.3
million of availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, the Company had borrowed approximately $6.4 million and had an additional $15.4 million of remaining borrowing capacity available under the foreign revolving credit arrangements. The foreign revolving line balances were included as current maturities of long-term debt in the Company's consolidated balance sheets as of January 31, 2024 and January 31, 2023, respectively.
In June 2023, the Company assumed a promissory note of approximately $2.8 million in connection with the formation of the joint venture with GIG. In accordance with the promissory note, all principal is due and payable on the maturity date of April 9, 2026, with the option to prepay, in whole or in part, at any time prior to the maturity date, without premium or penalty.
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, 2024 , the remaining balance on the mortgage in Canada is approximately 6.1 million Canadian Dollars ("CAD") (approximately $ 4.5 million at January 31, 2024 ). The interest rate is variable, and was 10.19% at January 31, 2024 . The principal balance is included as a component of long-term debt, less current maturities in the Company's consolidated balance sheets and is presented net of issuance costs of $0.1 million as of January 31, 2024 and January 31, 2023, respectively.
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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 fifteen-year lease agreement (the “Lease Agreement”), whereby the Company is leasing back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.
As of January 31, 2024 and 2023, the Company had a net book value relating to this asset of $1.9 million and $2.1 million, respectively.
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 8.0% 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 $
0.2
million is recognized in current maturities of long-term debt and the long-term portion of $
9.0
million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of
January 31, 2024
. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
Accounts receivable
In 2015, the Company completed a project in the Middle East with billings in the aggregate amount of approximately $41.9 million. The system has not yet been commissioned by the customer. Nevertheless, the Company has settled approximately $ 39.7 million as of January 31, 2024 , with a remaining balance due in the amount of $ 2.2 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, $ 1.4 million is classified in a long-term asset account.
The Company has been actively involved in ongoing efforts to collect the outstanding amount. The Company continues to engage with the customer to ensure full payment of open balances, and at various times throughout 2023 and in June 2022, the Company received a partial payment to settle $0.6 million and $0.9 million of the customer's outstanding balances, respectively. Further, the Company has been engaged by the customer to perform additional work in
2024
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, 2024
. 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.
Stock repurchase plan
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. 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. During the 12 months ended January 31, 2024, the Company used the remaining $1.0 million of the $3.0 million authorized to repurchase its outstanding shares of common stock.
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Critical accounting estimates and policies
The Company's significant accounting policies are discussed in the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The application of certain of these policies requires significant judgments or a historical based estimation process that can affect the results of operations and financial position of the Company, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts ultimately differ from previous estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known.
Revenue recognition. 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, in the Notes to Consolidated Financial Statements, for further information relating to input and output accounting methods.
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 for realizability at each reporting period. The Company is now recognizing a tax benefit on losses in the United States after removal of a partial valuation allowance applied against its deferred tax assets.
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, in the Notes to Consolidated Financial Statements.
New accounting pronouncements. See Recent accounting pronouncements in Note 2 - Significant accounting policies, in the Notes to Consolidated Financial Statements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - Not applicable.