Perma-Pipe International Holdings, Inc. 10-Q

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 2025 and 2024 are for the fiscal year ending January 31, 2026 and the fiscal year ended January 31, 2025, 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. 19 Table of Contents 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 April 30, 2025 2024 Change favorable (unfavorable) Amount Percent of Net Sales Amount Percent of Net Sales Amount Net sales $46,747 $34,321 $12,426 Gross profit 16,724 36% 10,517 31% 6,207 General and administrative expenses 7,749 17% 6,148 18% (1,601) Selling expenses 1,086 2% 1,235 4% 149 Interest expense 406 507 101 Other expense 47 67 (20) Income before income taxes 7,436 2,560 4,876 Income tax expense 1,582 770 (812) Net income 5,854 1,790 4,064 Less: Net income attributable to non-controlling interest 902 347 (555) Net income attributable to common stock 4,952 1,443 3,509 20 Table of Contents Three months ended April 30, 2025 vs. Three months ended April 30, 2024 Net sales: Net sales were $ 46.7 million and $ 34.3 million in the three months ended April 30, 2025 and 2024, respectively. The increase o f $12.4 million, or 36%, was a result of increased sales volumes in the Middle East and in North America. Gross profit: Gross profit was $16.7 million, or 36% of net sales, and $10.5 million, or 31% of net sales, in the three months ended April 30, 2025 and 2024, respectively. The increase of $6.2 million, was driven primarily by increased volume of activity and better margins due to product mix. General and administrative expenses: General and administrative expenses were $7.7 million and $6.1 million in the three months ended April 30, 2025 and 2024, respectively. The increase of $1.6 million, was due to higher payroll expenses and professional fees in the quarter. Selling expenses: Selling expenses remained consistent and were $ 1.1 million and $ 1.2 million in the three months ended April 30, 2025 and 2024, respectively. Interest expense: Net interest expense remained consistent and was $0.4 million and $0.5 million in the three months ended April 30, 2025 and 2024, respectively. Other expense: Other expense remained consistent and was less than $0.1 million in the three months ended April 30, 2025 and 2024 . Income tax expense: The Company's ETR was 21% and 30% in the three months ended April 30, 2025 and 2024, respectively. The change in the ETR is due to 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 $5.0 million and $1.4 million in the three months ended April 30, 2025 and 2024 , respectively. The increase of $3.6 million, was mainly due to increased sales volumes and better project execution in the quarter. 21 Table of Contents Liquidity and capital resources Cash and cash equivalents as of April 30, 2025 were $18.8 million compared to $15.7 million on January 31, 2025. On April 30, 2025, $0.7 million was held in the United States, and $18.1 million was held at the Company's foreign subsidiaries. The Company's working capital was $58.9 million on April 30, 2025 compared to $54.7 million on January 31, 2025. Of the working capital components, accounts receivable increased by $3.9 million and cash and cash equivalents increased by $3.1 million as the result of the movements discussed below. As of April 30, 2025, the Company ha d $5.0 million of borrowing capacity under the Renewed Senior Credit Facility in North America and $14.5 million of borrowing capacity under its foreign revolving credit agreements. The Company had $8.5 million borrowed under the Renewed Senior Credit Facility and $6.3 million borro wed under its foreign revolving credit agreements at April 30, 2025. Net cash provided by (used in) operating activities was $ 0.7 million and $(0.1) million in the three months ended April 30, 2025 and 2024 , respectively. The increase of $ 0.8 million was primarily attributable to changes in inventories, customer deposits, prepaid expenses and other current assets and net income, partially offset by changes to accounts receivable and unbilled accounts receivable. Net cash used in investing activities in the three months ended April 30, 2025 and 2024 was $0.9 million and $0.6 million, respectively. The increase of $0.3 million was primarily due to a greater amount of capital expenditures in the quarter. Net cash provided by financing activities in the three months ended April 30, 2025 and 2024 was $ 3.2 million and $ 2.6 million, respectively. Debt totaled $ 27.9 million and $ 24.5 million as of April 30, 2025 and January 31, 2025 , respectively. See Note 10 - Debt, in the Notes to Consolidated Financial Statements for further discussion relating to this topic. Revolving lines - North America . On September 20, 2018, and as amended, extended, or renewed subsequently thereafter, the Company and certain of its U.S. and Canadian subsidiaries (collectively 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”). The Credit Agreement with PNC was subsequently extended on September 17, 2021, 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 Renewed Senior Credit Facility matures on September 20, 2026. As of April 30, 2025, the Company had borrowed an aggregate of $8.5 million at a rate of 9.0% and had $5.0 million available under the Renewed Senior Credit Facility. As of January 31, 2025, the Company had borrowed an aggregate of $6.8 million and had $3.7 million available under the Renewed Senior Credit Facility. The Company was in compliance with respect to the covenants under the Credit Agreement as of April 30, 2025. 22 Table of Contents 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 April 30, 2025 ) from a bank in the U.A.E. As of April 30, 2025 , the facility has an interest rate of approximately 7.5% and expires in July 2025. The Company had borrowed an aggregate of $0.4 million as of April 30, 2025 and January 31, 2025 , and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. As of April 30, 2025 and January 31, 2025 , the Company had unused borrowing availability of approximately $1.7 million and $1.6 million, respectively. The Company has a revolving line for 65.2 million U.A.E. Dirhams (approximately $ 17.7 million at April 30, 2025 ) from a bank in the U.A.E. As of April 30, 2025 , the facility has an interest rate of approximately 7.5% and expires in August 2025. The Company had no outstanding balance as of April 30, 2025 and $0.1 million as of January 31, 2025 , respectively, and is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. The Company had unused borrowing availability of approximately $8.0 million and $9.0 million as of April 30, 2025 and January 31, 2025 , 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 $ 2.0 million at April 30, 2025 ). This credit arrangement is in the form of project financing, for which 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 April 30, 2025 , the facility has an interest rate of approximately 20.8% and expires in November 2025. As of April 30, 2025 and January 31, 2025, the Company had an immaterial amount outstanding, which is presented as a component of current maturities of long-term debt in the Company's consolidated balance sheets. Further, as of April 30, 2025 and January 31, 2025 , the Company had approximately $2.0 million of unused borrowing capacity with respect to this credit arrangement. In December 2021, the Company entered into a credit arrangement for project financing with a bank in Egypt for 28.2 million Egyptian Pounds. As this project has progressed and the Company has received collections, the facility has decreased to a current amount of 2.1 million Egyptian Pounds (approximately $0.1 million at April 30, 2025 ). 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 15.0% 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 no outstanding balance as of April 30, 2025 and $0.1 million as of January 31, 2025 , 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 April 30, 2025 ). 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 expired in May 2025. The Company is in the process of renewing this credit arrangement with substantially the same terms and conditions and is in regular communication with the bank throughout this process ensuring the facility continues without interruption or penalty. As of April 30, 2025 , the facility has an interest rate of approximately 8.9% . The Company had borrowed an aggregate of $3.1 million and $1.5 million as of April 30, 2025 and January 31, 2025 , 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 April 30, 2025 and January 31, 2025 , was $2.3 million and $3.0 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 in some cases, 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 April 30, 2025 and January 31, 2025 , the amount of foreign subsidiary debt guaranteed by the Company was approxim ately $10.0 million. The Company was in compliance with respect to the covenants under the credit arrangements in the U.A.E., Egypt, and Saudi Arabia as of April 30, 2025, with the exception of an arrangement that has expired and has not yet been renewed. Although a certain arrangement has expired and the borrowings could be required to be repaid immediately by the bank, the Company is in regular communication with the bank throughout the renewal process and the arrangement has continued without interruption or penalty. On April 30, 2025, 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 April 30, 2025, the Company's interest rates ranged from 7.5% to 20.8%, with a weighted average rate of 8.4%, and the Company had facility limits totaling $31.8 million under these credit arrangements. As of April 30, 2025 , $16.6 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 April 30, 2025 , the Company had borrow ed $6.3 million and had an additional $14.5 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 April 30, 2025 and January 31, 2025. 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 15). 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. This amount is presented as a component of current liabilities 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 April 30, 2025, the remaining balance on the mortgage in Canada is approximately CAD 5.7 million (approximately $ 4.1 million at April 30, 2025). The interest rate is variable, and was 6.8% at April 30, 2025. 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 April 30, 2025 and January 31, 2025. Finance obligation - buildings and land. On April 14, 2021, the Company entered into a purchase and sale agreement, pursuant to which 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 $8.7 million is recognized in long-term finance obligation on the Company's consolidated balance sheets as of April 30, 2025 . The net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. 23 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 $ 40.7 million as of April 30, 2025, with a remaining balance due in the amount of $ 1.2 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 amount, $ 1.2 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 three months ended April 30, 2025, and at various times throughout 2024, the Company received partial payments to settle $ 0.6 million and $ 0.3 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 support 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 April 30, 2025. 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, 2025 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 Table of Contents