Item 2. Management’s Discussion and Analysis
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations ( " MD&A " )
The statements contained in this MD&A and other information contained elsewhere in this quarterly report, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "continue," "remains," "intend," "aim," "should," "prospects," "could," "future," "potential," "believes," "plans," "likely" and "probable" or the negative thereof or other variations thereon or comparable terminology, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbors created thereby. These statements should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. Such risks and uncertainties could cause actual results to differ materially from those projected as a result of many factors, including, but not limited to, those under the heading Item 1A. Risk Factors included in the Company's latest Annual Report on Form 10-K. The Company's fiscal year ends on January 31. Years and balances described as 2024 and 2023 are for the fiscal year ending January 31, 2025 and the fiscal year ended January 31, 2024, respectively.
This MD&A should be read in conjunction with the Company’s consolidated financial statements, including the notes thereto, contained elsewhere in this report. Percentages set forth below in this MD&A have been rounded to the nearest percentage point.
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CONSOLIDATED RESULTS OF OPERATIONS
(In thousands, except per share data, or unless otherwise specified)
(Unaudited)
The Company is engaged in the manufacture and sale of products in one reportable segment. Since the Company focuses on discrete projects, operating results can be significantly impacted as a result of large variations in the level of project activity in reporting periods.
Three Months Ended July 31,
Six Months Ended July 31,
2024
2023
Change favorable (unfavorable)
2024
2023
Change favorable (unfavorable)
Amount
Percent of Net Sales
Amount
Percent of Net Sales
Amount
Amount
Percent of Net Sales
Amount
Percent of Net Sales
Amount
Net sales
$
37,513
$
35,141
$
2,372
$
71,834
$
64,798
$
7,036
Gross profit
13,474
36
%
9,464
27
%
4,010
23,991
33
%
16,239
25
%
7,752
General and administrative expenses
5,979
16
%
5,283
15
%
(696
)
12,128
17
%
10,742
17
%
(1,386
)
Selling expense
1,353
4
%
1,490
4
%
137
2,588
4
%
2,730
4
%
142
Interest expense
514
636
122
1,021
1,148
127
Other (expense) income
(38
)
81
(119
)
(105
)
154
(259
)
Income before income taxes
5,590
2,136
3,454
8,149
1,773
6,376
Income tax expense
1,306
966
(340
)
2,076
1,725
(351
)
Net income (loss)
4,284
1,170
3,114
6,073
48
6,025
Less: Net income attributable to non-controlling interest
995
148
(847
)
1,341
148
(1,193
)
Net income (loss) attributable to common stock
3,289
1,022
2,267
4,732
(100
)
4,832
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Three months ended July 31, 2024
vs. Three months ended July 31, 2023
Net sales:
Net sales were $
37.5 million and $
35.1 million in the
three months ended July 31, 2024 and 2023, respectively. The
increase o
f $2.4
million, or 7%,
was a result of increased sales volumes.
Gross profit:
Gross profit was $13.5 million, or 36% of net sales, and $9.5 million, or 27% of net sales, in the three months ended July 31, 2024 and 2023, respectively. The increase of $4.0 million, was primarily driven by increased sales volumes and better margins due to product mix.
General and administrative expenses:
General and administrative expenses were $6.0 million and $5.3 million in the three months ended July 31, 2024 and 2023, respectively. The increase of $0.7 million, was due to higher payroll expenses and professional service fees in the quarter.
Selling expenses:
Selling expenses remained consistent and were $
1.4 million and $
1.5 million in the
three months ended July 31, 2024 and 2023, respectively.
Interest expense:
Net interest expense remained consistent and was $0.5 million and $0.6 million in the three months ended July 31, 2024 and 2023, respectively.
Other income:
Other income was consistent and less than $0.1 million in the three months ended July 31, 2024 and 2023 , respectively.
Income tax expense:
The Company's ETR was 23% and 45% in the three months ended July 31, 2024 and 2023, respectively. The change in the ETR is due to the ability to recognize tax benefits on losses in the United States in the current year whereas the prior year had a full valuation allowance and changes in the mix of income and loss in various jurisdictions.
For further information, see Note 6 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income attributable to common stock:
Net income attributable to common stock was $3.3 million and $1.0 million in the three months ended July 31, 2024 and 2023 , respectively. The increase of $2.3 million was mainly due to increased sales activity and better margin performance in the quarter.
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Six months ended July 31, 2024
vs. Six months ended July 31, 2023
Net sales:
Net sales were $
71.8 million and $
64.8 million in the
six months ended July 31, 2024 and 2023, respectively. The
increase o
f $7.0
million, or 11%
, was a result of increased sales volumes.
Gross profit:
Gross profit was $24.0 million, or 33% of net sales, and $16.2 million, or 25% of net sales, in the six months ended July 31, 2024 and 2023, respectively. The increase of $7.8 million, was primarily driven by increased sales volumes and better margins due to product mix.
General and administrative expenses:
General and administrative expenses were $12.1 million and $10.7 million in the six months ended July 31, 2024 and 2023, respectively. The increase of $1.4 million, was due to higher payroll expenses and professional service fees.
Selling expenses:
Selling expenses remained consistent and were $
2.6 million and $
2.7 million in the
six months ended July 31, 2024 and 2023, respectively.
Interest expense:
Net interest expense remained consistent and was $1.0 million and $1.1 million in the six months ended July 31, 2024 and 2023, respectively.
Other (expense) income:
Other (expense) income resulted in expense of $(0.1) million and income of $0.2 million in the six months ended July 31, 2024 and 2023 , respectively. The change was primarily due to exchange rate fluctuations in foreign currency transactions.
Income tax expense:
The Company's ETR was 25% and 97% in the six months ended July 31, 2024 and 2023, respectively. The change in the ETR is due to the ability to recognize tax benefits on losses in the United States in the current year whereas the prior year had a full valuation allowance and changes in the mix of income and loss in various jurisdictions.
For further information, see Note 6 - Income taxes, in the Notes to Consolidated Financial Statements.
Net income (loss) attributable to common stock:
Net income (loss) attributable to common stock was $4.7 million and $(0.1) million in the six months ended July 31, 2024 and 2023 , respectively. The increase of $4.8 million was mainly due to increased sales activity and better margin performance.
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Liquidity and capital resources
The following discussion pertaining to liquidity and capital resources has been restated to reflect the corrections as further described in Note 1 to the Company's unaudited consolidated financial statements.
Cash and cash equivalents as of July 31, 2024 were $9.5 million compared to $5.8 million on January 31, 2024. On July 31, 2024, $0.5 million was held in the United States, and $9.0 million was held at the Company's foreign subsidiaries. The Company's working capital was $45.4 million on July 31, 2024 compared to $41.1 million on January 31, 2024. Of the working capital components, accounts receivable decreased by $7.0 million and cash and cash equivalents increased by $3.7 million as the result of the movements discussed below. As of July 31, 2024, the Company ha d $4.7 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $12.6 million of borrowing capacity under its foreign revolving credit agreements. The Company had $6.7 million borrowed under the Renewed Senior Credit Facility and $7.8 million borro wed under its foreign revolving credit agreements at July 31, 2024.
Net cash from operating activities was $2.7 million and $3.5 million in the six months ended July 31, 2024 and 2023 , respectively. The decrease of $0.8 million was primarily attributable to changes in accounts payable and prepaid expenses and other current assets, partially offset by changes in accounts receivable and customer deposits.
Net cash from investing activities in the six months ended July 31, 2024 and 2023 was $(1.2 ) million and $(6.8 ) million, respectively. The decrease of $(5.6 ) million was due primarily to fewer capital expenditures in the United States and Canada.
Net cash from financing activities in the six months ended July 31, 2024 and 2023 was $2.2 million and $3.7 million, respectively. The main source of cash from financing activities in the six months ended July 31, 2024 , consisted of net proceeds from borrowings of approximately $2.7 million under the Company's credit facilities, as compared to net proceeds of approximately $4.8 million in the six months ended July 31, 2023 . Debt totaled $27.9 million and $25.7 million as of July 31, 2024 and January 31, 2024 , respectively. See Note 10 - Debt, in the Notes to Consolidated Financial Statements for further discussion relating to this topic.
Treasury stock. During the twelve months ended January 31, 2024, the Company used the remaining $1.0 million authorized to repurchase its outstanding shares of common stock. Accordingly, t here was no repurchase activity with respect to the Company's shares of common stock during the three and six months ended July 31, 2024. See Note 15 - Treasury stock, for further discussion relating to this topic.
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. (collectively, the "Borrowers") is a borrower under the Renewed Senior Credit Facility.
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.
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. 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
July 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
July 31, 2024, the Company had borrowed an aggregate of
$6.7
million at a rate of 10.0%
and had $4.7
million available under the Renewed Senior Credit Facility. As of January 31, 2024, the Company had borrowed an aggregate of $5.5 million and had $4.0 million available under the Renewed Senior Credit Facility.
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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.
United Arab Emirates
The Company has a revolving line for
8.0 million U.A.E. Dirhams (approximately $
2.2 million at
July 31, 2024) from a bank in the U.A.E. As of
July 31, 2024 the facility has an interest rate of approximately
8.6%, and expired in July 2024, however, the Company has started the process to renew and extend this credit arrangement and the credit facility has continued without interruption and penalty. The Company had borrowed an aggregate of
$1.2 million
as of July 31, 2024 and $0.2 million
as of January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of
July 31, 2024 and January 31, 2024, the Company had unused borrowing availability of approximately $1.0 million and $1.9 million, respectively.
The Company has a revolving line for
20.5 million U.A.E. Dirhams (approximately $
5.6 million at
July 31, 2024) from a bank in the U.A.E. As of
July 31, 2024 the facility has an interest rate of approximately
8.7%. The facility expired in August 2024, however, the Company has started the process to renew and extend this credit arrangement and the credit facility has continued without interruption or penalty. The Company had borrowed an aggregate o
f $1.0 million
as of July 31, 2024 and $0.1 million
as of January 31, 2024, respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of
July 31, 2024 and January 31, 2024, the Company had unused borrowing availability of approximately
$1.2 million and
$1.0 million, respectively.
Egypt
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
$2.1
million at
July 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
July 31, 2024, the facility has an interest rate of approximately
20.8%
and expires in November 2024. As of July 31, 2024, the Company had substantially nothing outstanding with respect to this credit arrangement, and approximately $1.4 million outstanding at January 31, 2024, which is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of
July 31, 2024 and
January 31, 2024, the Company had unused borrowing capacity
of $2.1 million and $3.2 m illion, respectively.
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
2.1 million Egyptian Pounds (approximatel
y $0.1 mi llion at
July 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 11.0%
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 outstanding
as of July 31, 2024 and January 31, 2024, 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 Riyals (approximately $
9.9 million at
July 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. The facility was renewed in May 2024 with substantially the same terms and conditions and expires in May 2025. As of
July 31, 2024, the facility has an interest rate of approximately
9.7%. The Company had borrowed an aggregate o
f $2.6 million and $3.2 million as of July 31, 2024 and January 31, 2024 , 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
July 31, 2024 and
January 31, 2024, was
$6.3 million and $6.1 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 approxim
ately $1.1 million and $0.1 million at July 31, 2024 and January 31, 2024, respectively.
The Company was in compliance with the covenants under the credit arrangements in the U.A.E., Egypt and Saudi Arabia as of
July 31, 2024,
with the exception of those arrangements that have expired or are set to expire 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
July 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 base rates, as of
July 31, 2024, the Company's interest rates ranged from
8.6% to
20.8%, with a weighted average rate of
11.5%, and the Company had facility limits totaling
$24.7
million under these credit arrangements.
As of July 31, 2024
,
$7.1 million
o
f availability was used to support letters of credit to guarantee amounts committed for inventory purchases and for performance guarantees. Additionally, as of July 31, 2024
, the Company had borrow
ed
$7.8 million and had an additional $12.6 million of borrowing remaining available under the foreign revolving credit arrangements. The foreign revolving lines balances were included as a component of current maturities of long-term debt in the Company's consolidated balance sheets
as of July 31, 2024 and January 31, 2024.
In June 2023, the Company assumed a promissory note of approximately $2.8 million in connection with the formation of the joint venture with Gulf Insulation Group
(see Note 16). I n 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
July 31, 2024, the remaining balance on the mortgage in Canada is approximately CAD
5.9 million (approximately $
4.3 million at
July 31, 2024). The interest rate is variable, and was
8.8%
at
July 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 July 31, 2024 and January 31, 2024, respectively.
Finance obligation - buildings and land.
On April 14, 2021, the Company entered into a purchase and sale agreement (the "Purchase and Sale Agreement"). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its land and buildings in Lebanon, Tennessee (the "Property") for $10.4 million. The transaction generated net cash proceeds of $9.1 million. Concurrently with the sale, the Company paid off the approximately $0.9 million 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 leases back the Property at an annual rental rate of approximately $0.8 million, subject to annual rent increases of 2.0%. Under the Lease Agreement, the Company has four consecutive options to extend the term of the lease by five years for each such option.
In accordance with ASC 842, Leases , this transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded substantially the fair value of the underlying assets. 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 $8.9 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of July 31, 2024
. The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
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Table of Contents
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 received approximately $
40.1 million as of
July 31, 2024, with a remaining balance due in the amount of $
1.8 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 amount, $
1.3 million is classified in other
long-term assets on the Company's consolidated balance sheets.
The Company has been actively involved in ongoing efforts to collect this outstanding balance. The Company continues to engage with the customer to ensure full payment of the open balances, and during the
six months ended July 31, 2024, and at various times throughout 2023, the Company received partial payments to settle $
0.3 million and $
0.6 million, respectively, of the customer's outstanding balances. 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
July 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are described in Item 7. MD&A and in the Notes to the Consolidated Financial Statements for the year ended January 31, 2024 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.